The Foundation of Home Sales Has Been Weakened By The Sub-Prime Mess
Wednesday, July 04, 2007PAUL KANGAS: As Suzanne noted, Wall Street has grown concerned in recent months about continued weakness in housing sales. One of the main worries is that the rising number of defaults on sub-prime mortgages could put even more homes on the market. And as Stephanie Dhue reports, that's already happening in some places.
STEPHANIE DHUE: One out of three mortgages in Prince George's County, Maryland, made in 2005 were sub-prime loans. The county now has the highest foreclosure rate in the Washington, D.C. area.
TYRONE WHITBY, NATIONAL ASSOCIATION OF REAL ESTATE BROKERS: There's a house right next door. You can see another "For Sale" sign right down the street.
DHUE: Tyrone Whitby has developed a specialty selling distressed properties.
TYRONE WHITBY: It makes it hard for you to... To kind of hold steady on your price.
DHUE: He sees firsthand what happens when holders of subprime loans can't make their payments.
TYRONE WHITBY: I would say probably three out of every ten sellers that we talk to that want to sell, they're upside-down in their properties. So, in other words, they owe more on their property, including their real estate-related expenses, than they can sell the property for.
DHUE: It's a familiar story around the country: Rising interest rates and falling property values have increased loan defaults. Subprime loans are typically made to people with poor credit or no proof of income. One popular subprime product, the 2/28 loan, offered a low "teaser" rate that adjusted after two years-- meaning holders of those loans from 2005 now face sharply higher payments. Tommie Thompson runs the housing department in Prince George's County. Like other areas around the country, his office has an outreach campaign to help people avoid foreclosure.
TOMMIE THOMPSON, PRINCE GEORGE'S COUNTY DEPT. OF HOUSING: We've got a foreclosure crisis center for people that are in trouble already, and they can bring their loan documents in, and we've got trained professionals that can work through and just see if there's any options that are available to them.
DHUE: An estimated trillion-dollars' worth of adjustable rate loans are scheduled to reset in the next year. Union Bank of California economist Keitaro Matsuda says that will pressure the housing market.
KEITARO MATSUDA, SENIOR ECONOMIST, UNION BANK OF CALIFORNIA: We are probably looking for bottom over the next 12 months to 18 months. So until all that resetting will happen, and see what kind of response we get from the borrowers, we don't really know the full extent of the problems. So we definitely expect things to get worse before things get better.
DHUE: Problems from subprime loans have started to spread to the financial sector, sinking new century and more than 80 subprime lenders. Recently, Bear Stearns bailed out a hedge fund that was heavily invested in subprime mortgages packaged as collateral debt obligations, or CDOs. I.S.I. analyst Andy Laperriere says Bear Stearns' action could foreshadow trouble ahead.
ANDY LAPERRIERE , ANALYST, I.S.I GROUP: If the CDOs go down in value and there's less demand for CDOs, then there's less demand for the underlying collateral which make up the CDOs, which, in particular, could be mortgages. It could also be these private equity deals that we're seeing that end up getting packaged into CDOs.
DHUE: Bank regulators have issued new warnings about subprime loans, urging lenders qualify borrowers at the fully adjusted rates of their loans and verify income. Analysts say that's likely to make credit even tighter and further squeeze home prices. Stephanie Dhue, Nightly Business Report, Washington.
