Loan balloons coming, could trigger new foreclosure 'tsunami'

By DUANE MARSTELLER - Bradenton Herald - July 27,2009

A coming wave of mortgage adjustments threatens to prolong, and possibly worsen, the foreclosure crisis, industry analysts warn.

An estimated 2.8 million option adjustable-rate mortgages are scheduled to reset in the coming years, with the peak in mid-2011. Those resets will cause those borrowers’ monthly payments to balloon, potentially triggering a third wave of foreclosures.

“We do believe there is another wave coming, and I personally believe it will be the tsunami,” said L.R. “Chip” Waterman of Hunt Real Estate ERA in Sarasota, who specializes in foreclosed and bank-owned properties. “There’s no way we’ve begun to see the end of this.”

Others question if such dire predictions are exaggerated — but acknowledge the crisis is nowhere close to ending.

“I think we’re past the absolute tsunami of foreclosures, but we still have many more to go through,” said Ken Chapman Jr., a Sarasota attorney and president of the Sarasota-Bradenton Attorneys Real Estate Council.

Foreclosures rising

As of the close of business Friday, lenders have filed 3,602 foreclosure suits this year in Manatee County Circuit Court, court records show. There were 3.034 filed at the same point in 2008, which went on to set a local record with 5,592 in all.

The state and national pictures are not much better.

More than 1.5 million U.S. properties received a foreclosure filing or were seized by lenders in the first half of 2009, according to RealtyTrac, a data firm that tracks foreclosure filings.

One in 84 U.S. homes got a foreclosure filing, which can range from a notice of default to a bank repossession. In Florida, it was one in every 33, the firm said.

And more are on their way: More than 10 percent of Florida homeowners with a mortgage were at least 30 days behind on their payments during the first quarter of 2009, the Mortgage Bankers Association said. Another 10 percent already were in foreclosure.

The national delinquency and foreclosure rate was one in every eight, the highest in records going back to 1972, the bankers group said.

And a growing number of those are so-called “prime” borrowers, who had good credit and steady income when they got the loan.

“That’s the scary part,” Waterman said.

Many took out option adjustable-rate, or Alt-A mortgages, which allowed them to buy more house than they could have afforded using a traditional 30-year mortgage during the housing boom. Under most so-called option ARMs, initial monthly payments often covered just part of the interest, with the unpaid interest portion added to the loan’s balance. After a set amount of time, the loan resets and the borrower is required to also begin paying off the balance.

That will cause the monthly payment to balloon, something many borrowers had planned to avoid by either selling the house for a profit or doing a refinance. But housing prices slumped and credit tightened, leaving borrowers owing more than their homes were worth, unable to sell them for a profit or refinance, and struggling with higher payments.

As of April, more than half of such loans in the United States were either at least 60 days’ delinquent or in foreclosure, according to First American CoreLogic. Those numbers likely will increase, as resets are not set to peak until mid-2011.

As of April, more than half of such loans in the United States were either at least 60 days’ delinquent or in foreclosure, according to First American CoreLogic. Those numbers likely will increase, as resets are not set to peak until mid-2011.

Job loss a threat

Another threat to prolong the foreclosure crisis is growing unemployment.

“You can’t make the house payment if you don’t have a job,” Waterman said.
Manatee’s jobless rate hit 11.8 percent last month, the highest since the state began calculating it in 1975. The state and national unemployment rates also are near record highs.

Economists predict unemployment levels will continue rising in the foreseeable future, as job creation usually lags an economic recovery. That likely will help keep foreclosures at elevated levels, observers said.

“Unemployment is going to be driving it,” Chapman said.

While that could fuel new foreclosure filings, there’s still the thousands of already-filed cases that have yet to make their way through the courts.

“You’ve got a buildup out there that hasn’t even happened yet,” Waterman said.

Lenders held back in pursuing judgements and taking back homes late last year and in early 2009, the result of temporary moratoriums and the rollout of government programs designed to prevent foreclosures.

But those programs have had limited success to date, and even that might not be permanent. The rating agency Fitch recently said it expects three of every four homes that the government’s “Making Home Affordable” program saves from foreclosure will end up there eventually, largely because the homeowners have too much debt beyond their mortgage.

That has led to fears that lenders will flood the market with repossessed homes and drive down prices even more, thus delaying recovery of the housing market and the broader economy.

Chapman hopes that scenario doesn’t happen, and that the foreclosure crisis will ease.

“We’re nearing the end of the down cycle, but we’ve got a long way to go before we climb out of that hole,” he said. “We just don’t know how deep that hole is and how long it will take to climb back up.”

Another threat to prolong the foreclosure crisis is growing unemployment.
“You can’t make the house payment if you don’t have a job,” Waterman said.
Manatee’s jobless rate hit 11.8 percent last month, the highest since the state began calculating it in 1975. The state and national unemployment rates also are near record highs.

Economists predict unemployment levels will continue rising in the foreseeable future, as job creation usually lags an economic recovery. That likely will help keep foreclosures at elevated levels, observers said.

“Unemployment is going to be driving it,” Chapman said.

While that could fuel new foreclosure filings, there’s still the thousands of already-filed cases that have yet to make their way through the courts.
“You’ve got a buildup out there that hasn’t even happened yet,” Waterman said.

Lenders held back in pursuing judgements and taking back homes late last year and in early 2009, the result of temporary moratoriums and the rollout of government programs designed to prevent foreclosures.

But those programs have had limited success to date, and even that might not be permanent. The rating agency Fitch recently said it expects three of every four homes that the government’s “Making Home Affordable” program saves from foreclosure will end up there eventually, largely because the homeowners have too much debt beyond their mortgage.

That has led to fears that lenders will flood the market with repossessed homes and drive down prices even more, thus delaying recovery of the housing market and the broader economy.

Chapman hopes that scenario doesn’t happen, and that the foreclosure crisis will ease.

“We’re nearing the end of the down cycle, but we’ve got a long way to go before we climb out of that hole,” he said. “We just don’t know how deep that hole is and how long it will take to climb back up.”