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April 19th, 2009 1:20 PM by David W. Welch
The first wave of foreclosures were mainly investors or would be investors that tried to flip after the market already flopped. Many of these in the Orlando market were new homes that could not be resold until they were completed. By the time they were completed the market had already cooled off leaving the investor high and dry. These were true investments that the buyers had no intention of ever living in. The would be investors were people who took a chance on a sub-prime loan to get into a home that they only planned to live in for a couple of years and sell. They were not concerned about the adjustable interest rate, because they were not going to be in the home long enough for it to matter. I call these would be investors because they were making the purchase from the stand point of the appreciation on the property instead of making a home purchase. The market cooled and in fact turned on a dime here in Orlando leaving them with higher payments and a decreasing value on their property. Many if not most of these were 100% financing, so it did not take long for them to get upside down in the property.
Now we are into the second wave, and these are the people that are being effected by the downturn in the economy. These are not people walking away from their homes. These are not people who necessarily took out sub-prime or 100% financing on their homes. These are people who had equity in their houses, until the foreclosures and short sales became such a dominant force in the market that they eroded all the equity that had built up. Now, these homeowners are facing foreclosure because they have lost their job and their home is no longer worth what it was just a couple of years ago. These are the people that should be helped by the stimulus plan, but it really does not do any good to modify a mortgage down when you are out of work. Unfortunately, jobs tend to come back later in the recovery cycle. All of the government efforts have actually helped to push prices lower putting more homeowners upside down in their homes. That has lead to lower homeowner equity and lower confidence in the economy driving down demand plunging us into this deep recession. In other words the bailout has been bailing the water right into the consumer's boat.
My recommendation: have the federal government buy up one million foreclosures and get them off the market. This will stabilze the real estate market and real estate prices. The $200 to $300 billion it will cost will relieve the banks from managing these properties and let them get back to loaning money. This investment in low priced assets will also clear probably $400 billion in bad debts off the banks books and "detoxify" potentially trillions in mortgage backed securities. The best part is that, when market conditions improve the government will be able to sell these asset for more than they paid for them and even recover some if not all of the holding costs.
David Welch, Real Estate Optimist, Follow me on Twitter