As Colorado Goes, So Goes the Nation?

The Denver Post just published a fourth article in its well-researched series on foreclosures in Colorado.  The articles focus on the extreme conditions in Colorado – the state with the highest foreclosure rate in the nation – but many of its themes apply across the across the county. The series tells of recently-built neighborhoods in which one-fourth of the homes have been foreclosed.  It discusses the increasing proportion of interest-only and adjustable-rate mortgages, which account for an astonishing 43.6 percent of mortgages in Colorado. The national rate of 26.7 percent may seem small in comparison, but it too has skyrocketed in recent years. (In 2001, fewer than 2 percent of home loans were interest-only mortgages. Adjustable-rate mortgages accounted for about 14 percent of the market as recently as 2003.)

The Post also did some original empirical research of its own, and the results suggest that the state’s rates of foreclosures and its rates of high-risk mortgages are not unrelated. The newspaper studied all the foreclosure notices filed this August in three Colorado counties which have been particularly hard hit by the foreclosure boom.  Of the nearly 1,000 notices it examined, it found that, when excluding mortgages based on certain federally insured loans that require a small down payment, over seventy percent of the underlying loans were no-money-down. This means that the families became homeowners with no equity in their homes.

This series also tells a Colorado version of a story that has been documented nationally by the Consumer Bankruptcy Project.  The families in the Post articles take on mortgages with payments that are barely affordable when times are good. When something goes wrong, these families are forced into foreclosure.  Here that “something” ranges from divorce to surgery following a car accident to pay cuts to neighborhood covenants that required the new owner to landscape the property.  The Post’s research comports with the Consumer Bankruptcy Projects national findings in one other key respect.  Although a negative life event may be the immediate catalyst that sends a family into crisis, it is the family’s underlying financial structure – too much debt, too few assets (in this case, home equity) – that leaves it so vulnerable in the first place. As the reporters wrote in the most recent article in the series:  “In interviews with dozens of homeowners in foreclosure, The Post found that life events such as job loss, medical problems and divorce often precipitate a default. But lack of equity, which gives homeowners options when they face financial problems, was a factor in nearly all cases.”