Posted on 03/28/2006 9:40:42 PM PST by ex-Texan
Bankers, lenders remain bullish, but rate hikes may collapse house of cards
As the home-loan delinquencies rise nationwide, Nevada's numbers remain surprisingly strong. However, the pending interest-rate hikes by the Fed, the day-to-day fluctuations in oil prices, and the Silver State's high percentage of interest-only and adjustable-rate mortgages have left some lenders and analysts wondering if the bubble will burst.
"Where you will probably have problems is with the no-down-payment, 100-percent-financed ARM (type of loans), and interest rates go up," Nevada State Bank Senior Vice President Jeff Bargerhuff said. "It's kind of like the perfect storm of mortgage lending."
Nevada ranks second in the nation at 61.3 percent, behind only California (69 percent; in 2004, it was 46 percent), in the percentage of potentially negative-amortizing mortgages, including interest-only and products with ARM options, according to the Federal Deposit Insurance Corporation's most-recent numbers. Nationwide, 49.5 percent fall into that category. "ARMs tend to have a higher rate of foreclosure," said an official from the Mortgage Bankers Association. Realtor Linda Rheinberger shows a house in Summerlin to prospective buyers.
The year-end 2005 FDIC statistics show a sharp jump from the same time 12 months before, when Nevada's interest-only and adjustable-option loans were more in line with the rest of the country. The state had 39.5 percent of its mortgages in that category at the end of 2004, compared with 31.1 nationwide.
"It jumped for the nation and for Nevada. The reason is affordability," explained John Anderlik, the acting regional manager in the FDIC's San Francisco office. "With price appreciation in Nevada, it is getting more difficult for people to afford their homes. These products have become more attractive as affordability goes down."
Nevada has struggled with affordable housing issues as land prices skyrocketed in the past few years. Statewide, home prices rose 18 percent during 2005 and 37 percent in 2004, which enabled buyers to flip their properties if they couldn't afford to pay their mortgages, Anderlik said. "If they've been in them two or three years, they have pretty good price appreciation. That's the reason we have seen very few foreclosures."
A recent survey conducted by the Mortgage Bankers Association found that only 0.3 percent of the home mortgages in Nevada were in foreclosure as of the end of 2005, making it the 48th-lowest out of the 50 states, the District of Columbia and Puerto Rico. Nevada also showed one of the lowest home-loan delinquency rates in the country at 3 percent, according to the Mortgage Bankers' report. Past-due loans are defined as those 30 days or more behind in payments. Hurricane-stricken Louis-iana led the way in past-due loans with 21 percent, while Ohio ranked first in foreclosures with 3.2 percent.
EXCELLENT RATIO
Bankers like Nevada State Bank President Bill Martin are happy with the performance of their mortgage portfolio. "We have over 4,000 first mortgages, and only three are delinquent, and none over 90 days, which is when they usually trigger default," he said. "The economy is that good, but we also try to select very well. When somebody asks for a loan, we have to look at their ability to pay at a higher rate. With some of the others, there is no question there is a risk of default."
Wells Fargo has enjoyed a strong loan portfolio in Nevada as well, said Ed Delgado, the bank's vice president of default information. "I have not seen an increase, fourth quarter 2004 to fourth quarter 2005, in terms of Las Vegas." The bank would not release specific loan numbers, but the banker did say Wells Fargo tries to be proactive with its loans. "We might get involved in past-due loans before the 30-day point. We might call the consumer at 10 days or 15 days past due." At that point, the lender might be willing to adjust terms or make other arrangements to help the borrower.
Problems can show up when underwriting standards are relaxed, Martin added. "It just depends how tight the lender tied it and if they just didn't care because they wanted the loan. You have to realize people have car payments and other things to pay."
RISKY ARM LOANS
Some of the riskiest of loans -- the subprime ARM loans -- showed an increase in delinquencies at the end of 2005. The Mortgage Bankers reported 7 percent of such loans were 30 days or more past due in Nevada, compared with 5.2 percent the year before. The U.S. averaged a 12.6 percent delinquency rate in subprime ARM mortgages as of December 2005, which was up from 10.7 percent the year before. "They have shown some deterioration," Anderlik said of Nevada, "but they remain strong compared to the rest of the nation."
The last year was tough on mortgage holders. Nationwide, borrowers faced higher interest rates and fuel costs and mortgage delinquencies rose 4.7 overall, hitting its highest point since the middle of 2003.
"It's what we have been expecting," a Mortgage Bankers representative said. "There are so many new loans out there that haven't been seasoned. Interest rates may play a role in the future, but right now, it is just the economy -- job loss and low (home) appreciation."
Fortunately, those are two things that Nevada has not had to contend with in quite a while. "Nevada is anchored in the West Coast, where a lot of the home market is strong," said Wells Fargo's Delgado, who expects interest rates hikes to halt soon with inflation in check.
San Francisco-based RBC Capital markets analyst Joe Morford pointed to the Silver State's economy: "The healthy job market should keep loan losses to a minimum," he said.
One Source Realty broker and owner Linda Rheinberger believes there might be too much emphasis put on Nevada's interest-only loan numbers anyway. "It's just to maximize return," she said of the financing's popularity among investment buyers. "If you don't hold the properties that long, it doesn't make sense to put money down."
Never go there. A Freeper passed the word to me.
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