The ups and downs of every economic cycle have always been directly impacted by the health of the real estate sector. The severity of that impact, however, is open to discussion — depending, of course, on how you choose to massage the data to prove your point.

Delivering the results of his research as part of an economists’ panel on the last day of California Realtor Expo 2006 in Long Beach last week, Christopher Cagan, Ph.D., Director of Research and Analytics for First American Real Estate Solutions, said that even with $1 trillion of adjustable-rate mortgages ready to reset to higher interest rates in both 2007 and 2008, he believes the number of defaults and foreclosures resulting from the increased mortgage payments will be “painful but won’t break the economy or the market.”

Basing his comments on data collected on first mortgages — with an emphasis on those originated between 2004 and 2005 — Cagan said, “We have to figure out who has equity and who doesn’t. All those who bought or refinanced in 2003 or earlier are likely to have equity.”

Cagan’s report sorts various loans by how sensitive, or risky, the loans are. He categorizes the most risky — those with low initial rates like interest-only and negatively amortizing loans — as red loans. Those classified either orange or yellow loans are more likely to have resources behind them to keep from default.

According to Cagan, 90 percent of all red loans that have equity difficulty will go into default, while 70 percent of all orange loans are estimated to go into default because they are already under financial distress. Lastly, 50 percent of the yellow loans may go into default.

Breaking the data down, Table 18 in Cagan’s report shows as many as 1.4 million loans in the red category at an original value of $430 million; 3 million loans in the yellow category with an original value of $819 million; and 3.3 million loans in the orange category with an original value of $637 million.

In all, the table is the basis for Cagan’s belief that a total of $300 billion in homeowner equity is at risk, with mortgage resets being a strung-out process over a five-year time period rather than a one-time event. During this reset period he estimates losses of approximately 1 percent of homeowner equity a year.

Still, the bottom line is no matter how you divide up the data, you can expect foreclosure levels to increase over the next few years as the various forms of adjustable mortgages utilized to fund purchases of more home than most people could afford ratchet up their interest rates. In fact a recent Wall Street Journal Online/Harris Interactive Personal Finance poll revealed that 38 percent of adults have used a “creative or payment option mortgage” in a home purchase in 2006, a 5 percent increase from 2005.

According to the RealtyTrac September 2006 U.S. Foreclosure Market Report, on a yearly basis foreclosure activity was up 63% from the same month last year. This combined with Cagan’s statistics points to more future opportunity awaiting investors, real estate professionals and hopeful home buyers looking to RealtyTrac for bargain foreclosure properties.

LONG BEACH, Calif. — If California’s economic indicators stay at their present course, 2007 should be a very good year for investing and purchasing foreclosure properties at bargain prices. At Wednesday’s Opening Session of California Realtor EXPO 2006, Leslie Appleton-Young, Chief Economist for the California Association of Realtors, presented her housing forecast for next year, calling for the state’s median home price to drop for the first time in 10 years and the pace of home sales to continue to decrease.

The CAR forecast also calls for a 2 percent drop in the state’s median home price next year from a projected median price of $561,000 for 2006, down to a projected median of $550,000 in 2007 — a stark contrast to a year ago when most forecasters were predicting a soft landing and few were expecting prices to fall and sales to plunge.

Moreover, sales of California homes are expected to sink 23 percent this year compared to 2005 and fall another 7 percent next year.  The Realtor group expects 447,500 homes to sell in 2007, compared with 481,200 homes in 2006. Some regions of the state — including the Central Valley, San Diego and Riverside/San Bernardino — will experience sales declines greater than the state as a whole in 2007.

The expectations of the California Realtors is less bleak than a new housing report,  "Housing at the Tipping Point," released this month by Moody’s Economy.com that predicts sharp declines, some nearing 20 percent in many metropolitan areas of California, Arizona, Nevada, Florida, Washington, D.C. and Detroit. 

The Realtor group also forecast a spike in foreclosures activity next year. These new forecasts, along with monthly research complied by RealtyTrac, shows a slumping housing market in California and other states that could lead to increased foreclosure activity next year. Feel free to comment on the blog, or send us an e-mail to editor@foreclosurepulse.com.  We welcome your comments and feedback.

Many American homeowners — initially attracted to low teaser rates on those “exotic” ARMs and sub-prime loans — now find themselves swimming upstream in a desperate attempt to remain financially afloat. But as the rising tide of mortgage debt grows, many of those homeowners will unfortunately sink, drowning in foreclosure red ink. 

For the thousands of homeowners who jumped into turbulent housing waters via these easy-to-qualify-for loans, they are now succumbing to a riptide of bad news.  RealtyTrac™ (www.realtytrac.com), the leading online marketplace for foreclosure properties, released its September 2006 U.S. Foreclosure Market Report, which shows 112,210 properties nationwide entered some stage of foreclosure during the month, a decrease of less than 1 percent from August, and a 63 percent increase from September 2005.  The report also shows a national foreclosure rate of one new foreclosure filing for every 1,030 U.S. households, the third highest monthly foreclosure rate reported this year.  And prices of existing homes fell in August for the first time in 11 years as sales dipped to their lowest level since early 2004, according to the National Association of Realtors.

The next big wave of news may be a true real-estate slump, as hundreds of billions in adjustable-rate mortgages reset, making it even more difficult for homeowners in depressed markets to meet higher monthly payments. Those with adjustable-rate loans — almost a quarter of all U.S. mortgages — will face re-adjustments soon. That means higher monthly outlays and higher foreclosure rates.

Earlier in the year, there was a lot of discussion about a “soft landing” for the residential real estate market.  Now there is increasing talk of a “harder landing.”  But even if real estate's landing is a soft one, one thing is clear:  Real estate investors, agents and home buyers interested in successfully navigating the real estate foreclosure tide should let RealtyTrac help steer the ship towards continued success in the real estate business.

At RealtyTrac, we look to help you chart your course through rough waters, by supplying you with the latest in real estate news and information on foreclosure activity. We welcome your comments and feedback on this and other posts on ForeclosurePulse.blog. 

Concerned about the fallout from rising mortgage delinquency rates and foreclosures around the country, the federal government recently stepped into the fray, issuing new tighter guidelines aimed at dealing with so-called “exotic” adjustable-rate mortgages. Worried about the lingering effect of a growing pool of borrowers unable to meet their rising mortgage payments, regulators at the Office of the Comptroller of the Currency want banks to make sure the loans they are making are "consistent with prudent lending practices, including consideration of a borrower's repayment capacity."

The new Federal guidelines contain disclosure and underwriting provisions that could mean fewer buyers will qualify for such nontraditional loans. These loans are what many in the banking and real estate industries say have helped home buyers get into their first home or purchase more home than they otherwise could afford using more conventional mortgage products.

The National Association of Realtors (NAR) lauded the new consumer education efforts put forth by the government, but cautioned regulators not to restrict innovation in the mortgage lending sector. Striking a balance between consumer education and the free marketplace is of utmost importance, according to the Realtors.

Bankers are critical of the new guidelines, saying they are too restrictive, especially federally insured lenders. But will these new disclosure and underwriting requirements affect investors, realtors and RealtyTrac customers? Will the clamp down on underwriting possibly shrink the number of foreclosures? And at this point in the market are shrinking foreclosures good or bad for investors?

Keep watching ForeclosurePulse and RealtyTrac for more information. We welcome your comments and thoughts and encourage you to offer us feedback and suggestions. Post your comments on the blog, or send us an e-mail to editor@foreclosurepulse.com.