Monday, June 21, 2004 | 10:58 a.m.
A California company that has begun tracking residential foreclosures in Clark County says the rise in interest rates not only will slow down the housing market, but will lead to a rise in foreclosures.
Alexis McGee, president of Foreclosures.com, said foreclosures are a lagging indicator and that the impact of the rising rates probably won't be seen for another four to six months.
McGee said her company has tracked a correlation between increasing mortgage rates and rises in foreclosure activity.
"For one thing, we've seen an increase in the use of adjustable rate mortgages by people trying to qualify for more house," McGee said. "As rates rise, these loans will begin to squeeze some family budgets to the breaking point."
The company has no historic data on foreclosures in Clark County but is building a database to monitor activity in the county.
But a recent report by the Washington, D.C.-based Mortgage Bankers Association said Nevada's foreclosure rate right now is below the national and regional averages.
The MBA's first quarter national delinquency survey said the percentage of loans in foreclosure in Nevada during the quarter was 0.37 percent for 416,726 residential property loans, compared with 0.46 percent for 37.6 million loans nationwide. The average for the MBA's mountain region, which includes Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah and Wyoming, also was 0.46 percent, for 3.1 million loans.
In Clark County, foreclosures appear to be in decline. The county does not break out residential foreclosures from commercial and real estate foreclosures.
In 2003, there were an average 1,518 foreclosures a month. In the first five months of 2004, there were an average 1,425 foreclosures a month.
County officials said they recorded 1,309 real estate foreclosures in May, compared with 1,425 in May 2003. The county reported 1,436 foreclosures in April, compared with 1,582 in April 2003.
McGee also said the combination of rising interest rates, the willingness of lenders to accept payment-to-income ratios of more than 40 percent, and price appreciation at what she considers an unsustainable 31 percent year-over-year rate will put mostly younger and inexperienced borrowers at risk.
"These are almost all two-income households making low down payments," said McGee, "and with over 40 percent of income going to the house payment, it won't take much of a problem to put such households in distress."
Dennis Smith, president of local research firm Home Builders Research Inc., said he doesn't think there will be a large spike in foreclosures because interest rates go up.
"Just because interest rates go up a little bit doesn't mean there will be a severe increase in foreclosures. We better hope not anyway," said Smith, who does not track foreclosures. "In the long run sure, if interest rates go up 2 or 3 (percentage points) we might see some changes."
He said the biggest factor in foreclosures is jobs.
"Right now, people are not out of work. Until the umemployment rate starts to go up, then we'll see a significant rise in foreclosures," Smith said. "That's the key, whether people are working or not working."
McGee said the company records foreclosures at the county recorder's office daily and develops a report for clients that lists every new foreclosure, a description of the property, mortgage and tax information and a contact for the property.
She said she decided to monitor Clark County after hearing from clients that they wanted to invest in distressed properties in Southern Nevada.
"We look at it as a good opportunity for growth and there are a lot of foreclosures there," she said.
Foreclosures.com publishes daily pre-foreclosure property lists to help investors locate troubled homeowners. The company tracks property in 18 California counties and the metropolitan areas of Phoenix, Chicago, New York and the state of New Jersey, recently adding Clark County to its list.
The company sends foreclosure lists daily at a cost of $79 a month. Package deals can reduce the price per month and make an annual subscription $500 a year.
McGee, whose Sacramento-based company has tracked foreclosures for investor clients online since 1992 and on paper since 1985, said she believes interest rate increases currently being seen are a trend driven by the overall strength in the economy and the concurrent increase in job growth and inflation, and not a rate spike like the one seen late last year.
She said homeowners who have grown used to low interest rates over the past two years may have abused easy access to home equity credit lines.
"There has been hyper-appreciation of home prices in Las Vegas over the last 18 months," McGee said. "By March, resale home prices had increased 29.5 percent year over year, and that's not sustainable, especially in a hostile interest rate climate."
She said people who have over-leveraged their homes to buy consumer goods could struggle as prices of existing homes stabilize.
"As prices of existing homes level off or adjust downward, we see defaults begin to rise. It gets harder for troubled homeowners to sell their way out of foreclosure," she said.
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