The Washington area is expected to be slammed by a second wave of foreclosures later this year as a new crop of adjustable-rate mortgages resets to higher rates and homeowners struggle with rising monthly payments.
The problem is with “Alt-A” loans, which were popular with banks and mortgage lenders mid-decade after many stopped issuing subprime loans as more homeowners defaulted on their mortgages, according to local analysts.
Like other adjustable-rate mortgages, Alt-A loans reset to current rates, which are typically higher, after three to five years. They were used by consumers who had better credit than subprime borrowers but whose credit was not good enough to qualify them for the best loans and lowest rates.
And many of those mortgages will start coming due toward the end of 2009, according to John McClain, deputy director of George Mason University’s Center for Regional Analysis.
“We’re seeing a lot of the exotic loans,” said Peyton Herbert, director of Foreclosure Services at HomeFree-USA, a nonprofit backed by the Department of Housing and Urban Development that advises homeowners having trouble paying their mortgages.
Carol Robinson, a counselor at HomeFree-USA, estimated that at least one-third of the organization’s clients are facing loan resets.
“Unfortunately, a lot are not even aware that their mortgages are due to reset,” she said. “We ask to see their note, and then it becomes evident that they have an adjustable-rate mortgage — it takes them by surprise.”
The region has some of the highest rates of Alt-A mortgages in the nation, according to the Federal Reserve Bank of New York: Maryland ranks third with 16.8 such loans per 1,000 owner-occupied houses, a December report found. D.C. homeowners have a 16.7 rate, while Virginia comes in at 12.9. California led the nation with 40.8.
That translates to about 57,000 Alt-A loans in Virginia, just more than 51,000 in Maryland and about 7,500 in the District in December 2008, according to the New York Fed. About 6 percent to 8 percent of those loans are expected to reset this year.
“There are pockets in every jurisdiction … that seem to have concentrations of these dangerous mortgages,” said Stephen Fuller, director of the Center for Regional Analysis at George Mason. “No area is totally immune to this.”
The hardest hit regions will be those with a large percentage of first-time homebuyers, who have relatively weak credit, such as Prince William County, Fuller said. But even wealthier counties such as Montgomery and Arlington will have problems.
The Prince William Association of Realtors estimates there will be 12,000 new foreclosures in the beleaguered county this year, which already has seen more than 11,000 foreclosures in the last two years, according to a recent issue of the Prince William Newsletter.
The county held a lottery Feb. 10 to provide county employees the opportunity to buy low-cost homes in the county, including foreclosed properties.
Teresa Dakon, who works in the county’s budget office, was one of more than 150 winners. She said she had been considering buying a house before the event, but had reservations because of the tough market.
“I was just very worried,” she said. “I wanted to be careful.”
Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business, said the country was going to see millions more foreclosures, and that ARMs will affect people with all types of mortgages: subprime, Alt-A and even primes.
“We’re going to see many more defaults” when adjustable-rate mortgages reset, he said, because homeowners won’t be able to make the higher payments.
According to Robinson, many people facing mortgage resets cannot take advantage of various services and assistance — unless their mortgages are due to reset within 30 days. She added that resets could result in monthly payment increases as high as $300.
Fuller said, though, that organizations would be better equipped to help homeowners as awareness increases — welcome news for those seeking help.
Indeed, the Prince William County Home Help program required participants to take a homeownership class through the Virginia Cooperative Extension Service or have completed one in the last year.
Dakon said the class helped her and “tells you things you probably wouldn’t know” about homeownership.
But the house’s cost will be crucial as well.
“One of the things to look at is to right-size the loan, meaning to bring property values down to where they should be, given today’s market,” Robinson said.
“That remains to be seen based on [President Barack Obama’s plan announced Wednesday],” she continued. “There was talk before he even took office, but that is something they hope will happen.”
Examiner Staff Writers Alan Suderman and Teddy Kahn contributed to this report.
