Rosen: Foreclosures nothing new

Published December 15, 2006 at midnight

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'Denver-area foreclosures set a record," blared the headline over a recent Rocky Mountain News story. Well, not exactly, as you discovered if you got past the dramatic introduction. Yes, at 17,782 through the first 11 months of 2006, the absolute number of foreclosures has hit a new high compared to the 17,122 in 1988 when Colorado's oil industry went bust. But several paragraphs into the story, careful readers learned that foreclosures as a percentage of the number of homes and loans on the market are considerably below the record levels of 1988. In that year, the foreclosure rate was 3.8 percent. By contrast, this year's rate of 2.0 percent is about half that.

The explanation, of course, is that the number of dwellings with mortgage loans has about doubled since then. And that's why God invented percentages, so you can compare apples to apples to get an accurate comparison.

Now, if you're the one who's on the wrong end of a foreclosure, you might care little about the big picture. And I can sympathize with someone in that predicament, up to a point. But the big picture helps explain how some people got into this fix.

It seems that everybody and his brother are in the mortgage lending and refinancing business these days. While most lenders are reputable, there are some who aren't. Inexperienced and financially unsophisticated consumers/borrowers have been misled and deceived by shady lenders, sometimes in cahoots with corrupt appraisers. This is part of the problem, and grifters ought to be exposed and held to account. At the same time, it's the responsibility of consumers to exercise due diligence.

The greater part of the problem has to do with bad choices and risky behavior by borrowers. In 1988, when foreclosures last peaked, Colorado's economic plunge left many homeowners in the lurch. The current economic recovery, which started in 2002, is still fairly robust in our state. Low inflation and permissive credit policies significantly lowered the cost of borrowing. Combined with reduced down-payment and equity requirements, home ownership - a staple of the American dream - came within the reach of marginal borrowers. And some people overreached.

This is nothing new. Many of us have stretched to buy that first home, assuming our incomes would increase and that we'd soon grow into our mortgage payments. After a period of being "house poor," it usually works out for most families. The alternative is to defer gratification: to rent for a while longer, live within your means, forgo expensive vacations, squeeze a few more years out of your old car, and save money to put more down on a new home later on. That's what the proverbial ant does.

The grasshopper, conversely, isn't big on deferred gratification. Modern-day Americans tend to be more like grasshoppers. (An earlier generation that lived through the Great Depression had more antlike qualities.) Grasshoppers like to gamble and reach for the brass ring - now. In our market economy, they're free to take that risk and reap the benefits of success or pay the consequences of failure.

Some gambled and lost. Their incomes didn't meet their hopeful expectations. They didn't grow into their mortgages. Had things worked out better, they'd have gotten to enjoy that house for years while the "ants" were scrimping and saving. Ironically, ants may now be buying grasshoppers' foreclosed homes at distressed prices.

Compounding the problem, some borrowers also gambled on adjustable-rate mortgages and interest-only loans, eschewing a stable, long-term, fixed interest rate in favor of lower, short-term variable rates, while failing to retire any of the principal. When interest rates went up, their mortgage payments did, too. Clever borrowers also piled their auto loans onto their home mortgages in order to take advantage of the income tax deduction. They wiped out what remained of the equity in their homes by borrowing money for a hot tub, a home theater and a vacation in Hawaii. Then comes an unexpected career setback, a divorce or an illness and - poof! - overleveraged borrowers with zero or negative equity in their home and no savings find themselves in default and foreclosure.

Before you indulge your compassion and misdirect your anger at "heartless" lenders, consider that they're the ones left holding the bag after the foreclosed borrowers walk away from a devalued property. And the lender might be a perfectly respectable savings and loan representing the interests of its depositors - like an elderly couple with their life savings entrusted to the S&L in the form of a $250,000 CD.

The real estate market has its up and down cycles and is already adjusting. Borrowers and lenders are both becoming more cautious. The current spate of foreclosures is unfortunate but not a public policy crisis. In fact, it's the appropriate market remedy.

Mike Rosen's radio show airs daily from 9 a.m. to noon on 850 KOA. He can be reached by e-mail at mikerosen@850koa.com.

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