FinancialAdvisor's College Class (FACC)

[FinancialAdvisor]

Desperate house buyers increase foreclosure risk

Desperate house buyers increase foreclosure risk
By Adam Shell, USA TODAY
Posted 8/16/2005 11:16 PM

The meteoric rise in home prices has been accompanied by a sharp shrinkage in the size of down payments made by cash-strapped buyers, a trend that could portend a spike in future foreclosures, new research shows.

Nearly four out of 10 (38.1%) home buyers who bought houses in the first half of 2005 put down less than 5% of the purchase price, up from 30.6% in 2000, according to a study released Tuesday by SMR Research, a Hackettstown, N.J., firm that tracks mortgage debt. Nearly half (49.9%) of buyers put down less than 10%, up from 44.8% in 2000.

Another potential red flag is the growing use of so-called piggyback loans.

Traditionally, home buyers who did not come up with a 20% down payment had to pay an added cost each month for private mortgage insurance. But recently, more strapped borrowers are taking out two loans — one for 80% of the purchase price and a second, or piggyback, loan in the form of a line of credit or home equity loan. So far this year, nearly half (48.2%) of buyers used piggybacks, up sharply from 19.9% in 2001.

The statistics suggest that many home buyers are stretching their budgets well beyond their means. The risk is that recent buyers have such minuscule equity in their homes that if prices fall, they could owe more on their mortgages than their homes are worth.

The National Association of Realtors says the median price of an existing home rose 13.6% to $208,500 from the second quarter of 2004 to the second quarter of 2005.

"As home prices rise, people can't afford them," says Stuart Feldstein, president of SMR. The study, he adds, highlights the fact that most people haven't saved enough money to buy ever-more-expensive homes. Home buyers are "using much more leverage," he says.

Americans' ability to take on massive mortgage debt has been fueled by the availability of "exotic" mortgages, such as interest-only loans and adjustable-rate mortgages that provide borrowers with a lower monthly payment for a short period of time, says Dean Baker, co-director at the Center for Economic and Policy Research.

"Home prices are going through the roof, forcing people to turn to exotic loans and unorthodox financing," says Baker. "These people have no room for error."

SMR warned that the risk of foreclosures rises when borrowers take out loans in excess of 80% of a home's purchase price. While rising prices have reduced some of that risk, the "future foreclosure risk is rising," SMR claims.


LINK: http://www.usatoday.com/money/perfi/housing/2005-08-16-megamortgages-usat_x.htm