To understand what's happening to the mortgage industry, take a look at Douglas County. One of the country's most prosperous communities now has a foreclosure rate approaching what its former public trustee calls a "tipping point."
In 2006, foreclosures as a percentage of population were higher than any other year since 1991, said Jack Arrowsmith, Douglas' former public trustee and its current clerk and recorder.
At a recent foreclosure sale, Douglas officials offered 32 residential properties for auction. According to Arrowsmith, nobody bid on 31 of them.
That's why mortgage companies making risky loans are now closing by the hundreds.
Offering no-money-down home loans to unqualified buyers using artificially low teaser interest rates was just that - a tease. Especially here in Colorado.
We led the nation in foreclosures most of last year. We're still No. 4 in the latest RealtyTrac poll.
So on Tuesday, when a Federal Reserve governor expressed shock at the quick national collapse of the risky lending market, she sounded vaguely like Capt. Reneau in "Casablanca."
Subprime lenders, as risky-loan makers are called, are closing up so fast that financial experts now debate if it will affect the entire economy. Analysts can't agree. But with stock-market-traded mortgage companies reporting huge losses from subprime lending, it can't help.
The explanation for crazy lending has always been crazy.
"It is no longer community banks making mortgage loans," Englewood lawyer Robert Hopp told a recent foreclosure seminar at the Colorado Bar Association. Out-of-town lenders provide mortgage money for a fee. Risky loans are quickly packaged with other mortgages and sold as securities for a fee. Investors buy the mortgage-backed securities expecting a fat return.
Everybody gets paid. Risks get diluted in big loan portfolios. Those who can't afford houses suddenly can.
And lo and behold, the American Dream comes true. Is this a great country or what?
It all sounds too good to be true because it is.
Now, the only people capable of stopping the madness - the money grubbers - are getting a clue. Loose and deceptive home lending profits no one.
In Douglas County, Arrowsmith believes fewer risky home loans is good news. It makes lenders and borrowers more accountable, he said. That, in turn, will help everyone's property values.
Stabilizing home values is what this is all about. Arrowsmith lived through the real estate bust of 1988, when home values actually declined. It was ugly.
"It's a positive thing that lenders are starting to review the process," Arrowsmith said of the risky-loan meltdown. "But it's going to take time.
"In the long term, lenders are going to require borrowers to put some money into their property."
Sure, that thins the homebuying herd, but it forces folks back to the reality - and responsibility - of homeownership.
The risky-lending boom of the early 21st century was a Ponzi scheme. It depended on constant growth in real estate values. You could lend anybody anything so long as their house was worth 10 percent more each year. For lenders, growth meant collateral would always be worth more than the money tied up in it.
According to Hopp and Arrowsmith, some lenders made loans worth up to 20 percent more than the assessed value of homes. These lenders believed appreciation would make up for negative equity. When the market stagnated and borrowers couldn't keep up with mortgage payments, negative equity and zero-down lenders ended up with a bunch of houses worth less than the amount of money owed on them.
When that happens, you get foreclosure auctions where only one house in 32 is worth a bid.
And lo and behold, the American Dream comes to Jesus.
Jim Spencer appears Monday, Wednesday and Friday. Reach him at 303-954- 1771 and jspencer@denverpost.com.
For More Housing Information go to http://www2.blogger.com/www.ColoradoDreamHomes.net
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