Foreclosure forecast: Bad to worse

Maine Foreclosure & Real Estate News

By Victoria Wallack
State House News Service

AUGUSTA (Nov 7, 2007): Forecasters are predicting that 2008 could be the worst year yet for foreclosures on homes financed with sub-prime mortgages, but the state’s consumer credit office says it already is getting almost daily phone calls from Mainers who can’t repay their loans.

“We know there’s a problem because of the phone calls we are getting nearly every day from consumers, who are unable to make their mortgage payments,” said Will Lund, head of the Office of Consumer Credit Protection.

Lund said his office initially underestimated the problem.

“There was a perception that Mainers would be conservative and would only opt for fixed-rate loans, and Maine lenders were conservative and would only offer loans Mainers could afford,” Lund said. “That perception turned out to be myth.”

Lund’s office regulates 1,000 non-bank mortgage companies with licenses to do business in Maine and said mortgage-related complaints have more than tripled in the last year.

Studies and history have shown that out-of-state, non-bank lenders dominate the sub-prime market, offering high-interest loans to people who may not qualify for traditional prime rate loans because of their income.

The extent of the sub-prime problem in Maine is hard to quantify because the numbers are in a state of flux, but recent data show the foreclosure rate on sub-primes is rapidly getting worse.

In July, more than 8 percent of sub-prime loans were in foreclosure in Maine, compared to less than half a percentage point for prime rate loans, according to data from First American Loan Performance of San Francisco, which maintains a huge mortgage database to offer analysis to investors, lenders and regulators.

The state’s overall foreclosure rate is currently at 1.4 percent, because 86 percent of all the outstanding mortgages in the state are prime rate loans, compared to 14 percent that are sub-prime, according to the data base.

But the sub-prime foreclosure problem has more than doubled since last year, and watchdog agencies predict it will easily double again when sub-prime loans written in 2005 and 2006 re-adjust to a higher interest rate. Those adjustable rate mortgages offer a low introductory rate, but reset in two to three years to rates that can increase monthly payments by as much as 50 to 100 percent.

“They’re barely making the fixed-rate payments,” Lund said, and can’t afford it when the interest rate goes up.

More sub-prime loans were written in 2005 and 2006 because the frenzied real estate market nationally reached its peak, and people were stretching to take loans for homes they couldn’t afford.

In Maine, those inflated prices also attracted people to start taking what’s known as cash-out refinancing loans to tap into the equity in their property. Mainers had a higher percentage of sub-prime loans for cash-out refinancing than any other state in the country from 2004 through May of 2005, according to a report done in 2006 by Coastal Enterprise Inc., a community development corporation in Wiscasset.

And the sub-prime market just continued to grow through 2005 and 2006. A Wall Street Journal report in October, “The United States of Subprime,” estimated the number of sub-prime loans written as percentage of all loans written jumped from 16 percent nationally in 2004 to 29 percent in 2006. In Maine, that number went from 14 percent in 2004 to 25 percent in 2006.

The problem now is the real estate market has cooled and those hoping to refinance their loans based on ever-increasing values or sell their property are finding it tough. Lund said he’s discovered Mainers were attracted by sub-prime loan offers that didn‘t require any documentation about income.

“It’s related to the fact that many Maine residents derive their annual income from a wide variety of sources depending on the time of year. A fishermen could plow snow and he may also repair small engines,” Lund said.

While not requiring documentation, like back-up income tax forms, is attractive to those who piece their incomes together, it also allows them to inflate their earnings, especially if encouraged to do so by a mortgage broker, Lund said. Then when it’s time to pay a higher interest rate, people can’t meet their debt.

New state law going into effect in January requires sub-prime lenders to adopt ability-to pay-standards along with other safeguards, but much damage already has been done.
Carla Dickstein of Coastal Enterprise Inc., whose organization first alerted policymakers in Maine to the looming sub-prime problem, said the key now is reaching out to those in trouble and letting them know there are options.

“We need to try to identify as many people as we can as soon as possible.” she said, and see if they can either refinance their loans or restructure them with existing lenders.

“Some people are in so over their head it’s going to be impossible to restructure. The state has to think about what it can do to help them transition to some kind of rental housing,” Dickstein said.

For more Maine foreclosure news and related articles, head back to the Maine Foreclosures home page.

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