Foreclosure binge not felt locally

Biggest spike in foreclosures hit Whatcom County in 2002, according to statistics

Heidi Schiller
    A rash of media attention has been paid lately to the national increase in subprime loan defaults and foreclosures. But in Whatcom County, local experts and numbers paint a picture not quite as bleak for the area, at least for now.
   While trustee sale (foreclosure) notices are on the rise in Whatcom County — 97 were filed in the first quarter of this year compared to 60 filed during the same period last year, according to records from the county auditor’s office — the highest spike in trustee sale notices in the last five years occurred during the third quarter of 2002, with 138 filed (see graphic).
    Some local experts say they think the area may be experiencing just the first trickle of what could become a surge of local subprime loan defaults and foreclosures; others say they feel the problem can be avoided if local homeowners recognize their risk for defaulting and act now to avoid it.
    If that surge does occur, though, most agree that the local housing market would be affected by an increase in the length of time homes stay on the market, as well as buyers and sellers geared toward first-time home ownership.

Eisenhower

Tip of the iceberg?
   Many blame subprime loans, oftentimes in the form of adjustable rate mortgages, for the increase in foreclosures both locally and nationally. These types of loans are usually given to borrowers with low credit scores or a high income-to-debt ratio who don’t qualify for regular loans.
   In Whatcom County, as in many other regions around the country, these borrowers wanted to get into a home when home prices looked like they were on the rise, said David Eisenhower, a mortgage broker and owner of Sunrise Mortgage. The goal for many of these borrowers was to purchase a home with alternative financing or subprime loans, improve their financial status and credit scores, and eventually refinance for a better rate after a few years.
   Eisenhower said that some borrowers, however, are unable to escape the higher-interest subprime loans, and become unable to make their payments once these loans adjust to their higher rate after a few years. Many believed that their financial situation would be brighter, but oftentimes that is not the end result.
   “Obviously, in a situation like that, what if it doesn’t work out? What if you stumble, have an injury, get laid off?” he said. “Maybe you were 30 days late on your mortgage once, and it’s better now, but because of that, you’re still in the subprime qualifying.”
   Eisenhower said lenders offered such loans because there was a demand for them, and in most cases, he believes lenders did not intend to put borrowers at risk. However, Eisenhower said, he routinely discouraged his clients from applying for subprime loans.
   “As far as I’m concerned, if people came to me and asked, do you have 1 percent loans available, I’d say ‘Yes, but I really discourage you from going down that road,’” he said.
   In Whatcom County, the first quarter of 2007 showed the highest number of trustee sales filed since the first quarter of 2004.
   But Eisenhower said those foreclosure notices may not all reflect borrowers defaulting on subprime loans. They could be from construction workers and others in the homebuilding industry, which has slowed in Whatcom County recently, who have encountered tough financial times and fallen behind in monthly payments. Or they could be from people who over-invested in the local housing market, buying multiple homes, and couldn’t keep current on all their payments.
   But in the scheme of the last five years, foreclosure notices were highest in 2002. Eisenhower said this spike was likely connected to the loan defaults from people involved in the dot-com bust.
   The 2002 spike in foreclosures not- withstanding, Eisenhower said the area seems fairly stable now, and that the West Coast in general is faring better than the Midwest and the South.
   “It looks to me like it’s pretty stable right now,” he said. “It’s an indication the Bellingham economy is fairly strong.”
   Real estate agent Lylene Johnson of The Muljat Group South office in Fairhaven said the 2002 spike may simply have been caused by a higher number of home sales back then, leading to a higher foreclosure rate, although the number was still puzzling. She added that it makes the current number of foreclosures seem less daunting.
   “It makes no sense to me,” she said. “It’s actually kind of reassuring.”
   But that is not to say the area won’t experience more in the future.
   “Whatcom County wasn’t immune to that type of financing and there were a lot of subprime loans obtained here,” Eisenhower said.
   Julie Hansen, professor of economics at Western Washington University, said she, too, wouldn’t be surprised to see an increase in foreclosures in Whatcom County.
   “To the extent that it’s happening nationally, I expect it will happen here too,” she said. But she also added that the number of subprime loans represents only a small portion of total home loans, and said that most analysts don’t expect the problem to spread out of the subprime market.
   Eisenhower said he will be interested to see what happens when this area’s subprime loans, from the housing boom 1 to 3 years ago, reset during the next year.
   “Most of the foreclosures we’re talking about, we’re not going to be seeing on the charts yet,” he said. “There’s a few that are rearing their head now, and so it’s what people think of as the tip of the iceberg.”

Local effects
   Hansen said because of the increase in foreclosures locally and nationally, there are two main concerns for the housing market.
   The first is the effect delinquencies and foreclosures have on home sales.
   The worse-case scenario, Eisenhower said, would be that all of these new homes coming on the market from foreclosures would compete with homes already listed in an area where home sales have slowed recently.
   “We’d be back to where we were last fall and winter with a saturation of homes on the market,” he said. “People would hold off selling and buying and you’d have a market full of properties and nobody wanting to buy them.”
   Eisenhower said this effect wouldn’t necessarily result in decreased prices, but would slow sales. But at the same time, the housing market seems to be picking up lately, he said; Gragg Miller, a real estate broker for Coldwell Banker Miller-Arnason, agreed.
   He said if there is an influx in foreclosures, theoretically it would put more inventory on the market, but that the market seems to be experiencing an upturn, which could help offset that effect.
   “I think we saw a slowdown at the turn of the year, but now we’re seeing an upturn,” he said. “I think the first quarter is probably a little bit of an increase overall than last year.”
   However, Johnson’s recent real-estate report counters Miller’s optimism. The report found that although sale prices of Whatcom County homes rose slightly in this year’s first quarter, it is taking 58 percent longer to sell homes than it did a year ago.
   Even so, Johnson said the current amount of foreclosures in Whatcom County would not have much of an impact on the area’s housing market.
   “If it balloons, however, it is going to have an impact, because a foreclosed property is one that sellers and banks want very much to move,” she said. She, too, predicted that a surge in foreclosed homes would increase the amount of time homes spend on the market, and added that prices could either stabilize or drop.
    The other concern is the spillover effect on lending standards, Hansen said. Banks have started to tighten credit standards, which will affect first-time homebuyers and those with low credit scores, she said. Lenders are steering away from loans that would cover 100 percent of the value, and these borrowers will need more cash because lenders are asking for higher down payments, more financial documents and higher credit ratings to qualify for certain mortgages, she said. Ultimately, first-time homebuyers will need to save more money before they get into the market.
   Miller said the trend would likely prompt the federal government and Congress, which is debating the issue, to make new requirements that would affect buyers on the fringes.
   “For those marginal buyers, it may be more difficult to borrow money,” he said.
   But Eisenhower thinks a surge in local foreclosures can be avoided if homeowners at risk see the writing on the wall now. For those homeowners, Eisenhower said, the future is not entirely bleak.
   They can try to refinance now with a 40-year mortgage, as opposed to a 30-year mortgage, which might lower their monthly payment by a couple hundred dollars a month, he said. Or they can refinance to a 30-year fixed, interest-only loan that offers tax advantages. Or they can try to sell their home now, before a looming foreclosure takes the house away from them.
   “If you own a home in Whatcom County, there’s no reason to have your home foreclosed,” he said. “We’re coming into spring and the housing market seems to be picking up.”

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