Most Of Foreclosure Frenzy Avoids East Texas

East Texas Foreclosure News

Article Abstract:  While foreclosures in Texas continue their upward climb, east Texas foreclosure rates have remained relatively stable according to a Southside Bank representative. Texas foreclosures are said to have increased largely due to the “creative” lending practices of lenders during the real estate boom.  Many borrowers got in easy without considering a higher interest rate adjustment in the future or without waiting to qualify for higher quality loan. For the full East Texas foreclosure news article, please continue reading below:
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By GREG JUNEK
Business Editor

People with less-than-perfect credit are seeing their dreams of home ownership becoming more difficult to achieve as lenders clamp down on loan-qualifying requirements.

Local authorities say this is a result of a practice over the past couple of years of offering lending options that played fast and loose with a person's ability to make monthly mortgage payments - especially if the interest rate increased.

"The rise in delinquencies is an estimated 325,000 foreclosure proceedings, up from a quarterly rate of 230,000 the previous two years," said Guillermo Covarrubias, assistant professor of economics at The University of Texas at Tyler. "This particular sector is the one that is troubling the credit markets."

What some real estate agents called new, innovative ways to obtain home financing a few years ago has turned around to bite the borrower. Or, perhaps the borrower should have waited to qualify for a prime quality loan, Covarrubias said.

The subprime sector is a lower quality loan sector for individuals whose credit is not good.

"This sector is quite profitable because, giving the low quality of the credit of the individuals who are asking for the loan, companies are able to charge them higher rates of interest," he said. "But it is profitable as long as part of their portfolio is not being defaulted on, and the default rate has started to increase substantially."

Variable interest rates began to increase, and borrowers could no longer pay the increased monthly mortgage amount.

"Not only that, but these people have so little equity on their houses, that they find it really easy to just walk out," he said. "They're not going to lose a lot of equity, so they're tempted to say, 'Well, I'm just going to stop paying and let them come and repossess the house.' They already have bad credit anyway."

As a result, many companies are closing their subprime divisions, Covarrubias said. Some have continued writing subprime mortgages, but there has been a slowdown in that sector.

The effects of some lenders' troubles have been felt locally and in other parts of the country.

New Century Mortgage Corp. and its subsidiary Home123 Mortgage Corp. filed for bankruptcy protection in April, and the Tyler office closed.

In August, Capital One Financial announced it would close its wholesale mortgage banking business and restructure. Earlier in the month, American Home Mortgage reduced its staff from 7,000 to 750, according to information from forbes.com.

Countrywide Financial Corp. borrowed $11.5 billion from a group of 40 banks to fund loans. Countrywide, the nation's largest lender, said it made the move amid a credit crunch that had driven some of its smaller peers to bankruptcy.


'ENTIRELY TOO EASY'

Margie Fisher, branch management loan officer for Republic Mortgage Home Loans and owner of B4Closure of Tyler, said the terms of the loans "made it entirely too easy for people with than less than perfect credit and no cash to get into homes."

Lenders that will emerge from delinquencies the best are the ones whose business is diversified - ones who mix the more stable prime loans with their subprime loans, Ms. Fisher said.

"The lenders that specialized in subprime-only loans are the ones that are going to hurt the most because they don't have the good loans that they can fall back on," she said.

How did the industry get into this problem?

Ms. Fisher said she believes part of the problem is the way U.S. citizens seem to view credit. More people are letting their credit rating slide through defaults on payments. And many seem not to care.

For one, Ms. Fisher said, it is too easy to get a credit card.

"Somewhere along the line they've been taught that give it back to your credit card company (let the balance go into default and to collection) and in a couple of years your credit score will be high and everything will be alright again," she said. "That attitude is what has caused part of our problem right now."

Greater options available for subprime loans, available for the past couple of years, have made it possible for almost anyone to qualify for a mortgage.

A few decades ago, it was standard procedure to put 20 percent down on a home, Ms. Fisher said. The offering of the new, creative ways to establish financing, in hindsight, was probably not very prudent lending.

As a result, lenders have begun offering fewer options for people with questionable credit, although it is still possible for those with less-than-stellar credit to get home loans.

"Probably 70 percent of those really high-risk lenders are no longer offering that product any longer," Ms. Fisher said. "They're now requiring down payments, higher credit scores.

"But, yes, there are still some programs out there for people with less-than-perfect credit. You're just not going to be able to combine the no down payment, really, really bad credit, adjustable rate payoffs and ARMs all into one loan," she said.

"A lender might look at one, 'We'll take the credit, but we want you on a fixed-rate loan and we want you to make a down payment,' or 'We want the down payment and we'll take the less-than-perfect credit,'" she said. "They're going to want one or the other."

Covarrubias added many mortgage products have remained very healthy, including the prime quality fixed for variable rate mortgages.


CONSERVATIVE NATURE

Lauren Glass, senior vice president for Southside Bank, said although the bank offers subprime loans, the prime rate, fixed interest loan seems to be what most local residents desire.

"We rarely see nonprime loans or subprime loans or ARMs (adjustable rate mortgages) in the East Texas area," Ms. Glass said. "They prefer fixed-rate loans. ... Our delinquencies have not increased, and our foreclosures have not increased."

She said this is due in part to the conservative nature of East Texas citizens.

"So we don't expect that those products will cause the kind of issues that you are seeing in California, Michigan, Nevada, Ohio," she said.

The number of foreclosures has increased some locally, however, Ms. Fisher said, based on a check of foreclosures in Smith County each month.

Although she said she does not have cumulative numbers comparing the first half of 2007 with the first half of 2006, she has seen the monthly lists grow longer. Still, the problem is much, much worse in some other areas of the country.

"The foreclosures are higher than they were a year or two years ago in Tyler," she said. "We've seen very little downward effect on values, so I do not believe that is a problem in Tyler as of yet. I do think that we've seen a slowdown in the purchases, mainly because people are scared."

As more people default, the local market could see a little bit of a housing glut.

"While values haven't been affected, time on the market is starting to increase a little bit," she said. "I believe that since we still get a large amount of people moving in from Dallas - retirees - we're somewhat insulated where other parts of the country are not. We're fairly healthy."

 

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