Many homeowners aren’t able to pay when their fixed rates expire and monthly payments skyrocket.
Unconventional loans designed to give people a shot at home ownership appear to be coming back to haunt some Idahoans, industry experts say.
The number of Idaho homes in foreclosure during the first half of 2007 rose 21 percent to 1,418, compared with 1,174 during the same period a year ago.
The number of filings against those properties rose 91 percent from a year ago, according to RealtyTrac, an Irvine, Calif.-based company that monitors the nation’s foreclosure rate. That means many properties face multiple filings, which ordinarily means the owners are unable to stave off foreclosures by selling or refinancing.
In an unexpected twist, only 5 percent — or 70 out of 1,418 properties — in foreclosure during the first half of 2007 were actually repossessed by the lender. The national average for that same period was 25 percent, according to RealtyTrac statistics.
RealtyTrac Marketing Communications Manager Daren Blomquist said the small percentage that go back to the bank indicates that most Idahoans facing foreclosure have enough equity to sell or refinance.
Blomquist attributed rising foreclosures to runaway home appreciation rates that led many Idahoans to jump into the real estate market in hopes of making a financial killing. Many, however, had poor credit and had to resort to questionable financing methods just to pay for their new homes.
One unconventional short-term loan — the option adjustable rate mortgage — gives the consumer a choice of whether to make a payment as if the loan was a 30-year fixed rate or a 15-year fixed rate loan. He or she also could make an interest-only payment or the minimum payment required.
Other unusual forms of financing include loans that require no documentation or even proof of income. Like the option ARM, these loans also carry a fixed rate for a specified time. But when the loans adjust, the interest rate shoots upward, often putting the monthly payment beyond the homeowner’s ability to pay.
“A guy is making a $900 payment and all of a sudden it goes up to $1,400. He is not going to be able to make it,” said U.S. Bankruptcy Court Trustee Bernie Rakozy.
Just like somebody in bankruptcy must undergo credit counseling before receiving a discharge of their debts, lenders should be required to explain in detail to the borrower the dangers of an adjustable rate mortgage, he said.
“It’s there in the fine print,” Rakozy said. “But by that time, they have you on the hook.”
As a result, organizations such as Debt Reduction Services, a locally based nonprofit debt counseling service, are seeing an increase in bankruptcy filings related to foreclosures.
One local attorney said that some foreclosures were the result of what is referred to as “flippers.” But these speculators try to take advantage of the market, hoping the house they bought with a 100 percent subprime loan would appreciate quickly and make them a 20 percent or 30 percent profit. For a time, that worked.
“Now that the gold rush market we were experiencing is over, these people are falling on their bottoms,” said Boise attorney Holger Uhl.
However, he said some homeowners also were victimized by unscrupulous lenders who knew they were putting a customer into a tenuous financial position.
“I don’t know how system-wide the problem is, but we are certainly hearing more about it,” he said.
Attorney Jake Peterson says most lenders will wait until the borrower is 90 days behind in his or her payment before moving to foreclosure. At that point, he recommends a Chapter 13 bankruptcy filing, in which a trustee is appointed to oversee the repayment of debts owed. The borrower then sets up a repayment plan designed to pay off that money.
“But he still has to keep making his regular monthly house payment,” Rakozy said.
Adds Peterson, “It’s a good deal for the lender, because they don’t want your house. If they try and sell it in this market, they’re going to lose money.” It’s a good deal for borrowers, too, because otherwise they’re likely to face foreclosure.
A local mortgage broker said she was surprised Idaho’s foreclosure rate wasn’t higher.
Marianne Wake, owner of The Mortgage Co., which serves the Treasure Valley, said about 30 percent of the loans her company brokered before last January were subprime, including stated-income mortgages in which the lender did not verify a borrower’s income.
Wake said her company continues to make subprime loans but under much tighter lending criteria. For example, the 100 percent loan that once could be obtained with a credit score of 580 now requires a score of 620 to 660.
Credit scores — based in part on a person’s payment history and the amount of outstanding debt — range from 300 to 850 points. Most people score in the 600s and 700s. Scores above 700 are considered a sign of good financial health; below 600 indicates a person is financially a high risk.
Wake also said the stated income — or so-called “liars loan,” in which the salary needed to qualify for a loan is simply written in but never verified — also changed. Now, for example, if part of a borrower’s income depends on commission, the borrower has to show that those commissions have been coming in for a year in order to qualify for a subprime loan. If a spouse has gone to work, their earnings must be shown to be consistent over the course of a year before they can be considered for a loan, Wake said.
But that is not going to make up for the sins of the past, she said.
“It’s a sad time for the mortgage industry,” Wake said. “When American Home Mortgage (the 10th largest independent home loan provider in the U.S.) closed its doors, it laid off 7,000 people, including employees in Boise, Meridian, Nampa and Caldwell.”
When Aegis Wholesale Corp., a Delaware-based subprime lender, recently shut down, it left one of Wake’s customers without a way of buying a new home.
“They approved the loan on Friday, then pulled the plug on Monday, so the loan wasn’t funded,” she said. “These people are all packed and ready to go, and now we have to find them a new loan.”
According to Mortgageimplode.com, a Web site that tracks the subprime market, 110 subprime lenders had gone belly-up as of early August. Wake said an equal number may be on the “watch list.”
“And many of them are lenders that we use here in Idaho,” she said.
Even so, Idaho is still doing better than most states, said Rick Sharga, vice president of marketing for RealtyTrac.
“Even though the trend in Idaho is up, you’re not living in a state where anybody should be panicking,” Sharga said.
Idaho’s foreclosure rate was so low last year that it did not take much of a bump to show a dramatic increase, said Susan Semba, director of home ownership lending with Idaho Housing and Finance Association.
The association’s delinquencies and foreclosures numbers are down because its portfolio is heavily weighted toward FHA and conventional mortgages, loans that have more stringent qualification requirements.
Dawn Justice, president and chief executive officer of the Idaho Bankers Association said where Idaho stands in terms of foreclosures depends on who is crunching the numbers and what criteria are used. She said one Web site she routinely visits recently showed that foreclosures in Idaho were down between the first and second quarter of 2007.
“And it was progressively lower: 569 in April, 542 in May and 501 in June,” she said. “I’ve seen numbers that show us fifth-lowest from the bottom in terms of FHA and first-home loans.”
Meanwhile, a local economist said an increase in foreclosures does not represent a danger to the Idaho economy.
“The strength of a local economy is a function of its base,” said Don Holley, professor of economics at Boise State University. “Our economic base is not residential housing. It’s Micron, Hewlett-Packard, Simplot and Boise Cascade.”
As a result, the economic impact of rising foreclosure numbers will be limited to the housing sector, Holley said.
By Joe Estrella, IdahoStatesman.com