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BUSINESS:
Foreclosure was a record, but they're still rare
Apr 4, 2007
A corporate executive decides to buy a mansion in Ridgefield. Ho hum, right? It happens almost every week.
Yet even CEOs and other “people of means” can run into financial problems such as the Ridgefielder whose $6-million house went into foreclosure in February.
The house was auctioned in the beginning of March, although the homeowner continues to work toward securing new financing so he can keep the property. The palatial home on West Mountain features seven bedrooms, 9.5 bathrooms, an indoor pool, theater and gymnasium.
The fact the owner went into foreclosure, however, may be a sign of the times.
“It’s uncommon but not unheard of,” said mortgage broker Yohan Sookdeo. “What it all comes down to is cash flow and whether people use the mortgage products that are available responsibly.”
Mr. Sookdeo was not involved in the West Mountain foreclosure. However, he said a typical problem some people run into is they use low-interest variable rate financing to secure a home, but instead of putting aside the money they might save from the low payments, “they buy new cars or boats or property in Florida. Then, when something happens or their rates suddenly go up because it’s a monthly adjustable, they don’t have the cash flow to handle it.”
Leveraging the future
The West Mountain foreclosure was the biggest house foreclosure in town history. It is also one of the few to occur in the last few years. State listings show no other foreclosures in Ridgefield and town Realtors say they know of no others either.
“There are none that I am aware of,” said Carroll Cousins of Century 21. “There also hasn’t been any real pickup in existing homes sales. To sell today, homes have to be priced really, really well - at what the owners may consider below market value — and they can’t have any negatives.”
Although there aren’t a rash of foreclosures in town, across the state foreclosures are up 65 percent, the Fairfield County Business Journal reported in its April 2 edition. Connecticut had one forclosure for every 941 households, the second-highest rate behind only New Jersey in the Northeast.
The blossoming of “For Sale” signs around town could be an indication of not only the upward trend in Ridgefield property value, but in some homeowners’ problems in meeting their mortgages. Even a well-heeled homeowner can get into trouble using “creative financing” to buy a house or property that otherwise might be just out of his or her reach.
“Creative financing might mean two loans,” said Terry Hastings, president of Hamilton Mortgage Co. “It could mean someone getting 90% or 95% financing, which they would do by getting a loan for 80%, then a loan for 10% or 15%.”
This type of financing allows the borrower to avoid paying mortgage insurance, which banks and lenders charge on any loan over 80% of asking price of a house or property. An 80-10 loan, for example, means someone put down 10% of the asking price, then got a first mortgage for 80% and a simultaneous second mortgage for the remainder.
For a $900,000 home, for example, 80-10 financing could break down as a 30-year first mortgage of $720,000 at 6.25% and a 30-year second mortgage for $90,000 at 8.25%. Second mortgages use the prime lending rate as their baseline and charge more interest than first mortgages.
The total monthly payments for this home would be $5,126.30 if the homeowner paid both principal and interest. Many homeowners, however, choose to pay off just the interest. In that case, payments would total $4,368.75.
“It is a tremendous savings, but there is a major caveat,” Mr. Sookdeo said. “They are only paying the interest. There is no equity and after 30 years, you still have to pay the principal.”
Prime challenge
For Ridgefield residents, the pressure comes when those second mortgages tied to the prime rate suddenly balloon as the prime rate rises.
“They might have started at 4% but now prime has doubled,” Mr. Sookdeo said. “They didn’t anticipate prime would double and all of a sudden, they have to make a hard decision.”
Some homeowners simply don’t have the available cash to make up the difference when the prime rate jumps. Mr. Sookdeo said they either have to raid retirement funds or look to sell their home.
“It is a cause for concern,” Mr. Sookdeo said. “This is especially true for the people in the middle - the people that bought $500,000 or $600,000 homes two or threes years ago.”
Mr. Hastings at Hamilton Mortgage said more and more homeowners are now looking to refinance their variable-rate mortgages to fixed-rates.
“They got good rates for three months, but now, they’re getting stretched or they’re afraid of being stretched so they want to finance now,” Mr. Hastings said.
The availability of “creative financing” allows even stretched homeowners to afford the refinancing costs. “The bottom line,” Mr. Hastings said, “is people need to be honest with themselves. They have to take a hard look at exactly what they can afford.”
Market driver?
As more homeowners find themselves caught between rising interest rates and somewhat flat property values, Mr. Sookdeo said he believes it could lead to even more existing homes going up for sale.
“I say be on the lookout,” he said. “The biggest challenge for many people right now is they may want to refinance but they can’t afford the costs and because that second mortgage rate jumped, their credit may have suffered a little. Those are the people who might have no other choice but to sell.”
Ms. Cousins at Century 21 said one problem hard-hit homeowners may face, however, is a buyer’s market in existing homes. “It’s an unforgiving market right now,” Ms. Cousins said. “A house better be at the right price; if not, it won’t sell. We can’t stress this enough. A home seller has to get that house into really good shape. If it is, it will sell.”
Although “creative financing” may haunt some homeowners, mortgage brokers and Realtors say everything isn’t “doom and gloom.”
“The sky isn’t falling,” Mr. Hastings said. “There are great opportunities out there for people with average to good credit to get rates lower than last year.”
Mr. Sookdeo said he expects the market “to get going in April.”
“There are some very good products out there,” he said. “I know people think mortgage products are full of hidden numbers, but they’re really not. If you take the time to look at the numbers and are really honest with what you can afford, there is a very good market out there.”
© Copyright 2007 by Hersam Acorn Newspapers |
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