HOUSING: Rate jump could mean higher payments, more foreclosures

Wall Street weakness might hit home for North County residents

By ZACH FOX - Staff Writer | Wednesday, September 17, 2008 8:01 PM PDT ∞

As Wall Street wobbled, a key lending rate doubled overnight Tuesday, raising concerns that a historic onslaught of foreclosures could worsen.

If the rate, known as the London interbank offered rate, or Libor, maintains its level, mortgage payments for thousands of local homeowners will rise sharply.

With high gasoline prices and rising food costs, some housing advocates say that families are living paycheck to paycheck and any increase in mortgage payment could force them into foreclosure.

"You've got people who are stretching their dollars because we're not paid more in San Diego, but it costs more," said Gabe Del Rio, director of homeownership for Community HousingWorks, a San Diego nonprofit. "We're going to feel the squeeze more."

California and San Diego County have a higher number of adjustable-rate mortgages that are based on the Libor because high real estate prices over the last few years meant more borrowers resorted to loans that had low introductory payments initially that later adjusted upward, along with the Libor.

There are an estimated 207,000 adjustable-rate mortgages in San Diego County, about 35 percent of all loans, according to First American Loan Performance, an industry research firm.

Over the last four months, North County has averaged about 700 foreclosures per month, double the rate a year ago, according to ForeclosureRadar, a Northern California tracking site.

Real estate analysts said homeowners should check their mortgages to see if the interest rate is based off the Libor and if it is, attempt to refinance into a fixed-rate loan if possible.

However, falling home prices ---- down about 30 percent from a 2005 peak ---- mean many homeowners are unable to refinance because lenders typically require a property to hold some equity before issuing a new mortgage.

The Libor represents the interest rate banks charge each other on loans and is often used to determine the interest rates for adjustable-rate mortgages and home equity lines of credit. For example, if the Libor sits at 2.14 percent ---- as it did just a week ago ---- a homeowner might pay as little as 4.75 percent on a mortgage. But financial turmoil has drained the confidence that banks will stay in business.

And Tuesday night, the Libor leaped to 6.44 percent, meaning that same homeowner could pay as much as 9 percent on the same mortgage when it readjusts, oftentimes every six months.

For a home equity line of credit with a $200,000 balance, the spike in the interest rate would translate to a bump in payments of $565 each month.

Mortgages typically carry provisions that limit the amount a monthly payment can increase and also place caps on the maximum interest payment. Still, the spike in the Libor probably would mean several hundred dollars added to the monthly payment for most loans.

The jump in borrowing rates came after a tumultuous 10 days on Wall Street during which five of the nation's largest financial institutions, mortgage giants Fannie Mae and Freddie Mac, insurance company AIG, investment bank Lehman Brothers and brokerage firm Merrill Lynch, faltered.

For homeowners stuck in adjustable-rate mortgages tied to the Libor, it would probably be months before any payment would adjust, and lenders are becoming more amenable to loan modifications, housing advocates said. Therefore, if a borrower is current on all mortgage payments and can afford the current interest rate, there is a good chance the lender would freeze the rate rather than adjust it upward along with the Libor and force a foreclosure, said Del Rio, the community housing advocate.

Further, Greg McBride, a senior financial analyst with Bankrate.com, an interest rate tracking site, said the Libor could return to its low levels within a week. "Things are very day to day in the financial system right now," he said.

At the same time, there appears to be very little confidence in the banking system, depressing stock prices for major lenders such as Washington Mutual and Wachovia 80 percent or more over the last year.

And because the Libor is determined by how much banks trust each other to repay loans, low confidence means higher rates.

"They're saying, 'There's no safe institutions now,' " said Mark Goldman, a real estate lecturer at San Diego State University. " 'The banks we would lend to at the Libor rate are not sound, so we want a higher rate.' It's like subprime lending."

Contact staff writer Zach Fox at (760) 740-5412 or zfox@nctimes.com. Read his blog, "On the Realside," at nctimes.com/blogs/minding_your_business

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