Economy Can Withstand More Mortgage Foreclosures
By James R. Hagerty
From The Wall Street Journal Online
About 1.1 million foreclosures are likely to result from jumps in monthly payments on adjustable-rate home-mortgage loans made in 2004 through 2006, according to a study by First American CoreLogic.
Christopher Cagan, director of research at the real-estate-information concern based in Santa Ana, Calif., said those foreclosures are likely to occur over six to seven years and won’t be enough to damage the national economy. (Financial markets could be hurt, however.
Dr. Cagan analyzed 8.4 million adjustable-rate loans made during those three years and estimated that 13% of them, totaling $326 billion, will end in foreclosures. After lenders resell those properties, the total losses for lenders or investors holding the loans will be $113 billion, he estimated. That is about 1% of total U.S. home-mortgage loans outstanding.
“The vast majority of borrowers will be fine,” Dr. Cagan said.
The estimates are based on an assumption that average home prices will remain about level with the December 2006 level over the next five years. If prices drop 10%, the number of foreclosures would jump to 1.9 million, Dr. Cagan projected. But a 10% rise in prices would cut foreclosures to 489,000, he estimated. When prices rise, people struggling with loan payments are more likely to be able to refinance into a loan with easier terms or sell their homes for more than the loan balance.
The projections include only foreclosures expected to result from jumps in interest rates that occur when loans “reset” from their initial interest rate to a higher one, usually after two to five years. They don’t take into account foreclosures that will occur for such reasons as job losses, deaths, divorces, illness or fraud.
The worst-performing loans will be those that started with low “teaser” rates, below 4%, the study predicts. On such loans, the typical rise in monthly payments at the reset is 118%, Dr. Cagan calculates.
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– March 20, 2007