Homeowners feel the pain of contracting market

RAL ESTATE MATTERS

September 14, 2007|By ILYCE GLINK

The fallout continues.

The housing market is contracting. Pending sales dropped 12 percent last month to the lowest levels in six years. Although home selling normally slows at the end of the summer, before kicking back into gear for the fall market, the turn of events is substantial.

Homeowners everywhere are feeling the pain. According to the latest numbers from the Mortgage Bankers Association of America, the number of homeowners starting the foreclosure process hit a record high this spring, with 0.65 percent of all homeowners receiving a foreclosure notice - the third consecutive record-breaking quarter.

The number of homeowners more than 30 days late in paying their mortgage also rose sharply. Slightly more than 5 percent of all loans were delinquent, a rise of 0.75 percent from a year ago.

If you look at a map of the United States showing states with the highest number of delinquencies and foreclosures, two trends jump out, said Doug Duncan, the association's chief economist.

First, a large number of homeowners can't make their mortgage payments in Michigan, Ohio and Indiana, states that have had large job losses. If you lose your paycheck, it's tough to make ends meet.

Michigan, which has suffered through the trials and tribulations of Detroit, also has suffered from higher gas prices, which have cut somewhat into the state's tourism revenues. The state was hit again recently when Volkswagen, the world's fourth-largest auto manufacturer, announced it would fire a quarter of its U.S. staff, amounting to about 400 jobs, and move its headquarters from Detroit.

The second trend that pops out on the map is that states with the highest levels of home-value appreciation are contracting nearly as quickly. The collapse of previously booming housing markets in California, Florida, Nevada and Arizona also has contributed to the rise in delinquencies and foreclosures.

Underlying it all is the subprime mortgage mess, which might claim as many as 10,000 more jobs from Countrywide Financial, the nation's largest independent lender. More than 100,000 people in the financial sector have lost their jobs this year, according to Chicago-based outplacement firm Challenger, Gray and Christmas. The vast majority are mortgage-industry jobs.

As many as 2 million adjustable-rate mortgages will reset in the next year, according to the bankers association. It's likely that some of these borrowers will find themselves unable to afford their new, higher interest rate. Many may be unable to refinance (because their credit scores aren't good enough to qualify for a good rate) or find that their homes are worth less than the mortgage balance.

These, combined with next year's presidential election, are the reasons some housing experts don't see an end to the current cycle until 2009.

What can help? President Bush's plan to loosen refinancing requirements at the Federal Housing Administration might help some 80,000 homeowners. But what about those who don't have FHA loans?

I received a letter recently from a reader whose monthly payments for his primary residence and a rental property gone bad total 100 percent of his take-home pay. His loan is a negative amortization mortgage, which means that the amount he is paying doesn't cover the amount that is due. The difference gets tacked onto the back end of the loan, which means that with each payment, his principal balance grows.

He's living on some cash he has in the bank, but that will run out soon. Since the property is worth far less than the mortgage amount, his options aren't good - and he likely won't qualify for the help the president is promoting.

All of this makes for plenty of housing pain going forward into 2008.

www.thinkglink.com

Contact Ilyce Glink by mail at Real Estate Matters Syndicate, P.O. Box 366, Glencoe, IL 60022 or calling her radio show at 800-972-8255 from 11 a.m. to noon Sundays.

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