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Foreclosures have led to tighter lending by mortgage companies

Abstract : Foreclosures are on the increase and lenders are tightening their lending practices and all this is really good news for future growth in the real estate market, says Jeff Adams.

The number of foreclosures coming into the US market have led to a large number of defaulting borrowers and a credit crunch which has made it harder for new borrowers to borrow more money. Read at face value these are all signs of an economy about to go into a tailspin, but is it really like that?

In real estate nothing ever occurs in a vacuum and this case is absolutely no exception. There is always a knock-on effect on things which means that no bad situation can lead to a worse one without also sowing the seeds for its own improvement. While this may sound, at first, paradoxical, it is actually very logical.

Let’s examine the current state of the foreclosure market. Home owners are defaulting and, as a result, foreclosures are coming to the market at auctions and then, if they fail to sell, become the property of the bank which will try to dispose of them in a variety of different ways in order to reclaim at least some of its money.

The banks and the lending institutions are, at the same time, tightening up on lending, which has led, according to the latest figures released by Experian, the credit check company, to up to half of all credit card applications being refused and more than a 20% increase in rejections in mortgage applications.

Now you will ask how is it possible to view the increase in foreclosures and the fiscal crunch as a positive thing and the answer has to lie in our examination of the effects. While, for instance credit rejections have risen, there is still a sizeable majority getting through and these represent low-risk, rock-solid borrowers who will go ahead and purchase a home they can afford to repay.

By the same token, the increase in foreclosures is fuelling movement and interest in the driving engine of the real estate market: the new home buyers and real estate investors looking for value homes which will appreciate in price.

So, while the credit crunch is forcing a tightening of the market it is also creating the conditions which will help it grow again. More and more of the borrowers approved have the credit necessary to support the backbone of the market, and with an influx of homes being sold off at below market rates there should, in future, be enough low priced homes appreciating in value to lead to a further jump in equity and create the buzz which is needed to sustain interest and momentum in a market.

And all this because right now we are facing both a credit crunch and an increase in foreclosures. The real estate market is ran along the lines of a very organic model and by the looks of it, it is pretty robust.