RISMEDIA, Oct. 18, 2007-(MCT)-Banks now own more than 800 houses in Rhode Island that were repossessed through foreclosure, setting the stage for what experts say could be a massive real-estate fire sale not seen here since the banking crisis of the early 1990s.
The number of bank-owned properties in the state has climbed about 380% as of June, compared with a year earlier, according to an analysis of mortgage loans by San Francisco-based LoanPerformance, a division of First American CoreLogic Inc.
The banks include giants such as Deutsche Bank National Trust, an arm of Germany’s biggest bank, which represents investors around the globe who bought securities backed by the mortgages.
Mark Zandi, chief economist at Economy.com, said that the longer a bank holds on to a foreclosed property, the more the maintenance costs add up, so “generally they want to get rid of it immediately.” The banks may hold properties a month or two if they think the market will ease up, Zandi said, but “at some point, they’re just going to cut prices and get out.”
The cut-and-run strategy worries state and local officials, who say that in areas with large numbers of bank-owned properties any “dumping” of real estate could further depress house values.
The vast majority of Rhode Island’s roughly 875 bank-owned houses — 78% — were bought with subprime mortgages, typically given to borrowers with spotty credit, according to LoanPerformance. (The numbers are estimates based on an analysis of loans for about 80% of the state’s mortgage market.)
“We’re at a critical juncture,” state General Treasurer Frank Caprio said at a recent meeting of the state housing agency. Caprio, who is a member of the board of directors of Rhode Island Housing, referred to a state map that showed red dots indicating foreclosures. “The banks are ready to take the red dots and bundle them and sell them” at discount, he said. “When they do it, Wall Street cheers them and bids up their stock prices,” Caprio said. “But of course it impacts people who live on that street because when they try to sell their house, there’s one of their houses next door.”
In Providence, banks repossessed about 235 houses as of June, according to the LoanPerformance data.
Providence Mayor David N. Cicilline said he is meeting with local representatives from the banks that are repossessing the properties to find alternatives. “We have to work quickly and now to begin to deal with the issue,” Cicilline said, “as well as prevent it from growing into a more-serious problem.”
Lenders generally begin foreclosure proceedings on mortgages that are three months delinquent. In Rhode Island, one in five subprime mortgages, on average, were more than 60 days delinquent as of June, according to LoanPerformance.
A study by the Center for Responsible Lending, a nonprofit research group based in North Carolina, predicts that one out of five subprime mortgages originated in 2005 and 2006 will wind up in foreclosure. Another wave of foreclosures is just around the corner, the group predicts, as interest rates on subprime mortgages taken out in 2006 ratchet up.
About 18% of all mortgages in Rhode Island are subprime, which means they carry higher interest rates. The rates often adjust a year or two into the mortgage, increasing the likelihood that borrowers will not be able to make their payments and the loan will default. Nationally, the share of subprime loans is just under 15%.
Rhode Island’s higher-than-average share of subprime mortgages — as high as 22% in 2005 — has driven up foreclosures. The state also has no law requiring that lenders seek a court order to foreclose, which means they can move more quickly to foreclose than in states such as Massachusetts, which require a court hearing.
Mark Van Noppen, managing director of The Armory Revival Co. of Providence, which has invested heavily in Providence’s residential redevelopment, said the problem could worsen if lenders become desperate to get rid of these properties and try to sell off blocks of foreclosed houses at below-market rates.
“This irresponsible dumping is exactly what happened in the 1990 credit-union/banking crisis,” Van Noppen said, “and it resulted in more disinvestment, a lot of abandonment and demolition, and delayed the recovery substantially.”
Caprio, the state treasurer, said that in 1994, Fleet Bank held a giant auction in Hartford, Conn., to sell its foreclosed properties in Rhode Island and other New England states at below-market rates.
Now, repossessed properties are owned by companies such as the one with a corporate parent based in Germany. “How much time and energy are they going to take worrying about Providence, Rhode Island,” Caprio said, “is an open question.”
But Richard J. August, a retired banker who was responsible for managing the portfolio of foreclosed residential real estate at Fleet Bank during the 1990s, said the size and location of the bank matters little to the outcome.
“It’s probably no more of a threat than it was 10 years ago,” August said, “when we had our local banks — Hospital Trust, Fleet, Citizens, and the savings and loans.”
Zandi, of Economy.com, said the housing market downturn in New England is the worst since the early 1990s, and “the problems are intensifying” as more subprime mortgages go into default.
State housing agencies and neighborhood groups around the country are calling upon mortgage lenders to work with borrowers to restructure their loans so people can keep their homes — an approach that, on its face, would benefit lenders, too. A house that is taken over by a bank, Zandi said, generally loses 20% to 30% of its value, after taking into account the cost of upkeep and lawyers fees. But so far, efforts to persuade lenders to modify the terms of these high-cost loans have been “going badly,” Zandi said.
Only 1% of all loans with scheduled interest-rate increases were modified during the first half of this year, according to a survey of 16 subprime mortgage servicers by Moody’s Investors Service.
Mortgages that a generation ago were held by a local bank are now packaged up as securities for global investors, and it’s their financial interests that are driving what happens to the loans. For example, an investor who is first in line to be repaid if the mortgages default, Zandi said, may feel it is better to let them fall into foreclosure, sell the properties at a discount, and cash out — rather than rework the loan and hope that borrower will pay it back.
Copyright © 2007, The Providence Journal, R.I.
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