If you have been reading my recent posts at Personal Loan Portfolio, you know that I am in the process of formating a P2P lending strategy. However, lending does not seem to be a good business to be in recently. Countrywide, one of the nation’s largest mortgage lenders, is hemorrhaging jobs and money due to poor lending practices. Countrywide is not alone — see the recent financial results at Morgan Stanley , Citibank, and Merrill Lynch which have all been negatively impacted by their mortgage backed securities investments. These recent results make for a frightening lending environment.
Today, MSNBC is reporting that mortgage foreclosures rose 30% in the third quarter of 2007 over the second quarter. The level is double the third quarter 2006. That makes the overall US foreclosure rate one out of every 196 households. How does this rise in foreclosures impact your Prosper lending strategy?
First, why the increase in foreclosures? Too many borrowers bought more house than they could afford by taking out an adjustable rate mortgage (ARM). ARMs give the borrower a lower introductory mortgage rate on the assumption that the borrower will 1) sell the house before the rate adjusts upwards or not long after the rate change, 2) the borrower will earn more money in the future and thus be able to take on the additional payment or 3) refinance at a lower rate or under better terms in the future. Too often, I believe that the reason that borrowers took on ARMs was that they simply did not understand the interest change.
An upward rate adjustment of only 2% could add over $600 per month on a $500K mortgage payment[1] — but the story is even worse if the borrower had received a special introductory rate. Add to the picture rising gasoline prices, rising home owner’s insurance rates, and inflation. This makes the foreclosure rate very understandable in the markets that had high price home appreciation, especially considering that many people can no longer sell their house at a profit in the slow moving and declining market. According to BankRate.com, a borrower has a 1 in 3 chance of losing their home if they took out an ARM and had an initial interest rate of less than 4%. Unfortunately, foreclosure even impacts those who borrowed wisely according to the Center for Responsible Lending:
The center’s property value analysis was based on academic research indicating that a foreclosure lowers the price of neighboring properties by 0.9 percent on average. That impact was higher in poor neighborhoods, where prices dropped 1.4 percent on average.
So how does this effect a Prosper or other P2P lending strategy? Just like real estate, Prosper lending is not only about the overall national economic situation but also the local economic conditions. The previously mentioned MSNBC article, states the highest rates of foreclosures are in particular states:
[T]he highest concentrations were a handful of housing markets; California Arizona, Florida, Nevada, Ohio, Texas and Michigan made up more than half of the total.
To be more specific, the foreclosures are concentrated in specific cities. Another MSNBC article lists the cities with the highest foreclosure rates. For example, Stockton, California had a foreclosure rate of 1 out of every 31 households! Below are many of the top foreclosure markets with a longer list in the article. I would avoid lending in any of these top foreclosure markets because a lender could essentially truthfully tell you that his or her debt to income ratio is currently a reasonable value, but possibly the borrower knows that the rate is changing in the near future and will significantly change the equation. The borrower could be using your loan on a prayer to keep their house in the near future, but with no long term real hope of recovery. I will be avoiding loans to borrowers in any of the following metropolitan markets.
| Top Foreclosure Rates by Metropolitan Area | ||||||
| Rank | Metro Area | Filing per #HH | Change vs Q2-2007 | Change vs Q3-2006 | ||
| 1 | Stockton, CA | 31 | 31.6% | 465.3% | ||
| 2 | Detroit/Livonia/Dearborn, MI | 33 | 91.7% | 93.4% | ||
| 3 | Riverside/San Bernardino, CA | 43 | 39.1% | 267.9% | ||
| 4 | Fort Lauderdale, FL | 48 | 89.8% | 127.4% | ||
| 5 | Las Vegas/Paradise, NV | 48 | 28.7% | 200.3% | ||
| 6 | Sacramento, CA | 48 | 34.4% | 408% | ||
| 7 | Cleveland/Lorain/Elyria /Mentor, OH | 57 | 30.3% | 178.5% | ||
| 8 | Miami, FL | 60 | 42.7% | 82% | ||
| 9 | Bakersfield, CA | 64 | 73.4% | 361.4% | ||
| 10 | Oakland, CA | 71 | 71.0% | 268.8% | ||
| 11 | Akron, OH | 11.4% | 128% | |||
| 12 | See the rest at MSNBC… | |||||
[1] The monthly payment on a $500K mortgage at 4% interest is $2,387. The monthly payment on a $50K loan at 6% interest is 2,997. A difference of $610 per month.
I got a loan I never knew much about a 80/20 loan the lender and this person who worked for WELLSFARGO bank this MR.Thomas [[removed]] of Malden Mass who was employed by WellsFargo Bank assured me of a solid 30 year loan and he assured me that I would get a first time mortgage to where I had two loans. Then one mortgage was for 150.000 dollars and a junior mortgage for 50.000 dollars. He said I would be locked into a 30 year fix loan. They gave me a two year ARM on the prime note at 7.6-250 % and a 150.000 dollar loan was the key. Instead the bank or writers changed the loan by baiting me to believe i was getting not a bad deal at the current rates, and of course the junior loan was high but I could refinance and change over to a lower percent which would drop points and money.Never happened I got screwed and I requested a change over or re-modification they did nothing so I didn`t pay. Then they short sale and rebought the home back…
I have not enough room on comment sheet to explain my loss.On a 80/20 loan the banks work against the borrower and they are keen and sharp to take advantage over the buyer. The banks Wellsfargo had employed people working to switch mortgage papers over to attract other banks to buy or trade off prospective current loans that were for trade to other lending institutions. The bank crafted away for a loan to look attractive to another bank as the mortgage customer never got to see the current papers as they simply high lighted in magic marker where to sign in yellow color markings and the borrower would follow instruction from the lender and sign what was marked off in order to distract and speed up the processing time,the lender would say we have another closing so we have done it this way to get the paper work completed faster. And then you have the keys and your in your home never to read anything for how ever long it takes and then it is to late.
William, that is a rough and unfair sounding situation. I am sorry that your home mortgage did not work out for you in that way. It sounds like you might have been dealing with some unethical people. The story you present about rushed paper work to push you into a loan that you did not expect is one that I have heard before both with home and car loans. However, there should have have been a “truth in lending” sheet that was simple and easy to understand.
Did the mortgage broker personally buy back the house? If so, you might be able to prove a predatory pattern by checking county records for other homes he purchased that way. Contact the people that he bought the homes from and see what happened to them. He may have been ripping off both home owners and his employer.
By the way, I removed the man’s last name that you listed since I have no way to verify the story.
Very useful information . Thanks for sharing. many folks are in need of a loan modification lawyer or a real estate agent show specializes in short sales.
I’m just wondering where you got this blog’s theme. Is it free or paid? Where can I download it from? Thanks!
The site is different now, but you can still find the theme here: http://templatic.com/category/freethemes