Realty Check

High-End Foreclosures Are Next


I heard a startling statistic from the National Association of Realtorsthis morning…no not that home sales are actually increasing, but something about the high end of the market.

Chief economist Lawrence Yun said that the supply of existing homes for sale over $750,000 has reached a forty-month supply. Yep, that means it would take well over three years at the current place to sell off all of those homes.

The trouble is manifold: Jumbo loans are pricier and more difficult to get, job losses are mounting, and buyers in that price home are generally move-up buyers, so they have to sell their own homes first. I asked Mr. Yun if, given how hard it is to sell a home in that price range, he expects to see more foreclosures of high-end properties. He said absolutely.

That’s going to mean a new phase of the current housing recession. So far we’ve seen the “correction” of a boom market that was driven by faulty, exotic loan products, investors looking to make a quick buck, and average Americans using their homes as ATMs. Now the losses are being driven by traditional economic factors and by sweeping price drops across the nation.

Yesterday Fitch ratings estimated that up to 75 percent of the modifications now being done through the administration’s Making Home Affordableprogram will re-default in six months to a year. I’m not talking about the old mods, which were largely repayment plans that could actually raise monthly payments. I’m talking about the new mods, which lower monthly payments to 31 percent of a person’s income. I couldn’t understand Fitch’s reasoning, so I called them.

Diane Pendley, managing director at Fitch, said the problem is not on that “front-end” ratio, but on the back end, which is all of the borrowers other debt (credit cards, car loans, student loans, etc.). She said that in talking with servicers, she’s hearing other debt is so high that most of today’s troubled borrowers cannot afford any loan payment at all, even at a very modest debt to income ratio. “Just getting the house payment done doesn’t mean their lifestyle is sustainable,” she said.

Another problem is that with home prices continuing to fall, more and more borrowers, who are essentially just renting their mortgages now because they will never see any home equity, are walking away. Even if the mortgage payment is low, the property taxes and home maintenance costs are padding that payment, and without an upside to the investment, there’s simply no reason to pay.

Suffice it to say, the foreclosure crisis, on the high and low ends, is not getting any better. It’s great that we’re seeing more sales action in the “distressed” market, but that’s not a real organic recovery. Now that the administration has managed to lower interest rates for conforming loans, they have to focus on jumbos, on jumbo rates and modifications. These are not all million-dollar homes of the rich and famous. In many markets, especially urban markets, a million-dollar home is a basic three bedroom, two bath on a postage stamp lot.

Tomorrow we get the most recent data from the Mortgage Bankers Associationon loan delinquencies. I’ll be watching the prime jumbos. You should be too.

Questions?  Comments?