The Mortgage Blog

One topic has gotten a lot of press lately and it’s how everybody is in foreclosure. I have heard some of the craziest statements made as if they were fact; “1 in 5 homes in Southeast Michigan are in foreclosure.” “25% of SubPrime loans are delinquent.” “25% of home purchases are funded with SubPrime loans.” People read or hear this stuff from sources that may be totally misinformed or are incorrectly quoting other sources.

Obviously, it’s ridiculous to imagine that 1 in 5 homes are in foreclosure. Look around your neighborhood – are 5 people on your block in foreclosure? I don’t think so. The delinquency rate of Prime mortgages right now is, on average, a little over 2% of total prime loans and these loans account for the vast majority of all home loans in existence. The delinquency rate of SubPrime loans is higher at approximately 18%. So, it’s true, a lot more Subprime loans are in trouble right now and that means foreclosures in this arena are also up.

The question is do foreclosure rates effect home values? The answer, of course, is yes. Homes that are in foreclosure are generally in worse condition and sell for less money than competing homes in the marketplace. Banks, although not giving homes away, are likely to sell a home they are carrying for less than it may have sold for if not in foreclosure.

In a report from the Fannie Mae Foundation they estimate that “each conventional loan foreclosure within a 1/8 of a mile of a single family home results in a 0.9% decline in the value of that home. Certainly, there is a correlation between home values and foreclosure rates.

There is a factor here that no one is really talking about though. It’s the idea that what could really impact home values is a significant reduction in available credit via a tightening of credit standards. A reduction of loans being made is also a reduction in buyers to make purchases and this results in lower sales prices because there are fewer buyers in the market.

Credit standards have tightened up this year primarily in the SubPrime arena where some crazy loans were being originated last year. A buyer who has bad credit, can’t document their income and has no down payment has no business getting a mortgage! These loans, which never should have been made, are no longer going to be available. However, there are still a host of great loan programs which have not changed and are still available for no money down and bruised credit borrowers. It doesn’t look like there is going to be a significant change in credit standards that would have had a negative impact on home values.

I believe that the current run of foreclosures and credit tightening is going to be contained and normalize over the remainder of 2007 and that home values are stabilizing. There is reason for optimism and I suggest everybody stop listening to all the negative talk they see on the news, hear on the radio and see on the web! Keep in mind – Your own positive thinking impacts the world you operate in so be a positive influence on it!