Tuesday, May 15, 2007

TOP STORY >>Mortgage defaults increase

Special to The Leader

Bankruptcies and home foreclosures are rising in central Arkansas even though help is available to high-risk borrowers who are in financial trouble.

There are 1,788 homes in Pulaski County, 398 in Lonoke County and 266 in White County in foreclosure, according to Realty Trac, a company that tracks foreclosures.

“They may feel they have to file for bankruptcy, but not always,” said Linda Tucker, director of education at the Consumer Credit Counseling Service. Her agency offers free credit and home ownership counseling. She said she has recently seen an increase in the number of people who have attempted to save their homes by filing for bankruptcy.

“A lot of people think their name will appear in the paper when they file for bankruptcy and that’s it,” she said, noting the process is more complicated than that. “When it’s time to get out of bankruptcy, it could take years.”

Foreclosures are not only worrying homeowners who have defaulted on their mortgages, the real estate industry has noticed the increase and is looking at whether mortgage defaults will further push down home prices that have already been dropping across the country.

“Because there are a lot of foreclosures and a lot of higher-risk loans, a lot of those companies are revising guidelines and the federal government is looking at regulations,” said Ethan Nobles of the Arkansas Realtors Association.

Economists attribute the rise in foreclosures to the number of such high-risk loans, called subprime mortgages, which became popular at the beginning of the housing boom in 2000. Subprime mortgages were offered with extremely low or no-interest rates that increase well beyond those of conventional mortgages after a few years. They are generally given to people with poor credit, including those who have previously filed for bankruptcy. The number of subprime mortgage loans increased over the last few years, while delinquencies and foreclosures rose almost simultaneously.

Doug Duncan, Mortgage Bankers Association of America’s (MBA) chief economist, said, “Increases in delinquency and foreclosure rates were noticeably larger for subprime loans.”

His organization reports that Arkansas ranks 14th in mortgage delinquencies and 27th in foreclosures. A quarter of homeowners in Arkansas have subprime or Federal Housing Administration (FHA) loans.

“There needs to be some regulation because there are some problems. (The federal government) wants to do something to reduce the default rate, but we have to keep loans viable — some people cannot apply for conventional 30-year loans,” Nobles said. “It’s better to have something available so they can get homes.”

MBA reported that subprime mortgages have contributed to a decline in the housing market.

Nobles said real estate sales have not slowed down in Arkansas as much as in other parts of the nation, but he said, “Building is down a bit, a number of houses have been down just a bit and we’re behind from last year. I know from builders in Arkansas that the slow housing market is hurting them.”

The drop in the housing market will even affect consumers who have kept up with their high-interest mortgages. They have a limited chance of refinancing with lower interest mortgages because they can only borrow against a property’s value. “They get behind in credit cards, and then they weren’t paying house payments and can’t catch up,” Tucker said. Credit card companies are aggressive in seeking payment, which can cause consumers to “get their priorities mixed up.”

Borrowers who get into trouble go to an attorney, who usually suggests bankruptcy, but before then, a financial counselor can help by mediating between the mortgage lender and the consumer, she said. Homeowners should get help before they default on their mortgages and have to enter into foreclosure.

“It is extremely rare for someone to be able to reverse a home foreclosure once it begins,” Tucker said. The Consumer Credit Counseling Service can be reached by phone at 501-753-0202 or online at http://www.helpingfamilies.org.