ThomasGoodwin.com

CNN.com, in partnership with Money magazine (via the CNNMoney website), recently published a list of the 500 top foreclosure areas based on zip code and the number of foreclosures in those zip codes. Not surprisingly there were several Ohio cities that made the list. It’s been no secret that Ohio is one of the nation’s leaders in foreclosures. Cleveland, Ohio had the most foreclosures in the nation.

Also on the list, and hitting closer to home in the Cincinnati and Dayton, Ohio real estate markets, was Middletown, Ohio zip code 45044. The rise in foreclosures in this zip code can be attributed to the year-long strike that the AK Steel (NYSE:AKS) union workers went through in their contract negotiations. Many of those employees faced a difficult year in 2006 with very little income and the fixed monthly bills associated with supporting a family.

While the local real estate markets throughout Ohio have not seen a tremendous decrease in prices, the increased level of foreclosures is worrysome because it will undoubtedly affect what consumers in the state will pay for a mortgage. If banks have a higher default rate in a particular state, they will most likely want to charge higher rates and/or have stricter requirements for qualifying for a mortgage in that state.

Higher mortgage costs mean less buying power for Ohioans. It also may drive some residents out of the market that would otherwise qualify for a loan. Some residents that live near a state border, such as those in Cincinnati that live near northern Kentucky, may even find it beneficial to move to the other side of the river to save money on a loan and therefore enable themselves to purchase more house for their money (lower interest = lower monthly house payment at every sales price level!)… I don’t think we’re to that point yet, the mortgage rates are still much more closely tied to the T-Bill and interest rates as a whole. But it’s worth noting.

The banks won’t participate in any kind of rate setting practice that could be construed as red-lining, an illegal practice where banks set higher rates in a particular area - historically done to subversively oppress minority homebuyers. But if they reduce their appetite for loans across the board for the entire state, the price for a loan will be higher given a fixed level of demand for the mortgage product. Likewise, if the rates charged are increased uniformly across the entire state, it would not be considered red-lining; rather, just an increased cost of doing business in that particular state. The banks would be charging those borrowers who actually pay their bills more to subsidize those who default. (Nothing like penalizing those people who are ACTUALLY YOUR GOOD CUSTOMERS!!!) But that’s no different than what happens when you buy a car or use your credit cards. The interest rate charged reflects a certain default rate (risk) given your credit score.

The rise in foreclosures also brings about an increase in supply of homes on the market as banks look to re-sell the foreclosed property to recoup the outstanding loans. These homes often sell at discounts as homeowners who are in default are less likely than those in good standing to maintain and improve their home. Think about it, would you take your car to get an oil change in you knew the repo man was cruising the block and coming to get it?! No, you wouldn’t spend money fixing something if you weren’t able to pay to keep it anyway!

Hopefully Ohio is only suffering a short-term setback in the way of foreclosures. Only time will tell. In the meantime we just have to pay the monthly mortgage and hope our neighbors and fellow Ohioans are able to do the same. As always, I welcome your comments and feedback…