With NJ raising sales taxes, property taxes, "stealth" taxes like water taxes and now even considering adding higher income taxes to the mix while at the same time Corzine's administration is considering selling state assets like the NJ Turnpike, any wonder the following is happening?

Home Mortgage Foreclosures Soar

Bidders at an auction of foreclosed housing; many lenders lowered loan-approval standards during the boom.

Borrowing costs and a weak housing market take an increasing toll
-Evelyn Lee, NJBIZ Staff, 1/1/2007

Rising foreclosure rates in New Jersey are likely to remain on the upswing in 2007, but experts say the odds are slim that the increases will signal a crisis for the state’s housing market or its economy.

For the first 11 months of 2006, home mortgage foreclosures in the state were 25,472, up 78 percent from 14,311 for all of 2005, according to Foreclosures.com, a real estate advisory firm in Sacramento, Calif.

Big increases occurred throughout the state. In affluent Bergen County, foreclosures jumped more than tenfold, from 104 in 2005 to 1,367 last year. In Monmouth County, home to many shore communities, foreclosures rose from 883 in 2005 to 1,533 last year.

An increase in foreclosure rates tends to be symptomatic of an economic downturn, when homeowners lose jobs and therefore lack the income to pay their mortgages, says Jeffrey Otteau, president of Otteau Valuation Group, a real estate appraisal firm in East Brunswick.
But this doesn’t apply to current circumstances, says Joel Naroff, chief economist at Cherry Hill-based Commerce Bank. “It’s not as if the New Jersey economy is falling apart, and unemployment rates are rising, and people are losing their jobs,” says Naroff. “That’s just not happening.”

Instead, rising interest rates that have increased housing payments for adjustable-rate mortgage (ARM) holders, together with a weak housing market, have driven up foreclosure activity, Otteau says. Foreclosures are less common in healthy market conditions, he says, because homeowners are able to sell their homes quickly if they fall behind in their mortgage payments.

“But when you have people with an affordability issue on top of the fact that houses are taking a very long time to sell, that’s when the foreclosure market spikes,” he says.

These factors put subprime borrowers at particular risk. Such homebuyers may have relatively low credit ratings and therefore turn to nontraditional loan instruments like interest-only mortgages, or pay-option ARMs that let borrowers choose how large a payment to make.
Such instruments have been available for years and have become more popular recently, says E. Robert Levy, executive director of the New Jersey affiliate of the Mortgage Bankers Association (MBA) in Springfield. “Part of it was the rising cost of housing,” says Levy. “These loans made a house affordable for somebody that wouldn’t otherwise be able to buy it.”

But nontraditional mortgages can ultimately become more costly, according to Otteau. “In order for borrowers to be able to get a loan, they need to pay a higher interest rate than someone who has a good credit score,” he says. On top of that, “In the subprime market, the interest rate reset is much more dramatic than in the prime mortgage market.” For example, while the prime mortgage rate from two years ago, 5.5 percent, is resetting today to 6.5 percent, subprime loans from two years ago that originated at 7 percent are now resetting at 11 and 12 percent, according to Otteau.

With the housing slowdown, subprime borrowers increasingly feel the pinch. “Because of the imaginative mortgages kicking in, we’re now seeing foreclosures where we hadn’t ever seen them before,” says Naroff. “A lot of these mortgages are resetting, and as they reset, people are finding it difficult to either pay the higher reset levels or remortgage, especially in light of a housing market that’s softening.”

According to MBA’s National Delinquency Survey for the third quarter of 2006, 4.68 percent of subprime ARMs in New Jersey were in foreclosure, compared with 0.75 percent for prime ARMs.

Subprime foreclosures are clearly on the increase, according to the Center for Responsible Lending in Durham, N.C. It reported last month that subprime loans that originated last year in New Jersey have a projected lifetime foreclosure rate of 19.6 percent, compared with a projected 7.6 percent rate for such loans made between 1998 and 2001.

Mortgage lenders helped to proliferate the use of creative mortgages by relaxing their loan approval standards during the housing boom, Otteau says. Many lenders assumed that housing appreciation would continue, so they could recover the money that was borrowed if a loan went into default. “Mortgage lenders became very aggressive in trying to get their share of the market or increase their share of the market,” he says.

Amid concerns about the credit quality of loans that originated in recent years, mortgage lenders have become more cautious, says Keith Gumbinger, vice president of HSH Associates, a mortgage information publisher in Pompton Plains. “We could experience some moderation in the availability of mortgage credit,” says Gumbinger. “The people who are least able to qualify in the first place might not find credit conditions as welcoming for them.”

Most experts do not currently see the rise in delinquencies and foreclosures as cause for alarm. “The foreclosure inventory rate has increased somewhat from the very lowest point, but relative to where we’ve been in recent history, it’s still quite low,” says Mike Fratantoni, senior economist at the MBA in Washington, D.C. For the third quarter of 2006, less than 1 percent of the 1.2 million loans the organization tracks in New Jersey were in the foreclosure process, compared with 1.86 percent of loans during the recession in 2001.

“That the number of foreclosures is increasing was to be expected, because we were at an incredible low point here in terms of the amount of foreclosure activity in the market, so it could only go up,” says Otteau. The current numbers, he adds, are less than those in previous periods of high foreclosure rates, including the late 1980s and early 1990s, and the late 1970s and early 1980s.