Lenders Are Banking On New Loans To Move Foreclosures
Monday, January 28, 2008SUSIE GHARIB: As the housing crisis deepens, some of the nation's biggest lenders are becoming big property owners. The rise in foreclosures is placing thousands of homes into the hands of banks. But as Diane Eastabrook reports, lenders are marketing new loans that could help put those homes back in the hands of consumers.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Thirty-year- old Robyn Sykes is settling into her first home. The single mother recently purchased this 110-year-old row house on Chicago's west side for $230,000.
ROBYN SYKES, HOMEOWNER: We carpeted the second floor and there are three bedrooms up here.
EASTABROOK: But the property, which had been foreclosed, needed improvement. So Sykes got a mortgage renovation loan, which allowed her to increase her loan amount by $35,000. She was able to add a new bathroom, a wood floor in the kitchen and make other minor improvements. Sykes says without the mortgage renovation loan, she never would have considered a foreclosed property.
SYKES: Just because I'm a first-time homeowner and I had no clue what problems would have already been there, so by being a foreclosure there is nobody that you can call to say, did you have problems with this or that.
EASTABROOK: A credit crisis, a struggling economy and the upward resetting of interest rates on adjustable rate mortgages are spurring home foreclosures in the U.S. The Federal Deposit Insurance Corporation says the amount of real estate owned property or property held by lenders increased 76 percent in the third quarter of 2007 versus the same period the year before. Real estate-owned property can be a huge expense for banks. There are property taxes and maintenance costs that have to be paid. And in today's real estate market there is a real risk that the house could depreciate in value. Wells Fargo home mortgage foreclosed on this 100-year-old home in Oak Park, Illinois last fall.
JOHN SWAY, NATIONAL RENOVATION MGR., WELLS FARGO HOME MORTGAGE: You will see that the ceiling and some of the areas needs work also.
EASTABROOK: John Sway, Wells Fargo's national renovation manager, thinks the house will fetch less than the $680,000 price it sold for a few years ago. He also estimates the home will need at least $60,000 in repairs, including a new roof, new plaster on the ceilings and new molding. Sway says Wells Fargo can make more money selling the home to an owner occupant who gets a mortgage renovation loan, than to an investor who is likely to pay cash.
SWAY: What we're doing is we're increasing the pool of buyers, so we're getting more buyers to look at a property, so we may end up selling it for a couple percentage points higher than we would to an investor. And for us also, we are a responsible lender and we want to get owner occupants in the property. We want to stabilize the neighborhoods and better the neighborhoods.
EASTABROOK: But some experts aren't sure mortgage renovation loans will do much to increase the value of low-income neighborhoods where foreclosures are rampant. Jim Wheaton, deputy director of Neighborhood Housing Services of Chicago, says some mortgage renovation plans carry loan caps. That is why he's doubtful home owners would have enough money to really increase the value of their properties.
JIM WHEATON, DEPUTY DIRECTOR, NEIGHBORHOOD HOUSING SERVICES OF CHICAGO: You know, $25,000 or $30,000 sounds like a lot of money, but when you start talking about home improvements and construction, it doesn't go very far.
EASTABROOK: Still, Robyn Sykes says her mortgage renovation loan allowed her to buy a better property at a lower price. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Chicago.
