Foreclosures reach prime borrowers
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Kai Ryssdal: Lennar Homes reported a surprise jump in orders for new houses this morning. That, in part, helped Wall Street look on the bright side of life today. The other side of the real-estate market, though, is still dark and really gloomy. The part with foreclosures, subprime loans and houses going unsold for months at a time. A lot of subprime borrowers lost their homes a year ago or more. But now, thanks to rising unemployment and falling household incomes, people with good credit and vanilla loans are defaulting. And that’s spreading the real-estate bust all over the place, as Marketplace’s Mitchell Hartman reports.
MITCHELL HARTMAN: South Carolina realtor Gerry Prud’homme is showing us around his own slice of real-estate heaven — the exclusive Forest Beach neighborhood on Hilton Head Island.
GERRY PRUD’HOMME: Now we’re heading down one of the streets, this is called Sandpiper. If you look down these streets you can see the ocean.
Or maybe we should call it Prud’homme’s “real-estate hell”?
PRUD’HOMME: This is a property that was foreclosed on several months ago. It includes a guest house.
Prud’homme says these luxury homes have had much of their value washed away over the last few years.
PRUD’HOMME: This house was originally listed for over $3 million. And the bank is now offering this house for $979,000.
The people who bought these homes weren’t deadbeats. They had good credit and money in the bank. But many of them fell into the same traps that subprime borrowers did: taking out huge loans with exotic names like Alt-A and Option-ARM.
John Taylor heads the National Community Reinvestment Coalition. He’s been tracking the mortgage crisis. He says in some cases borrowers didn’t have to disclose their income to lenders. So they didn’t. They got low initial interest rates.
JOHN TAYLOR: At some point that interest rate was going to change, or they were going to have to pay the full interest and principal amount. And at that point you’re looking at a loan that was not sustainable and not a prime loan, but actually a quite expensive loan for the people given the income that they had.
PATRICK NEWPORT: They’re starting to reset at the exact point where the unemployment rate is rising.
Patrick Newport is an economist with IHS Global Insight. He says all over America, people are losing jobs and income as the economy sputters. Homeowners with adjustable-rate mortgages are stuck: they can’t refinance because they owe more than their houses are worth.
NEWPORT: So we’re going to see another wave of foreclosures on top of what we’re seeing right now. And what it means is that the foreclosure problem is going to be with us for quite a while.
Newport says he’s most worried about prime borrowers. As job losses mount, they’re defaulting at a record pace. These are people who didn’t do anything risky when they bought their houses. They got standard fixed-rate mortgages with reasonable interest rates and affordable monthly payments.
They’re people like Mark Remington. He owns a landscape design business in the small town of Valdese, N.C. But nobody’s building these days. And he’s hurting bad.
He has to pay $1,800 a month to service his mortgage and home-equity loan. He’s had to dig deep into his savings. And he’s running out of options.
MARK REMINGTON: What I’ve done is rather than not make the payment and just stick my head in the sand and run the other way, I’ve tried to make good-faith payments of $500 a month towards the mortgage. And it doesn’t matter what you have your mortgage at, if there’s no work out there to pay your bills, it just becomes a non-issue.
On Hilton Head Island 300 miles to the south, Gerry Prud’homme’s well-heeled clients are heading down a similar path.
PRUD’HOMME: And we’re seeing people who have been real-estate investors as well as investors in equities for many, many years, who have never missed a mortgage payment, who now are missing their first mortgage payment. You know we haven’t seen the crest of the wave yet, but it is certainly on its way.
If the economy continues to falter, that’ll mean more job losses, and more foreclosures. Prud’homme thinks, in his area, with loan resets in the mix, home prices could keep spiraling downward for the next three years, at least.
I’m Mitchell Hartman for Marketplace.
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