LA Times - Foreclosure pace nears record high

The MSM is finally catching on. Front of today's LA Times Business section was "Foreclosure pace nears decade high". Graph from DataQuick.

Nearly 900 Californians a week are losing their homes because they can't afford to pay the mortgage — up from about 100 a week a year ago — providing fresh evidence that the housing market's troubles are nowhere near over.

The surge is raising concerns that home prices will soon suffer as a result. The 11,033 foreclosures in the first three months of the year represent an 800% increase over the same period a year earlier.

Instead of "concerns ... home prices ... suffer" how about "hopes ... home prices ... fall to more affordable levels"?

So far, the effect on home values has been muted. But as the number of move-outs, evictions and forced sales continue to increase, some economists say they will soon start to push prices down.

First to fall will be the low-income communities where marginal loans proliferated, they say. The trend will spread like a virus to more affluent neighborhoods.

The most pessimistic think a housing bust will wound the economy.

"For this rise in foreclosures to be happening in the midst of a strong labor market is truly unique and scary," said analyst Christopher Thornberg of Beacon Economics.

He predicts foreclosures will top out at four or five times the current level — enough, he says, to either induce a recession or at least bring the economy to the precipice. ...

Most of the loans going into default now were made at the peak of the housing boom in 2005, when some thought the good times would continue forever and lending standards were lax. Nearly 80% of loans made in the state in May 2005 for the purpose of purchasing houses had adjustable rates, a record high.

Many of these mortgages required the borrowers to put little or no money down, and lenders took their word for whatever income they said they made.

Which pushed the bubble up even more.

For a moment, everything was fine. Then housing prices stopped going up — meaning that many of these borrowers did not have enough equity or income to refinance to a new loan. Others in foreclosure may be able to afford the payments, but have chosen not to make them because their homes are worth less than they paid. ...

There's little precedent for the current wave of foreclosures. Traditionally, people lose their jobs, and then they lose their houses. In the early '90s, the aerospace industry's collapse triggered a broad recession.

And no precedent for these loans, either. Gee, do you think there's a connection?

This time, the foreclosures are happening first — and fast.

"It surprises me, the speed at which all this is evolving," said Edward Leamer, director of the UCLA Anderson Forecast.

"Surprised"??

He sees plenty to worry about. For instance, the recent tightening of loan standards is, for better or worse, eliminating a lot of the fuel that powered the bottom of the market. Entry-level buyers are priced out, which means existing owners have a harder time selling their homes to move up. Eventually, everyone is vulnerable. ...

I remember many articles in the early 1990s of how foreclosures were pushing prices down until they finally got worked through.