Home losses loom
But experts are divided over how hard a mortgage foreclosure wave
would hit region
By Jim Wasserman - Bee Staff Writer

Published 12:00 am PST Sunday, January 28, 2007
Story appeared in BUSINESS section, Page D1

James and Beth Fullenwider are living inside a bad dream growing ever
more familiar across the Sacramento region: Their 2,400-square-foot
house in Elk Grove is slowly slipping away from them.

They can't afford their $3,300 monthly payment.

"If the credit people had really looked at our situation, they would
have laughed and said, 'You can't come close to qualifying for this,'
" says James Fullenwider, who runs a video production business at
home. "We're in a house we have no business being in."

He says the couple didn't read the home loan's fine print. Only after
moving into the $500,000 home last August did they learn the loan
agent inflated their income to qualify them for the financing. "But we
were stupid to do it," Fullenwider says.

The couple's story illustrates one of the biggest questions hanging
over the Sacramento region's real estate market this year. As housing
prices search for bottom, some financial experts fear that a multitude
of expensive and newly adjusting mortgages have the potential to spark
a rising tide of foreclosures. That, in turn, could be a hidden time
bomb, shoving more homes onto the for-sale market and further
stressing a downturn already well into its second year.

What actually will happen is anything but clear. Late mortgage
payments and foreclosures, while rising, largely remain below levels
of the region's 1990s recession-driven housing bust. Yet, the
repercussions from a boom fueled in large part by cheap money and easy
credit can't be ignored.

Adjustable rate loans became the dominant form of financing for people
who otherwise could not have afforded their homes during the rapid
price escalations that marked the boom.

The loans offer low initial payments that eventually reset to higher
interest rates and often much bigger monthly payments.

Nearly $1.3 trillion in adjustable rate mortgages -- ARMs -- will
reset to higher payments this year, according to mortgage giant
Freddie Mac and other financial institutions.

That will cause some payments to rise $200 a month. Others will double
or triple.

In markets like Sacramento, already heavy with excess resale
inventory, some speculate that stressed owners will hand more homes
back to banks and aggravate the oversupply. Since the high inventory
of houses for sale already is depressing prices, a run of foreclosures
would likely further depress them.

New statistics indicate foreclosures are rising fast. Last week, La
Jolla-based DataQuick Information Systems reported 865 foreclosures in
Amador, El Dorado, Nevada, Placer, Sacramento, Sutter, Yolo and Yuba
counties during the fourth quarter of 2006, nearly doubling from the
previous quarter.

DataQuick also reported 3,071 notices of late mortgage payments --
known as notices of defaults -- during the same period. While that was
a 16 percent increase over the previous quarter, the rate of growth
had slowed somewhat from earlier in 2006.

Economists say areas like the Central Valley that had an explosion of
new houses and now wrestle with falling home values are particularly
vulnerable to "payment shock." Many ARM borrowers owe more on their
loans than their houses are worth. They can't sell and they can't
refinance into cheaper loans, which raises their risk of foreclosure.

"For people in adjustables especially, if they owe more than their
house is worth, they're going to have little reason to stay and kill
themselves to make that mortgage payment," says Vicky Henderson,
senior loan consultant at Sacramento's Vitek Mortgage.

But other real estate analysts still believe the foreclosure
phenomenon will be more of a ripple than a 1990s-style wave.

DataQuick analyst John Karevoll says the slowdown in growth for
notices of defaults -- the first step toward fore- closure --
indicates the largest share of potentially troubling loans is moving
past its riskiest time frame for problems. Karevoll said last week the
region "may have seen most of the surge it's going to have in (notices
of) default activity."

Others cite steady job growth and relatively low interest rates that
have allowed many borrowers to refinance out of their ARMs. And
experts such as Alexis McGee, president of Fair Oaks-based
ForeclosureS.com., believe banks' deep pockets will stop them from
dumping excessive numbers of repossessed houses onto the market at
once.

Christopher Cagan, who analyzes financial trends at Santa Ana-based
First American Real Estate Solutions, predicts 21,420 foreclosures
during the next five years among ARM holders in El Dorado, Placer,
Sacramento, Sutter, Yolo and Yuba counties. That's 16.9 percent of the
126,000 ARMs used for home purchases and refinancings in 2004, 2005
and the first half of 2006.

"Adjustables generally have higher default rates than fixed,
particularly those taken out near the top of the market cycle," he
says.

Yet Cagan maintains that those defaults -- while extremely painful to
those involved -- represent only a tiny slice of the overall economy.

"I think this is going to be long and drawn out," he says. "If
somebody faces a reset in 2007, often it takes a year to lose the
property. A lot of lenders will work with you. They don't want to be
stuck with the property in a difficult market."

Like all of California, Sacramento-area homebuyers have grown
dependent on adjustable rate financing to buy houses that more than
doubled in value since 2000. In 2004, about 65 percent of homebuyers
in Amador, El Dorado, Nevada, Placer, Sacramento, Sutter, Yolo and
Yuba counties used adjustables. The next year, the total jumped to 73
percent before falling back to 62.5 percent from January through
November 2006, according to DataQuick.

That's about 135,000 ARMS in the last three years, with thousands of
them adjusting upward in 2007, according to San Francisco-based Loan
Performance, which tracks mortgage risk data. Data-Quick analysts said
thousands more used ARMS in refinancing loans.

Loan Performance, which tracks U.S. mortgage industry loans, estimated
that nearly half of 2004 and 2005 homebuyers in the eight-county
region used interest-only loans. Those let borrowers pay only the
interest portion for a specified number of years, then hike payments
to cover principal, as well.

The firm estimates that in 2005 as home prices peaked, nearly one in
five borrowers used even riskier Option ARMS. Those loans let buyers
choose from a variety of payment options -- including a minimum
payment that doesn't cover the cost of interest. In the first nine
months of 2006, one in four Sacramento-area borrowers were using them,
Loan Performance estimated.

Those kind of loans will spell trouble later this year when some
borrowers face skyrocketing payments, said Bob Walter, chief economist
of Michigan-based Quicken Loans.

"Seventy-five percent of the people who take those make the minimum
payment," he said. "If you make the minimum payment, about the third
year, about the 36th to 38th payment, it nearly triples. Most people
will adjust out of them, but the ones in financial difficulty are the
ones who will get caught."

For now, economists like Keitaro Matsuda of San Francisco-based Union
Bank of California, see low interest rates, job growth and a strong
state and Sacramento-area economy overriding any rise in foreclosures.

"I agree that the foreclosures will be a fact of life moving forward
and will play some role," said the bank's senior economist. "But I
don't think that in itself it can move the market as significantly as
in the 1990s. The reason is the economy here in California is on much
firmer ground than we were in the '90s."

The Fullenwiders, who received an interest-only loan, considered
walking away from the house and becoming a foreclosure statistic. But
real estate agent Mike Toste of Antelope is trying to save them with a
short sale. That's a tactic in which he finds a buyer for the home and
persuades the bank to accept less than it's currently owed.

If he can do that, the Fullenwiders will escape with less damage to
their credit than a foreclosure.

http://www.sacbee.com/142/story/114248.html