Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Wednesday, May 10, 2006

Stretched and Falling Behind

( "RealtyTrac, a California organization that tracks foreclosed properties nationwide, found that the foreclosure rate in March of this year was up 63 percent compared with last year."

"The company's foreclosure data includes a variety of categories: homes that enter the foreclosure process, homes that are actually foreclosed on and homes that are returned to the banks."

"As interest rates increased steadily over the past year and the explosive growth in housing prices declined, many Americans fell behind in their mortgage payments. Now some have defaulted on home loans and could lose their homes due to foreclosures."

"When home prices soared at double-digit rates during the recent red-hot housing market, many Americans stretched themselves financially to purchase a home. The use of lower-interest adjustable-rate mortgages, or ARMs, interest-only mortgages or option-ARMs that allowed home buyers to choose how to pay each month soared during the same period."

"But as interest rates steadily increased over the past year, and the explosive growth in housing prices declined, more Americans started to fall behind in their mortgage payments."

"Doug Duncan, chief economist at the Mortgage Bankers Association, reported in March that delinquencies now total 4.7 percent, up from 4.38 percent a year ago. For homeowners with ARMs, the rate is 5.72 percent, up nearly 1 percent from the previous year."

"According to the Mortgage Bankers Association of America, ARMs now represent 25 percent of the more than $8.5 trillion in outstanding loans."

"Economists with Moody's forecast that the interest rates on $2 trillion of those mortgage loans could be reset in 2006 and 2007. And that could become a problem if interest rates continue moving higher."

"Today the Federal Reserve increased a key interest rate by a quarter-point for the 16th time since June 2004. The federal funds fate — which is what banks pay for overnight loans — now stands at 5 percent."

"Homeowners who negotiated ARMs in 2004 and 2005 could face interest rate increases that boost monthly payments by as much as 50 percent. One in eight of these people is expected to default on their loans — as many as 1 million, according to First American Real Estate Solutions, which compiles national real estate data."

"There are 122 million housing units in this country. In Gallup polling data from last month, 11 percent of Americans were "very worried" about being able to pay their rent, mortgage or other housing costs — that number has been stable in annual surveys each April since 2001. However, 27 percent said they were very or moderately worried; the previous range had been 22 to 25 percent."

"A Los Angeles Times/Bloomberg poll in March focused specifically on people who have ARMs. Twenty-six percent of them were either "not too confident" (21 percent) or "not at all confident" (5 percent) about being able to make their mortgage payments if rates went up (how far up was not specified). But 74 percent were confident. And just 10 percent of all respondents had an ARM in the first place."

Reasons foreclosure rates have increased:

* People stretched themselves financially to get into homes using adjustable rate mortgages, interest-only mortgages and more exotic loan products.

* Banks relaxed lending standards to make it easier for people to purchase homes; however, for some of those homeowners, once they have an unexpected financial hardship, such as medical bills, a lost job or necessary car repairs, they stop making mortgage payments.

* Many homeowners put little to no money down when they bought their homes and currently have little or even no equity in their home and thus nothing to fall back on. And in some cases, these homeowners then took out home equity loans or lines of credit and now owe even more.

* Homeowners have relied on the recent double-digit increases in home prices to build up equity in their home instead of paying down more in principal. As housing prices increase more slowly, many homeowners will not be able to rely on high home values to cover their debt loads.


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