Foreclosures may warrant new look at mortgage options

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Mirroring national trends, Routt County foreclosure rates in the past several years have been steadily climbing. And although the trend has slowed slightly in 2004, lenders say borrowers need to be certain they understand the rules and implications associated with the many different loan products available.

Nationally, economic recession pushed the percentage of homes in foreclosure to a modern record of 1.51 percent at the end of the first quarter of 2002. The rate fell to 1.27 percent in the first quarter of this year, according to the Mortgage Bankers Association, which has collected foreclosure figures since 1979.

There were 42 residential foreclosures in Routt County last year -- a 36 percent increase from the number of foreclosures in 2001. In 2004, there have been 31 residential foreclosures, but that number likely will be 35 by the end of the year, Routt County Treasurer Jeanne Whiddon said.

Amy Flint, a lender with GMAC Mortgage in Steamboat Springs, said a slower economy might be making selling their homes more difficult for borrowers who are struggling to make mortgage payments. The economy also may be making some loans more risky than in more prosperous times.

"It used to be people could feel safe getting something with no money down because the value may double in a couple of years. ... In the current economy, that is not happening so much," she said.

Second mortgages could be presenting more of a problem to borrowers than first mortgages, however.

Lenders tend to be a lot more flexible with home values when dealing with second mortgages. Some programs don't require appraisals, and others allow homeowners to borrow up to 120 percent of their home value, Flint said.

"The only time it's a smart idea to do that is if you're getting money for a big upgrade that will increase the home value that much," she said, explaining that if borrowers encounter problems and have to sell, they will end up owing money even if they receive 100 percent of their homes' value.

Decisions, decisions

At GMAC, lenders have access to about 120 different loan products, though on a day-to-day basis, Flint probably only uses about a dozen of those, she said.

Because of the wide array of mortgage products available, even borrowers who have filed for bankruptcy or have been previously foreclosed on can buy a home with no money down.

"Over the last 10 to 12 years, underwriting guidelines have gotten much more lax," said David Motley, an executive vice president at Colonial National Mortgage in Fort Worth, Texas. "Today, you can get a 100 percent loan on a purchase or a 106 percent loan on your purchase to cover the closing costs."

Critics say the looser standards contribute to high foreclosure rates nationwide because owners with no equity in their homes find it easier to walk away from mortgages if they get into financial difficulty -- and still get approved for another mortgage later.

"I do think the erosion in underwriting standards, including the growing prevalence of low- or no-down payment and no-documentation or low-documentation loans, is contributing to the very high and rising foreclosure rate," said Mark Zandi, chief economist of Economy.com, a consulting firm in West Chester, Pa., that specializes in studying regional economies.

Flint agrees that more foreclosures likely will result from low-documentation loans, which don't require proof of income, and no-documentation loans, which don't require borrowers to disclose their income.

Borrowers usually must have good credit and also must be able to pay higher interest rates to be approved for those loans.

Although the products traditionally have been used by borrowers who want privacy when it comes to their incomes, lenders are seeing consumers exaggerate their incomes in order to get into a home they can't necessarily afford, Flint said.

A lot of people who haven't been able to afford traditional 30- or 15- year fixed rate mortgages have opted for adjustable rate mortgages and interest-only loans, which typically have lower interest rates than fixed-rate mortgages.

When considering these or other nontraditional loans, borrowers need to be well aware of rules that accompany the loans as well as future implications, Flint said.

Interest rates for adjustable-rate mortgages are fixed for a certain number of years and then are periodically adjusted based on a financial index. The loans can help borrowers purchase a bigger or nicer home and also have money available to pay other bills or expenses.

Adjustable-rate mortgages are good for borrowers who plan to sell or refinance their home after the fixed-rate period, Flint said.

Most adjustable-rate programs have a cap or maximum interest rate that can occur through the life of the loan, which can help borrowers determine if it's the loan is a safe option, she said.

Interest-only loans, which let borrowers pay on the principal when they can, are good for those with seasonal or varying incomes throughout the year. It's important, however, that borrowers understand all aspects of the loans from the onset -- including the starting interest rate, fees, how often rates change and how they are determined.

Borrowers also need to be aware of any prepayment fees associated with loans, as well as negative amortization, which raises payments if borrowers pay the minimum.

Evaluating risk

Nationally, critics say looser lending standards have contributed to higher foreclosure rates by allowing some consumers to borrow more than they can afford.

"We see debt ratios today that would have never been approved," Motley said.

Even with low mortgage rates, first-time buyers have strapped on so much mortgage debt that "roughly one-third now pay at least 30 percent of their after-tax income on shelter, and half of the lowest-income households spend at least 50 percent of their incomes on housing," according to a report published in September by Merrill Lynch.

Flint said lenders weigh three primary factors when judging a borrower's risk: credit history, down payment and the ratio of debt to pretax income.

Lenders typically are most comfortable with borrowers spending no more than 38 to 45 percent of their income on total debt, including housing costs. Lenders may, however, approve loans for clients with up to 65 percent of their income going to debt, if the borrower has excellent credit, Flint said.

The challenge in Routt County is that some borrowers have income that is hard to verify, such as tips or rent from roommates. Although that income officially doesn't count in the loan process, it may make lenders more comfortable with the borrower's situation, she said.

Not always the answer

Foreclosure often happens when borrowers get in over their heads with payments and, knowing they will make less money than they owe when they sell, opt to "walk away," Flint.

Borrowers that have a life-changing event -- a job loss or a medical condition, for example -- typically are more likely to call their lender and figure out a way to fix the situation before defaulting to foreclosure, she said.

As soon as borrowers know they are going to have problems -- preferably before they are 90 to 120 days late with their payments -- they should call their lenders to discuss any kind of mitigation programs that might be available.

Mitigation might allow, for example, borrowers to add portions of missed payments to future payments.

In certain situations, borrowers might opt for a "short sale," in which they would sell the house and the lender would arrange for borrowers to pay or not pay the difference between the sale price and owed amount.

"Trying to work your way out of that hole may be better than trying to work your way out of bad credit after a foreclosure," Flint said.

Even if borrowers who are foreclosed on should not assume they are clear of owing something on a loan. If a lender is not able to sell the home for as much as the borrower owed, the borrower -- depending on whether any mortgage insurance is involved -- may still owe the lender money.

Rather than assuming foreclosure is the answer, "it's always smarter to just bite the bullet and call (your lender)," she said.

Pamela Yip of The Dallas Morning News contributed to this report.

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