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Resetting the Bar: A Focus on Foreclosure
For the second month in a row, Colorado has earned the unwanted
distinction for having the highest percent of foreclosures in the
United States.
A statement released May 16th by Realty Trac reported that 3,706 homes
in Colorado were in foreclosure in April, a number that equates to one
out of every 494 households. The national average is one in 1,268
households.
Realty Trac, which touts foreclosures as a largely hidden market
opportunity, is the top online marketplace for foreclosure properties
and offers the largest national database of pre-foreclosure,
foreclosure, FSBO and new home construction properties.
A current search for foreclosures in Pueblo County on Realtytrac.com
displays 1,043 properties.
In a phone conversation on May 25th, Pueblo County Trustee Peggy Foley
stated that Pueblo County had 1,032 foreclosures in 2005 and has had
449 so far in 2006.
On May 30th, Governor Owens signed two new bills that target mortgage
fraud and foreclosure. The first, HB 1323, creates a minimum fine
of $75,000 for conviction of mortgage fraud, forbids plea agreements
that do not include an order of restitution, and places mortgage fraud
under the jurisdiction of both Attorney General Suthers and district
attorneys.
Owens also signed Senate Bill 71, creating the Colorado Foreclosure
Protection Act, which mandates that all transactions between homeowners
and foreclosure consultants be in writing, bans providers of advice or
assistance from obtaining any interest in the homeowner’s property, and
requires a three-day cooling off period before property can be
transferred or encumbered.
Even though the number of foreclosures in Colorado dropped by 31
percent from March, when 5,392 homes were in foreclosure, market
indicators point to a continued increase in foreclosures in the coming
years.
One of the key factors that will contribute to the impending growth of
foreclosures is the massive number of adjustable rate mortgage loans
(ARMs) that will be reset in the next few years. The adjustment
frequency varies for different ARMs from anywhere between one month to
five years, when the loan is reset at a higher rate.
Moody’s Economy.com, a research firm in Pennsylvania, estimates that
over $2 trillion of U.S. mortgage debt, or about one quarter of all
mortgage loans outstanding, will come up for interest-rate resets
during 2006 and 2007.
And worryingly, Aldo Svaldi of The Denver Post reports that Colorado
borrowers lead the nation in their reliance on adjustable-rate and
interest-only mortgages.
Adams County Public Trustee Jeannie Reeser stated in a May 17th article
in the Rocky Mountain News that the bulk of the new foreclosures are
from homeowners who used mortgages with adjustable interest rates to
buy more home than they could otherwise afford.
And now, with the colossal volume of loan resets, the rising interest
rates are showing up in the form of higher payments, sometimes as much
as fifty percent higher.
Reeser adds that an unfortunate personal aspect of the situation is
that many of these borrowers are young, first time buyers or the
elderly, groups who are often not capable of relying on other resources
to offset escalating monthly bills.
Most market analysts agree that resets will decrease discretionary
spending for many Americans, even those who can afford the jump in
mortgage payments. The monthly paycheck can only stretch so far…energy
and gasoline costs continue to rise, as do property taxes, and many
credit-card companies have started requiring higher minimum payments.
To further compound our regional troubles, a May 13th article in the
News notes that Colorado is at an increased risk because homeowners in
Colorado on average have little equity in their home. In Colorado, 28.5
percent of homeowners have 5 percent or less equity in their homes, and
47 percent have 15 percent or less equity. Only Tennessee homeowners,
on average, have less equity in their homes.
Other negative events are also making things
difficult
for already troubled borrowers. Not only are the
climbing interest rates increasing the size of each mortgage reset and
making refinancing more pricey, but the housing market is cooling off,
which makes it harder to sell a home or build up equity.
The increased number of foreclosures can also lead to market
saturation, making it even more difficult for sellers who are now
trying get out from under mortgage expenses they cannot pay.
Regulators are advising lenders to tighten their lending standards, a
move that would make it more complicated for many borrowers to qualify
for refinancing and take some buyers out of the market entirely.
Comptroller of the Currency John C. Dugan stated at a community
development conference in Los Angeles last month that "potential for
payment shock got the attention of the regulatory agencies and led to
the proposed guidance that is now under consideration. The guidance
addresses fundamental issues involving nontraditional mortgages,
including the prospect of substantial increases in monthly payments
that borrowers may not be able to afford and may not understand. The
increased monthly payments could put their homes at risk and lead to
losses for lenders."
Kevin Petrasic, a spokesman for the Office of Thrift Supervision,
stated in an April 7th article in the Washington Post that “making sure
institutions are making loans based on creditworthiness is good for the
institutions and good for borrowers. The last thing we want is
borrowers taking out loans they can’t pay for three years from now or
when the monthly term adjusts.”
But the article also states that banking trade groups, including the
Mortgage Bankers Association, have written to regulators opposing some
of the changes, saying they are too restrictive and make lenders
responsible for problem loans initiated by mortgage brokers."
As an appraiser, the effect of massive foreclosures and a tightening of
lending standards will certainly have an effect on business. Of course,
appraisals will still be required on foreclosed properties, but a
softening of the market will certainly slow business. And on a positive
note, but perhaps too optimistic, is the possibility that the changes
of the coming few years will weed out many unqualified appraisers and
incompetent mortgage brokers as well as more cautious lenders depend on
accurate information.
There is one thing for sure; the vultures and sharks of the mortgage
world will be out there planning the next con, an inevitability that is
already occurring in the form of foreclosure scams and quitclaim deed
lease backs.
Now, more than ever, consumers and lenders must ensure that the other
players in the mortgage transaction, including the Realtor, the title
company, the underwriter, the mortgage broker, and the appraiser, are
ethical and honest.
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