Foreclosures Creep Upmarket

Foreclosures Creep Upmarket

By ELSA BRENNER

THE 54-year-old red-shingled ranch has peeling paint, an untended yard and an overall appearance of disrepair. Its look may seem consistent with the image of a house in foreclosure — but not its address: Greenwich Road in Bedford.

These days, when it comes to foreclosures, very little is typical “and no community is immune,” said Mark Boyland, a broker with Keller Williams NY Realty.

In Scarsdale, where the median household income is $217,000, among the highest in the country, 57 properties, or one in 254, are in some stage of foreclosure, according to RealtyTrac, a firm in Irvine, Calif., that tracks foreclosures.

White Plains has 201 properties, or one in every 133 houses, in some stage of foreclosure — which covers everything from an initial notice of pending action to the lender’s acquisition of the home.

One example, a well-maintained $1 million single-family colonial, looks like any other on its street. But its landlord stopped paying the mortgage six months ago, although he continues to collect $8,000 a month from his tenants, said Mr. Boyland, who is also president of the Westchester-Putnam Multiple Listing Service.

What’s happening in Westchester is not atypical, said Rick Sharga, the president of RealtyTrac. “There is no ZIP code, no neighborhood, no place except perhaps the White House, that is not feeling the effects of the current downturn,” he said. “What’s unusual this time, compared to the late 1980s and early 1990s, is that much higher-ticket homes are also involved.”

Such homes remain in the minority, however; the densest concentration of foreclosures is occurring in low-income areas. Within Westchester, Yonkers is in the lead in raw numbers, with 655 houses, or one in 107, in some stage of foreclosure, and Mount Vernon is in second place, with 519, or one in 53.

In Port Chester, where housing prices tend toward the lower end of the spectrum for Westchester, 128 homes are in foreclosure, one in every 128, RealtyTrac said.

But the problem there is expected to worsen soon, said George Groves, an agent with Re/Max Prime Properties in Scarsdale. With 52 two-family houses for sale and only two in contract, the situation in Port Chester is “a real disaster in the making,” Mr. Groves said.

For Westchester as a whole, the number of foreclosures as of Sept. 1 was 2,984, equal in one in 119 housing units. By comparison, in Queens County, the number was 10,654; in Suffolk County, it was 9,091, according to RealtyTrac.

As the numbers continue to mount (they were up 11 percent in Westchester during August from the same time a year ago), each element of the market is coping with fallout of one kind or another.

Some investors are profiting, and real estate agents like Mr. Groves have “a ton of work” — though he emphasized, “It’s very specialized and not for every broker.”

In a recent transaction, Mr. Groves represented investors who bought a four-bedroom raised ranch at a bank auction for $320,000. The investors then listed it for sale for $399,000 and within a week received eight offers. Even after fees and the real estate commission, they will realize about $60,000, Mr. Groves said. “That’s what I call flipping a property,” he added. “But it doesn’t always happen that way.”

For the lending institution, chances are that such transactions will involve a loss. Take, for example, the case of a 30-year-old four-bedroom split with an indoor pool in Rye Brook. The owner bought it several years ago at the height of the market for $1.1 million and then took out a second mortgage to remodel. But after his payments went up, he defaulted on the mortgages. The house was sold for $870,000, with the bank swallowing a $1 million loss, Mr. Groves said.

And then there are the homeowners who lose everything, including their good credit ratings. Surprisingly, said Mr. Boyland of Keller Williams, not everyone these days is taking such losses to heart.

Gary Leogrande, a colleague of Mr. Boyland at Keller Williams, says the less-than-concerned attitude toward foreclosure is shown by some sellers at every economic level, from those in less well-to-do neighborhoods to those in upscale communities like Harrison and Rye.

Because a foreclosure takes so long — sometimes two or three years — some owners unable to keep up with payments and taxes in essence decide to live rent-free for a year, then start stalling when eviction proceedings begin, Mr. Leogrande said.

“Certainly, there are some victims in this wave of foreclosures,” he said, adding that while “we tend to feel sorry for them,” some people these days “are just playing the system.”

Enough economic tools are available to avoid a foreclosure, he said, if a client really wants to. Forbearance agreements can be struck, with banks accepting lower payments in the short run. And short sales can be negotiated, in which a home is sold for less than what is owed on the mortgage.

That way a bad credit rating can be avoided. But not everyone is worried about that, according to Mr. Boyland. “At that point,” he said, “their credit isn’t in great shape, and they’re not going out to buy a house again soon. So they just shrug their shoulders and walk away.”

Housing Lenders Fear Bigger Wave of Loan Defaults

Interesting NY Times article on loan defaults, worth reading…

Housing Lenders Fear Bigger Wave of Loan Defaults

By VIKAS BAJAJ
Published: August 4, 2008
 

The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is quickly building.
Homeowners with good credit are falling behind on their payments in growing numbers, even as the problems with mortgages made to people with weak, or subprime, credit are showing their first, tentative signs of leveling off after two years of spiraling defaults.

The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.
The mortgage troubles have been exacerbated by an economy that is still struggling. Reports last week showed another drop in home prices, slower-than-expected economic growth and a huge loss at General Motors. On Friday, the Labor Department reported that the unemployment rate in July climbed to a four-year high.

While it is difficult to draw precise parallels among various segments of the mortgage market, the arc of the crisis in subprime loans suggests that the problems in the broader market may not peak for another year or two, analysts said. Defaults are likely to accelerate because many homeowners’ monthly payments are rising rapidly. The higher bills come as home prices continue to decline and banks tighten their lending standards, making it harder for people to refinance loans or sell their homes. Of particular concern are “alt-A” loans, many of which were made to people with good credit scores without proof of their income or assets.
“Subprime was the tip of the iceberg,” said Thomas H. Atteberry, president of First Pacific Advisors, a investment firm in Los Angeles that trades mortgage securities. “Prime will be far bigger in its impact.”

In a conference call with analysts last month, James Dimon, the chairman and chief executive of JPMorgan Chase, said he expected losses on prime loans at his bank to triple in the coming months and described the outlook for them as “terrible.”
Delinquencies on mortgages tend to peak three to five years after loans are made, said Mark Fleming, the chief economist at First American CoreLogic, a research firm. Not surprisingly, subprime loans from 2005 appear closer to the end of defaults than those made in 2007, for which default rates continue to rise steeply. “We will hit those points in a few years, and that will help in many ways,” Mr. Fleming said, referring to the loans made later in the housing boom. “We just have to survive through this part of the cycle.”

Data on securities backed by subprime mortgages show that 8.41 percent of loans from 2005 were delinquent by 90 days or more or in foreclosure in June, up from 8.35 percent in May, according to CreditSights, a research firm with offices in New York and London. By contrast, 16.6 percent of 2007 loans were troubled in June, up from 15.8 percent. Some of that reflects basic math. Over the years, some loans will be paid off as homeowners sell or refinance, and some homes will be foreclosed upon and sold. That reduces the number of loans from those earlier years that could default. Also, since the credit market seized up last year, lenders have become much more conservative and have stopped making most subprime loans and cut back on many other popular mortgages.
The resetting of rates on adjustable mortgages, which was a big fear of many analysts in 2006 and 2007, has become less problematic because the short-term interest rates to which many of those loans are tied have fallen significantly as the Federal Reserve has lowered rates. The recent federal tax rebates and efforts to modify more loans have also helped somewhat, analysts say.
What will sting borrowers more than rising interest rates, analysts say, is having to pay interest and principal every month after spending several years paying only interest or sometimes even less than that. Such loan terms were popular during the boom with alt-A and prime borrowers and appeared appealing while home prices were rising and interest rates were low.
But now, some borrowers could see their payments jump 50 percent or more, and they may not be able to sell their properties for as much as they owe.
Prime and alt-A borrowers typically had a five- or seven-year grace period before payments toward principal were required. By contrast, subprime loans had a two-to-three-year introductory period. That difference partly explains the lag in delinquencies between the two types of loans, said David Watts, an analyst with CreditSights. “More delinquencies look like they are on the horizon because so few of them have reset,” Mr. Watts said about alt-A mortgages.
The wave of foreclosures is still rising in states like California, where many homeowners turned to creative mortgages during the boom. From April to June, mortgage companies filed 121,000 notices of default in California, up nearly 7 percent from the first quarter and more than twice as many as in the second quarter of 2007, according to DataQuick, a real estate data firm based in La Jolla, Calif. The firm said the median age of the loans increased to 26 months from 16 months a year earlier.

The mortgage giants Freddie Mac and Fannie Mae, which own or guarantee nearly half of all mortgages, are trying to stem that tide. Last week, they said they would pay more to the mortgage servicing companies that they hire to modify delinquent loans and avoid foreclosures. Delinquencies in prime and alt-A loans are particularly challenging for banks because they hold more such loans on their books than they do subprime mortgages. Downey Financial, which owns a savings bank that operates in California and Arizona, recently reported that 11.2 percent of its loans were delinquent at the end of June, a big increase from the 6.1 percent that were past due at the end of last year. The bank’s troubles stem from its $6.2 billion portfolio of so-called option adjustable-rate mortgages, which allow borrowers to pay less than the interest owed on their mortgage in the early years. The unpaid interest is added to the principal due on the loan, so over time borrowers can owe more than the initial loan amount. Eventually, when loans grow by 10 percent or 15 percent, the borrowers are required to start paying both the interest and principal due. Many borrowers who got these loans during the boom had good credit scores, but many of them owe more than their homes are worth. Analysts believe that many will not be able to or want to make higher payments.

“The wave on the prime side has lagged the wave on the subprime side,” said Rod Dubitsky, head of asset-backed research at Credit Suisse. “The reset of option ARM loans is a big event that will drive the timing of delinquencies.”

Citigroup Loss Raises Anxiety Over Economy

Citigroup Loss Raises Anxiety Over Economy   By JENNY ANDERSON and ERIC DASH   Published: January 16, 2008 Citigroup, the nation’s largest bank, reported a staggering fourth-quarter loss of $9.83 billion on Tuesday and issued a sobering forecast that the housing market and the broader economy still had not bottomed out. To shore up their financial condition, Citigroup and Merrill Lynch, which has also been rocked by the subprime mortgage debacle, both were forced again to go hat in hand for cash infusions from investors in the United States, Asia and the Middle East, for a combined total of nearly $19.1 billion. Citigroup’s gloomy news will most likely amplify the anxiety of consumers and workers already concerned that the mortgage crisis could plunge the economy into a recession. Adding to worries, the government reported that retail sales in December declined for the first time since 2002. Growing pessimism led to another sharp sell-off in stocks, which fell about 2 percent for the day and are now down about 6 percent since the beginning of 2008, the third worst start for a year since 1926.

More bad news is coming, with Merrill Lynch expected to report sizable losses this week and major financial institutions like Bank of America retreating from their investment banking business. These moves add to concerns that financial institutions will be forced to pull back on lending at a time the economy most needs access to credit to help cushion against a downturn. “It looks like the financial sector as a whole will see a big decline in profits, and the only time this happened in the last 100 years — financial firms’ going from making good profits to negative profits — was the Depression in the 1930s,” said Richard Sylla, a professor of financial history at New York University. “I don’t think it will be as bad this time; the Federal Reserve is fighting the problem as hard as it can.” Just last week, the Federal Reserve chairman, Ben S. Bernanke, said the economy was worsening, bringing widespread hope that the Fed would move swiftly to lower interest rates. Wall Street’s worsening results combined with Mr. Bernanke’s comments will certainly add fuel to the economic stimulus package being debated by the White House, Congress and the central bank. Citigroup’s record loss was caused by write-downs from soured mortgage-related securities and reserves for current and future bad loans totaling $23.2 billion. Responding to a string of dismal quarters, the bank said it would also lay off another 4,000 workers, on top of announced reductions of 17,000 employees, and cut its dividend to conserve $4.4 billion cash annually. Citigroup, which earlier raised $7.5 billion from the Abu Dhabi Investment Authority to improve its capital, said it had raised an additional $12.5 billion from a number of investors, including the Government of Singapore Investment Corporation and Citigroup’s former chairman and chief executive, Sanford I. Weill. Citigroup will also offer public investors about $2 billion of newly issued debt securities, a portion of which will be convertible into stock. At the same time, Merrill Lynch announced it had issued $6.6 billion in preferred stock to the Kuwait Investment Authority, the Korean Investment Corporation, Mizhuo Financial Group, a Japanese bank and other investors, including the New Jersey pension fund and a Saudi investment fund. That is in addition to the $4.4 billion it raised in December from Temasek Holdings of Singapore.   While the banks were able to raise record amounts of cash, they had to circle the globe to get it, and they had to raise it in two separate rounds. There is “a tremendous amount of liquidity in the world,” Mr. Weill said in an interview. “That is witnessed in the amounts of money Citigroup was able to raise in a very short period of time.”Citigroup, which has a large consumer lending business, sounded some warning bells on Tuesday that the American economy was turning. The bank reported sharp upticks in losses stemming from souring auto, home and credit card loans, with problems coming from the same areas being hit by real estate.Two-thirds of the credit card losses, for example, occurred in just five states — California, Florida, Illinois, Arizona and Michigan — that have been among those hit hardest by the housing downturn. Gary L. Crittenden, the company’s chief financial officer, acknowledged the bank’s losses appeared to be accelerating month after month. The banks’ need for additional financing suggests that housing-related problem will persist. Citigroup executives expect house prices around the country will fall, on average, another 6.5 percent to 7 percent. The news sent the company’s stock tumbling 7.3 percent, to $26.94. It has now fallen about 50 percent in the past year. The write-downs did not assuage fears in the market that more bad news was coming. “I think the financials will continue to need to raise more money,” said Barry L. Ritholtz, chief executive of Fusion IQ, a quantitative research and asset management firm. The fear is that financial institutions will continue to take large write-downs as bad loans mount, while consumers, facing higher energy costs, falling house prices and a bleak outlook for job growth, will rein in spending even more than they already have. Citigroup set aside $4.1 billion for future bad loans, and Mr. Crittenden said the bank is tightening lending standards as credit card defaults increase, a move that could make it harder for consumers to continue the spending that has helped fuel growth in recent years. Bank of America said on Tuesday that it would lay off 650 people on top of the previously announced 500 and retrench in a number of significant businesses, including certain trading operations and prime brokerage, or servicing hedge funds. Kenneth D. Lewis, its chairman and chief executive, sounded a somber note about the markets. “I am not sure there are any quick fixes,” he said in a meeting with reporters. “Only time and a little more pain will be the answer.” Adding concern to the outlook is the significant role that financial service companies have come to play on the back of robust growth. From 1995 through 2006, financial service companies represented 17.8 percent of the Standard & Poor’s 500 index and contributed a whopping 25.1 percent of total earnings. No longer. Including Citibank’s large fourth-quarter write-down, financial service companies constituted roughly 7 percent of total fourth-quarter earnings, according to Howard Silverblatt, senior index analyst at Standard & Poor’s. For a sense of how steep the fall has been, Mr. Silverblatt pointed out that for the fourth quarter, earnings for all companies in the index fell 11.2 percent. But taking out financials, the index was up almost 11 percent. Mr. Ritholtz from Fusion IQ is watching carefully to determine if weakness in consumer spending is psychological and temporary or more severe, stemming from a lack of available capital. “Lending is a function of trust — trust that people will pay back what they borrow,” he said. “The problem with the banks is that they don’t trust their clients or each other.”