Home Basics
Popular Loans Gamble On Home Value Rising
Wednesday, January 01, 2003
Michael E. Kanell and Diane Glass
The Atlanta Journal-Constitution
Two hot borrowing trends in Atlanta home finance, cash-out refinancing and interest-only home loans, are premised on a steady increase in housing values.
The question now giving pause to some area economists: What if that doesn't continue? Are Atlantans overextended?
"The danger points are there," said Rajeev Dhawan, director of the economic forecasting center at Georgia State University. "If it weren't for low interest rates, we could all be in a lot of trouble."
Housing optimists say as long as home values continue to rise, there's nothing to worry about. And median housing prices increased 5 percent metrowide last year, according to the AJC 2003 Home Sales Report.
But last year's price rise pales in comparison to the double-digit increases of years past. And signs of cooling continue, particularly in less desirable areas and in some parts of the high-end home market.
Prices don't even have to fall. Throw in a troubled economy and Atlantans' love affair with debt, and beads of sweat form.
The historically low interest rates and looser lending standards that have helped push homeownership to an all-time high have also put more Atlanta homeowners at risk of losing their homes than ever before.
One reason is that many homeowners own less of their house than ever before.
In the last decade, mortgage debt nationally has jumped from 59 percent of disposable income to 74 percent, according to the Federal Reserve.
"One of the top five reasons for getting into financial trouble is that people buy too much house," said April Lewis of Consolidated Credit Counseling Services, which offers consumers help in getting out of debt.
Interest-only loans can enable that practice.
Twenty years ago, it was difficult to get a mortgage for more than 90 percent of the value of your home. Today, homebuyers not making a significant down payment are usually required to purchase mortgage insurance, which provides an alternative safety net for the lender. Thanks to that safety net, it is not uncommon for homeowners to obtain what amounts to a 100 percent mortgage, or higher.
With an interest-only loan, monthly payments may be 30 percent to 50 percent lower than a conventional home loan, making it possible to buy more house.
"Five years ago, interest-only loans made up about 10 percent of our total mortgage volume, now they make up about 40 to 45 percent," said Mark Scott, vice president of marketing at HomeBanc.
The potential problem with interest-only loans is that the homeowner is betting heavily on the value of the home increasing. If it doesn't, the homeowner winds up with little or no equity and could end up owing money when the home is sold.
Many Atlantans also build larger debt burdens because they use their homes as a fall-back source of cash.
Seventy-three percent of recent loans were refinancing -- the highest ever, said Judy Levine, senior account executive at Bank of North Georgia Mortgage. Of the refinancings, 35 percent were cash-outs, where the borrower increases the value of the mortgage and takes the difference in cash.
"I am seeing more cash-out refinancing -- people are either consolidating debt or doing home improvement," Levine said.
Mortgage lenders often sell cash-out refinancing as a way to escape high credit card interest rates and consolidate debt in one low monthly payment. But the fact is, Atlantans' total credit card debt hasn't decreased. Last year's growth rate was down from the high single-digit rates of years past, but credit card debt is still increasing -- just at a slower rate.
The average credit card balance carried by Atlantans was unchanged in 2002 from 2001, averaging around $4,600 per person, according to Economy.com, a financial information services company. That continues to be 10 percent to 15 percent higher than the national average.
"Consumers should know that using home equity to pay off high credit card debts is not an invitation to run the credit cards back up," said Scott, from HomeBanc. "If that happens, then they'll have high-interest credit card debt and have already borrowed against their home equity, leaving them little safety net."
There are signs that net is shrinking here.
In January, Atlanta's percentage of seriously delinquent prime loans ranked 17th on a list of 87 U.S. cities, according to Loan Performance, a mortgage research company.
Late last year, Atlanta was ranked as the nation's riskiest housing market by the Federal Deposit Insurance Corporation.
Consumer Credit Counseling Service, a not-for-profit agency that aims to help debtors avoid disaster, reports its Atlanta housing counseling sessions were up 67 percent in 2002, of which more than 63 percent were mortgage default delinquency counseling sessions, according to representative Todd Mark.
Every county in metro Atlanta has experienced a rise in personal bankruptcies in the past two years. The biggest percentage surge was in Paulding County, up 67 percent since 2000.
"I can't remember a time when so many people with questionable credit were able to get single-digit mortgage rates as they have in the last 18 months," said Consumer Credit Counseling Service President Suzanne Boas. Formula falls apart Curtis Kittrell was one of those for whom the math wasn't working out.
Kittrell bought the family's Lawrenceville house in 1999. He refinanced in the fall of 2001, when he and his wife were both working. The new mortgage was $148,000 and he took out about $6,000.
But then the formula began to fall apart.
For a few months, he was forced to switch jobs, taking a serious pay cut. Then, for five months, he had no job. "The expenses exceeded the income," he said. "I began to fall behind."
Kittrell thought he had planned well, making sure he had a cushion in reserve, just in case.
But by spring, he was missing mortgage payments.
He and his wife tried rearranging their finances, cutting back on nonnecessities. They managed to get caught up within three months. The big difference: His wife got another job, and her employer gave her an advance.
But the deal called for her to pay that money back in three months. Through a stress-filled spring and summer, the Kittrells confronted a series of unexpected and unpleasant expenses. The air conditioning quit: $2,000. Emergency dental work: $800. Car problems: $600.
Suddenly, Kittrell was five months behind. He received a warning from his lender. Finally, he went to the Consumer Credit Counseling Service. They came up with a plan the lender could accept that would catch them up by August.
But the solution is no slam-dunk. The Kittrells must pay $900 a month extra. To make that, they can't even think about dining out "or anything extracurricular," he said.
They are managing to make the payments, he said. "So far."
