Foreclosures spike as housing market slows

No money down and adjustable rate mortgages sounded like a good idea two years ago when the housing market was still a seller's playground.

But lenders say in today's buyer's market these loan programs are leading to more defaults and foreclosures, which last month reached a year-long total of 1 million homes nationwide.

"Pick-a-pay" loans are the worst possible on the market because they lure buyers who really can't afford to purchase a home, said Dennis Peck, a Lodi lender with All Valley Mortgage.

"They're given an option to pay below interest and it sounds great to them at the time," he said. "The problem is nobody explains to them those low payments won't last."

With an adjustable rate mortgage, buyers pay the interest or less for the first two years of the loan. After the initial 24-month period they are moved to the actual payment, including interest and principal, and find they can't afford to make the payments, Peck said.

Others blame the slowing housing market, which in some cases has depleted home prices by up to 15 percent, for increased foreclosures throughout the state.

No matter the reason, the fact remains: Foreclosures are increasing drastically throughout the United States, with a 42 percent increase last month from October 2005 numbers, according to a report released earlier this month by RealtyTrac, an online marketplace for foreclosure properties.

In California last month, more than 16,000 homes entered some stage of foreclosure, the most of any state for the second straight month. The state's foreclosure rate of one new foreclosure filing for every 759 households rose to 1.3 times the national average and was 12th highest among the states. California foreclosure activity has more than tripled from a year ago.

"It's a result of people getting loans who probably should be saving money instead," Peck said. "People don't see down the road; they just want a low monthly payment."

He said people who received 100 percent financing don't have many options because the market has eroded what little equity they may have stored and now they owe more than their home can sell for, making it impossible to refinance or sell.

In San Joaquin County 1,809 homes entered some stage of foreclosure last month. Last year's numbers were unavailable for comparison.

According to the RealtyTrac report, Modesto was third in the nation for increased foreclosure rates, with one in every 214 homes entering foreclosure. The state rate is one in 759.

Highest and lowest foreclosure rates by state

With a total 115,568 homes entering foreclosure in the United States last month, the nationwide rate showed one in every 1,001 homes filed.
California was ranked 12th highest in foreclosures, with 16,089 homes — or one in 759 — entering foreclosure.
Colorado was ranked No. 1, with one in 327 homes, or 5,592, homes in foreclosure. Vermont had the most finance-savvy residents, with only one foreclosure in October for all of its 294,382 homes.
Source: http://www.realtytrac.com.

However, the increased number of foreclosures could mean banks will work with homeowners rather than foreclosing immediately, said Duane Burg, manager of Guild Mortgage in Lodi.

"It's up to each individual lender," Burg said. "But it's not profitable for lenders to foreclose on homes with no equity, so right now lenders seem to be more willing to work with borrowers."

Burg said in the last six years he has only helped two people through foreclosure — and both were last month.

He said foreclosures will probably continue to increase for at least two years while the housing market stabilizes.

"This little down-cycle can really hurt people, but if they can just hold on, their homes will begin to appreciate again," Burg said.

Contact reporter Rebecca Adler at rebeccaa@lodinews.com.

First published: Tuesday, November 28, 2006

Reader Feedback

Art-YourHome-YourMoney wrote on Dec 1, 2006 9:57 AM:

" These "pick-a-payment" type mortgages have been over-used and over-promoted. These loans are NOT to be used to buy a home. Sadly, the large investors and lenders have already factored-in the default rate in their P&L and really risk nothing. It's the greedy homebuyer-now crying "victim"- that will suffer foreclosure and damaged credit alone with his family. Whether or not this is poetic justice for a dumb decision is not my call, but look aroung at the millions of cigarette smokers and then you can try to guess just how self-destructive we really are... Art - YHYM Mortgage Radio "

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Economist wrote on Nov 29, 2006 2:17 PM:

" Burg writes This is "a little down cycle". Get real, this is getting ugly! Wake up! "

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Another Realtor wrote on Nov 29, 2006 2:11 PM:

" Previous Realtor wrote that the general practice of Lodi realtors is to offer more than one lender to help their clients to obtain financing. That is a grossly negligent lie! The common practice among almost all realtors I know, and I've been in the business for 25 years, is Realtors send buyers to their friends who are lenders! Rarely are they offered more than one lender to call! You must be new and ignorant of this most pervasively common practice. "

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Leonard wrote on Nov 28, 2006 4:06 PM:

" One of the things that this article doesn't mention is that these foreclosures are hitting the families of active duty military particularly hard. There are a number of great organizations working to relieve some of the pressure on these men and women as well as on the heroes who run their households while they are away. I hope that people will seriously think about giving to these organizations in this holiday season. Supporting the Troops, its not just a bumper sticker! "

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OTH wrote on Nov 28, 2006 12:56 PM:

" Realtor......You are right, you only sell the homes. It's th lenders who come up with the creative financing plans for people who cannot really afford them. When I bought my home the market bottomed out a year or two later and I was upside down for awhile. Thank God I had a good job and worked a lot of hours but I had not gone for any creative financing. I was encouraged by my realtor to stay with what I could afford. "

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Realtor wrote on Nov 28, 2006 11:21 AM:

" It's the online mortgage companies and the one's that "pop" up when the market is good and then bail out when it drops. Like anything else, you're much better off doing business with people who have been in the business for the long haul and are "local". Ease up on us a bit. Lodi Realtors live, work and volunteer in the community as much as anyone. "

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Realtor wrote on Nov 28, 2006 11:18 AM:

" T&C, I don't know why you seem to be so hard on our industry. Realtors have nothing to do with the financing of one's home. As a practice, I will only suggest local mortgage companies and will always suggest more than one. I don't want to be involved in that decision. I can assure you that is the general practice in Lodi. "

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Lodi Price Declines wrote on Nov 28, 2006 9:47 AM:

" Ms. Adler: How about some reporting on Lodi's declining home prices? Is that too controversial to print in the paper? How are we supposed to know if this will be a "little" down-cycle if the paper doesn't bother to print the actual data? "

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wtf wrote on Nov 28, 2006 9:22 AM:

" The article mentions that those losing their homes should have been saving instead. If I remember, it was a few years ago when the news was broadcasting affordable loans for low-income and minority groups and how it was now possible for them to own their own home. These are the people losing their homes now. They're worse off now than they were before they bought a house. Call me cynical, but I'm sure Greenspan and his cronies had this all planned when they lowered interest rates to 1%. "

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T & C wrote on Nov 28, 2006 9:02 AM:

" This greedy side of the real estate business. Many realtors will not divulge fine print in these contracts and merely sell property to get that 6% commission. Lodi is using developments as pyramid schemes to keep finances coming to the citys' cash coffers. Nothing more. By the time you consider Spanos' new development, there will be about 10,000 more new homes in the next 15 years. There are at least 450 properties for sale right now in the Lodi area. Is it necessary to build Reynolds Ranch at this time? Let's get started with the BS project, like they promised. "

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OTH wrote on Nov 28, 2006 8:35 AM:

" The loan industry should be ashamed. They dangled a carrot in front of people who couldn't afford to buy and now they are paying for it. Their credit wil be shot for years. "

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LodiMom wrote on Nov 28, 2006 6:40 AM:

" So why are we building 2000 more homes in Lodi? What is wrong with this picture? "

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