Investors key in foreclosure puzzle

By: CHRIS BAGLEY - Staff Writer | Sunday, September 9, 2007 12:20 AM PDT ∞

Families losing their homes to foreclosure have drawn the attention of real estate agents, economists and news media, but real estate investors' large role in the housing-market meltdown has gone virtually unnoticed.

In fact, investors are defaulting on mortgages at an alarming rate that appears to exceed the rate among owner-occupants.

Investors accounted for 15 percent of all high-risk loans that were in default June 30, even though they made up just 7 percent of homebuyers who had taken out subprime loans two years earlier, according to the Mortgage Bankers Association, an organization representing lenders nationwide. The discrepancy that suggests investors are as much as twice as likely to stop making payments than owner-occupants are.

"People who are having trouble making mortgage payments, they'll do almost anything to hang on to their homes," said Delores Conway, an economist at USC's Lusk Center for Real Estate.

Neighbors hope they do. Foreclosures typically result in neglect ranging from dead lawns to collapsing roofs. Neglected backyard swimming pools can become breeding grounds for mosquitoes. Issues in need of maintenance, including leaks and termites, can compound when ignored for six months while a house remains empty. Neighbors often worry that such problems become eyesores or worse, thus eroding nearby property values.

Home prices have already edged down from record highs set last year, by 2 to 10 percent in most parts of Southwest County. The average price of a single-family home sold in the area last month was $443,400, about 8 percent lower than in August 2006, according to The Californian's analysis of figures from a database used by local agents.

While further declines may bring back some of the "affordability" that made Riverside County a target for buyers as recently as 2005, heavily indebted owners worry about being left high and dry by falling values. Of the 4,400 houses in Southwest County that are now in the foreclosure process, investors account for about 2,100 ---- 48 percent ---- of them, according to foreclosureradar.com, an online database.

Sean O'Toole, who owns and runs the database, said that figure has risen in the last year across much of California.

Real estate professionals said the mix includes a particularly large number of speculators, who bought up houses in 2005 and 2006, hoping to "flip" them six or 12 months later for a profit. As long as houses continued to appreciate at double-digit rates, the strategy proved successful. Over the course of 2006, however, prices leveled out surprisingly quickly, leaving the speculators unable to sell their way out of debt before their mortgage payments began to rise. The result is that many of the speculators were in over their head, and simply walked away from their mortgages, an economist for the lenders' association said.

Investors intending to act as landlords for five years or more have been shielded from the whims of real estate market, said Marsha Swanson, a real estate broker who also owns and rents out one local house.

"A lot of investors got in too late on flipping," Swanson said. "Flipping is not real estate investing. It's gambling."

Swanson's statement underscores the difficulty of measuring the investors' impact in any local real estate market; databases even vary in how they identify investors.

Foreclosureradar.com defines investors as buyers who don't claim a $7,000 "homestead exemption" from each property's assessed value. Other databases count owners whose mailing addresses don't match the addresses on the property they buy. Some economists look at the title or mortgage document for each house to determine whether buyers applied for mortgages as owner-occupants, a status that usually affords them lower interest rates.

That last factor relies on buyers' accuracy in completing mortgage applications, another difficulty in obtaining reliable data on investors and owner-occupants. In Southwest County, two groups of real estate investors have let nearly 200 houses slide into foreclosure. The Californian inspected documents from one group and found that at least a handful of the buyers considered themselves owner-occupants. And members of the other group say their loan and real estate documents were filled out falsely by a small ring of managers who wanted to obtain lower interest rates.

Contact staff writer Chris Bagley at (951) 676-4315, Ext. 2615, or cbagley@californian.com.

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