According to last Sunday’s New York Times, foreclosures are starting to really hurt mortgage companies and the local real estate market.  Last year, lenders began offering “no documentation, stated income” loans to buyers with marginal credit or poor job history.  At the end of the year, the loan applications were compared with the borrower’s reported tax income and huge discrepancies were found.  In fact, the lending industry changed the name of this loan to “liar loans” because it was determined that so many borrowers had greatly inflated their incomes on the stated income loan application, some by as much as 50%.  Loans were indiscriminately handed out to borrowers, albeit at higher interest rates, and ultimately many of those borrowers have not been able to make their mortgage payments which has led to high foreclosure rates.

So what does all of the above mean for the real estate market here in Portland, OR?  First, it means that loans in the sub-prime market are going to be tougher to get.  Companies are no longer offering the no doc, stated income package and some borrowers will not be able to qualify for a loan with the more conventional forms of financing and with the need to provide income and employment verification.   

Also, it means that more foreclosure properties will be hitting the Portland market.  Are these good deals for future buyers?  Probably not.  Since the home owner typically has no to little equity in the house, future real estate buyers can only bank on housing appreciation to make the cost of a home affordable (or a good buy).  When you add in real estate commissions, foreclosure costs and repairs (since foreclosure properties aren’t typically in good condition), the cost of the house either needs to support all of these fees or be sold as a “short sale,” which means that the mortgagor agrees to take a loss in order to sell the house. 

The higher rate of foreclosures also will add more inventory to the Portland real estate market.  More houses on the MLS means more competition for all sellers.  Typically, this kind of competition will perpetuate a buyer’s market and could lead to prices coming down.

If you have specific questions about financing or would like to receive lists of foreclosed properties, please email me at phyllis@pointclickandpack.com.