“Foreclosures Rates Skyrocketing”

“Sub-prime Nightmare!”

By Laura J. Christian
Nov/Dec 2007 Publication, Washington Realtors

Like Chicken Little running around screaming "The sky is falling!" the current media attention on foreclosures is overwhelmingly pessimistic. The media suggests that foreclosures everywhere are hitting record highs. Realtors and consumers alike are getting anxious with these doom and gloom headlines screaming at them each week.

So how bad is it really? What is the state of foreclosures today in Washington and how does that compare to national statistics? Is it better or worse than it was five years ago or even 10?

According to the Mortgage Bankers Association (MBA) which tracks data on 85 percent of all mortgages in the US (approximately 44 million) the current foreclosure rate for Washington State as of June 2007 is .49 percent, whereas nationally it is 1.40 percent. This means that Washington is currently doing 65 percent better than the national rate.

The national average has increased in recent years but those numbers are being driven by only a handful of states according to Doug Duncan, MBA's Chief Economist and Senior Vice President of Research and Business Development.

"What continues to drive the national numbers, however, is what is happening in the states of California, Florida, Nevada and Arizona. Were it not for the increases in foreclosure starts in those four states, we would have seen a nationwide drop in the rate of foreclosure filings. Thirty four states had decreases in their rates of new foreclosures and the increases were very modest in the states with increases, other than those four," Duncan said.

Foreclosure rates rise and fall from quarter to quarter and year to year but to get a true picture of the current situation we need to look at the bigger picture of how we are performing today compared to five or 10 years ago. Are things really worse?

Washington State is currently in slightly better shape foreclosure-wise than it was 10 years ago, while nationally the foreclosures rates are worse. Looking at the second quarter in 1997 Washington foreclosures were at .50 percent which was 54 percent better than the national rate of 1.08 percent in 1997.

For the past 10 years Washington has remained well under national average and in recent years the gap between national foreclosure rates and Washington's foreclosure rates has increased. Washington foreclosure rates are in fact trending down over the past 10 years while, even with all its ups and downs, the national foreclosure trend has remained fairly constant.

Even though the national foreclosure rates are currently on the upswing the rates are still below where they were just five years ago in the US.

In early 2002 rates for both national and Washington hit the highest point since 1997. National foreclosure rates were at 1.51 percent with Washington just 17 percent under that at 1.24 percent.

"There were two main driving factors in 2002 that had an impact on the housing market." states Glenn Crellin, the Director of the Washington Center for Real Estate Research at Washington State University.

"The crash in the tech industry and the immediate aftermath of 9/11. Washington was actually in a more severe recession (in 2002) than the rest of the country due to the heavy amount of tech industry out here." Crellin said.

So what is driving all the media attention and speculation on foreclosures in today's market?

A lot of the rising foreclosure data being given to the media comes from foreclosure listing sites. The data provided by these sites has drawn criticism recently because their process of tracking foreclosures takes into account several steps in the process and homes in foreclosure could end up being counted more than once and not all homes counted end up being foreclosed on.

There has also been an increase in subprime foreclosures across the board. The subprime delinquencies combined with the large foreclosure jumps in California, Florida, Nevada and Arizona has drawn the media's spotlight.

A subprime mortgage is a loan made to borrowers with credit scores below 620. These loans draw a lot of people who could not get approval on a traditional mortgage. Borrowers with bad credit or no money down are able to get into these loans with up to 60 percent debt-to-income ratio as opposed to a maximum of 33 percent on traditional mortgages. This is a shaky situation for anyone regardless of credit history.

The main type of subprime loan today is an ARM called a "2/28". These mortgages which are sometimes referred to as exploding ARMs take people already at risk of defaulting and wrap them into what many consider to be dubious terms. These "2/28" loans feature a two-year deeply discounted introductory "teaser rate" that then balloons to a much higher rate and adjusts every six months from thereon. This has lead to payment shock for many and from there it only takes a small push such as a job loss, divorce, or unexpected medical bills to send a homeowner over the edge.

The amount of subprime mortgages ramped up in recent years. With the declining housing market many borrowers who ended up with no or extremely low down payments and high prepayment penalties are suddenly faced with owing more on their house than it is currently worth. This situation has eliminated the refinance safety-net for many. As a result of all these issues delinquencies are much more common for subprime loans. More than one-third of foreclosures start on subprime ARMs.

A news release at the end of 2006 from the Center for Responsible Lending (CRL), which is a nonprofit, nonpartisan research and policy organization advocating for homeownership and family wealth, reported three key findings regarding subprime mortgages as of December 2006:

· 2.2 million subprime home loans made in recent years have already failed or will end in foreclosure.

· These foreclosures will cost delinquent homeowners as much as $164 billion, primarily in lost home equity.

· Nearly one in five (19 percent) of subprime mortgages originated during the past two years will end in foreclosure.

According to the MBA the four states of California, Florida, Nevada and Arizona have more than one-third of the nation's subprime ARMs. The higher a state's non-primary loans (FHA and subprime) tend to equal a higher level of delinquency for that state. Washington is currently ranked at 47 in delinquencies and 49 in foreclosure inventory. In Washington non-prime loans (FHA and subprime) make up just 15 percent of all mortgage loans.

In addition the four states have a disproportionately high share of investor loans (loans to buyers who do not plan to live in the house).

"As of June 30, the non-owner occupied share of defaulted loans (90 days of more past due or in foreclosure) was 32 percent in Nevada, 25 percent in Florida, 26 percent in Arizona and 21 percent in California, compared with 13 percent in the rest of the nation. These investors are much more likely to default on their mortgages if they see the value of their investments falling due to falling home prices…. the problems in these states will continue, and they will continue to drive the national numbers, but they do not represent a national problem," Duncan said.

Political and financial pressure has driven lenders to take some big steps to help curtail the spiraling foreclosures, especially in the subprime market.

"There is a lot of turmoil in the credit markets today and all of the policy makers and leaders in the economic environment are focused on performance of housing and real estate finance broadly" said Duncan "Lenders are trying to stanch the flow by refinancing or restructuring monthly payment plans."

Fannie Mae, America's leading mortgage lender, says it plans to help as many as 1.5 million subprime borrowers refinance out of their high-interest loans.

Freddie Mac, which is a government-backed company like Fannie Mae, is creating products to make homes more affordable to borrowers with poor credit. Freddie Mac doesn't make loans directly but pledges to buy as much as $20 billion worth of these mortgages from participating lenders.

Another major lender, Washington Mutual, states it will refinance $2 billion in subprime loans thereby helping borrowers avoid foreclosure. These new loans will come with below-market interest rates.

How does all this foreclosure hype and subprime issues affect Realtors in Washington?

Foreclosures affect those around them by lowering the property value of surrounding houses as well as neighborhood values. Why would a client buy a house at full value when a comparable one down the street is in foreclosure and selling for $30,000 or $40,000 less? It is a conundrum more and more sellers are facing today.

As more foreclosures hit neighborhoods and drags down property values this cuts revenue for local governments when property taxes, fees, and utility bills end up going unpaid as well. The more foreclosures clustered close together has a snowball effect on the whole community making less money available for schools and government services. The lowering of house values also hits Realtors directly in the pocket book through lessened commissions and lost sales.

So what can Realtors do, if anything, regarding foreclosures?

Clients trust their Realtor to help guide them through the home buying process. While the responsibility of selecting the right mortgage for a consumer lies with the lender, a Realtor can help educate their client. Realtors can be the eyes and ears for their customers and help them understand what they are getting themselves into with their mortgage. Where a lender tends to look at the numbers only and see how much house can a consumer qualifies for, a Realtor can help their clients figure out how much house they can comfortably afford as well as give estimates on taxes, and averages on city water, sewer, electricity and other utilities.

"Realtors can and should work very closely with their clients to make sure any mortgage applications and terms are affordable and explained very clearly." says Crellin. "It is the lenders job to explain the terms of a mortgage agreement, but as a service to your clients it behooves Realtors to make sure their clients understand all the terms including prepayment penalties based on the size of the down payment."

The MBA also encourages consumers to have clearly defined budget as well as shop around for the right mortgage option.

"It's very important for each household to have a financial plan and evaluate the different products relative to their financial plan. It's also critically important for consumers to shop. The power of there being competition in the market doesn't work if you only talk to one lender. But rather if you talk to multiple lenders you get them competing for your business and typically get a better deal." states Duncan.

By being the eyes and ears as well as a trusted advisor to your customers, Realtors who offer exceptional customer service can build loyalty and expand their clientele via word of mouth. This is key to helping Realtors maintain and grow their business in good times and bad.