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Default: The view behind the numbers

By Andrew Moore / The Bulletin

Published: July 13. 2008 4:00AM PST

Though their number may be skyrocketing in Deschutes County, notices of default represent just a fraction of outstanding loans. Few lead to foreclosures and more of them to sales, but often at reduced rates. Nonetheless, the consequences have proved to be far-reaching for some in the area.

When the Deschutes County Clerk’s Office closed June 30, an ominous milestone was reached. Through the first half of the year, 788 notices of default — a document initiating foreclosure proceedings — were filed with the county.

The number is significant, considering 590 of them were filed in all of 2007, and just 221 in 2006.

The amount is still a small percentage of all loans outstanding. But the numbers behind the notices of default tell a lot about the rise and fall of the housing bubble.

Of those notices of default filed in 2008, more than 75 percent are for mortgages originated in 2006 and 2007, coinciding with the local real estate boom, according to an analysis by The Bulletin.

That doesn’t surprise Tim Duy, an economist with the University of Oregon. Duy said delinquent borrowers caught up in the frenzy either bought too much house or were stuck with unrealistic loan terms that became inescapable as the market declined.

“A lot of people expected they would be able to make quick sales, or a lot of people bought at high rates and with zero down, on the expectation they would build equity and (refinance at a later date) to get a lower mortgage rate,” Duy said.

Also, borrowers who took out loans in 2006-07 with an initial fixed rate that later switches to an adjustable rate are caught in a similar predicament, he said. Unable to refinance and get a lower interest rate, and with fuel and food prices driving higher, “something has to give.”

On a map, the notices of default are spread throughout the county. It’s just as far-reaching in Bend, from the city’s tonier west-side neighborhoods, such as Broken Top and Awbrey Butte, to many of the newer subdivisions on the city’s east and south sides that sprung up during the housing boom.

A notice of default doesn’t always portend foreclosure — Michael Hinton, president of the Central Oregon chapter of the Oregon Association of Mortgage Professionals, estimates only 25 percent of homes in default end up on the courthouse steps for auction — but the implication is clear.

“I don’t know that anyone alive has seen this kind of correction,” said Steve Robertson, president of Abito, a Bend-based homebuilder. Robertson’s company intended to build roughly 200 homes on the old Bend Trap Club property — and spent $5 million on lead removal — but put the property up for sale last year.

“Whenever the good times roll, since everyone participates, and in real estate that means mortgage people, banks, Realtors, builders, developers, all the trades, you even have the person that reaps the biggest reward, the homebuyer, because, my God, the house I bought yesterday for a dollar is now worth two … with all of that good mojo, nobody wants to see that end. So you just turn a blind eye to the good times people are enjoying, and we see the results.”

Everyone’s to blame for the real estate downturn and everyone loses, said Robertson. Lost jobs and lost revenue have a ripple effect throughout the local economy, he added.

Going all in

A notice of default is generally filed by a lender after a borrower defaults on his or her loan obligations, generally after missing two or three payments. A borrower can bring the loan current, pay the loan in full or work with a lender to sell the home for less than the amount owed, with the agreement that the bank agrees to swallow the loss. This process is called a short sale.

If a remedy isn’t reached, the lender will put the home up for auction approximately 90 days after filing the notice of default. If no one bids on the home, it is foreclosed on by the lender, who then assumes ownership.

The percentage of U.S. loans in some stage of delinquency is small. According to the Mortgage Bankers Association, the seasonally adjusted delinquency rate for mortgage loans on one- to four-unit residential properties stood at 6.35 percent of all loans outstanding at the end of the first quarter of 2008, and the percentage of loans in the foreclosure process was 2.47 percent. Those figures are 31.2 percent and 92.9 percent increases, respectively, over first quarter 2007.

Bend resident Brandon Reynolds lives in a small housing development off Brosterhous Road, across from the abandoned trap club. Next to his home is a vacant house whose owner was issued a notice of default this year. Its lawn is dead and a dandelion blooms in the middle of the driveway. A “For Sale” sign lies on the ground in front of the small one-story home. Another home two doors down from Reynolds’ also is vacant, its lawn brown, a notice of default posted with red tape on its door.

“It’s difficult, just to see them sit and depreciate my home,” Reynolds said. “We put lots of time and energy and effort into our yards and to see (the vacant homes) turn ugly is difficult.”

Across town, Bend builder Cary Martinez has been issued nine notices of default this year by various lenders.

It’s a far cry from earlier in the decade, when Martinez formed a construction company, Abacus GC, and went to work building homes, including the modern townhomes on Newport Avenue in Bend. Riding the real estate boom, he said, was “wild” and “amazing.”

But the bubble popped and ever-increasing home valuations ceased. Martinez decided it was smarter to walk away from his projects rather than struggle to keep them afloat because he believes it will be two to three years before they financially make sense again.

Martinez said he’ll likely file for bankruptcy in the near future and has even stopped paying the loan on his primary residence, with the hope it’ll give him some leverage to refinance his loan with his lender. But despite his losses, Martinez says he has no plans to leave real estate. He chalks up the experience to an important lesson.

“(Real estate) started out slow for me as far as my involvement and with the gains we saw we got more committed and really weren’t prepared for any downturn because we hadn’t experienced it before,” he said. “I had an idea in my head that this could continue on and on. Next time around, I’ll be a lot smarter, but I went all in and risked everything I gained and now I’m at risk of losing all my gains from the last 10 years, and now I am starting over.”

Martinez doesn’t blame anyone for his predicament except himself.

Nor does Hinton, who also is president of HSI Mortgage in Bend, blame any one party for the region’s current housing decline. From Hinton’s perspective, everyone from Main Street to Wall Street is at fault.

“I would distance myself from anyone that tries to point the finger at any one area,” Hinton said. “The customers signed the notes, they understood the risk, and people made bad decisions. And then there were people that were supposed to be geniuses of the financial system, the pillars of the nation’s banking system, that made really bad decisions also, so both ends of the spectrum need to take responsibility.”

An analysis of the loans referenced in the notices of defaults filed through June 30 in Deschutes County shows many were underwritten by lenders that have gone out of business or stopped lending, according to the Mortgage Lender Implode-O-Meter, an online site that tracks defunct lenders.

Subprime mortgages, or mortgages made to risky, less-than-prime borrowers, and which became a buzzword nationally when the housing decline began last year, do not make up a major part of the lending market in Central Oregon, Hinton said.

However, Hinton said lax underwriting standards, in general, helped fuel the current crisis but so did a number of other factors that fed the market frenzy. One of its sparks, Hinton said, was the 1997 change in the nation’s tax code that allowed homeowners to avoid capital gains tax when they sold their primary residence, as long as they had lived in the home at least two years. Previously, the tax could only be avoided if the profit from the sale of a home was used to buy a more expensive home within two years.

That change helped create a speculative mind-set, Hinton said. Investors could purchase a home, wait two years and sell it at a higher price thanks to steady rates of annual price appreciation. In turn, that price appreciation made it easy for lenders to lend, Hinton said, because rising values meant it was easier for borrowers to sell and get out of their loans. Rising property values cover up a lot of sins, he said.

“I think there’s a lot of speculation in that pile of defaults, that’s my gut feeling, because there was so much of that going on,” Hinton added. “People were looking at real estate as a short-term investment, which is never a good idea.”

Hinton said that as property values decline, foreclosures follow, as it becomes harder for borrowers to get out from under their loans. The opposite is true when property values rise, as it becomes easier for borrowers to sell.

In June, the median sales price and sales price per square foot in Bend both rose, according to the Bratton Report released last week.

And there was more sales activity throughout most of the region, the report showed.

How the area ranks

RealtyTrac, an Irvine, Calif.-based online marketer of foreclosed properties, reported Thursday that 1.4 million foreclosure filings of all types, including notices of default, were filed in the United States in the first six months of 2008. That represents a 56 percent increase from a year ago, the report said.

Oregon ranked 17th in the nation for most foreclosure activity as of June 2008, according to RealtyTrac. That equates to one foreclosure proceeding for every 775 housing units. In Nevada, the state with the most foreclosure activity, one in every 122 housing units is affected, according to RealtyTrac. The national number is one in every 483 homes.

Deschutes County ranked first in the state for foreclosure activity as of June 2008, with one foreclosure proceeding for every 414 homes, according to RealtyTrac.

RealtyTrac use documents filed in all three phases of foreclosure — default, auction and listings of Real Estate Owned properties, which are properties that have been repossessed by a lender — to compile its reports.

A notice of default or foreclosure doesn’t always mean ill-timed speculative behavior is at fault, as genuine hardships can force families from their homes. Even in the best of times, said the University of Oregon’s Duy, there is a steady series of foreclosures.

Duy said blame for the recent decline of real estate can be equally spread around, from investors “willing to put money anywhere without due diligence,” to mortgage originators capitalizing on the trend, to real estate agents who “have an incentive to convince people that if they don’t buy now they will never be able to afford a house,” to homeowners that took out loans incompatible with their long-term financial abilities.

Duy also said “cheerleading,” or steady praise for the housing market during its boom, also did a disservice to the community.

For Abito’s Robertson, the market’s current condition is the result of one thing: greed. And he’s surprised by what it’s wrought.

“Anyone that tells you that they accurately predicted the depths of this would be misleading,” Robertson said. “No one I’ve talked to in the Bend development community would have told you even a year ago that things would continue to decelerate at this pace. This is a bit of a shock to everybody.”

Help coming?

On Friday, the Senate approved a package that would, among other things, authorize the Federal Housing Administration to write up to $300 billion in new fixed-rate loans for struggling homeowners facing foreclosure. Some in Congress oppose the idea, saying it rewards bad behavior. President Bush has threatened to veto the bill.

Andrew Moore can be reached at 541-617-7820 or amoore@bendbulletin.com.

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