Important news for anyone who owns a home or is thinking about buying one. A change in the Milwaukee housing market could change your bottom line.
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Amid the deepening Wisconsin mortgage foreclosure crisis, Legal Aid Society of Milwaukee last week announced an inquiry into what went wrong.
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Bad Wisconsin home loans continue to dog this state and the nation, with rising default and foreclosure rates in this year’s first quarter, the Mortgage Bankers Association reported Thursday.
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The calendar says 2007. Wisconsin home prices say it’s still 2006.
Milwaukeeans’ love of discounts is on full display in this year’s Wisconsin housing market.
“With flooding inventory out there, it’s not uncommon to see offers at 10 percent below asking price,” said Greater Milwaukee Association of Realtors President Dave Schmidt Jr.
Wisconsin mortgage holders have paid dearly for the wild success of the quick-but-costly subprime loan trade.
Homeowners across the state took on $1.6 billion in subprime loans in 2005 alone - the most recent year for which figures are available. Those loans accounted for nearly 21% of the state’s mortgage market and an incredible 34% of Milwaukee County’s, federal Home Mortgage Disclosure Act records show.
“High cost loans,” as they’re dubbed by the industry, carry mortgage interest rates at least 3 percentage points above market norm.
Typically issued to people with poor credit or tight finances, subprime loans also appeal to affluent borrowers who want to bypass the traditional underwriting review. As these loans ripened, Wisconsin housing market residents’ reputation for responsible bill-paying got scuffed.
The state is now 11th worst in the nation on loan defaults, based on its fourth-quarter 2006 foreclosure rate of 1.46%, the Mortgage Bankers Association reported March 13. Legal actions to seize property for unpaid debt surged 34% last year and are running 27% higher in this year’s first two months, according to industry tracker ForeclosuresWI.com.
“We’re seeing the fallout from the inappropriate loans of ‘05 and ‘06,” said Todd G. Clausen, data center coordinator for the Nonprofit Center of Milwaukee Inc., after mapping the numbers attached to all those broken dreams.
“It will take a few years to see this picture clearly, but I think that’s what the big increase in foreclosures is all about - adjustable-rate mortgages, high interest rates, high fees,” Clausen said. “I don’t think people realized just how high their payments would go.”
Hunted down
Hard-luck cases are pouring into Milwaukee County Circuit Court Clerk John Barrett’s office at such a heavy flow that he asked staffers to double-check the figures.
“I wondered, did we input something incorrectly, or is something happening out there?” Barrett said.
He spotted a new ingredient in the usual mix of life blows - divorce, death, illness, job loss - in foreclosure filings. It was bad credit mortgage loans.
“They’re mining us, calling us, doing all kinds of stuff to get us to take out a loan,” Barrett said. “And some of it is predatory. Big banks have the FDIC and other regulators looking over their shoulders. These subprimes don’t have anyone looking over their shoulder. They’re working to make sure the deal happens, with the same hunger that buyers feel about having a home of their own.”
Now it’s all coming apart.
At least two dozen subprime lenders nationwide have hit the skids in recent weeks, unable to meet their own financial obligations, as defaults soar on even their newest loans.
Hard times and bad choices have landed thousands of Wisconsin mortgage holders in deep trouble.
Foreclosure filings, which rocketed 34% in the state last year, jumped another 27% in this year’s first two months, reported Robert A. Jansen, president of ForeclosuresWI.com in Milwaukee.
Foreclosure filings totaled 16,473 in 2006, with another 3,240 so far this year, his figures show.
Today’s paths to financial ruin, here and nationwide, are well-worn ones: “job loss, health crisis, unexpected expenses, some mismanagement,” said Dean Caldwell-Tautges, vice president of programs at the Homeownership Preservation Foundation, a Minneapolis non-profit group launched with a lending industry grant. “Or maybe it was several of these things that all ganged up on them.”
Jansen sees a new ingredient in the mix, however.
“Much of the increase in foreclosures is the result of individuals stretching to buy more expensive houses than they could afford,” Jansen said.
Adjustable-rate home loans, which accounted for 51% of America’s mortgage market in the second half of 2006, helped people buy beyond their means. When teaser-rate terms expired, he noted, borrowers’ monthly mortgage payment spiked.
About $1 trillion in adjustable-rate mortgages is due to reset to higher rates this year, estimates Fannie Mae, the nation’s largest mortgage buyer. “It’s going to take some people’s monthly payments from the hundreds of dollars to the thousands of dollars,” CEO Daniel Mudd predicted last fall.
Some borrowers hit the wall even before their adjustable-rate mortgage loans made that jump, said foreclosure specialist Marie M. Flannery, an attorney with Kohner Mann & Kailas in Glendale. She was shocked, she said, to get a wave of new foreclosure cases this year from borrowers whose loan payments had not gone up.
Over their heads with mortgage loan payments
“What I’m seeing are people getting in over their heads,” Flannery said. “People shouldn’t go by these calculations that lenders do. You can’t live paycheck to paycheck. If there’s no pad there, and something happens - your spouse dies, your child gets sick - the whole house of cards comes tumbling down.”
Alarmed at the growing financial turmoil in a state known for frugality, officials at Wisconsin Realtors Association and Wisconsin Mortgage Bankers Association said they will team up this spring on a consumer awareness campaign about the risks of some loan terms. Their targets: new and existing mortgage customers.
“We have credible lenders and good laws. What we need is much better education,” said Bill Malkasian, president of Wisconsin Realtors Association.
One important lesson that needs reinforcing right now is delayed gratification, said Jim Kopp, legislative chairman and past president of Wisconsin Mortgage Bankers Association.
“Some people say, ‘I want it now and I want it easy.’ But they may not be getting the best deal they could,” Kopp said. “Before they sign for a [home purchase loan], before they even choose a lender, we want them to know what the smart options are.”
By June, the two men say, their trade groups will have a consumer alert to distribute, “in time for the spring selling season,” Malkasian said.
Meanwhile, debate rages across the nation about what role aggressive lending has played in the rising tide of mortgage defaults. Federal banking regulators have issued increasingly stern warnings to lenders about their duty to write loans suited to borrowers’ means. Industry critics say lenders profited handsomely by downplaying risks.
Such criticisms are unwarranted, contends the Mortgage Bankers Association in Washington, D.C. In a Feb. 5. advisory called “The Facts about Mortgage Lending,” the trade group asserted that there’s no evidence tying the growth in distressed borrowers to non-traditional loans.
Officials there also pointed out that about 75% of defaulting borrowers ultimately arrange repayment or a quick sale and avoid seizure of their home for unpaid debt.
Caldwell-Tautges sides with this view, saying, “It’s still life events that cause people to miss a payment and hardly ever because of the mortgage product.”
It’s also true that of the 300 to 350 calls a day fielded by his organization’s consumer hotline - a 600% increase over 2006 - about half involve non-prime loans, he said. Typically, bad credit mortgage loans are made to people with marred credit or tight finances and cost the borrower more.
“A lot of the people that are having trouble now are in loans that are not more than a year old,” Caldwell-Tautges said. “Clearly, if their payment was a little more expensive, it put them closer to the edge.”
SOURCE: The Journal Sentinel
A handful of Milwaukee-area credit unions are experiencing more Wisconsin mortgage foreclosures so far this year, driven by lower housing prices, higher interest rates, and borrowers who are unable to make such higher rate payments.
Banks, meanwhile, are not facing the same issue. Bank executives said their foreclosures so far this year are relatively flat compared with the prior 12 months. Credit union and bank executives said one reason banks may be avoiding an increase in foreclosures is because banks often take on fewer bad credit home loans than credit unions, which are willing to take on potential problem loans to help their members.
Contributing factors
Several factors are contributing to foreclosures: adjustable rate mortgages beginning to reprice, often at double the previous interest rate; homeowners who used their home equity to pay off other debts are not recovering that equity because housing prices have fallen; and borrowers’ willingness to give up their homes.
“Individuals continue to grossly overextend themselves,” said Ralph Brunner, president of ALLCO Credit Union, West Allis.
ALLCO has seen a significant increase in the number of foreclosures - to about 26 so far this year compared with two or three during all of 2006, Brunner said.
Most of the credit union’s mortgages were written with balloon payments after two, three or five years. The credit union also offered loans at 100 percent financing, expecting that borrowers could quickly build equity in the property, he said.
If borrowers see the value of the home increasing, they are more likely to want to work something out with their lender to hold on to the home, Brunner said. Now that home prices have dropped, that’s less the case.
“The appreciation that was taking place probably created a comfort level for lenders,” he said. “If there is no equity, it’s fairly easy for somebody to walk away.”
Sorry, Wisconsin mortgage holders or potential applicants: the cost of owning a home may soon increase.
Governor Doyle proposed as much as a 4 percent increase to property taxes in his State Budget address Tuesday night.
If you’re out looking to buy on the market and this increase is passed, home mortgage brokers and Realtors say you may have to look at purchasing a cheaper home.
President of Security Realty in Wausau Glen Witter says: “It’s going to affect the amount of money they have available to buy a home on a monthly basis and it could affect the value of a home that they can afford by as much as $2,000.”
For home buyer LeeAnn Kitchell, this property tax increase affects what she’ll buy.
“It does affect our monthly payment, my families budget is definitely affected by what we pay in property taxes.”
But would this limit LeeAnn’s family on where they plan on settling?
“You tend to look at different areas, around Wausau, there are different ranges of property taxes and for my family’s budget, it definitely affects where we look for decent property tax rates that won’t affect our monthly payment too much.”
The increase would not only challenge buyers and Realtors, but the entire community.
According to Witter: “Any increase in taxes in any municipality, in any area, affects the ability of people to buy a home, and home sales could slow.”
While some areas in the economy could slow, some home buyers understand the rate hikes; they believe it’s important to fulfill the needs in a community, even if it adds to Wisconsin housing market costs.
Kitchell says: “Each community has to look at what their needs are and hopefully their leaders are being fiscally responsible and only good use that rate if they absolutely feels necessary or if there’s a lot of growth if they need to add services such as Kronenwetter, Westin, Mosinee.”
After several years of soaring housing costs, there’s good news for renters in the Wisconsin housing market - the trends are swinging back in the other direction.
According to The Capital Times, the Madison apartment vacancy rate has dropped to 5.07 percent. That’s down from spring 2005 when vacancy rates were running over 7 percent.
Apartment industry officials say the rise in mortgage rates has priced many out of the market.
Specifically, it has left on the outside looking in those who were right on the edge of qualifying for a home loan, but are now stuck paying rent.
In addition, some people with adjustable rate loans or other more risky home loans such as interest-only mortgage products have lost their homes, forcing them to start renting again.
“The chill that’s hit the housing market has been good for the apartment business,” said Nancy Jensen, executive director of the Apartment Association of South Central Wisconsin.
With roughly half of Madison residents renting and a solid base of UW-Madison students, the apartment industry has long been a stable component of the local economy.
But vacancy rates began to climb during the housing boom as scores of renters took advantage of record low Wisconsin mortgage rates to buy homes. That left many landlords with empty units and forced some to offer free months of rent or other perks to lure tenants.
In fact, the rental market was so bad that several large complexes were eventually converted into for-sale condominiums as real estate investors tried to take advantage of the demand for owner-occupied housing.
At one point in 2005, several areas of the city were seeing vacancy rates in the double-digits. But figures for the last quarter of 2006 show that vacancy rates had fallen back to earth a bit.
Downtown landlord Steve Brown said this spring will determine whether the apartment market has rebounded or not. He said the number of new dorm rooms opening on the UW-Madison campus - including 600 bedrooms in the residence hall at Dayton and Park streets - has added to the city’s rising inventory.
“I just haven’t seen the market downtown tighten noticeably,” said Brown. “It’s too early to say we’re back.”
The city’s affordable housing ordinance had also slowed the construction of new apartments in the city, which has contributed to a tighter market. She said developers were reluctant to build new rental units if they were forced to price them for low-income residents.
But the Apartment Association was successful this fall in having the city’s zoning or “IZ” ordinance overturned in court. The for-sale portion of the IZ ordinance was not challenged and remains in effect.