Crunching the credit numbers
The subprime mortgage mess sweeping the country won’t overtake Baton Rouge’s robust housing market, which will likely begin feeling the rumblings of a credit crunch and increasing foreclosures this year.
“The sky isn’t falling. We’re still real affordable compared to the rest of the nation,” says Mike Anderson, president of the Louisiana Mortgage Lenders Association in Baton Rouge. “We’ll still sell homes, but the bottom line is not as many people will be approved for loans.”
The credit crunch—or what Anderson calls a “huge paradigm shift” in lending observed in recent weeks—was ignited by mounting foreclosures nationally with subprime borrowers defaulting on mortgages. As the interest on their adjustable rate mortgages (ARMs) increases, they’re finding themselves unable to afford their monthly payment.
With the credit crunch, they can’t qualify for refinancing and often are unable to sell their house because they typically owe more than it’s worth in a market with falling house prices, or the market is too glutted to find a buyer as the housing bubble bursts.
Anderson and area real estate agents agree foreclosures are rising in the Baton Rouge area, but disagree over the impact.
“The people who know they have good credit are not worried about it,” Anderson says. “But it’ll definitely make an impression on those who think they may have credit issues.”
People with good credit will still be able to get loans, but there will be fewer buyers, he says. Anyone with a credit score in the mid- to high 500s has little or no chance of getting a loan, especially a zero-down loan.
“I think you will see credit tight another year,” Anderson says. “I think the problem and industry will correct itself. I don’t think it’s as big a catastrophe as it’s being made to be. It won’t be as easy to get a home loan as it used to be, but to be honest it was a little too easy.”
Rising foreclosures won’t signal a hard landing for Baton Rouge, he says. The area’s healthy market—and Louisianans’ typically conservative preference for 30-year fixed mortgages—will cushion the blow from the sub-prime meltdown.
But Bonnie Boyter, an agent with Coldwell Mackey Co. in Baton Rouge who handles Fannie Mae REOs (bank repossessed properties) says she’s hearing a heavy wave of foreclosures is anticipated by year-end. Boyter, who has been an agent for 36 years, says it could equal the one that hit with the savings and loans crisis in the 1980s.
“We’re looking at it flattening to a terrible slowdown,” Boyter says of the local market. While she could not estimate the number of anticipated foreclosures, she says, “It has gone up a great percentage”—so much so that her company has added a Web page solely dedicated to them. “I do not see relief or let up in the foreclosures until well into 2008. It will be 2009 before we come out of this foreclosure thing, before the housing industry can right itself.”
Boyter also says more foreclosures will hurt house prices as more buyers expect to buy these properties at bargain prices. Despite the forecast, Boyter also readily says the Baton Rouge market will rebound. “We look down the road to a real good, strong market in Baton Rouge.”
Jeff Furniss, who handles REOs for Coldwell Banker One in Baton Rouge, says the situation is difficult to gauge when his foreclosures are still half of what they were before hurricanes Katrina and Rita. Furniss says he handled nearly 140 a month before the 2005 storms.
“We still are in one of the best real estate markets around,” Furniss says, optimistic about the market ahead. But he also reports seeing more defaults on higher-end properties in the $350,000 to $750,000 range, which he also attributes to ARMs and poor judgment by lenders. “They’ve been giving loans to almost anybody with a pulse.”
Areas with mostly “first-time, working-class buyers with credit glitches” in the $150,000 or less price range will likely be hardest hit by foreclosures, he says. Because of bad lending, Furniss predicts more property will sit on the market soon and eventually prices will drop in certain areas for one to two years. Soon after, he predicts a slow 2% to 3% yearly growth in appreciation instead of the 6% to 10% experienced in the last two years.
Dianne Pellerin, an agent with C.J. Brown Realtors and a 24-year veteran in REOs, says their REO sales have increased substantially. Pellerin also blames ARMs for the increase and buyers not setting up escrows to cover taxes.
“The sky is not falling,” Pellerin says, echoing Anderson. “It’s not gloom and doom in Louisiana. It’s going to be fine. I’m no busier than I was before Katrina, but I expect some increased activity from subprime in the next five years. Louisiana is not one of the worst states for repos. We are fine.”
While easy loans are gone, Pellerin also predicts the Baton Rouge market will turn itself around.
“It may take things longer to sell, but I don’t think it’ll hurt the value,” she says of house prices. “REOs aren’t selling at bargain prices because they’re priced pretty well to the market.
“They’re good deals, but not bargain basement yet because they’re selling without us having to give them away. Investors who couldn’t buy a year ago have it to buy now.”
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