Foreclosures put neighborhoods in crisis

A significant number of vacant homes in a neighborhood attracts crime and drives down the price of adjoining homes. They have no residents to support local businesses and government, they require more public safety dollars and community resources, and they make neighbors feel uneasy and unsafe. Most importantly, they drive down home prices for the entire neighborhood, igniting more forced sales and foreclosures. Once blight reaches a certain level, it’s very difficult to turn around.

Vacant homes are not maintained as well as owner-occupied homes. In fact, a home is often poorly maintained in the year before foreclosure. The grass may not have been watered or cut, the sidewalks not cleared of leaves and snow, the paint may be peeling and windows broken.

How are foreclosures damaging neighborhoods? According to the Denver-based Committee for Stabilizing America’s Neighborhoods, the best neighborhoods seem to have seven components:

•A majority of the homes are owned by the people who live in them.

•Good walkability.

•An attractive civic core – with local retailers and a community square or park.

•Safety – a place where can citizens live and play comfortably.

•A working public-private partnership, with locally supported businesses.

•Privacy and protection from excessive traffic and noise.

•Clear neighborhood identity and boundaries.

When 2008 finally came to an end, there were approximately 871,000 foreclosed, or “real estate owned” homes, in the United States, up from 414,000 at the close of 2007. More than 5 percent of all “performing” mortgages are 60 or more days delinquent.

TransUnion, the huge credit and information-management company, expects that percentage to double in 2009 as more adjustable rate mortgages and Option Arm instruments click in to their adjustment mode. These adjustables, approximately $321 billion strong and scheduled to re-set before 2012, could well drive the number of bank-owned homes to more than two million. Most of these properties are vacant, creating a drag on neighborhoods and lessening the desire of many other homeowners to hang on.

In a report titled “Option ARM-ageddon: The Real Reset Risk,” Barclays Capital researchers predicted that a majority of the existing loans would recast in 2010-11 and monthly payments would jump 60-80 percent. By comparison, most subprime resets should cause only an 8-10 percent payment shock.

The study included several subprime/Option Arm comparisons, including a $250,000 loan on similar homes in the same neighborhood. While the mortgages carried different interest rates, margins and loan caps, the mortgages were typical for what a borrower could expect. The subprime loan made in 2006 was recast after two years under its original terms and the monthly payment rose from $1,903 to $2,044, or 7.4 percent. The Option ARM, recast when the borrower hit the negative amortization ceiling of 115 percent, saw its monthly payments leap 89 percent, from $1,074 to $2,027.

Recasting (or re-calculating a loan) is another way of limiting negative amortization and keeping a loan on the original schedule. The main purpose of recasting is to ensure the loan is paid off within the scheduled amortization period. Option ARM loans are usually recast every five or 10 years (or sooner, if the negative amortization limit is reached). This re-calculation (or re-amortization) is based on the outstanding principal balance, the remaining term and the fully indexed rate. When the loan is recast, the payment to fully amortize the loan over the remaining term becomes the new minimum payment.

To compound the problem, qualified buyers can’t get mortgages. One loan representative sent a note stating that while interest rates appear to be at 20-year lows, the bigger story “is how many people can’t even qualify for a mortgage under 5 percent.”

Perfectly qualified “new generation” buyers who have been on the sidelines are having extreme difficulty in getting financing. The pendulum has now swung from “no loan ever rejected” to “no loan good enough for funding.” Bargain hunters are not able to absorb this massive housing inventory due to the illiquidity of mortgage lenders. Other than credit unions, some hard-money lending and the HUD program (despite encouragement from the Federal Reserve), almost no financial institutions are making jumbo loans for residential real estate – and those that do are imposing conditions that are keeping buyers out of the market.

How do we get qualified buyers into homes – homes that are not stigmatized by a foreclosure moniker?

Next time: A creative solution to foreclosures and financing.