Is there Another Wave of Foreclosures Coming to Loudoun in 2009?

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.