Foreclosures Grow in Housing Market's Top Tiers By Nick Timiraos Wall Street Journal 10-13-2009

Foreclosures Grow in Housing Market's Top Tiers By Nick Timiraos Wall Street Journal 10-13-2009

Foreclosures Grow in Housing Market's Top Tiers
By Nick Timiraos
The Wall Street Journal
October 13, 2009

New data suggest that foreclosures are rising in more expensive housing markets.

About 30% of foreclosures in June involved homes in the top third of local housing values, up from 16% when the foreclosure crisis began three years ago, according to new data from real-estate Web site The bottom one-third of housing markets, by home value, now account for 35% of foreclosures, down from 55% in 2006.

The report shows that foreclosures, after declining earlier this year, began to accelerate in the late spring and that more expensive homes have more recently accounted for a growing share of all foreclosures. "The slope of that curve in recent months is much sharper than it was recently," said Stan Humphries, chief economist for Zillow. Rising foreclosures among more-expensive homes could create added pressure for a housing market that has shown signs of stabilizing in recent months as sales of lower-priced homes pick up.

The Zillow research compared homes against the median values for their local market and broke each market into three tiers by value. Zillow then looked at the share of monthly foreclosures in each tier over the past decade.

Foreclosures are rising in more expensive markets as home values in those areas fall, leaving more homeowners with mortgages that exceed the value of their properties. Prime loans accounted for 58% of foreclosure starts in the second quarter, up from 44% last year, according to the Mortgage Bankers Association. Subprime mortgages accounted for one-third of foreclosure starts, down from one-half last year.

The prime category includes so-called exotic mortgages that were increasingly used to buy more expensive homes, including interest-only mortgages that allowed borrowers to defer principal payments during an initial period. Borrowers often aren't able to refinance out of these products because the drop in home values has left them with little equity in their homes.

Default rates are particularly high and expected to rise on option adjustable-rate mortgages, which allow borrowers to make minimum payments that may not cover the interest due. Monthly payments can increase to sharply higher levels after five years or when the outstanding balance reaches a certain level. A study by Fitch Ratings found that 46% of option ARMs were 30 days past due last month, even though just 12% of such loans have reset to higher monthly payments.

Zillow estimated that nearly one in four homes with mortgages was worth less than the value of the property at the end of June. Mr. Humphries said he didn't expect to see foreclosure volumes level off until later in 2010.


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Failure Is Not An Option

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CHICAGO (Reuters) – The seven-bedroom, three-bath house in this city's West Garfield Park neighborhood had once been someone's American Dream.

But at a recent auction of about 100 foreclosed houses and condos, it was just Property No. 20 -- and drawing no bids from a roomful of buyers despite its bargain-basement price.

"Any interest in this home at $7,000?" fast-talking auctioneer Renee Jones asked the crowd. "If not, we'll move on."

Saddled with swollen portfolios of foreclosed and unsold properties in the housing crisis, U.S. lenders and builders are turning to professional auctioneers to help them unload the unwanted real estate in a hurry.

It is an open question whether the auctions indicate that the U.S. real-estate market is recuperating or is still in intensive care.

But the rapid-fire, under-the-hammer sales -- usually resorted to only after every other effort to market a property has failed -- are on the rise across the United States, providing a colorful burst of activity in a corner of the weak economy that needs all the life it can get.

"Over the last two years, we've progressively seen more and more of these," said Chris Longly, the deputy executive director of the National Auctioneers Association trade group. "It's a sign of the times."

Hard data on the number of foreclosed properties being sold at auction are hard to come by. "The foreclosure market is a moving target right now," said Dave Webb of Hudson & Marshall, one of the biggest auctioneers in the market.

But Hudson & Marshall and its rivals say they are gearing up for more in the coming months, convinced that a moratorium on foreclosures earlier this year only postponed what they believe is an inevitable avalanche of new repossessions.

"The foreclosures are going to explode again," said Webb.


The cadence and rhythm of the auctions, and the great deals that many buyers walk away with, make the events exciting to watch -- and make it easy to forget the heartache that lies behind almost every forced property sale in a country where home ownership is often equated with "The American Dream."

At the weekend Chicago event, Jones managed to race through the 100 properties up for bid in less than two hours.

When a home did not immediately attract interest or the minimum price, Jones, wielding her gavel in front of a giant tote board, wasted no time moving on.

Kendi Kiogora, a 28-year-old first-time home buyer, said she felt like she "won the lottery" when she bought a one-bedroom, one-bath apartment in Chicago's trendy South Loop neighborhood, with skyline views and heated parking, for just $105,000 -- $62,000 less than its last listed price.

Real-estate professionals in attendance were less euphoric.

Antonette Taylor, an agent at a brokerage that plans to start holding auctions this fall, said the low prices -- most sold for 30 to 50 percent below their last deeply-discounted list price -- made her "a little nervous for my sellers."

Other troubling signs: buyers passed on almost half the properties offered in Chicago and fewer than 100 bidders showed up for the event, which also attracted some online buyers.

"We're having a difficult day," said Tom Atkins of Zetabid, the company holding the auction. "There was a $1,000 property that no one bid on. You'd think a slum lord at the very least would buy it and put a (federal housing assistance voucher) renter in there for $600 a month."

Atkins said bidders at auctions are generally evenly split between first-time homebuyers and veteran investors. Zetabid has a special VIP area near the auctioneer's dais so bidders can raise their paddles with one hand even as they sign contracts with the other.

Among the investors was Thomas Smith, 48, who paid $16,000 for a five-bedroom, three-bath home in Englewood, a notoriously violent neighborhood on Chicago's South Side he called "the murder capital of the world."

Smith figured another $15,000 in repairs would render the place rentable and said his ideal tenants would be "people...who fell off the ladder a little bit. I'm not trying to make a million dollars or anything."


Later, when the nine-bedroom, four-bath property that David Kosak's boss had been trying to sell for a year went under the hammer, it fetched just $15,000 -- less than one-third its last list price but a figure the 23-year-old broker's assistant called "better than anything we've gotten."

Asked if he thought the auction activity might be a sign the property market was improving, Kosak was less upbeat.

"If it's getting better, we're not seeing it," he said. "We only do foreclosures, and we're only getting busier."

Whitney Tilson, a managing partner of T2 Partners and Tilson Mutual Funds and the author of "More Mortgage Meltdown: 6 Ways to Profit in These Bad Times," said there is a reason Kosak's office is getting busier.

After Barack Obama's election as U.S. president last year, Fannie Mae and Freddie Mac, the two government-sponsored mortgage giants, imposed a foreclosure moratorium that lasted about four months. Many private banks followed suit.

As a result, there was a gap in the pipeline of foreclosed homes that pushed into late spring. That helped auction prices stabilize for a few months and permitted some analysts to claim the market had found its bottom.

But the moratoriums have now expired. With the mortgage modification and foreclosure prevention efforts championed by the Obama administration unable to keep pace with defaults, as many as 7 million homes and condos may eventually enter foreclosure before the dust finally settles, according to a report by Amherst Securities Group issued in September.

"There are a lot of things that have temporarily stabilized the market," Tilson said. "But those things are going away ... Delinquencies are spiking. This is going to be a mess."

(Editing by Peter Bohan and Vicki Allen)



Failure Is Not An Option