Headlines are blaring, foreclosures are sky rocketing and sub-prime problems are creeping into the prime lending area. So what! If you get past the headlines you realize that foreclosures are probably still below the historical average and the prime lending market is vibrant except for lenders who made deliberate moves to emphasize the option arm market.
These loans which are easy to sell, bad for the borrower and very profitable for the lenders, at least in the early years have a way to turn on the borrower and lender in the later years. Why, because you have to make two bets: interest rates need to stay low and real estate prices need to continue rising. Not easy to win two bets on one transaction.
Let's start with foreclosures. A recent report stated that U.S. foreclosures were up 42% from 2005. You ask, why did the rate jump so high in 2006? Wrong question. The right question would be why was the foreclosure rate so low in 2005? The number of foreclosures increased from 885,000 in 2005 to 1,259,118 in 2006. The report goes on to say while that is a substantial increase it is still within the scope of normal historical averages. So, what happened in 2005? Just one of the best real estate markets of all times with prices increasing in double digits across the nation. Nevertheless there were still 885,000 foreclosures out of probably 125 million homes in this country.
The three states with the highest foreclosure rates are Colorado, Georgia and Nevada.
Colorado still has a " hang over " from the telecommunications debacle around the beginning of the century, Nevada had 21,000 in 2006 which was up from about 7,000 which is so low that it was off the charts. Georgia had 2.5% of the households go into foreclosure which is still historically in line.
The total percentage of households in foreclosure in the United States in 2006 was 1.1%.
This tells you one important fact: read the story not the headlines.
Now the sub-prime blame game. I truly believe that most people who write the stories haven't the slightest idea what type of loan is a sub-prime loan. I think their opinion is anything that isn't a fixed rate is a sub-prime loan. I know they believe any 100% loan is a sub-prime loan. Many years ago I did a 100% purchase for a doctor who wanted to buy a million dollar home and didn't want to disturb his stock portfolio. One of the biggest banks in the world gave him the loan without batting an eye.
Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom.