Foreclosures: More Expected In 2008

A study showed that 139 of California's ZIP codes fell within the top 500 for total foreclosure filings in the United States. The next highest count for any state is less than half that at 72 and is in another sun-belt state Florida.

The number one ZIP code in the nation for foreclosures is still, however, in the Rust Belt. It's Cleveland, 44105, with a total of 784 filings during the three months ended June 15. The hardest hit ZIP in California was Sacramento, 95823, where there were 634 default notices, repossessions and auction notices. It had the sixth most foreclosure filings for any zip code in the nation.

California boasts a vibrant economy and a fast growing population. High number of foreclosures occur due to serious underlying economic problems such as job layoffs or plant closings. But the California foreclosure spike, as well as those in Florida, Arizona and Nevada, was set up by a huge appreciation in house prices that put the market beyond affordability. In last few years the house prices have appreciated in double digits making it an attractive proposition for real estate investors. Developers bid up land prices to get product to market. When markets cooled, speculators added to downward price pressure by unloading their properties onto already lengthening inventories. In many of these markets, prices fell below what investors paid. Many of them havent been able to pay up for the mortgage, leading to foreclosure.

Many Sun-Belt buyers bought their high-priced houses using 2/28 adjustable rate mortgages (ARMs) which featured very low initial, or teaser rates that reset much higher after the first two years of fixed payments. ARMs are set up for borrowers to show they can keep up mortgage payments and then refinance out into affordable fixed-rate loans after two years. Many buyers used ARMs to get into a house with little regard for whether they could afford the payments, betting that rising prices could build enough home equity they could tap for cash. When prices stabilized or fell, that safety valve disappeared. Owners couldn't pay monthly bills, and they had no equity to draw on.

In the Rust Belt, it was the ripple effects of a dying industrial economy instead of speculation that crushed the finances of many borrowers in states like Michigan, Ohio and Indiana. People in these area have lower than average income, higher than average unemployment and a large stock of older, single-family homes. Many of them sell for less than $100,000, some for under $30,000.

In Sacramento, 95823, by contrast, residents depend more on government jobs and service industries for employment, although wages are still below average for the state. Homes there are more modern and more valuable than in 44105; even modest three-bed/two bath houses go for several hundred thousand dollars.

Neither the Rust Belt nor Sun Belt are likely to see easier conditions any time soon. In the Sun Belt, the subprime mortgage mess will take many months to work through as the many borrowers who took out 2/28 and 3/27 ARMs during 2005 and 2006 will hit their reset points this year and next.

It is expected that delinquencies will peak by the end of the year and so will foreclosures in 2008.

(Source: CNN Money)