Rising Foreclosures Point To A Need For Mortgage Alternatives

I have become very wary of data dumps about single-family housing trends. Like many things in life, housing data is often only understood months or even years after the initial delivery. Also, the data can also be confounded by countervailing trends that may or may not be causal or correlated. Still, I was interested in a recent post at Realtor.com about foreclosures. According to the post, foreclosures are rising noticeably, up 18% since about a year ago. Factors, according to the post, are high housing costs, interest rates, and homeowners with less cash. The post calls out Florida and Texas as places where the problem is more acute. Are we headed for another 2008 style default driven crisis. The post doesn’t point to that, but rising foreclosures are a troubling trend and another indicator of the nation’s overreliance on the 30-year mortgage.

The data in the post comes from ATTOM a data aggregator and analyst. In August, there were a total of 35,697 U.S. properties with foreclosure filings—default notices, scheduled auctions, or bank repossessions—according to ATTOM, a leading curator of land, property data, and real estate analytics. That figure was down 1% from July but up 18% compared with August of last year.

“While overall levels remain below those seen before the pandemic,” said Rob Barber, CEO at ATTOM, “the ongoing rise in both foreclosure starts and completions suggests that some homeowners may be experiencing added financial strain in the current high-cost and high-interest-rate environment.”

And here is a spot where I doubt that even the most analysts can make much sense of the trend. Clearly, more foreclosures mean households have less money and thus are missing payments, enough payments in a row to trigger legal action by a lender. But what does that have to do with interest rates? Some homes might have mortgages that adjust to current rates, but most don’t. As I’ve pointed out before, a long-term mortgage can work if employment is steady and households stay stable. Does the increase in foreclosures have to do with job losses, family break ups, or something else. It’s impossible to guess at this point.

The post cited housing price data, indicating that current “price per square foot also remained steady, increasing by just 0.1%. But compared with pre-pandemic levels, affordability has deteriorated significantly. Since August 2019, the typical list price has climbed 36.1%, while the price per square foot is up 51.3%.”

Prices are up compared to what they were before the pandemic but not moving all that much in real time. What does that mean? According to ATTOM, states with the highest foreclosure rates were Nevada, South Carolina, and Florida. According to a real estate and tax attorney, Chad Cummings, quoted by the post, Florida presents a unique case.

“Florida homeowners are confronting a unique trifecta: adjustable-rate mortgages resetting sharply higher, windstorm and flood insurance premiums doubling in many counties, and widespread underinsurance post-hurricane.”

What all this means to me is that American dependence on the 30-year mortgage puts our entire economy on fragile ground. Florida might be something of an outlier, faced with numerous issues piling up at once. But the truth is that the amount of debt a household assumes with a mortgage is enormous, and when life changes – whether because of a lost job or a hurricane – families get in trouble. When enough of them do, it can create a wider economic crisis that is destructive for everyone.

This is why I’ve been urging a new system of helping families and households achieve ownership. My experience tells me that cooperative ownership is a good path. Government should be using its power and credit to ameliorate risk for financial institutions that are willing to finance cooperative ownership. Until we begin developing a different path that doesn’t rely on 30 years of bank debt, but shared risk among communities that lend to each other, then we’re putting a great deal of confidence in a mechanism that can create an economic chain reaction when they fail.

As Cummings, the tax attorney points out, “unfortunately, by the time some clients get to my office, it is far too late, and our options have narrowed significantly. Timing is everything!” Indeed it is, and there is no time like the present, when foreclosures seem concentrated in only some areas, to consider paths to ownership that don’t rely on making mortgage payments every month to a bank.