Thursday, June 22, 2006

Even Foreclosure Hawks Hurt by Sagging Real Estate Market

They gather outside the courthouse every day for the latest real estate auction. Some are professional investors; others come to ply skills gleaned at get-rich-quick seminars.

All of them are trying to scoop up homes that belonged to others who died, divorced, were thrust into bankruptcy or fell too far behind on their mortgage payments and failed to sell.

But these days, those investors are having a harder time finding good deals, as the once red-hot housing market cools amid rising mortgage interest rates.

Many homes that do end up in court are saddled with more than one mortgage and have little or no equity - so the investors take a pass.

"In the last six months or so, it has been like this," said James Lee, who has mined trustee auctions for investment property for 15 years.

When home price increases were stronger, investors could buy a property and sell it a few months later for a hefty profit.

"Now you're getting into the market where there's plenty to buy, but there's nowhere to sell it," said Peter Winn, owner of San Diego-based Westminster Investments.

The number of homes up for grabs could increase in the coming months based on signs that more homeowners are having trouble making mortgage payments.

In the last quarter of 2005, the most recent data available, the rate of mortgage delinquencies rose nationally to 4.7 percent, up from 4.38 percent in the year-earlier period, according to the Mortgage Bankers Association. It marked the first increase in three years, the group said.

As home prices soared in recent years, many buyers had to take out more than one mortgage with low-interest, adjustable rates to close their deals. Those rates are now climbing, forcing many homeowners to drain their equity to cover larger payments then try to sell their property to stave off foreclosure.

Nationwide, foreclosures hit a historic low last year at about 50,000. But that figure has more than doubled since then, according to property tracker Foreclosure.com.

Real estate experts said that number is still very low and noted that, traditionally, the overwhelming majority of strapped homeowners have avoided foreclosure by selling their home or somehow coming up with a payment.

As the market slows, however, finding buyers in time to avoid foreclosure can become more difficult, said Brad Geisen, president and chief executive of Foreclosure.com.

That could aid well-funded investors who buy directly from homeowners and may no longer have to compete with buyers who took advantage of cheap borrowing in recent years to drive up prices.

"There's definitely a turn," Gelsen said.

Some experts are forecasting Armageddon-level increases in foreclosures in overpriced markets during the next few years. But some economists counter that a mortgage crisis is unlikely unless there is a major economic downturn with heavy job losses.

Still, other factors suggest problems ahead for the housing sector.

Historically, borrowers who run into trouble paying their mortgage tend to do so within the first three to five years of the loan period.

Currently, more than half of the nation's $9.2 trillion in outstanding residential mortgage and home equity loans are less than three years old, said Doug Duncan, chief economist for the Mortgage Bankers Association.

Another potential trouble spot: About 24 percent of all home loans are adjustable, which can be risky if borrowers end up paying far more than they bargained for as the Federal Reserve hikes interest rates.

"Adjustable rate mortgages always have a slightly higher delinquency rate than fixed-rate mortgages," Duncan said.

California, where the median price of a home hit $468,000 in April, leads the nation in the percentage of homes purchased with adjustable rate mortgages.

An increase in the number of homeowners in trouble could mean big business for companies like Dallas-based HomeVestors of America, which provides training, marketing and, in some cases, financing for its investor franchisees.

The company, which proclaims, "We Buy Ugly Houses" in its advertising, operates in some 30 states, targeting distressed homeowners and others who need to sell property quickly.

The company projects its franchisees will purchase 8,000 homes this year, up from 6,500 in 2005 and 4,800 in 2004.

Less than 5 % of deals now made by HomeVestors franchisees involve foreclosed homes. But CEO John Hayes expects that to increase.

"I am certain that as we've seen in the last few months more incidences of pre-foreclosure activities, we're going to see an increase a year from now," Hayes said.

1 Comments:

Anonymous Anonymous said...

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6:30 PM  

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