I don’t see why we’re quibbling over the percentage of recent mortgagees (which number includes far more than just the people who have recently purchased) who are overextended enough to be susceptible to foreclosure. And we definitely shouldn’t be limiting our analysis of the percentage to any single year’s sales volumes because the credit overextension spans more than one or two years, and those totals are cumulative.
If the rate of foreclosures were to exceed even 5% of these mortgagees that number would be much more than sufficient to drive the market. A rate of 5% of mortgagees over the last 3 years would be more than 15% of any single year’s sales volume, especially in a year of reduced volumes. In such a market, if 1 sale out of 6 is from a lender you better believe those sales will dominate the market pricing. A 10% foreclosure rate among recent mortgagees would be catastrophic to lenders. A 5% rate might even be too much.
How many $50,000 losses would it take to put any one lender down for the count? I don’t think it will take very many. When you consider a $50k loss is less than 10% of the current median prices here we would need to be very concerned for any price corrections exceeding 20%. Such a loss on a regional scale would wipe out many of the equity positions held by recent mortagees and start cutting into the mortgage positions held by the lenders. That’s at 20%. The risk to the lenders could increase exponentially if the price corrections were to exceed 20%, as some people believe may happen.
