Report: ‘Exotic’ mortgages leading to foreclosures in West

FAIR OAKS
September 25, 2006 6:51am

So-called creative mortgage products are a major factor in “the coming spike in foreclosure activity” in several western housing markets, predicts a Central Valley company that makes its money by providing foreclosure information.

“We saw a drop in California foreclosures in the west in July, but that’s not going to last,” says Alexis McGee, president of Foreclosures.com, a privately held company based in Fair Oaks. “You could say that this summer is the calm before the storm.”

Ms. McGee says the foreclosure epidemic is already happening in Colorado where rising interest rates are colliding with slumping home prices and squeezing homeowners out of their houses.

“In Greeley, at the end of the second quarter of 2006, one in every 66 households was in some stage of foreclosure,” she says.

She points to a statement by Tom Teixeira, director of the Greeley/Weld housing authority, in which he blames the extremely liberal underwriting practices of competing lenders that put inexperienced homebuyers into adjustable rate loans that they really couldn’t afford in the long run.

“I have seen some aggressive marketing by a lot of companies and very liberal underwriting procedures that allow people to overextend themselves, loans that allow you to use 40 percent of your income (toward mortgage payments),” Mr. Teixeira told the Longmont, Colo., Daily Times-Call newspaper in an article published on Sept. 12.

“When these option ARMs reset to market rate interest, a first time homebuyer’s payment could almost double,” says Ms. McGee. “On top of that, there has been a significant drop in home values in that market. The owners can’t make their new payment, and they can’t sell in a market overloaded with unsold homes.”

Weld County, Colorado, where Greeley is located, now has the third highest foreclosure rate in the nation.

But it’s not an isolates case, according to Ms. McGee, who says foreclosures are on the rise again in Maricopa and Pima counties in Arizona and that California is not far behind.

“As of Sept. 11, there were 44,683 properties in some stage of foreclosure in California, and again, these exotic mortgages are a major factor,” she says. “In San Diego, more than 50 percent of purchase money mortgages issued in recent years were these so-called creative loans. Now they’re coming back to haunt homeowners and lenders alike.”