Foreclosure trend may mask trouble Interest rates on uptick; some buyers may get squeezed

Home mortgage foreclosures in the Coachella Valley were down sharply in 2005 - continuing a steady downward trend over the past five years.

Recent figures from research firm DataQuick Information Systems show the valley's 49 foreclosure sales were about half the number seen in 2004 and an 88 percent drop from the 421 seen in 2000.

But experts are reacting to the numbers with caution - and advising potential buyers to do plenty of homework before closing on a home mortgage.

Industry watchers' concerns are punctuated by the growing use of "exotic" low-rate mortgages and other financing vehicles that have helped buyers get into homes at a time when prices are rising.

The fear: Homeowners could be faced with rising monthly payments as their loans shift to adjustable rates in the next two to five years.

This comes as the median resale price of valley homes ended the year at the $390,000 mark.

The rising costs - the median price was 15 percent higher in December 2005 than the year before - have meant many buyers have relied increasingly on nontraditional loans to be able to buy into the local market amid plunging affordability.

The loans have helped many, including investors like Danielle Galland of Desert Hot Springs. She bought a home in that city recently with an interest-only loan with payments scheduled to jump in two years.

"I think interest-only is a good way to go for investors like me," Galland said. "But it's probably not so good if you're holding on to a house long term."

Most experts agree there is no imminent danger of a foreclosure crisis in the valley. Here and elsewhere, foreclosure rates remain generally negligible during periods when home prices are rising, job creation is holding steady and unemployment remains low.

"Right now, as long as the prices are steady and people have their jobs, I think they will do what is needed to make their payments and avoid the foreclosure process," said Chapman University economist Esmael Adibi. He tracks regional trends for The Desert Sun's quarterly economic index.

However, Adibi and others note that a time of reckoning could be coming for buyers who stretched themselves to get into homes via loan packages offering low introductory payments, with rates slated to rise when that introductory time is over.

The economist said higher payments for some buyers could arrive in late 2006 or early 2007, depending on when they took out the loans.

Observers say this applies not only to those who have taken out "exotic" loans with 1 percent or 2 percent teaser rates, sometimes with 40-year terms, but also interest-only loans and other types that have become popular in the current market.

One red flag is that the valley's notices of default - sent by lending institutions when payments are overdue - totaled 816 in 2005.

According to DataQuick, that was up 29 percent from the 632 notices seen in 2004, and reversed a three-year trend of declines between 2002 and 2004. (DataQuick did not track valley default notices prior to 2002).

Based on the latest available data, only about 10 percent of default notices statewide end up with somebody losing a home to foreclosure, said DataQuick analyst John Karevoll.

He noted that most people are able to stop the foreclosure process by bringing their mortgage payments up to date, or by selling their home to pay off the loan.

"But things could change," Karevoll said.

He and others said more homeowners could find themselves strapped - perhaps starting in late 2006 - as introductory rates expire on their loans and they convert to adjustable-rate terms.

There's another worrisome fact: It's costing more to buy a home in the desert.

According to recent figures from the California Association of Realtors, only 10 percent of valley households can afford to purchase the median-priced valley home based on working income.

Paying more later

Longtime valley banker William Powers, president and CEO of Pacific Western Bank, said while his bank does not offer them, many valley buyers have been able to save on their monthly payments initially by opting for non-traditional loan packages.

The upside is that it allowed many more people to purchase homes than would otherwise have been possible.

The downside is that when their introductory rates convert to adjustable, some will find that they really weren't able to afford their properties long term.

The reason: They've already spent their monthly-payment savings on other items - like cars, big-screen TVs and upscale furnishings.

If those owners find themselves with default or foreclosure notices - and home values aren't rising as they are today - some may unload their homes at a loss or below-market value to pay off their loans. That could put a drag on the selling prices of non-distressed homes in the same neighborhoods.

"As a homeowner, that wouldn't make me very happy," Powers said.

Interest-only loans popular

As an indicator of what could be at stake nationally, there is currently between $1.5 trillion and $2 trillion tied up in what are known as interest-only loans, according to LoanPerformance, a San Francisco-based research firm that tracks banking and mortgage trends.

Interest-only loans, which have become increasingly popular in California and elsewhere as a way to afford homes, allow buyers to initially make only interest payments based on a fixed rate.

But the loans convert to adjustable rates after a set period - usually three to five years - as principal payments also kick in.

On average nationally, that changeover could mean a 30 percent rise in monthly payments for those holding interest-only mortgages, said loanperformance vice president Bob Visini.

Realistically, Visini said most of those homeowners will refinance before their loans become adjustable.

"You could see a really wild re-fi market in the next three to five years," he said. "People are not going to wait for those loans to reset into straight adjustable-rate mortgages."

"They're going to go into other types of (loan) products, but that's going to depend on where interest rates are."

Currently, interest-only loans are more popular in the inland Riverside-San Bernardino metro area, which includes the valley, than in California and the nation.

According to LoanPerformance:

39.3 percent of all inland home loans were interest-only in 2005, up from just 3.7 percent in 2000.

The California percentage was 34.3 (up from 1.4 percent).

The national percentage was 24 percent (up from 1.1 percent).

Adjustable loans are especially susceptible to changes in short-term lending rates, which have been increased by the Federal Reserve 13 times since mid-2004. Rates are likely to get another boost when the Fed's Open Market Committee - the branch of the Federal Reserve Board that determines the direction of monetary policy - meets again Tuesday.

Fixed rates historically low

Most experts advise those who are worried about future loan rate fluctuations to choose fixed-rate loans when originating a home purchase, or to refinance into longer-term fixed rates on existing loans.

Fixed-rate home loans remain at historically low interest rates, with rates actually decreasing in some recent weeks.

According to Bankrate.com, which tracks lending rates, a 30-year fixed-rate mortgage was averaging 6.17 percent at the close of the week ending Jan. 27, and a 15-year fixed loan was averaging 5.75 percent nationally.

Those rates are not much higher than adjustable offerings. The average 5/1 adjustable-rate mortgage was at 5.75 percent as of Friday, and the one-year ARM was at 5.5 percent, according to Bankrate.com.

Regional analysts say that the valley is currently experiencing a "soft landing" in home prices and has several bubble-proofing elements.

Patrick Veling, an analyst with Brea-based Real Data Strategies, notes that those include:

Continued demand for local homes among retirees inside and outside the valley.

The fact that most owners sell their homes because they want to - not because they have to.

An overall supply of homes in the state that continues to lag demand.

The valley remains a seller's market, although it is nearing equilibrium as local unsold inventory rises.

According to DataQuick, the latest valleywide year-over-year price appreciation was 15 percent in December 2005. That's down from 28 percent a year earlier.

The December median home sales price in the valley was $390,000 - down slightly from the record $400,000 posted in November, DataQuick reported.

What are people saying about mortgages today:

Rates on 30-year mortgages edged down last week to a seven-month low. Mortgage-giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages fell to 6.3 percent, down slightly from 6.31 percent two weeks ago. It put rates at the lowest level since they were at 6.24 percent the first week of March.

Bank of Hawaii, Central Pacific Bank, Territorial Savings Bank and Wells Fargo Home Mortgages all cut their 30-year mortgage rates to 5.75 percent this week.

Most people think of a mortgage as a means to an end. After all, you buy a house, not a home loan. But a mortgage is much more than the path to homeownership. It is a financial instrument that must be managed, just like any other financial investment.