The Inland Empire's housing market is showing signs of slipping as more homeowners default on their home loans.
 | | Cariño Casas / The Business Press | | Bob Bishop is manager of Exit Inland Realty in Riverside. | | | |
Mortgage default notices rose sharply throughout the Inland Empire during the fourth quarter of 2005, compared with the same quarter in 2004, according to DataQuick Information Systems.
San Bernardino County homeowners received 1,473 notices of default, which increased 14% from 1,292 notices. In Riverside County, homeowners received 1,607 notices of default, which increased 43% compared with 1,123 notices filed in the fourth quarter of 2004.
Real estate analysts expect mortgage delinquency notices to rise again this year leading to more home foreclosures, they say.
Job loss, health problems and and divorce typically contribute to delinquency and foreclosure, said Bob Bishop, manager of Exit Inland Realty in Riverside.
Though layoffs are most often behind a high mortgage delinquency rate, this is not the case in the Inland Empire, said John Marcell Jr., owner of Better Mortgage Brokers Inc. in Upland.
"If we had a bunch of layoffs and the economies here were less than attractive, that would lead people to being delinquent. But that is not what I am seeing. The Inland Empire economy is a plus unless [home owners] are into a loan that is not in their best interest," Marcell said.
Industry experts point to high-risk home loans and brokers writing loans to people with low incomes and bad credit, which can force home owners into debt that causes a home foreclosure.
One type of high-risk loan, referred to as an 80/20 loan, is two separate loans representing the entire cost of a property, Bishop said. The 80% of the loan for the home can be an adjustable or fixed-rate loan, currently of about 6%, but the 20% loan usually comes with an adjustable percentage rate of at least 7% and is used as the down payment, Bishop said. The adjustable 20% loan is commonly made with a higher percentage rate, contingent on the homeowner's credit, he said.
Nearly all adjustable-rate mortgage loans are considered high-risk because interest rates can fluctuate, Bishop said.
"Some people were just flat out put into homes they can't afford and it catches up to them," Bishop said. "People have an escalating [mortgage] payment. Rates are up and some people have difficulty making money or keeping up with their payments."
Increasing interest rates coupled with household incomes that increase marginally each year force homeowners to fall short on their mortgage payments, he said.
Mortgage brokers exploit loose underwriting practices among some lenders, said Marcell, who is president of the the California Association of Mortgage Brokers in Folsom. The association provides education, legislative and regulatory representation and public relations for its membership and the mortgage industry, while promoting standards of professional and ethical conduct. The economy is strong and people are working, unlike the 1990s, when McDonnell-Douglas downsized and General Motors closed its plants in Los Angeles. "There aren't a lot of reasons now, unless [home owners] have gotten into a loan where they were told one thing and ended up on the other end," Marcell said.
Consumers should consider 40-year loans over high-risk loans, he said.
The Inland Empire housing market will slump as housing supply outpaces the demand from consumers, Bishop said. Exactly how the Inland Empire will react is uncertain because the reasons for high foreclosure risk now are "totally different" from Southern California's housing collapse in the early 1990s, said Alexis McGee, president of Foreclosures.com in Sacramento. Foreclosures.com provides listings of foreclosed properties and educational resources for consumers and investors.
Baby boomers are buying second homes, immigration is high in the state and interest rates are low, McGee said.
"I just think we are going to have a flattening of the appreciation curve. There are negative prognosticators speaking about the collapse of housing and I don't think that is true," McGee said.
Across the nation, home appreciation is slowing after five years of strong growth, but the Inland Empire's average home value is still healthy.
The median price of San Bernardino County homes sold in January was $355,000, an increase of 27.7% from $278,000 in January of 2005, according to DataQuick. Riverside County's median home price was up 15.8% in January to $410,000 from $354,000 in January of last year, according to the report.
Slow appreciation of values is another hurdle homeowners must overcome to avoid foreclosure in what most experts consider to be a buyer's market, Marcell said.
"The equity that people have in their homes today is not enough for them to refinance and pull themselves out of a difficult situation and still come out whole," Marcell said.
Mortgage lenders are hurt when homeowners default because the interest rates are too low for them to profit on high-risk loans even if a foreclosed home is revamped, discounted and sold after a foreclosure, said David Schalow, professor of finance and real estate at California State University, San Bernardino.
Banks are tightening their underwriting practices and making it more difficult for homeowners to refinance their homes to avoid foreclosure.Schalow said.
Unlike the past five years, "people are not using their homes as ATM machines anymore. You see refinances sometimes, but not as much because people have done it already," Schalow said.
"It will create more opportunities for investors," McGee said. "I think foreclosures are going to have to happen."
Real estate investors stand to benefit the most as foreclosures increase, Bishop said
"When the market starts to turn like this, this is when investors' eyes start to light up," Bishop said. As the housing market sours, investors may be able to find bargains on foreclosed homes.
In January, Riverside County was one of several areas in the country identified as a "problematic" market for investor purchases, according to Loan Performance, a mortgage research company based in San Francisco.
Home values will transition from slow appreciation to depreciating values, said Bill Norris, president of the Norris Group, a Real Estate Investment firm in Riverside.
Norris has been involved in the transactions of about 2,000 homes in the Inland Empire during his 20 years as an investor.
"I think this is a long-term trend. How an investor benefits is to be cautious in the beginning. I caution them not to buy [quickly] because the property could be worth less next year," Norris said.
Investors would have to buy a lender-owned property at 70% or less of its value to turn a profit by selling a year later, Norris said.
Things may get worse. "We've only seen the tip of the ice berg," Norris said.
