The story of foreclosures – in and out.

We don’t know how many people are currently in foreclosure and mainly judge by the articles in the newspapers, stories on the Internet, signs on the street where we live and what we see in the neighborhood. Our view really depends on where we live.

Apparently, all those foreclosures are not random events happening to random people.  They are happening every day and snowballing. The more properties on the market, the less percentage of them selling and the lower the prices buyers are willing to pay. More frequently, the sales price isn’t covering the investment.

People who got in in 2003-2004 with 3 year ARMs are now hit with the higher payments they can’t afford. The 5 year ARMs are coming next. Stated income loans and no income verification loans, that were given to the public by many mortgage companies now constitute a pool with a significant rate of default.

In my opinion, this situation is somewhat similar to 1998 Russian Default prompting Emerging Markets crisis and 2001 Enron collapse causing liquidity crisis in the energy markets. In both cases, the defaults drastically increased the spread over Libor / Fed Funds Rates or short-term borrowing rates, causing the ripple-effect on the economies and markets.

In a similar way, mortgage companies that don’t have access to the short-term financing are going bellies-up. So far, 70+ mortgage companies went out of business in the last few months.

This exacerbates the problem in the real estate market, creating a vicious circle.