Market may not recover till ’09 or later, expert says

The Tucson economy is wallowing in recession, dragged down by a robust housing market that went bust in 2006 and 2007 and likely won’t boom again until next year.

As foreclosure filings continue at a record pace and homes for sale languish on the market for weeks, even months, it raises questions: How did this happen? And perhaps more important, how do we get out of it?

The answer to the former is easy – subprime loans. To the latter? The best answer from local economists, real estate experts and others is, simply, time.

Between 2003 and 2005, the Tucson real estate market went gangbusters – homes sold within days of being listed and values kept going up. Thousands of homeowners cashed in on rising values, refinancing their home loans, sometimes repeatedly, and taking out the increase in value in cash.

Homebuyers by the thousands also were able to buy bigger homes than they normally could have afforded thanks to record-low mortgage interest rates.

In more sane financial times, many of those borrowers might not have qualified for home loans because they either didn’t have the required income to pay them off at normal interest rates or had bad credit histories. But banks and other lenders still made loans for these so-called subprime borrowers, often using adjustable rate mortgages that started out with extremely low interest rates but were subject in succeeding years to the vagaries of financial markets.

When ARM interest rates began resetting to higher rates in 2006, thousands of homeowners in Pima County with subprime loans began to see their mortgage payments rise.

When they began defaulting on the loans, the housing bubble burst.

In 2007 there were nearly 4,500 foreclosure filings in Pima County, according to RealtyTrac, an online foreclosure listing service. Foreclosed homes can be found in every neighborhood in the metro area.

In the midst of the crisis, homeowners such as Randy Longacre, Claudia Estrada and Ricardo Heredia and Colleen Strader are struggling to keep current on payments and stay in their homes.

When Heredia signed the loan agreement for the home he and Strader live in, the assistant tile setter and native Spanish speaker didn’t know what a teaser rate was or even understand the language the contract was printed in – English.

Now the couple face a crash course in home mortgages as the interest rate on their loan resets every six months and the loan servicer they are working with is threatening foreclosure.

Their teaser rate was set at 7.5 percent in 2005, which was relatively high then. Now the loan carries an 11.5 percent rate and could increase to as much as 13 percent.

The difference is about $200 a month, enough to keep the young couple from dining out, renting movies or fixing up their house, which they say is overvalued at $73,000. It is located near the Interstate 10 and Interstate 19 interchange.

Claudia Estrada said her mother took out a loan on the home they have lived in for seven years in order to fix up the place. It looks nice on the inside, but increasing interest rates have forced them to put it on the market to avoid foreclosure.

“We thought about our kids, we thought about getting the best things for our house, and it’s just going down the drain like nothing,” Estrada said. “There’s nothing we can do about it. This is the consequences of what we’ve done but we did it because they assured us everything was going to be fine.”

Estrada, whose home is near 12th Avenue and Drexel Road, has not had much luck finding a buyer. Her contract with one Realtor has expired and she hopes another agent will be more successful.

Half in danger of losing homes may be able to save them

Randy Longacre has lived in his home for decades with his wife, Margie. When she was diagnosed with chronic obstructive pulmonary disease, their household lost a wage earner and gained a hefty number of medical bills.

Now, Longacre may have to go through the foreclosure process for the third time in 18 months. Loans from relatives kept them in the home until recently, but Longacre doesn’t feel comfortable borrowing more.

“I’ve never looked at this and tried to place blame with someone,” Longacre said. “We’re like many Americans. Along the way we made some foolish financial decisions and those things have impact.

“There’s just a lot of factors to it and I don’t know if we’re going to make it,” Longacre said. “I don’t know. I’m hoping we make it. But if we don’t, we’ll just have to scramble to get it sold and maybe we’ll be OK.”

For David Guthrie, a real estate agent specializing in foreclosures for Coldwell Banker at its Williams Centre Office, business is better when the market is down. The spike in foreclosures has kept him going nonstop.

The hardest part of his job is when he has to tell the homeowners or renters they have to leave because of a foreclosure.

“I feel just horrible for them when I have to go post a notice on their door,” he said.

“I’ve walked into foreclosures that looked like they were brand-new,” Guthrie said. “I’ve seen the other aspect of it where you need to rip the floor out. There are old toys of the children and pictures of the grandmothers (left in the home). Things that you just can’t replace.”

The situation can be avoided, he said.

“Let’s not be an ostrich here. It’s time to contact a professional like myself or contact the bank. This is not a time to be ashamed. This is a time to stand up and say, ‘You know what, I’ve had a job loss. I’ve had medical expenses . . .’

“Banks do not want to be in real estate. They want to make loans and they want to keep these loans,” he said.

But owning up to a large amount of debt, especially debt attached to something as personal as a home, can be difficult, Longacre said.

“I have stuck my head in the ground in the past,” he said. “You get so gripped by fear and you get gripped by guilt and you get gripped by shame and you put your head in the ground.”

Cris Poor, director of homebuyer programs at the local non-profit Family Housing Resources, said it’s important to avoid doing that. She said that as soon as you start to get behind in payments, begin working with the bank or seek help through an intermediary such as the counselors at Family Housing Resources, ACORN, the Primavera Foundation or Chicanos Por La Causa.

“Some people are in good loans,” she said. “Over 50 percent of them are workable. They don’t have to leave their house.”

Betty Villegas, a housing program manager with the county, said that local agencies are teaming up to offer “foreclosure clinics” targeted at areas of town with large numbers of filings.

The first clinic will be held June 28 and will be modeled on a forum held in March. One-on-one counseling will be available, but Villegas said there will be a series of workshops to educate borrowers on how to keep their homes.

“We’re really trying to empower people to help themselves,” she said.

The foreclosure process can take as long as six months, from the first missed payment until the home is put up for auction. It is possible to work out a solution and stop the process right up until the home is on the auction block.

“It just depends on what you want to do,” Poor said. “Do you want to keep your home or do you want to walk out?”

Part of the problem may lie with the complexity of home loans.

Politicians, social workers, real estate agents, economists and even the borrowers themselves say that most borrowers never really understood the finer details of their mortgage.

“It comes down to sophisticated loans for unsophisticated borrowers,” Guthrie said.

Poor said that may be true, but there is more than enough blame to go around for effects of the spike in subprime loans and the spate of home purchases by underqualified buyers in 2005 and 2006.

“It was not whether or not you can get a loan, it was which loan you can get,” she said. Borrowers “went on the goodwill of what someone was telling them or what someone was not telling them. They share a part (of the blame), but I think a majority of them were misinformed.”

Borrowers taking out their first, second or third loans may not have understood the terminology or did not consider the consequences of an adjustable rate mortgage. Others simply may have lost their jobs or have had other expenses, such as medical bills, pile up, Poor said.

“A large number of loans were made that shouldn’t have been made,” said Marshall Vest, director of the University of Arizona’s Economic and Business Research Center. “There were a bunch of borrowers that didn’t understand the risk that they were getting into. Other borrowers were in it to flip properties.

The combination of a stalled economy, hundreds of foreclosed homes and tight mortgage credit has created a glut of homes for sale in the county, which is helping drive home values down, further exacerbating the problem. Some homes now are worth less than their loans.

The only real solution to the mess, Vest and others say, is time.

“The foreclosure issue will simply make the inventory situation worse, which means it will be longer before we are able to absorb those houses,” Vest said. “It’s the rest of this year and if we’re lucky, its the middle of next year before we see inventories come down to the point where we can build again.

“It could be longer than that. We’re still discovering how large the problem is right now,” he said. “The situation is not getting better, it’s still getting worse.”

Coldwell Banker’s Guthrie said that although inventory may be overstocked, that doesn’t mean homes aren’t selling.

“I see it as a natural correction in our market, which has been needing to happen for the last couple of years,” Guthrie said. “Average people with regular jobs and regular families just had trouble buying a home to live in before. Now there’s plenty of homes.”

Guthrie and other Realtors point out that homes will continue to sell because newcomers continue to be attracted by jobs in Tucson’s optics industry and at Raytheon Missile Systems, not to mention the weather.

“If you price correctly as a seller, you’re going to be able to succeed in this market, and if it’s not the right time you need to be waiting it out,” Guthrie said. “Regardless of the amount of inventory, if you price something well, there’s going to be buyers for it.”

Vest said the excess home inventory will eventually be absorbed by the area’s growing population.

“These are normal business cycle kinds of results I think,” Vest said. “We’ve been through this before. We’ve been through credit cycles before, we’ve been through recessions in the housing cycle before and I’m sure we will get through this one again, but not without pain.”

What to do if you get behind on your mortgage

There are several options for borrowers having trouble paying their mortgage. They are dependent on what kind of outcome the homeowner is looking for, who the lender is, the deed of trust and the borrower’s payment history. As soon as you suspect you will miss a mortgage payment or have missed one, call your lender and discuss the following options:

TO KEEP THE HOME
• Repayment plan – Typically a plan where the borrower makes a full monthly payment and a partial payment.

• Forbearance – A delay in payments while a repayment plan is instituted.

• Modification – Changing the terms of the loan, which could include adding the delinquent amount to the unpaid balance, resetting the interest rate or extending the length of the loan.

• Partial claim – A partial claim on the mortgage insurance where the borrower signs a second loan to be repaid after the first loan is paid in full.

• Refinance – Take out a second loan that is secured by the Federal Housing Administration. This may require a second borrower on the loan in order to qualify.

TO SHED THE HOME OR LOAN
• Assumption – Allow another borrower to take over the loan.

• Sale – Sell the home and keep any money from the sale that is left over after paying off the loan.

• Short sale – This option is for borrowers whose homes are worth less than they owe on the loan. The lender agrees to settle the debt in exchange for the proceeds from the sale of the home. The remaining balance of the loan is forgiven. There are possible tax consequences because the IRS will count the difference between the market value and the loan amount as income.

• Deed in lieu of foreclosure – The debt is forgiven after the borrower voluntarily gives the property to the lender. The property can not have any other liens on it. This also can have income tax consequences, but by doing this, the borrower avoids bad-credit issues associated with foreclosure.

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Advice and Assistance

State, federal and local governments and social service agencies have created a one-stop web site for Pima County homeowners in danger of foreclosure in already going through the process.

http://www.dontborrowtroubleaz.com

This entry was posted on Friday, May 9th, 2008 at 12:00 am and is filed under Edge, Local. Tags for this post: Briefs, Edge-Briefs, Edge-Briefs-Local, Edge-Government, Edge-Government-Local, Eric Sagara, Government, Local-Sci/Tech, page-a01, Sci/Tech. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.