Grace Leong - DAILY HERALD | Posted: Thursday, November 20, 2008 11:00 pm
As the deepening financial crisis and growing unemployment in Utah County compounds the problem of foreclosures, a worrying trend is emerging among those considered to be most at risk, according to a real estate research consultant.
"When someone is 60 days late on their mortgage payment, 90 percent of those cases end up in foreclosure within a year," said Jason Eldredge, vice president of sales with Salt Lake City-based Newreach, which tracks pre-foreclosure statistics along the Wasatch Front.
"What's worrying is, many of those at risk of being foreclosed on are those who have loans of less than $300,000, supposedly the affordable category," said Eldredge.
In other words, foreclosures are not only affecting those who had speculated and got caught, or lived beyond their means. Even those who had bought affordable homes are getting hit as more people start to lose their jobs or suffer pay and hours cuts as the downturn deepens, he said.
He said there are about 650 homes in Utah County under foreclosure for the year ended in October.
Eldredge was part of a panel of business and government leaders who discussed ways to provide more affordable housing and combat rising foreclosures in the face of rising unemployment and recession fears, at the Utah County Realtors Summit on Affordable Housing in Orem on Thursday.
The sharp contraction in Utah's employment growth over the past year will likely aggravate foreclosure activity, said James Wood, director of the Bureau of Economic and Business Research at the University of Utah, citing Tuesday's jobs report from the state Department of Workforce Services.
"We've moved from 52,000 new jobs added in October 2007 to 2,200 jobs lost in October 2008. We've never seen a contraction like this. These contractions usually take 24 months but this one occurred in just one year," he said.
And the problem is about to get worse.
The number of foreclosures in Utah could jump to 13,000 by 2010 as more adjustable-rate mortgages in Utah are scheduled to reset at higher interest rates next year -- which would cause these borrowers' monthly payments to rise -- and many of them aren't expected to be able to qualify for new loans under now stringent lending standards, Wood said.
In 2007, adjustable-rate mortgages made up about 70 percent of all subprime loans in Utah, compared with just 59 percent in the nation, Wood said, citing data from First American Loan Performance. Utah also trumps the nation in terms of the number of ARMs resetting in 2008 and in 2009.
"What these numbers indicate is that Utah was a little late to the subprime problem," Wood said. "Utah has a higher percentage of adjustable-rate mortgage loans resetting this year and next year, compared with that of the nation, because the subprime problem in the U.S. led us by about one year."
"There's a direct correlation between defaults and subprime loans," said Deon Spilker, senior banking compliance officer for Utah Housing Corp.
"But Utah's foreclosures won't be as bad as Nevada or California because we didn't see that kind of huge and rapid appreciation in home prices," she said.
According to the latest report from the Mortgage Bankers Association, the number of foreclosures in Utah is at 6,450 for the second quarter, or 1.5 percent of some 430,000 mortgages in Utah.
Also raising the foreclosure risk is the fact that many of Utah's homebuyers typically spend 50 percent or more of their monthly gross income on house payments, Spilker said. Ideally, they should keep their mortgage payments to less than 30 percent of their gross monthly income.
"If they're using 50 percent of their income, by the time they pay taxes, food, utilities and their children's expenses, there's nothing left. There's no room even for unexpected pay cuts or a reduction in hours," she said.
And while the number of foreclosures in Utah is below that of the national average, local real estate analysts say the next two years will likely remain "difficult" years for homebuilders.
"It's going to be a difficult year for builders even though the number of foreclosures in Utah County is small. If there are 650 homes dumped back on the market in Utah County, competing with a few thousand new homes for sale, that's going to drive prices down," Wood said. In 2007, there were 3,500 single family homes built in Utah County.
"Most contractions have a four to five year life span, and given the climate we are in, there's no way we can avoid a fourth or fifth year of contraction," Wood said. "We're now in the third year of contraction in construction."
The number of new building permits issued is expected to plummet 65 percent to just 11,000 this year from 28,282 in 2005. And these could drop to 10,000 by 2009.
While there are signs that the credit markets are starting to thaw, consumers have pulled back on spending as recession fears grow, creating what Wood calls "a lethal mix."
"We've got a recession on the heels of a liquidity crisis and they're making each other worse. Nobody knows how long this will last," he said. "This credit bubble is different from all the other bubbles in the past in railroads, real estate, dot.com sector. Credit is the very air for the economy. Because of derivatives and swaps involved, nobody knows what's happening. Every day brings a new chapter."
Not surprising is the sharp spike in demand for foreclosure prevention counselling in Utah County.
Doris Rushaw, housing coordinator of the Homebuyers and Mortgage Counseling program at Community Action Services, saw a 123 percent jump in demand for such services since October 2007. And the nonprofit group's staff and resources are getting overwhelmed by growing demand for assistance as the economic crisis deepens.
"We're seeing more people who have lost their jobs. Our credit counsellors are helping more people in foreclosure," she said. "The best line of defence against foreclosures is prevention through education, counselling. If you know you're missing payments, don't wait to get help."
Also helping is an announcement Thursday that Fannie Mae and Freddie Mac -- which own or back trillions of dollars in mortgages -- will temporarily suspend foreclosures and evictions during the holiday season in an effort to keep people from losing their homes.
Foreclosures and evictions will be stopped from Nov. 26 to Jan. 9.
The companies said they are taking the step so they can include more people in a newly announced program to change the terms of troubled mortgages to make them more affordable.
The mortgage finance giants, seized by the government in early September, have been under pressure by lawmakers and housing advocates to take bolder steps to fight foreclosures.
Last week, the companies said they would enact a program to restructure mortgages for borrowers who are falling behind in their payments. That effort would seek to help homeowners who haven't paid their loans for three months but whose homes had not been foreclosed upon yet. In a foreclosure, Fannie Mae or Freddie Mac seizes control of a home and, usually, tries to sell it.
The foreclosure freeze announced yesterday will extend the mortgage modification program to those who have already been declared in default and are at immediate risk of being forced from their homes. The companies said up to 16,000 borrowers nationwide could benefit.
• The Washington Post contributed to the report.