Housing Market Braces for Possible Blow from Rise in Subprime Mortgage Foreclosures
Housing Market Braces for Possible Blow from Rise in Subprime Mortgage Foreclosures
San Francisco Chronicle
As home prices in the San Francisco Bay Area stagnate and sales volume plunges, the next blow to the region's housing market could come from defaults among high-risk borrowers, some experts say.
The stunning erosion in mortgage credit quality is quickly becoming another very heavy weight on the Bay Area's housing market.
Until recently, the Bay Area's booming housing market kept such marginal borrowers out of trouble. But no more.
Housing prices went on a five-year tear in the region, jumping 72 percent to reach a median of $628,000 last year from $365,000 in 2001, according to DataQuick Information Systems. That enormous appreciation meant that borrowers who got in over their heads were often able to sell their houses quickly at a profit or refinance, pushing the percentage of homeowners who fell behind on payments or had their properties foreclosed to record lows.
That appreciation has all but ground to a halt. The median price of a house or condo in the Bay Area climbed only 4.7 percent in the region's nine counties from 2005 to 2006. More-recent data suggest no price gains at all. Meanwhile, the foreclosure rate is rising, particularly among high-risk borrowers, known as subprime in the lending industry.
Subprime customers are those with scant borrowing records or a history of credit problems. Nationwide, the number of such borrowers who missed home-loan payments jumped to 22 percent in the fourth quarter of last year from 16 percent in the fourth quarter of 2000. The percentage of Bay Area subprime borrowers who fell behind on payments jumped to 23 percent from 11 percent in that same period.
About a quarter of the mortgages issued in 2005 and 2006 in California fell into the subprime category, compared with 20 percent nationwide.
Rising delinquencies are bad news for an already teetering housing market, both regionally and nationally. A higher number of delinquencies will likely lead to a spike in foreclosure rates, depressing home prices as lenders sell repossessed property at a discount. Also, as lenders struggle to cope, they become increasingly tightfisted. That makes it harder to borrow, shrinking the pool of potential buyers and drying up demand.
That could lead to another big step down for the housing market.
Nationwide, as many as 2.2 million subprime borrowers could wind up losing their homes to foreclosure over the next several years, according to the Center for Responsible Lending, a nonprofit group whose estimate is considered a worst-case scenario by many in the industry.
The foreclosure rate will likely be higher in places where the economy is weaker or where home prices have fallen harder than in the Bay Area. But this region is not immune, economists stress.
Some experts believe that subprime loans will affect the market for the Bay Area's least-expensive homes most dramatically and is unlikely to spread to the higher end of the market. But other experts said that the poor credit quality of borrowers who received loans, especially those who took out mortgages in 2005 and 2006, could have significant consequences.
The most common type of subprime loan is what people in the industry refer to as a 2/28. The monthly payments are fixed for the first two years of the 30-year loan, currently at a rate of about 6 or 6.5 percent, and then begin to rise, with adjustments occurring every six months until they hit a cap of as much as 12 percent.
With adjustments occurring so frequently, many subprime borrowers see their monthly costs skyrocket.
For borrowers who took out loans in 2005 and 2006, a group of buyers that has seen the value of their homes rise little since they purchased them, that could spell trouble.
During the peak of the housing boom, borrowers lined up in droves to get money and it was easy for lenders to find qualified buyers, economists say. The sharpest gain in home prices in the Bay Area came between 2004 and 2005, when the median price of a house or condo in the region jumped 20 percent from $500,000 to $600,000.
As the market started to slow at the end of 2005 and into 2006, the pool of buyers with good credit began to shrink.
"When the housing market was strong, the brokers expanded, adding staff and origination infrastructure," one expert said. "When demand started to weaken, they were under tremendous pressure to fill the void. The only way to do that was by lowering their standards and bringing in less-creditworthy borrowers."
Across the country, those loans are going sour fast, one expert predicted. More than 7 percent of homeowners who took out adjustable-rate subprime loans in 2005 were at least 120 days behind on their mortgages within 12 months of when the loan was issued. For the 2006 subprime loans, 4 percent of borrowers fell into that same category after just five months.
NCaHome is a full service residential real estate brokerage charging only 1.5% commission. Professional real estate services for California buyers and sellers. Visit us today at www.NCaHome.com or call (707) 693-0200.
San Francisco Chronicle
As home prices in the San Francisco Bay Area stagnate and sales volume plunges, the next blow to the region's housing market could come from defaults among high-risk borrowers, some experts say.
The stunning erosion in mortgage credit quality is quickly becoming another very heavy weight on the Bay Area's housing market.
Until recently, the Bay Area's booming housing market kept such marginal borrowers out of trouble. But no more.
Housing prices went on a five-year tear in the region, jumping 72 percent to reach a median of $628,000 last year from $365,000 in 2001, according to DataQuick Information Systems. That enormous appreciation meant that borrowers who got in over their heads were often able to sell their houses quickly at a profit or refinance, pushing the percentage of homeowners who fell behind on payments or had their properties foreclosed to record lows.
That appreciation has all but ground to a halt. The median price of a house or condo in the Bay Area climbed only 4.7 percent in the region's nine counties from 2005 to 2006. More-recent data suggest no price gains at all. Meanwhile, the foreclosure rate is rising, particularly among high-risk borrowers, known as subprime in the lending industry.
Subprime customers are those with scant borrowing records or a history of credit problems. Nationwide, the number of such borrowers who missed home-loan payments jumped to 22 percent in the fourth quarter of last year from 16 percent in the fourth quarter of 2000. The percentage of Bay Area subprime borrowers who fell behind on payments jumped to 23 percent from 11 percent in that same period.
About a quarter of the mortgages issued in 2005 and 2006 in California fell into the subprime category, compared with 20 percent nationwide.
Rising delinquencies are bad news for an already teetering housing market, both regionally and nationally. A higher number of delinquencies will likely lead to a spike in foreclosure rates, depressing home prices as lenders sell repossessed property at a discount. Also, as lenders struggle to cope, they become increasingly tightfisted. That makes it harder to borrow, shrinking the pool of potential buyers and drying up demand.
That could lead to another big step down for the housing market.
Nationwide, as many as 2.2 million subprime borrowers could wind up losing their homes to foreclosure over the next several years, according to the Center for Responsible Lending, a nonprofit group whose estimate is considered a worst-case scenario by many in the industry.
The foreclosure rate will likely be higher in places where the economy is weaker or where home prices have fallen harder than in the Bay Area. But this region is not immune, economists stress.
Some experts believe that subprime loans will affect the market for the Bay Area's least-expensive homes most dramatically and is unlikely to spread to the higher end of the market. But other experts said that the poor credit quality of borrowers who received loans, especially those who took out mortgages in 2005 and 2006, could have significant consequences.
The most common type of subprime loan is what people in the industry refer to as a 2/28. The monthly payments are fixed for the first two years of the 30-year loan, currently at a rate of about 6 or 6.5 percent, and then begin to rise, with adjustments occurring every six months until they hit a cap of as much as 12 percent.
With adjustments occurring so frequently, many subprime borrowers see their monthly costs skyrocket.
For borrowers who took out loans in 2005 and 2006, a group of buyers that has seen the value of their homes rise little since they purchased them, that could spell trouble.
During the peak of the housing boom, borrowers lined up in droves to get money and it was easy for lenders to find qualified buyers, economists say. The sharpest gain in home prices in the Bay Area came between 2004 and 2005, when the median price of a house or condo in the region jumped 20 percent from $500,000 to $600,000.
As the market started to slow at the end of 2005 and into 2006, the pool of buyers with good credit began to shrink.
"When the housing market was strong, the brokers expanded, adding staff and origination infrastructure," one expert said. "When demand started to weaken, they were under tremendous pressure to fill the void. The only way to do that was by lowering their standards and bringing in less-creditworthy borrowers."
Across the country, those loans are going sour fast, one expert predicted. More than 7 percent of homeowners who took out adjustable-rate subprime loans in 2005 were at least 120 days behind on their mortgages within 12 months of when the loan was issued. For the 2006 subprime loans, 4 percent of borrowers fell into that same category after just five months.
NCaHome is a full service residential real estate brokerage charging only 1.5% commission. Professional real estate services for California buyers and sellers. Visit us today at www.NCaHome.com or call (707) 693-0200.
