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Foreclosures And The Northern Virginia Real Estate Market

by @ 8:45 am on June 30, 2007. Filed under Real Estate, Sub-Prime Mortgage Crisis, Virginia

It’s becoming a familiar story, but the Post reports this morning on the rise of real estate foreclosures in the Northern Virginia area:

Home repossessions are cropping up almost everywhere in the region, regularly occurring on suburban streets unaccustomed to hard times. In Montgomery County, the foreclosure rate has tripled in a year. In Fairfax County, it has quadrupled. In Loudoun County, it has increased tenfold. In Howard County, there was one foreclosure in 2004; there are 157 so far this year. District officials are reporting a similar trend.

(…)

The surge in foreclosures, in relatively good times, can be traced to risky, so-called subprime mortgage loans made to people who stretched too far to purchase homes in an inflated real estate market.

In many cases, lenders loosened credit rules for home buyers with bad credit, who made no down payment or who didn’t earn enough money to qualify for traditional loans. The lenders charged them higher interest rates, which made the loans more expensive

Back at the height of the real estate market, it made sense for lenders to offer, and homeowners to buy into things like interest-only loans. The payments were incredibly low, meaning that you could potentially afford to buy a house that you wouldn’t be able to afford if it was financed through a traditional 30 year mortgage.

The problems started when the real estate market took a dip

Bolivian immigrants Marcelo Ortega, a dump truck driver, and his wife, Jenny, who cleans houses, bought a brick-front Colonial in Herndon for $549,000 in February 2006. The payments are $4,200 a month, which grew unbearable as residential construction work slowed and Ortega’s income dropped.

The couple tried to sell the house, but the value has fallen to $499,000, and they can’t refinance without paying a steep prepayment penalty, something Ortega says they did not know

It’s more likely that they didn’t really take the time to understand what they were buying into, or bother to read what they were signing. But there’s something even more fundamental about this; what made Mr. Ortega think that he could afford a half million dollar house on the salary of a dump truck driver and someone how cleans houses for a living ? That bad financial decision is not the lenders fault.

As the Post relates, the increase in foreclosures is due in part to the decline in the market, but it’s also contributing to a further decline:

If foreclosures multiply in a neighborhood, with lenders eager to dump properties for a quick sale, home prices can be depressed. The drop in prices can pull down tax assessments, giving local governments less money to pay for schools, police, parks and social services.

And you can always tell the homes that are in foreclosure from those that are merely for sale:

The first effects of a foreclosure are cosmetic, as many Washington area residents are starting to learn. People facing foreclosure typically lack the time or money to maintain their homes, and then end up abandoning them. Torn screens are not replaced, the grass goes uncut, yards turn to weeds.

And, sometimes, people just walk away from the house altogether:

Home abandonment is not uncommon in foreclosures, because if people paid more for a house than it is now worth, or if they made only a small down payment, they can find themselves with a mortgage higher than the value of the home, making it almost impossible to sell at a profit or even to break even on the transaction expenses.

The uptick in foreclosures will end at some point, and the housing market will turn around. What one wonders is whether people will learn their lesson and not buy houses they clearly can’t afford.

Something tells me they won’t.

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6 Responses to “Foreclosures And The Northern Virginia Real Estate Market”

  1. what made Mr. Ortega think that he could afford a half million dollar house on the salary of a dump truck driver and someone how cleans houses for a living ? That bad financial decision is not the lenders fault.

    Actually, the lender is partially at fault. The lender should be assessing the ability to repay, as indicated by a number of factors. But some lenders play fast and loose with the factors and qualify folks who should never be given a mortgage.

    Further, it could be that they got a so-called “no doc” loan. That’s a loan that requires no substantiation of income, but the borrower has to have good credit and pays a higher rate of interest.

  2. brimur says:

    The problem with your thesis of “blame the borrower” is that it assumes perfect information- or even good information.

    A lot of people place some amount of faith in the professionals they seek out to help them with a certain need. For instance, I don’t question my doctor too much if he shows me something on an x-ray that I don’t think too much of and tells me I need an operation. He did, after all, go to medical school and do some other things that I didn’t do, otherwise I would probably just conduct the check-up myself.

    Likewise, a lender tells you you can afford something, shows you the monthly payment, and says oh don’t worry about the possibility of bigger rates down the road, you’ll just refinance and you’ll be fine. That’s what happens.

    Of course, you’re a libertarian? Only the government is capable of coercion or abusive influence, right? Haha.

  3. [...] wrote earlier today about a Washington Post article about the rising number of foreclosures in the D.C. Metropolitan [...]

  4. jim says:

    Not to question anyone whom is providing a service for you,and to become as informed as possible,especially medical operations,is just not very wise.

  5. TSmith says:

    I work for http://www.CurrentForeclosures.com and we have been noticing a huge increase in the number of foreclosures in Northern Virginia. I believe it is because of subprime lending, ARM loans, the lack of buyers on the market, and the price depreciation in many areas of the country.

  6. Dan says:

    I blame all the “get rich quick on real estate” schemes for this entire problem. It’s sure evidence that greed is a sin, and parallels the events of 1929. And now we all pay the piper…

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