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September 10, 2002 |
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More Fall Behind on Mortgages, By QUEENA SOOK KIM
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When Krista and Scott Mullins saw housing prices in the San Diego area spiraling upward in late 2000, they knew they had to move fast to buy a bigger home. "Would we be able to afford a house if we waited?" fretted Mrs. Mullins.
On a grassy one-acre spot in Vista, about 40 miles north of San Diego, they found a renovated house that was perfect for their two children. The asking price of $292,000 would double the couple's mortgage payments. But "surely, the bank wouldn't give us a loan if we couldn't afford it," Mrs. Mullins thought.
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Enter an eager loan officer who helped the couple package their application. She showed them how to get a loan despite their high credit-card debt, and pushed them into a higher-interest-rate loan, the Mullinses say.
Last month, the couple filed for personal bankruptcy.
In recent years, the housing industry has bent over backwards to allow people like the Mullinses to buy houses they couldn't previously afford. Lenders require smaller down payments and allow buyers to devote more of their income to mortgage payments. And many borrowers are being lured by adjustable-rate mortgages with low teaser rates that quickly climb, pushing up house payments.
Now, the bill is coming due. In the second quarter, a record 1.23% of all home loans were in the foreclosure process, above the first quarter's tally of 1.10%, and surpassing the previous record of 1.14% in the first quarter of 1999, according to a report released Monday by the Mortgage Bankers Association of America, an industry group. That same report found 4.77% of all home loans outstanding were at least 30 days delinquent. That's one of the highest rates of the last decade, though it's well below the record delinquency rate of 6.07% in 1985.
The growing number of distressed borrowers is heightening fears that the nation's red-hot housing market is poised for a correction. If the delinquency rate worsens, lenders could tighten lending standards, making it harder for many potential home buyers to get financing and resulting in a weaker overall housing market. That would be bad news for the economy since surging housing prices are a big reason that consumers have kept spending even as the stock market has slumped.
Part of the reason the housing market got so hot is that lenders rushed out loans designed to cut monthly payments so that buyers could get bigger homes. It is some of those very loans that are now experiencing problems. One indication: Conventional adjustable-rate mortgages, popular with budget-stretched customers, currently have a 5.25% delinquency rate vs. a 2.75% rate for conventional fixed-rate mortgages.
In addition, credit counselors say they are getting more calls from people who are struggling to make their house payments. Auriton Solutions, a nonprofit credit-counseling agency based in St. Paul, Minn., says it now receives about 400 such calls a month, up from just 100 a month a year ago.
Doug Duncan, chief economist at the Mortgage Bankers Association, attributes the rising delinquency rate to the dual forces of a recession and a "huge innovation" in mortgage loans. Still, Mr. Duncan maintains that the slew of mortgage products have allowed people who were traditionally shut out by lenders the chance to become homebuyers.
Others see it differently. The realtor or loan officer says, "'Let's get them into a different kind of loan,' even if they know [the borrower] can't afford it," says James Croft, executive director of Mortgage Asset Research Institute, a Reston, Va.-based organization that tracks mortgage-industry fraud.
A Blurry Line
The line between loan deals that help consumers and those that hurt them can be blurry. Homebuilder Dominion Homes offered a temporary interest-rate discount a few years ago to lure marginal buyers into a new tract just outside Columbus, Ohio. That kept buyers' monthly payments attractively low during the first year. But now, the owners' monthly payments have shot up, and some residents have had to abandon their homes.
That's what happened to Rob Jones, a 50-year-old help-desk employee and his wife, a merchandise handler for Sears. In the summer of 1998, the couple turned to Dominion after another homebuilder rejected them for a loan because they owed $10,000 on car and credit-card bills. Dominion offered the Joneses a loan that shaved three percentage points off the going interest rate if they purchased a home in the builder's Southfield Village development. The catch was that the rate increased by a percentage point in each of the next three years.
The couple's monthly payments were $650 in the first year, but rose in the third year to $1,100, including higher-than-expected property taxes. The couple's income didn't keep pace. Last fall, the Joneses had to declare personal bankruptcy and give up their house. "I feel now that I wasn't told everything upfront," Mr. Jones says.
Today, nearly half of the 15-or-so homes on the Jones's block are empty or for sale. Dominion Homes defends its role, saying it was merely administering a government program backed by the Federal Housing Authority. The federal agency stopped the program in 1998 after determining it was "too aggressive," says Lori Steiner, a senior vice president for Dominion.
Aggressive lending practices tend to correlate with hot housing markets. In San Diego, for instance, the 22% year-over-year rise in the median home price to $368,000 has outpaced the roughly 4% increase in residents' median annual income to $49,000 over that period, says John Burns, a real estate consultant in Irvine, Calif.
Springboard, a nonprofit credit counseling service in Southern California, says that so far this year it has helped about 500 homeowners with mortgage-payment problems, a 67% increase from last year.
In the San Diego county town of Vista, the Mullins think their broker nudged them into a home they couldn't afford. The couple, who are in their 30s, had racked up $20,000 in credit-card debt after buying their first home in 1999. Mr. Mullins figured that monthly mortgage payments on the Vista home would eat up about 60% of their take-home salary and exceed the 36% of gross income that once was the banking industry's usual limit.
The couple say their broker, Patty Villanueva, steered them toward a "stated income program," which allows borrowers to simply write their income on an application without submitting tax returns. The interest rate on a stated-income program is between an eighth of a percentage point and one percentage point above the conventional rate.
Ms. Villanueva, who is self-employed, tells a somewhat different story. She says the couple's loan was approved based on their consumer credit score, which was good enough to qualify them for the "stated income program." The Mullinses' financial problems today are due to their free spending ways, not their mortgage payments, she says.
The Mullinses say their spending, which led to $50,000 in credit-card debt, has been mostly for home repairs and necessities such as kid's shoes and groceries.
-- Patrick Barta and Ruth Simon contributed to this article
Write to Queena Sook Kim at queena.kim@wsj.com7
Updated September 10, 2002