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Lets Get in Front of the Next Wave of Foreclosures
{b}Why is the sub-prime mess, all of our problems? Each and every one of us?{/b} “I’ve got good credit, I’ll be able to buy anytime,” said a buyer recently. Well yes and no. What started as sub-prime issue with sub-prime borrowers has rapidly flowed over, first to the Alt A purchaser, then, as lenders react they change the standards and guidelines, first for homes- all borrowers now, then cars, then credit cards and soon about everything the American consumer can buy on credit is affected. Today we have the unheard of event of the Federal Reserve lowering interest rates, but mortgage rates are rising. And while this government has made some attempt to intervene, it is characteristically too little. My only hope is that it is not also too late. Now I understand the argument for personal responsibility, agree with it, and hopefully have taught it to my children… I believe in personal responsibility. But the issues here go way, way beyond my (or your) desire for personal accountably, let me explain why.
Lets suppose I live in a neighborhood of 103 homes and the average sales price is $100,000. 3 go into foreclosure, just three, that’s less than 3%, hardly a crisis you would say… but lets scratch the surface and look deeper… The 3 homes go into foreclosure, and lest assume they are able to be sold in the winter of 2007-08, at a discount, for $78,000-$81,000. In the spring, 5 home sellers would like to sell their homes. What will their asking price be? Their sales price? Here is the scary thing, if they have to sell, their sales price will be no more than $82-85,000 because the house WILL NOT Appraise for anything higher.
So each homeowner in the community- all 100 good taxpaying mortgage paying families, have conservatively Lost 15% of their home value, in this case, $15,000 each. That is not fair you say, and I’d agree, that is why stopping foreclosures is a paramount value.
But the losses continue…the community lost $1.5Million in equity, (100 x $15,000), but … in the spring the city sends their tax appraiser out and because of the foreclosures, he appraises the houses at $85,000. The city just lost $1.5Million in tax base, or at 1% rate about $15,000, about half a starting teacher’s pay. Multiply that by ten, 20, or 50, and you will begin to see a cities plight, but that is not the worst case scenario… Now suppose that the homes foreclose, but don't sell. No buyers, even at a 20-30% discount. Soon the grass is overgrown, then the banks board up the windows… Any idea what that does to neighborhood home values? If you guessed it’s even worse than selling the homes at 80 cents on the dollar, you are correct. In this case, those homes might not sell until you hit $65,000, or 65 cents on the dollar. Now the community loses $3.5 M, and the city, at a 1% tax rate. loses $35,000, or the cost of a policeman without benefits. Now lets say you have 100 communities in your town like this- see the Cleveland example below- that fall into one of the two scenarios above- that means your city is going to have to cut back either 75 teachers or policeman because they just can’t pay their bills…and remember, this is because that about 3% of the homes foreclosed. And this isn’t just a possibility, it has happened in 8-10 American cities, see the example of Cleveland below, and if we don't get in front of this next wave, it will happen in another 8-10 cities this year. And the damage isn’t finished there. The reality is these bad loans are concentrated in areas where the foreclosure rate has reached 15%. Boarded up houses invite crime, and formerly good neighborhoods go down the drain quickly. Many of these high density bad loans are concentrated in the rustbelt, and not all were to people who stretched too far, many of the worst loans were refinances to people whose homes were all but paid for, but when the rate reset, they couldn’t afford the loan- and they couldn’t refinance either because home prices had stopped rising.
Not surprisingly, the burden falls heaviest on the poorest educated Americans, ones not savvy enough to understand the rules, or ones who were lied to by unscrupulous lenders. Cleveland provides a real life example. Something between 40% and 50% of the mortgage loans issued in 2005 were sub-prime. Today, a little more than 2 years later, Deutsche Bank is the largest land owner in the city. Dozens of working class neighborhoods have been gutted, and city tax revenues with them. The City of Cleveland announced they were suing 21 investment banks- Deutsche and Wells Fargo among them, for $100’s of millions of dollar of lost revenues and costs. We can expect more of that-more Cleveland’s and more lawsuits, if the next wave of 1-2 Million foreclosures take place in the coming two years. Even in Charlotte where home prices increased substantially in 2007, we also suffered a fair number of foreclosures in predictably, higher minority areas of the city. The outside credit conditions still impact us every day- a couple of months ago, a customer with 10% down and credit scores above 700 had to fight for a loan…today, a buyer of a commercial property with 25% down, and a 20 year record of owning investment properties and paying on time, is on the bubble on a property here in “safe” Charlotte. They don’t understand it, they’ve played by the rules and done everything the right way, paid every loan on time. Yet, they are dealing with a terrified lender. I’m writing our Governor, and US Senators and demanding they start working on some solutions here- fast. I don’t have the answers here- but someone needs to get their arms around this, and do it in a hurry. Otherwise, these years won’t be remembered as the “war years”, but the years the American dream went up in smoke- the smoke of greed and unregulated avarice. ——————————————————————————————- Terry McDonald, a veteran real estate broker and former builder writes the Charlotte blog, CharlotteCommunitiesOnline.com and CharlotteRealEstateHomesandCondos.com
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Contributor's Note
Originally published on my blog a month ago, it grows more true every day. The Time To Act is NOW.
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A Community based Charlotte real estate blog
| Terry's Charlotte Search site
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