Foreclosure problems trickle to the top
It's no surprise that the housing crisis hit subprime borrowers or those who bit off more than they could chew. But now foreclosures seem to be making their way to prime borrowers -- those with good credit and a fixed rate. Mitchell Hartman reports.
A foreclosed house for sale in Los Angeles. (Robyn Beck, AFP/Getty Images)
TEXT OF STORY
TESS VIGELAND:We've been hearing for a long time now about the sub-prime mortgage crisis. Well the problem is quickly moving into a different area of the housing market. Prime borrowers are defaulting on their loans and foreclosing on their homes. These borrowers boasted good credit ratings and fixed-rate mortgages, they didn't buy homes they couldn't afford. But they're now in trouble.
Marketplace's Mitchell Hartman has our story.
Mitchell Hartman: When economist Patrick Newport of IHS Global Insight scanned the latest statistics from the Mortgage Bankers Association, he didn't like what he saw.
Patrick Newport: These were horrible numbers.
What caught Newport's attention is that prime borrowers are now falling behind at a record pace. These are people with good credit scores, many in conventional 30-year mortgages with reasonable interest rates. And nearly one in 10 of them is in trouble -- behind on their mortgage or already in foreclosure. That's double the number last year.
It's what economists are calling the "third wave" of the mortgage crisis. In the first wave, speculators dumped houses as prices plummeted. In the second, sketchy borrowers lost their homes as the payments on their adjustable-rate sub-prime mortgages soared. Now, the problem has shifted again.
Newport: And in this case what's driving the numbers is job losses. And they're likely to continue driving the numbers because of the high unemployment rates we're expecting.
To see how the crisis is building, I headed to the little town of Carlton, Ore. There's a thriving wine industry and some timber mills not doing so well.
Craig Wright works in one of those mills --when there's work --and lives with his daughter in one of several new housing developments in the area. It backs up on a meadow and acres of wetlands.
Craig Wright: And this is just a little trail we keep clear for hiking. We got deer, pheasant, quail. It's just a nice little place to be.
Wright's "nice little place" cost him $257,000. He has good credit and put 20 percent down. So he got a fixed-rate 30-year mortgage that costs $1800 a month. He's been struggling to make the payments since the mill cut back on work in February.
Wright: At work we've been doing what we call "curtailment," so basically I'm working about half the time that I normally do. So I do have what I call a nest egg saved up, and that's what I'm able to dip into and make my payments. But of course, that only lasts so long, and then what?
Wright's trying to get a loan modification through the Obama Administration's homeowner assistance program before he runs out of money. He wants to lower his monthly payments by $500.
Wright and borrowers like him may have a hard time refinancing their mortgages to take advantage of lower interest rates. If a homeowner's income has gone down, or they owe more on the house than it's worth, they may not qualify.
And that's the case all the way up the housing ladder. Plenty of people who had large incomes -- and took out large mortgages -- are also in trouble. Foreclosures on jumbo loans -- those worth more than $729,000 in the top markets -- more than doubled at the beginning of 2009.
Many of these homes were purchased with so-called "creative" financing: adjustable-rate mortgages with optional payment schedules or loans that didn't require proof of income. Some of these are now resetting at higher interest rates. But with home prices collapsing, the borrowers can't easily refinance. Selling means taking a huge loss. This situation creates losers, as well as winners.
Kathy Saitas: You know, I was looking for houses in my neighborhood, and I saw a house, great location, and the price just didn't make sense.
Kathy Saitas is a lawyer and former co-worker of mine in Portland. She has a teenage daughter, her mom visits for a few months at a time, so she's looking for a bigger place. She bid on this sprawling ranch house a few blocks from where she lives.
Saitas: And it sold in 2006 for $800,000. The asking price was $595,000. Maybe this is an opportunity to get a great house at a great price.
This is a short sale -- the owner's in default on the mortgage, so the bank's trying to sell the house at a loss to avoid foreclosure. It's a complicated and time-consuming process.
Knowing it's a distressed property, Saitas has bid below the asking price. Which is just what savvy buyers are doing all over the country as delinquent and foreclosed properties flood the market and continue to fuel this vicious economic cycle.
In Portland, I'm Mitchell Hartman for Marketplace Money.
Comments
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From Portland, OR, 06/23/2009
Thanks to Jim Demarest for catching a point in my story that needs clarification. From my research, he is correct that it is the owner who is selling the property and must push the sale. Although the owner is in default, the bank has not foreclosed yet. Banks must approve short-sales because in many cases they are agreeing to discharge the borrower's debt by taking less than is owed on the mortgage. In the case of our would-be short-sale home buyer in Portland, she has put a bid in to the seller, and she and the seller will now present the offer jointly to the lender for negotiation.
From oak park, CA, 06/21/2009
I own a condo and have an outstanding balance of $140k, consisting of $104k primary and $36k secondary. I took the home equity to consolidate debts. At the time the property was valued at $163k but now it is valued at $134k. I'm looking to sell because i am engaged and will be moving into my fiancee's home. Check http://obamamortgage2009.blogspot.com/2009/03/obamas-mortgage-modification-do-you.html If I have a buyer who offers me within say $5-7k of the outstanding, can i agree to assume a loan on the residual and pay the bank the difference over time with interest? The same bank holds both mortgages.
From Fort Lauderdale, FL, 06/20/2009
Thanks for a great show. I need to ask for clarification in the report about foreclosures on this weekend's show. The reporter said: "This is a short sale -- the owner's in default on the mortgage, so the bank's trying to sell the house at a loss to avoid foreclosure. It's a complicated and time-consuming process." Now every market is different but in South Florida banks are not typically involved in pursuing short sales. It would have been more accurate to say that the 'SELLER is trying to sell the house for a loss'. In my real estate practice, banks are passive in short sale attempts and don't become involved until an offer is presented. That offer must then be defended and PUSHED by the seller to get the bank to respond. I feel it is important for your listeners, who may be considering a sale or purchase by short sale, to understand this nuance. THANKS!
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