Why a Wave of Foreclosures Could Be Good for the Mortgage Refinance Market

[Feb 24, 2010.]

 

For homeowners looking to refinance a mortgage, a so-called "second wave" of foreclosures would seem to be all bad news, not only for the individual neighbors who end up losing their homes but also for the homeowners who are left behind, with home values depleted by so many foreclosures in the neighborhood.

It's true as far as it goes that foreclosures do lower home prices because foreclosures are taken as "comparable sales" by some real estate brokers and real estate buyers. Lower home prices, in turn, means harder refinancing, because loan-to-value is a key ratio that refinance lenders evaluate.

However, there is an argument that one can make that letting the foreclosure wave roll over the U.S. could actually be a long-term positive for the mortgage refinancing marketplace.

When Prices Hit Bottom, They Have Nowhere to Go But Up

By all accounts, the extreme measures taken by the U.S. government to prevent home prices from completely collapsing have done what they were intended to do: prevent home prices from completely collapsing. In fact, the Case-Shiller Index of home prices shows "a slowing pace of deterioration."

The thing is, everyone still lives in fear that home prices will completely collapse at some point. If a second wave of foreclosures were to sweep the nation, banks and borrowers would at least be able to see and hit rock bottom--and there would be nowhere to go from there but up.

Foreclosures Teach Banks That Everything Is Negotiable

Think the "little people" are the only people facing foreclosure? Think again. Morgan Stanley just walked away from its mortgage on five office buildings in San Francisco.

Rich people know that everything is negotiable. The average homeowner who is struggling to refinance with limited options may not know that as adequately as he or she should.

The more foreclosures that banks are forced to endure (and pay for), the clearer it will be to all banks that it's far better (and cheaper) to help a homeowner refinance than it is to foreclose on the home.

Homeowners Are Supposed To Be the Responsible Types

One giant issue in the mortgage finance industry is how to restart the "securitization" markets. That is, how to package mortgages into bonds that investors are willing to put money into.

If investors are not convinced that homeowners, by and large, are committed to paying their mortgages, the securitization model is dead on arrival--and the mortgage market is severely hampered.

In that sense, more foreclosures might be a plus for refinancing because it would show that the age of people not paying their mortgage and that being A-OK is coming to an end.

 

About Author:

Andrew Freiburghouse is a writer and businessman. He has worked as a magazine reporter, tax preparer, screenwriter, copywriter, and loan officer. He graduated from Santa Clara University in 1999 with a B.A. in English. Andrew was born and raised in the City of Los Angeles.