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Begin forwarded message:
From: [EMAIL PROTECTED]
Date: March 12, 2007 11:35:09 AM PDT
To: [EMAIL PROTECTED]
Cc: [EMAIL PROTECTED], [EMAIL PROTECTED], [EMAIL PROTECTED], [EMAIL PROTECTED]
Subject: Effects of Real Estate Bubble Being Felt
HOMEOWNERS STUCK AS LENDERS CINCH STANDARDS
By Noelle Knox
USA Today, March 9, 2007
http://realestate.aol.com/article/_a/homeowners-stuck-as-lenders-
cinch/20070309152209990001?ncid=AOLCOMMre00DYNLprim0001
Edward Booker is one of nearly 3 million homeowners with adjustable-
rate mortgages who've had trouble paying their bills. And, like
Booker, many of them won't be able to refinance their loans once
the interest rates start rising. At that point, they'll have to
tighten their belts, sell their homes or lose them through
foreclosure.
This month, the mortgage payment on Booker's Chicago home rose
$200, to about $1,300. It'll go up again in September. He wants to
refinance, but he fell behind on payments after his wife died of
cancer in 2005, so no lender wants to take the risk.
OWNERS AT RISK
Metro area Home-price decline Rate Reset risk
Akron, Ohio -7% 60%
Barnstable/Yarmouth, Mass. -8% 58%
Bloomington/Normal, Ill. -6% 58%
Bridgeport, Conn. -5% 58%
Cape Coral/Fort Myers, Fla. -12% 63%
Columbus, Ohio -6% 50%
Daytona Beach, Fla. -5% 56%
Gary, Ind. -4% 63%
Grand Rapids/Muskegon/Holland, Mich. -4% 56%
Indianapolis -4% 51%
Kennewick/Richland/ Pasco, Wash. -4% 63%
Miami/Fort Lauderdale -6% 60%
New Orleans -9% 49%
Edison, N.J.* -4% 60%
Palm Bay/Melbourne/ Titusville, Fla. -17% 61%
Pensacola -4% 64%
Reno -9% 59%
Sacramento -4% 51%
San Diego -5% 59%
Sarasota/Bradenton, Fla. -18% 63%
Springfield, Ill. -10% 62%
Toledo, Ohio -7% 67%
Worcester, Mass. -5% 59%
Youngstown/Warren, Ohio -8% 66%
* = includes Newark, N.J., Nassau/Suffolk, N.Y., and 23 counties in
New York, New Jersey and Pennsylvania. Sources First American
LoanPerformance, National Association of Realtors
"I'm just trying to hold onto my house until I can figure out
something else to do," says Booker, 58, a former rail-car inspector
who's on disability.
Since the start of the year, more lenders have been shutting their
doors to people such as Booker, just as those homeowners' interest
rates are rising. They're slashing the "Bad credit? No problem"
types of loan programs, known as subprime, that helped fuel the
housing boom. And they're raising the bar for homeowners and first-
time buyers to qualify for new loans.
The trend accelerated last week after federal regulators proposed
stricter guidelines for banks that make subprime ARMs (adjustable-
rate mortgages). The move followed Freddie Mac's decision to
drastically raise the criteria for the subprime ARMs it would buy
and to require better proof of a borrower's finances.
The industry is reacting to the waves of subprime borrowers who've
defaulted on their ARMs in recent months. The tighter controls
should help prevent future borrowers from getting in over their
heads and protect them from predatory lenders. But the sudden shift
in lending rules could also threaten the homeownership gains made
by families since 2000, weaken the recovery of the housing market
and potentially slow the economy.
"It will be a very severe correction (in the subprime market), and
I think it will last anywhere from six to 12 months, during which
many of the lenders who have operated in this market will gradually
get pushed out of business," says Chris Flanagan, a managing
director for JPMorgan.
Nearly two dozen subprime lenders have already closed their doors
or been purchased, and a dozen more are in trouble, according to a
report by Credit Suisse.
To stem their losses, lenders nationwide are notifying mortgage
brokers to cancel loan programs. Many of them are:
Reducing loans for 100 percent of the purchase price.
Reducing the number of "piggyback" loans, whereby a lender makes
one loan for 80 percent of the purchase price and a second loan for
the remaining 20 percent of the price at a higher interest rate
Raising the required credit score.
Requiring more documentation of a borrower's income and
scrutinizing the appraisal and comparable-home sales data.
"Some of these companies are yanking away six, eight (loan)
products at a time, and the reps are just hanging on the phone with
their mouths open, saying, 'What are we going to sell?' " says Dave
Tucker, owner of MileHighMortgage.com in Castle Rock, Colo.
That's partly why he can't help Anita Furakh and Bobby Pervez this
time.
Tucker helped them buy their first home near Denver two years ago
with an ARM that covered 100 percent of the $195,000 purchase
price. The young couple, with two children, made their payments on
time until December, when Pervez traded in his car for a new one.
That month, they were late on their mortgage. The timing couldn't
have been worse. They needed to refinance their mortgage before the
rate started rising this month. But their home's value hasn't gone
up, and their credit score has gone down.
"I don't know what I'm going to do," says Furakh, 24, who was
bathing and feeding her two daughters after work. "I'm trying to
work on my credit, but sometimes you can't be that good. I've got
two jobs. I've got two kids. Sometimes, I am just late."
The industry was caught off guard by the surge in delinquencies
last year. ARMs made to people with shaky credit in 2005 and 2006
are defaulting at two to three times the rate of loans from 2003
and 2004, according to First American LoanPerformance.
Because the interest rates on these loans are usually fixed for the
first two or three years, and then start rising, "The worst is
still to come," says Brenda White, a managing director at Deloitte
& Touche.
So far, the deepening crisis seems confined to lenders who made
riskier loans and hasn't spread to the broader financial markets,
which hold up to $1.5 trillion in subprime loans.
Still, as many as 7 percent of those loans will go into
foreclosure, resulting in losses as high as $70 billion, Flanagan
estimates.
The Center for Responsible Lending projects that 2.2 million
homeowners with subprime loans will lose their homes.
Sharing the blame
Thousands of homeowners are already feeling the pain. In January,
the Homeownership Preservation Foundation, a non-profit financial
counseling group, received 4,500 calls to its toll-free hotline
(888-995-HOPE or 888-995-4673), 150% more than last summer. The
callers are in financial difficulty and often trying to stave off
foreclosure. Equally alarming was that 16 percent of the callers
from October to December didn't know what kind of mortgage they
had, according to the foundation.
Experts say there's plenty of blame to go around. During the real
estate boom, lenders began offering an array of loans to borrowers
with poor credit histories. They let many borrowers finance 100
percent of the purchase price, often asking for little or no proof
of income or assets. Last year, 43 percent of loans required little
or no documentation of the borrower's finances, according to First
American LoanPerformance. These "stated-income" loans have earned
the nickname "liar loans."
"When these loans were introduced, they made sense, given the
relatively strict requirements borrowers had to meet before
qualifying," according to an April 2006 report by the Mortgage
Asset Research Institute. "However, competitive pressures have
caused many lenders to loosen these requirements to a point that
makes many risk managers squirm."
The lenders typically use a network of independent brokers who sell
loans from a variety of lenders for a commission. The brokers, some
of them new to the industry, some of them unlicensed, were
responsible for explaining the complex terms of the loan to the
borrower. This led to allegations of predatory lending -- pushing
high-cost loans that are plainly unsuitable for a person's
financial resources and prospects.
Take Betty Jean James, 70, a retired glass inspector living on
Social Security. Two years ago, she refinanced the Chicago home
where she's lived for 25 years. The rate on the loan started rising
after the second payment. The payments started at $1,032 but have
since climbed to $1,761. "I fell behind two months ago," said
James, who is facing foreclosure. "It just got too high." Though
James signed the loan document, which clearly states that the
interest rate is adjustable, she recalls that the mortgage broker
"explained to me he could refinance the house, and he did. He
didn't explain the interest rate could go up."
Some borrowers, meantime, contracted real estate fever and took out
loans they didn't fully understand or stretched their budgets too
thin. Some lied about their income on their loan applications,
sometimes with a wink or a little help from their broker on a
stated-income loan.
Casey Serin is a classic case. Serin, a Sacramento website designer
who was profiled in USA TODAY in October, has admitted that he lied
on his loan applications to buy eight houses in four states as
investments. He hoped to flip them for a quick profit, but he made
too many newbie mistakes. He sold three of the homes, the lenders
foreclosed on two, and he's still trying to sell the remaining three.
When the real estate market was on fire, such excesses and abuses
were often overlooked. If a borrower ran into trouble and fell
behind on a payment, it was easy to refinance or sell the property.
Everything changed after the market peaked in August 2005. "For
sale" signs swung in front yards for months, and home prices
started falling. Borrowers who fell behind on their loans sometimes
owed more than their homes were worth. Or they couldn't sell their
property before the lender foreclosed and drove neighborhood prices
down further.
In 23 metro areas where home prices fell 4 percent or more at the
end of last year, at least half the subprime ARMs will reset to
higher rates this year or next, according to an analysis by First
American LoanPerformance for USA TODAY. (See chart.)
In Grand Rapids, Mich., for example, home prices fell 4 percent at
the end of last year, and 56% of homeowners with subprime ARMs will
see their rates reset by the end of next year. "I've got a handful
of clients right now I want to help, but I can't," says Pava
Leyrer, president of Heritage National Mortgage in Grandville,
Mich. "They are better off selling their homes." But that's hard in
Michigan, which has one of the highest foreclosure rates in the
country.
'One of the real tragedies'
First-time home buyers are also vulnerable. On average, first-time
buyers made only a 2% down payment last year, the National
Association of Realtors says.
"One of the real tragedies of this is that the folks who became
first-time buyers because of this expansion of credit, many times
they were first-time buyers not just themselves, but for
generations of their families," says Jim Wheaton, deputy director
of Neighborhood Housing Services of Chicago, a non-profit
counseling and lending service. "But if they lose that home to
foreclosure, given the impact on their credit, the appreciation of
home prices, and the fact that their incomes generally are not
rising that quickly, they are losing their only opportunity at
homeownership."
Yet the lack of affordable housing is one of the reasons subprime
ARMs became so popular. With a starting "teaser" rate, these loans
let people with little money for a down payment still buy a home.
Last year, 7 percent of buyers used a subprime ARM, according to
the Mortgage Bankers Association.
It's too soon to know how many buyers won't qualify under the
tighter criteria and how the trend will hamper this year's expected
housing recovery. "It's a tough situation," says Dick Syron, CEO of
Freddie Mac.
Under Freddie's new rules: If a subprime borrower wanted to buy the
U.S. median-price home at $210,600 with a two-year ARM, the buyer
would have to qualify not only at the starting monthly payment of
$1,619, at 8.5 percent, but also at the maximum payment of $2,412 a
month, at 13.5 percent.
"There's a very delicate and difficult balance between getting as
many people into houses as you can," Syron says, "and at the same
time putting people into houses they can't keep unless home prices
are appreciating or interest rates are very low." Hanging in that
balance: nearly 400,000 homeowners with subprime ARMs who, like
Booker in Chicago, have already missed at least one loan payment
and have a lot fewer options now.
Though James signed the loan document, which clearly states that
the interest rate is adjustable, she recalls that the mortgage
broker "explained to me he could refinance the house, and he did.
He didn't explain the interest rate could go up."
Some borrowers, meantime, contracted real estate fever and took out
loans they didn't fully understand or stretched their budgets too
thin. Some lied about their income on their loan applications,
sometimes with a wink or a little help from their broker on a
stated-income loan.
Casey Serin is a classic case. Serin, a Sacramento website designer
who was profiled in USA TODAY in October, has admitted that he lied
on his loan applications to buy eight houses in four states as
investments. He hoped to flip them for a quick profit, but he made
too many newbie mistakes. He sold three of the homes, the lenders
foreclosed on two, and he's still trying to sell the remaining three.
When the real estate market was on fire, such excesses and abuses
were often overlooked. If a borrower ran into trouble and fell
behind on a payment, it was easy to refinance or sell the property.
Everything changed after the market peaked in August 2005. "For
sale" signs swung in front yards for months, and home prices
started falling. Borrowers who fell behind on their loans sometimes
owed more than their homes were worth. Or they couldn't sell their
property before the lender foreclosed and drove neighborhood prices
down further.
In 23 metro areas where home prices fell 4 percent or more at the
end of last year, at least half the subprime ARMs will reset to
higher rates this year or next, according to an analysis by First
American LoanPerformance for USA TODAY. (See chart.)
In Grand Rapids, Mich., for example, home prices fell 4 percent at
the end of last year, and 56% of homeowners with subprime ARMs will
see their rates reset by the end of next year. "I've got a handful
of clients right now I want to help, but I can't," says Pava
Leyrer, president of Heritage National Mortgage in Grandville,
Mich. "They are better off selling their homes." But that's hard in
Michigan, which has one of the highest foreclosure rates in the
country.
'One of the real tragedies'
First-time home buyers are also vulnerable. On average, first-time
buyers made only a 2% down payment last year, the National
Association of Realtors says.
"One of the real tragedies of this is that the folks who became
first-time buyers because of this expansion of credit, many times
they were first-time buyers not just themselves, but for
generations of their families," says Jim Wheaton, deputy director
of Neighborhood Housing Services of Chicago, a non-profit
counseling and lending service. "But if they lose that home to
foreclosure, given the impact on their credit, the appreciation of
home prices, and the fact that their incomes generally are not
rising that quickly, they are losing their only opportunity at
homeownership."
Yet the lack of affordable housing is one of the reasons subprime
ARMs became so popular. With a starting "teaser" rate, these loans
let people with little money for a down payment still buy a home.
Last year, 7 percent of buyers used a subprime ARM, according to
the Mortgage Bankers Association.
It's too soon to know how many buyers won't qualify under the
tighter criteria and how the trend will hamper this year's expected
housing recovery. "It's a tough situation," says Dick Syron, CEO of
Freddie Mac.
Under Freddie's new rules: If a subprime borrower wanted to buy the
U.S. median-price home at $210,600 with a two-year ARM, the buyer
would have to qualify not only at the starting monthly payment of
$1,619, at 8.5 percent, but also at the maximum payment of $2,412 a
month, at 13.5 percent.
"There's a very delicate and difficult balance between getting as
many people into houses as you can," Syron says, "and at the same
time putting people into houses they can't keep unless home prices
are appreciating or interest rates are very low." Hanging in that
balance: nearly 400,000 homeowners with subprime ARMs who, like
Booker in Chicago, have already missed at least one loan payment
and have a lot fewer options now.
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