The latest news on the home front shows that in April real estate foreclosure filings were up 62 percent nationwide when compared with a year earlier. Given that we had 1.26 million foreclosure filings in 2006, we might see more than 2 million this year if current rates continue.
The figures from RealtyTrac.com show a massive increase in foreclosure activity, an increase which raises a question: Why?
“The usual factors which lead to foreclosure are unchanged,” says Jim Saccacio, RealtyTrac’s chairman and CEO. “People continue to lose homes because of job loss, the death of a spouse, divorce, medical bills and auto accidents.
“But one fresh reason behind the foreclosure surge is a growing fear among lenders that mortgage financing has become increasingly risky,” Saccacio continued. “The result is that refinancing is no longer easily or automatically available, even for those with good credit, and some of those who cannot refinance are losing their homes.”
Recent lender changes have huge implications: Many borrowers with interest-only and option ARM financing got such loans for two reasons.
First, homes with rising values could be acquired with small monthly payments. Second, nontraditional loans could be readily refinanced before payment requirements “re-set” and monthly costs soared
In a marketplace with rising home values the thinking was buy now, buy cheap and don’t worry about future loan costs. After all, said the logic of the moment, you could always sell — at a profit, of course — before higher monthly mortgage costs kicked in.
But now changes in the marketplace have knocked the legs out from under such thinking.
Figures from the National Association of Realtors show that among 145 metro areas, 82 had price increases in the first quarter of 2007 when compared with last year — but 62 lost ground.
It’s easy to misread the NAR figures, to suggest that things are actually going pretty well because prices are up in most metro areas. The catch is that not all metro areas are the same. It may well be true, as NAR reports, that home prices are up 14.1 percent in Bismark, N.D., but the economic impact of a small area does not compare to the impact of a major metro region such as Dallas where home values are down 0.6 percent.
The fact is that we don’t really know how much values have declined. When prices are up buyers pay full freight because demand exceeds supply, but when values fall reported sales “prices” may include a variety of invisible owner concessions such as “seller contributions” and other discounts. In effect, published home prices in slowing markets may overstate the real results of sale transactions.
The problem of price uncertainty is true both with existing homes and with new construction. Builders want to maintain given price points, however, when markets slow builders will include extras such as upgraded cabinets and carpets, finished rec rooms and mortgage interest reductions rather than lowering sale prices. On paper, sale prices seem the same but discounts mean the builder’s profit is substantially lower.
Not only are rising home prices not assured, the other leg of the recent get-rich-with-real-estate theory is also finished: Buyers cannot count on refinancing.
A new report from the Federal Reserve documents what observers have long predicted: Unless you have stellar credit, the days of easy lending and no-tell loan applications are gone.
The U.S. national banking system includes some 7,500 institutions, but most of them are relatively small. The ones that count are the big banks, the really big banks. For instance, just 44 institutions generate 67 percent of all the residential mortgages produced by commercial banks.
What the Fed found was that in the first three months of 2007 prime borrowers with good credit who wanted traditional loans were likely to have few problems getting a mortgage — 85 percent of the big lenders said their qualification standards for prime loans were untouched.
However, when it comes to “nontraditional” loans — typically interest-only mortgages and option ARMs — 47 percent of the big banks are tightening up, even though nontraditional borrowers often have strong credit scores.
As to those with weak credit, many subprime borrowers can forget refinancing. The Fed survey shows that 67 percent of the big banks now have tougher qualification standards.
What the Fed study tells us is that borrowers who gambled with exotic loans may well find that the option to refinance is simply gone. A percentage of such borrowers will inevitably be foreclosed because they can’t sell at a break-even price, they cannot afford higher monthly payments when “start” periods end, and now they can no longer refinance.
“Given the number of lenders who have failed in the past few months, it’s hard to fault banks and other mortgage sources for wanting tougher standards,” says Saccacio. “At the same time, a lot of borrowers — including many with solid credit — believed that refinancing would always be an option, a financial escape hatch if mortgage payments rose too much. For many borrowers that hatch is now sealed shut — and so is their financial fate.”
Peter G. Miller is the author of the Common-Sense Mortgage and is syndicated in more than 100 newspapers.