Real Estate Foreclosure Myths

Why Does The Mainstream Media Want To Scare Us So?

Listen to the evening news and you feel like going into the street and throwing a going away party for most of your neighbors. The impression is that most of us will be homeless in the next few months because the banks will be foreclosing on our mortgages. The economy will be grinding to a halt because so many of us are not capable of managing our money, or we were tricked into bad loans that are about to re-price at higher interest rates.

Upon hearing of the 1919 Chicago Withe Sox "Black Sox" baseball scandal, a young baseball fan was quoted as saying “Say it ain’t so.”  Well, it ain’t so!

More than mortgage trickery and poor personal management are to blame for the rising foreclosure rates, but fortunately here in the Midwest, we haven’t been subjected to the additional circumstances. Combined with some questionable loan practices, and some individuals who can’t manage their finances, two other factors are involved.

First, particularly on the coast, we have seen double digit increases in home values over the past five years. This rate of increase was not sustainable. Prices finally bubbled, and the price bubble burst leaving those who bought in “the last days” with properties that were devalued over night. In some instances, properties lost 25% of their value.

Second, because of the rapid value increases, many investors bought with the intent of selling at a profit over a very short timeframe. Since the property had no shelter value (it wasn’t going to be used as a primary residence), and since these investors were involved in many transactions, their losses are multiplied. Indeed, there is a problem that will be shaken out of the economy and the market over the next two years, but not so much here in Southern Indiana, and probably not as severe a problem as you are being led to believe.

Consider current and historic foreclosures. In the Midwest, historically, the foreclosure rate is about 7/10 of 1 percent, that’s .7%; less than 1 in 100. The media tells us “The Foreclosure Rate has Risen To 176% of Normal,” GASP!!! Actually, with a rise of 176% we see that mathematically (.7 x 176% = 1.23%), the number of foreclosures has risen to 1.23 in 100. Doesn’t seem so bad now, does it?

The media also blows another statistic out of proportion in the hope to scare you into watching tomorrow.  They might give an example of a financial institution foreclosing on a $1 million dollar property. Sounds like a huge loss, right? They make it sound like the bank just lost $1 million. But wait! The bank may have loaned $1 million (so they may have a risk of 1 million), but they get the house, right? At some point they are going to sell the house, let’s say for 80% of its value or $800,000. So really, the bank only lost $200,000. A lot of money, but not nearly what the media leads us to believe. And actually, the bank had been putting back a few dollars every month in case one of its mortgages went bad, so they have $75,000 held in reserve to cover any loss they have. They apply the $75,000 toward the $200,000 loss, and their actual loss is $125,000. Still a big number, but not nearly as bad as the $1 million you were led to believe. It takes a lot more losses of $125,000 to ruin the bank.

Things aren’t as bad as they seem. We are being misled, in hopes that fear will encourage you to tune in tomorrow for “Scared Stiff: How to Change Your Life for the Worse Through Exaggeration”.

DJ HINES
CFO, Schuler Bauer Real Estate Services