Is there Another Wave of Foreclosures Coming to Loudoun in 2009?
December 29, 2008 by Danilo Bogdanovic
Filed under Statistics
An unprecedented wave of foreclosures has hit Loudoun County as well as the rest of the nation over the past few years. The primary source? "Subprime" loans and their high rate of default.
But there may be a second wave of foreclosures coming to Loudoun County thanks to "Alt-A" and "Option ARM" loans. Though previously thought of as less risky than "subprime" loans, many are saying that they will have the same, if not higher, rate of default as "subprime" loans. Most of these "Alt-A" and "Option ARM" loans have not yet "reset", but will begin doing so early next year.
Note: "Alt-A" and "Option ARM" loans don't fall into the category of "subprime" loans and have been virtually unaccounted for nor talked about until recently.
Consider this…
If you put a "heat" map of the US showing the number of "subprime" loans next to a "heat" map of the US showing the number of foreclosures and/or bank-owned properties, they look almost identical. The higher the number of "subprime" loans, the higher the foreclosure rate and number of bank-owned properties.
Assuming that "Alt-A" and "Option ARM" loans have the same, if not higher, rate of default, I can't imagine we'd get anything but the same result when comparing "heat" maps of these types of loans with future Loudoun foreclosure rates.
That being said, let's look at a "heat" map of "Alt-A" and "Option ARM" loans in Virginia (click to enlarge):
As you can see, there is a high concentration of "Alt-A" and "Option ARM" loans in the Northern Virginia area, including Loudoun County.
According to a recent 60 Minute special about "Alt-A" and "Option ARM" loans (check out the video), they are just now starting to reset with the worse to come in the next year to three years. If this hypothesis holds true and no real help becomes available for troubled borrowers, according to the map above, Loudoun will see another wave of foreclosures coming on the market over the next few years.
At this point, the data is limited though it's on economist's radar screens and there should be more coming out soon. As more becomes available, I'll keep you posted.
You mentioned that there is a high concentration of “Alt-A” and “Option ARM” loans in the Northern Virginia area, including Loudoun County. I want to alert you to the fact that many of these mortgages may have been taken out by self-employed small business owners who were targeted for these mortgages and fell prey to them.
On December 14, 2008, CBS’s 60 Minutes had a segment on the 2nd Wave of Foreclosures. They indicated that experts were expecting another wave of mortgage defaults on ALT-A and Option ARMs mortgages which will dwarf the Subprime Mortgage Crisis. The CBS report missed a very important fact. There are millions of self-employed small business owners who are at-risk of foreclosure, business failure, and the resulting loss of jobs by their emplolyees.
Many fail to realize that there are millions of self-employed smaller businesses, who employ from 1-10 employees, that are holding the mortgages that are going to reset in 2009 through 2012. These borrowers are Prime and Near-Prime borrowers who hold ALT-A, Option ARMs, Interest-Only mortgages. There are $1 Trillion ALT-As, and $500-600 Billion Option ARMs.
So, here we have a major problem… Not only will these small business owners lose their homes, but there will be the resulting JOB LOSSES on their business failure.
Although President-Elect Obama is stressing the need to create 3 million new jobs, we must understand that “JOB RETENTION IS AS IMPORTANT AS JOB CREATION”.
A survey conducted by the National Association for the Self-Employed (NASE) disclosed these disturbing facts. The NASE survey is at http://www.nase.org . See the NASE News for the Survey on Toxic Mortgages.
According to this survey, it is estimated that 3,709,800 small business owners hold Alt-A and other toxic mortgages, and 1,279,800 are already delinquent as they have missed one to three or more monthly mortgage payments at mid-November, before the expected Resets that are scheduled to begin in 4th Quarter 2008 through 2012.
The solution lies in the hands of Congress as they meet in January to structure an economic stimulus package. Congress should take note of this survey and be “proactive” in addressing the situation, rather than “reactive” as the case has been in the Subprime Mortgage Crisis.
We can’t afford another shock of foreclosures and unemployment at this time. This 2nd Wave of Foreclosures which will be caused by the ALT-A and Option ARMs will not only result in Foreclosures, but also Job Loss.
Thank you very much for your comment and bringing that up. That’s an important fact which I was unaware of. Definitely agree that being proactive is key, but it seems that the words “proactive” and “government” don’t quite go together these days…
Question for you…with most of this part of Northern VA being big business and government contractors rather than small privately-owned businesses, do you think the effect will not be as severe as other areas where small businesses are more prevalant (e.g. Austin)?
Mr. Bogdanovic,
Thank you for posting my Comment and for your kind words. In answer to your question. It is possible to identify the number of self-employed small business owners in your part of Northern VA, but it may not be necessary to get that specific.
Many economists recognize that the malaise in our economy is a function of a Crisis of Confidence. As small business owners lose their homes to foreclosure and suffer business failure in this weak economy, these factors will not only impact foreclosures…they will also impact Job Loss. As Unemployment increases to the magical 10%, consumer confidence will suffer greatly. When consumers stop spending, our economy freezes and we spiral into a deeper and more pronounced Recession.
As Congress meets in January, it is urgent that they consider these facts as they develop an Economic Stimulus Package that will and must work quickly.
I read with interest. What happens in the US follows in the UK. Fiscally speaking of course. Great post.
Pete J.
Keep up these posts. Excellent!