Worst to Come for Foreclosures, says Zandi

Just when you thought it was safe to open a newspaper, there's some bad news: There could be an additional 4.8 million foreclosure sales between 2009 and 2011, said Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania in an interview with Reuters.

That's almost twice the 2.7 million foreclosure sales that happened between 2006 at 2008, Zandi says. Those earlier foreclosures battered our economy, almost destroyed our financial system, and cost many of us our jobs.

The argument for another foreclosure spike is straightforward...There are 47.4 million U.S. homeowners with mortgages, and 23 percent of those, or 10.7 million borrowers, now owe more money to their mortgage lender than their homes are currently worth, according to the third quarter report from First American CoreLogic.

Even worse, close to 10 percent of homeowners with mortgages have loans that are more the 25 percent larger than the current value of their homes, according to CoreLogic. That means roughly 4.5 million borrowers that are deep under water.

Some experts believe that homeowners consider simply giving their homes back to the bank once the current value is 12 percent less than the value of their loans, according to housing experts. And more homeowners might be in a position to walk away if home prices begin to fall again after the homebuyer tax credit eventually expires.

Sounds pretty bad. Of course, we can always hope that CoreLogic has its numbers off - the oft-quoted firm did issue a massive correction to its second quarter report. Also, CoreLogic's numbers are oddly concentrated: just over 2 percent of borrowers are 10 percent to 15 percent over-leveraged, 2 percent are 15 percent to 20 percent underwater, just under 2 percent are 20 percent to 25 percent over-leveraged, but nearly 10 percent are more than 25 percent underwater. Perhaps the most extremely over-leveraged homes are concentrated in a particular region or part of the housing market less likely to take the rest of the economy down with it.

Or we can just blame bankers - banks can't possibly expect to squeeze the full loan balances from over-leveraged homes seized in foreclosures. In auction, these homes will earn a fraction of their current value, which is already a fraction of the value of the loans. So why don't banks save us a few million foreclosure auctions and seriously set about adjusting the balances of some of these loans?
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