Credit Crunch Foreclosures on the rise

Amid a housing market slowdown and questionable credit practices, the number of foreclosures in Columbia has increased significantly. Simply put, overextended borrowers are failing to make mortgage payments and are losing their homes.

“The chickens are coming home to roost, and that’s what’s happening now,” said Colby Ardrey, a real estate agent with Coldwell Banker Tatie Payne, who handles mortgages for Fannie Mae and other companies.

Some local Realtors and mortgage brokers predict the trend of rising foreclosures will continue for another two years, although they point out that the problem is not as bad in Columbia as it is in much of the country.

According to a Senate Joint Economic Committee report this month, the states with the greatest percentage of foreclosures per household last year were Colorado, Georgia, Nevada, Texas, Michigan, Indiana, Florida, Ohio, Utah and Tennessee. In Colorado the foreclosure rate reached one out of four homes, most of them in the Denver area.

The Mortgage Bankers Association says the Senate report’s numbers are inflated, according to Forbes magazine, but the association in March reported the highest foreclosure rate in 37 years for the fourth quarter of 2006: 0.54 percent.

The evidence for the trend is more anecdotal in Columbia, including a big increase in advertisements for trustee sales in the daily newspapers.

“If you open up the paper on any given day, especially on Wednesday, and you go from half a page of notices to two or three full pages, it’s quite obvious that foreclosures are on the rise,” Ardrey said. “And I have seen an increase in the business that I do over the last four months with foreclosures, so there certainly has been an increase in folks losing their homes.”

Greg Harmon, a Realtor with Gaslight Properties, has seen a dramatic increase in the number of foreclosed properties in the year since he launched www.reoinvestornetwork.com, a Web site that tracks foreclosed properties in mid-Missouri, and says he sees no relief in sight.

Likewise, Ardrey said he has seen as many foreclosures in the first four months of this year as he has in the previous five or six years. He predicts the problem may get worse but says it probably won’t get any better for two years. Why? Because, Ardrey said, the process is just beginning for some homeowners who will lose their homes in the next six to eight months.

And those foreclosure cases that reach the courthouse steps are the tip of the iceberg. “I’ve seen more foreclosures in the last year and a half,” said Melody Derendinger, a salesperson with House of Brokers who handles foreclosures for Freddie Mac, which, along with Fannie Mae, is one of the two biggest federal underwriters in the Columbia area. “More are in the paper, but a lot of the cases are resolved before they are actually foreclosed.”

Agents such as Ardrey and Derendinger often don’t get involved in the process until it has progressed at least six months, since Federal Housing Authority and Veterans Administration loans usually carry a six-month grace period before foreclosure proceedings can commence.

“Folks for whatever reason get behind and can’t pay their mortgages for three or four months, and the bank sends them notices and whatnot for several months,” Ardrey said. “When it’s obvious that folks can’t pay their mortgages, then [the lenders] step in and start foreclosure proceedings.”

Next a legal notice is placed in the newspaper announcing a sale at the courthouse steps, and anybody who has the resources to do so can at that time purchase the property. If the bank that holds the note on the house does not accept the price, a real estate agent is engaged to help sell the property. It’s usually the bank that holds the note that winds up with the property, but sometimes another bank will purchase the note, Ardrey said.

“Most banks are not in the business of making money by actually buying or selling properties, so many times it is a question of how much they are going to lose instead of how much they are going to make,” Ardrey said. “Whoever holds that note is not going to sell these properties for $10,000 when they can get $100,000 out of them.”

And for those who’ve seen too many get-rich-through-foreclosure schemes on late-night TV, think again. “It just doesn’t really happen,” Ardrey said of these TV shows. “It ought to be criminal, actually.”

“A lot of people figure they can get a foreclosure at a big discount, or think they can get a deal,” Derendinger said. “That’s misleading. Freddie Mac, HUD and the VA do not try to price their homes much below fair market value.”

Last week, the wave of foreclosures led some U.S. senators to call for federal aid to at-risk homeowners, and the not-for-profit Neighborhood Assistance Corporation of America announced a $1 billion bailout program to help homeowners struggling with soaring adjustable-rate mortgage (ARM) interest rates move to fixed-rate mortgages.

So what forces are to blame for the foreclosure trend? The extremely attractive interest rates and healthy home appreciation in recent years may have made loan companies too hungry to provide easy credit. “There are a lot of people out there who were getting loans who probably shouldn’t have been getting loans,” Ardrey said.

Most often, the culprit named is the ARM loans that start with sub-prime interest rates. The sub-prime sector developed over the last 15 years as lenders saw a lucrative market in the vast numbers of people who couldn’t qualify for a loan in the past. The number of sub-prime mortgages has doubled over the past five years, according to media reports, making up 20 percent of new mortgages, according to one estimate.

“They’re loaning 100 percent to people without down-payments,” Harmon said. “In the old days, you had to have 3 to 5 percent down for a person with questionable credit in rules set by HUD or local banks. Sub-primers have changed the rules.”

Homebuyers may not be paying close attention to the terms of their agreements.

“What’s happening is that people who obtain sub-prime loans often have credit problems before they purchase their homes, and they continue that trend after they purchase their homes,” said Sam Bodine, vice president of operations for Chapel Hill Mortgage. “Their credit gets much worse because they have such a high mortgage payment, and they start missing payments on other items. Once the fixed term on their ARM comes due, their credit is so bad they cannot refinance.”

In other cases, homeowners will wait until after they are 30 days late on their mortgage payment before attempting to address the refinancing of their loan, Bodine added. “Most of the time, we can help someone who doesn’t have a recent 30-day-late payment on their credit report,” he said.

“I strongly suggest that those who think they might have a problem making a payment should refinance out of their ARMs because, once they miss a payment, it is usually too late to help them. ARMs are actually at higher interest rates now than fixed rates, so it’s not even beneficial to do an ARM right now.”

Bodine said the cycle is familiar. The homeowner gets an ARM at 7 percent, but it jumps to 12 percent after two years. The homeowner handles the higher rate for a couple of months, but something happens to make him or her miss a payment. Missing a payment gives the homeowner a bad credit score, so he or she can’t refinance the loan, handcuffing the homeowner to the higher-rate loan and forcing the lender to foreclose.

“What people need to do is call the lender first thing,” Harmon said. “The banks are sensitive to this issue and may be able to give a little leeway or modify the loan.”

Bodine said his company encourages people to refinance out of ARMs as quickly as possible. Usually, after two years in an ARM, homeowners can refinance without a penalty. However, sometimes the ARM contract from a lender includes a pre-pay penalty, which means the homeowner cannot refinance without paying a penalty before the ARM comes due. If the homeowner borrowed 100 percent of the purchase price, he or she cannot refinance or sell the home because the penalty puts it over the 100 percent mark.

The ease of obtaining other credit in general to pay for other items that people want but can’t really afford also plays a role in the problem.

“People are getting overextended on other things,” Harmon said. “There’s too much easy credit, such as credit cards and auto loans.”

And people in danger of foreclosure often have used their home equity to obtain even more credit. Over and above the original note, which may have been a 100 or 105 percent of the price of the house, might be tacked a second mortgage or a home equity line of credit, and soon the house of cards collapses.

A lack of family fiscal discipline, driven by the desire to consume too much, can overspend the family budget and lead people to purchase a home they can’t really afford. Bodine said he has heard of some recent foreclosures in which the homeowners weren’t thinking clearly. “There are a lot of people who are trying to buy houses that are way outside of their means,” he said. “We’re seeing people who want to buy a $500,000 house when they really should only be buying a $200,000 house, but a lot of the loan programs out there nowadays allow them to do that.”

“It’s our job as mortgage brokers to inform them that they shouldn’t be buying the house,” Bodine said. “The problem is that when we tell them, ‘Sorry, we can’t do that loan,’ they’ll just go to the next person. Somebody will eventually do it for them.”