Whether there is a housing "bubble" is becoming as popular a topic of conversation as how much the house down the block sold for. But beneath all the froth is an ominous undertow -- high foreclosure rates in some of the country's hottest markets.
The number of new properties in foreclosure increased nationwide for the second month in a row, with 64,057 in April compared to 62,422 in March, although the rate eased off somewhat in May, possibly indicating the March increase was a temporary spike.
According to data released today by online foreclosure listing service, Foreclosure.com, 22,734 new foreclosed residential properties were listed for sale in the U.S. during May 2005. The number represents a decrease of 17 percent from April 2005. The total number of U.S. residential foreclosure properties available for sale in the U.S. during the month of May was 74,011, a decrease of nearly 4 percent from March.
In Florida, which had the highest rate of foreclosure in the previous two months -- there was one property in foreclosure for every 719 households. Texas is close behind. Both states' foreclosure rates were more than 2.5 times the national average.
"April continues a trend we've seen over the last few months where Texas and Florida have consistently produced an above average number of properties in some stage of foreclosure," said James J. Saccacio, chief executive officer of RealtyTrac.com.
The rising foreclosure rate in Texas, Florida and other prime real estate country may be the early warning signs of an implosion, or they may be just a blip. But whatever the big picture turns out to be, any foreclosure is an unmitigated tragedy for the family that loses its home.
In Texas, homeowners are fighting back. Class action lawsuits against Ameriquest, Option One, Washington Mutual and Long Beach Mortgage allege that their adjustable rate home equity loans written between 1998 and 2003 violate a critical provision of the Texas Constitution.
The Texan homeowners aren't the only ones who are irate about their variable-rate mortgages. Economists are worried too.
Not long ago, the typical homebuyer took out a fixed-rate, 30-year mortgage. Everyone knew upfront what the payments would be and lenders conducted reasonable due diligence to ensure the borrower would be able to pay.
Such staid financing instruments have come to seem as old-fashioned as an oboe. Today as many as two-thirds of home buyers are taking out variable rate mortgages, gambling that interest rates won't rise faster than their ability to pay.
Lenders, meanwhile, are rushing to write paper for nearly anyone who has a pen with which to sign on the dotted line. "No document mortgages" -- which are based largely on the value of the property rather than the borrower's credit worthiness -- have been at record levels. Even headier are the interest-only mortgages that are allowing eager buyers to snap up property they could otherwise not afford.
Of course, interest-only means you never pay off your house. In fact, you don't even make a dent in the original debt and therefore don't build any equity except for that which results from prices that rise faster than the interest rate. While that may be happening now, there's no guarantee it will continue.
"Foreclosure inventory in 2005 has reflected the current volatility and geographic variations of the overall housing market. The tendency for homeowners to enter into adjustable-rate mortgages, no-down payment loans and other low initial cost loan options has resulted in an atmosphere where slight changes in interest rates or economic conditions have a dramatic effect on ownership," said Brad Geisen, president and CEO, Foreclosure.com.
"In areas of the country where the housing market is strong, homeowners facing foreclosure are still able to sell their home to pay their mortgage. But, in areas of the country where the market is flat or slipping, homeowners are left with very few options and foreclosure inventory remains high," he said.
The national median existing-home price for all housing types is expected to rise 8.8 percent in 2005 to $201,500, while the typical new-home price should increase 5.7 percent to $233,600. A rising tide of this sort might continue to lift all boats, but national averages can be misleading and a house that might increase 100 percent in value in a decade in San Francisco might very well show no increase or even a loss in Detroit, St. Louis or other markets that have lost a lot of high-paying jobs.
Home Equity Loans
As troubling as the new styles of financing is the willingness of homeowners who have built up equity in their homes to borrow against that equity, putting their home at risk to pay off credit cards, put their kids through college or go on an extended vacation. Economy.com estimates that Americans borrowed some $705 billion against their homes last year, up from $266 billion in 1999.
Many consumers who've borrowed against their homes were enticed by low interest rates and tax provisions that, in some cases, allowed them to deduct the cost of the loan from their income tax.
What consumers sometimes didn't consider carefully was what would happen if they were unable to pay the loan back. If a consumer falls behind on a car loan, the car may be repossessed. A bad credit card debt can bring annoying collection efforts and damage to one's credit rating. But fall behind on your home equity loan and you can lose your house.
As the foreclosure rate demonstrates, this is not a theoretical problem. But it's not fair to put all the blame on consumers -- lenders have been very aggressive in making loans without pointing out the risk and, often, without adequately vetting the borrower's ability to make the payments.
"No one is doing serious due diligence and underwriting," Diane Thompson, a housing and consumer unit attorney with Land of Lincoln Legal Assistance Foundation Inc. in East St. Louis, told the Belleville News-Democrat recently. "There is not documentation to support income or assets. Clients are never offered a choice."
Thompson said this has forced the foreclosure rate in St. Clair County to more than double in the past decade. Most of the loans that have gone bad are what the industry calls "subprime."
Subprime loans are those issued at a higher than standard interest rate to those whose credit rating prohibits them from otherwise securing a home loan. With interest rates ranging between 5 percent and 6 percent in recent years, subprime rates can reach as high as 12 percent.
Thompson said she has seen cases where subprime rates topped 20 percent. She blames Wall Street for the problem.
Clients are being pushed into these loans because of the demand for income from Wall Street, she said. Brokerage houses are making a lot of capital available for high-interest loans and are using "push marketing" tactics.
"It's extremely profitable," Thompson said. "Most of my clients were not actively shopping for homes for refinancing. They don't shop around. They don't know of those that are around, and they get steered to disadvantaged loans."
On the other hand, there are parts of the country -- like Los Angeles -- where foreclosures are not much of a problem. During April, Los Angeles County had the lowest foreclosure rate of the nation's top five metropolitan areas, according to RealtyTrac.com.
Credit the price of housing, which continues to climb, though not at the super-heated pace of a year ago. Houses are so expensive that: a.) low- and middle-income homeowners are rare; and b.) anyone who gets into financial trouble often can quickly sell their home, probably at a profit.