Mortgage defaults spread as even 'safe' borrowers falter

Larry Doss Monday, July 13, 2009

Mortgage defaults spread as even ’safe’ borrowers falter

By Jim Wasserman and Dale Kasler

The mortgage default crisis has an ominous new face. It’s your neighbor with a traditional fixed-rate loan.

No longer is the real estate bust simply the result of exotic, subprime loans that doubled payments and blew up in homeowners’ faces. As the Sacramento economy buckles, even the safest mortgages have become part of a new wave of loan defaults, experts say.

With capital-area job losses reaching 45,000 in the past year and unemployment at 11.1 percent, lenders, bankruptcy attorneys and debt counselors all say they’re seeing rising delinquencies among prime borrowers with fixed-rate loans and good credit. Many of those slipping into trouble are state workers, the mainstay of Sacramento’s economy.

"The tide has definitely shifted," said Pam Canada, executive director of the Neighborworks Homeownership Center of Sacramento, a nonprofit loan counseling firm. "We’re seeing more people with a loss of income."

Prime fixed-rate mortgages, with the most favorable interest rates and 15-, 20- or 30-year terms that guarantee the same monthly payment for the life of the loan, have long been the bulwark of American homeownership.

There are 3.3 million of them in California – 56 percent of all mortgages. But nearly 4 percent were delinquent in the first quarter, according to the Mortgage Bankers Association. That number was less than 1 percent two years ago, when the default crisis was dominated by subprime loans.

The MBA says layoffs are now hitting more educated borrowers.

"There tends to be a higher correlation there with having a fixed-rate mortgage," said Jay Brinkmann, chief economist of the lender trade group.

It’s not just the layoffs creating trouble for traditionally safe loans. Many area workers have had to absorb wage cuts. Others who lost jobs have found new jobs that pay less. Or they have found only part-time work. Many workers who depend on overtime pay have also seen it disappear or dwindle.

Finally, in a capital region defined by a massive state government work force, furloughs have grown to three days monthly, approximating a 14 percent salary cut. Gov. Arnold Schwarzenegger is proposing still more pay cuts for an educated population that’s increasingly showing up at nonprofit mortgage counseling centers.

This upheaval has had a ripple effect on small-business owners like Michael and Winnie Kyalwazi, owners of Cafe Le Monde at McClellan Business Park. They’ve fallen behind on their fixed-rate house payments because business is down 25 to 30 percent, said Michael Kyalwazi.

"This is a short setback, the way I look at it," he said. "We’re viable. We just need some breathing room."

It’s a familiar sentiment.

"Most want to pay, but they can’t because they’re underemployed and have cuts in income and cuts in commissions," said Paul Rigdon, vice president for lending at Sacramento’s SAFE Credit Union. "We’re seeing all kinds of income-related problems."

As the newest turn in a housing crisis that has seen 40,000 area foreclosures and heartbreak in thousands of other homes, trouble for prime borrowers is one more obstacle to a housing recovery any time soon.

Lending-industry officials say it’s harder to restructure loans for jobless people who can barely afford any payment. Worse, economists say rising defaults and the foreclosures to come among these borrowers are likely to persist long after unemployment peaks sometime next year.

"Foreclosures and delinquencies have a long tail, and we will see that continue for several quarters after a turnaround in unemployment," said the MBA’s Brinkmann.

Forecasters at Stockton’s University of the Pacific predict unemployment in the capital region will peak late next year at 12.3 percent – and remain in double digits through 2011. If so, problems with prime loans are likely to linger in a region having a hard time catching a break.

Already in the foreclosure process is Ron McClure of Roseville. He bought a $600,000 house at Sun City Roseville in 2003, using a prime, fixed-rate loan that cost him $3,200 a month.

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