Avoiding mortgage crisis is a priority
Lenders have to help distressed borrowers find a way to dig out, and all the participants, including home builders, have to reform their business -- or someone else will do it for them. The pressure is already building. In a Senate hearing last week, regulators criticized the recent wave of exotic loans that are squeezing many homeowners and will soon hit thousands more...The problem has been evident in Texas for a while. Foreclosures have been rising at double-digit rates for four years, and unlike other parts of the country, home values haven't appreciated enough to bail out borrowers.

Avoiding mortgage crisis is a priority

By Mitchell Schnurman
Star-Telegram Staff Writer

When the real-estate industry made it easy to borrow a lot of money, it also made it easy for people to get into financial trouble. Which is exactly what's happening, as foreclosures are surging across the country.

Now we'll see whether the key players can head off a crisis.

Lenders have to help distressed borrowers find a way to dig out, and all the participants, including home builders, have to reform their business -- or someone else will do it for them.

The pressure is already building. In a Senate hearing last week, regulators criticized the recent wave of exotic loans that are squeezing many homeowners and will soon hit thousands more.

There are calls for loan restrictions, more disclosure and more education. Lenders are talking about "foreclosure prevention" -- ways to give homeowners more time to make payments or rework their debts. Hot lines have been set up to counsel strapped consumers.

Some people are even questioning the sanctity of homeownership, which is the equivalent of economic blasphemy.

Common sense tells us that owning a home isn't for everyone, but if that notion gains wider acceptance, look out.

Real estate and construction are pillars of the economy, and for years, we've heard only about the great wealth they create. Now there are plenty of stories about folks getting in over their heads and losing everything.

The problem has been evident in Texas for a while. Foreclosures have been rising at double-digit rates for four years, and unlike other parts of the country, home values haven't appreciated enough to bail out borrowers.

With little equity, they can't escape a financial jam by simply selling their property or refinancing their mortgage and taking out cash. In areas with soaring home prices, those have been effective antidotes for big debt burdens.

About 3,300 homes in the Metroplex are posted for the October foreclosure auction, the most since the real-estate bust of the late 1980s, says George Roddy of Foreclosure Listing Service in Addison.

He says we may be approaching a peak, but he had the same thought a year ago, only to see the postings keep rising.

Other parts of the country are starting to feel the pain in a big way, including areas that were at the center of the real-estate boom.

In Colorado, foreclosure activity surged 60 percent in one month, reports RealtyTrac of Irving, Calif. In Nevada, August totals were three times higher than the year before. Nationwide, RealtyTrac says, August foreclosure activity was 53 percent greater than last year.

Who's to blame -- borrowers who overreach, lenders who are too aggressive, builders who never stop building?

Consumers bear the ultimate responsibility, and they'll pay the highest price. But all the players are part of the mix.

In North Texas, excessive building plays a big role. Foreclosure postings have been concentrated on the edges of big cities -- south of Dallas, in south Arlington, on the northern edges of Fort Worth.

That's where the most new construction is happening, and too many buyers took on more than they could handle. Many underestimated the costs of taxes, insurance, utilities and furniture.

Some foreclosure filings happened quickly, in the first few months after the loan closed; others came a year or two later, when full payments were due for taxes and insurance.

In other parts of the country, exotic loans are a major factor. Because homes cost so much and their values have appreciated, borrowers jumped on interest-only loans and loans that allowed them to set the monthly payment.

The financing looks good, but it's risky. Because payments aren't large enough to cover the true interest and amortize the loan, the loan amount grows over time. After a few years, the interest rate is reset to a market level on a higher principal.

If incomes don't rise sharply or housing prices don't climb so borrowers can refinance, those borrowers have a big problem.

It's not uncommon for a monthly payment to increase by a third, even more if the borrower had a teaser rate that started at less than 2 percent.

Last year, interest-only loans accounted for 11 percent of the privately funded mortgages in the Fort Worth area, up from 2 percent three years earlier, according to LoanPerformance, a unit of First American Real Estate Solutions.

Nationwide, 26 percent of the home loans were interest-only in 2005, up from 6 percent three years earlier.

In California, these loans accounted for 44 percent of originations.

Some analysts look at those numbers and predict a wave of defaults, as scores of adjustable mortgages reset to higher rates. This year, $375 billion in hybrid adjustable-rate mortgages will reset, according to the PolicyLab Consulting Group.

Next year, $1 trillion in loans are scheduled to reset.

What worries me is that we're seeing an increase in foreclosures without any downturn in the economy. That signals an industry problem, a combination of too much building, easy credit and a bubble mentality.

In the past, surges in foreclosures were triggered by people losing their jobs in a recession.

Job loss is still a key factor, along with illness. But overspending and risky loans have put many buyers on the edge, despite a healthy economy.

Not long ago, loan standards for mortgages were tougher, and that served as a screening mechanism. People who weren't ready for the financial burden often couldn't qualify for financing, or they had to settle for less house.

But everybody, especially politicians, loves to promote homeownership, and many buyers simply needed a chance. So Congress urged lenders to get creative and find ways to get more low-income buyers into the game.

Private companies developed dozens of new loan programs. One broker recently told the Star-Telegram about 350 different financing schemes.

It's not uncommon today to get a mortgage with no money down. Or to set your own monthly payment. Many times, buyers put up little or no escrow money for taxes and insurance.

No-interest loans have been around for decades, but they're designed for sophisticated, well-heeled buyers, who will have enough cash to pay down the principal when the time comes. Yet the exotic loans are most popular with low-income, less-educated borrowers, according to a consumer survey.

So why does the industry sell this kind of financing to questionable candidates? Or push loans that require no down payments and no escrow? Probably because they allow buyers to qualify for bigger mortgages and bigger homes, which means more commissions for everybody.

It works for buyers, too, as long as home values are rising. When that stops and the loans reset, the party's over.

That's where the industry is headed now. What can it do, knowing that regulators are hatching their own solutions?

Builders have to slow their construction, even more than they've done recently. Lenders have to make sure that customers can handle a loan's worst case, not just the early teaser rate.

And buyers have to be more thorough in their due diligence. Assess how much they can really afford to pay for shelter every month, and don't overlook the additional costs.

Maybe more people should look at mortgages the way they look at the dozens of credit-card offers that come through the mail.

It's easy to take on a lot of debt at a low-interest rate, but what happens when the deal expires and reality sets in?