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November 23, 2014

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Next foreclosure wave building with defaults on fixed-rate loans

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Back in 2000, long before subprime lending to credit-risky homebuyers overheated the housing market, Rosemary Murphy used her financial good standing to pay for a house the old-fashioned way.

There was no funny financing or gimmicks. No adjustable rates.

Safely employed by the Clark County School District, she secured a traditional, 30-year, fixed-rate mortgage.

She’s now in trouble. And she’s a face of the next wave of foreclosures: homeowners who thought they were doing everything right but have still been overrun by the recession.

Murphy, 55, left her job in 2004 and, profiting from the real estate boom, refinanced her home with another conventional loan after its value skyrocketed to $800,000. She used the newfound money to launch her own mortgage brokerage business in Texas, where she and her husband owned land.

But the recession — triggered by homeowners with subprime loans who were unable to adjust to rising mortgage interest rates — is expanding its reach. Murphy’s mortgage business collapsed last summer, and she has fallen behind on her $3,960 monthly payments.

The bank is warning her that, come August, the foreclosure wheels will start turning. Last week it turned down her attempts to modify her loan.

“I am so willing to scratch and give them every penny I have to stay in my home, but they won’t work with me,” she said.

Economists expect unemployment to keep climbing until mid-2010, so prime-mortgage foreclosures will likely worsen even as the number of foreclosures involving subprime mortgages is dropping.

In Las Vegas, the number of prime mortgages 90 days delinquent is up almost 4 percent compared with last year, according to First American CoreLogic. Nevada had an increase of more than 3 percentage points in the rate of conventional-loan foreclosures, second only to Florida’s growing rate of prime mortgage foreclosures.

Debbie Kohl, housing coordinator for the Henderson office of Auriton Solutions, said the credit counseling agency is increasingly getting calls from homeowners like Murphy.

“For a while every call was: ‘I have an adjustable-rate mortgage that will reset soon,’ ” Kohl said. “We’re not hearing that as often now.”

Other agencies report the same trend and say that although prime mortgages have always been in the foreclosure mix, the percentage has increased. Job loss is the most common impetus. And it’s not limited to a total loss of employment.

Many are struggling with payments that were once reasonable for their income but are a hardship now because they’re no longer getting overtime hours, are working 30 hours instead of 40 or have had some sort of furlough imposed, Kohl said.

“We’re hearing this from all walks of life: plumbers, electricians, dentists,” she said. “I talked with a dentist recently who said nobody’s coming in anymore unless it’s an emergency.”

In a healthy economy, a homeowner who suffered a significant loss of income would sell the house and become a renter, but in the current market there aren’t buyers at the prices owners need to get to pay off their loans. So, many are seeking loan modifications, in which the bank lowers the interest rates and in turn the monthly payments.

Some, though, are finding it’s hard to get the bank to budge because any modification is predicated on income.

“You have to be employed with a certain amount of cash flow. Otherwise you’re dead in the water,” said Jaime Lopez of Neighborhood Housing Services of Southern Nevada.

That’s the problem confronting Murphy. She has a limited income working as a substitute teacher but expects to be hired full time in the fall. The banks told her that’s not good enough, she said.

“They said I don’t earn enough money to get a modification. That’s the stupidest thing I ever heard. That’s why you need a loan modification,” she said.

The government committed to spending $75 billion to encourage lenders to cut payments for those in trouble, but so far the number of those helped is small and experts question whether the government can spend enough to stave off foreclosures.

Kohl said she’s been having some success getting people like Murphy a forbearance plan, in which the bank agrees to give the owner a chance to catch up by not requiring payments for a few months. But only some banks are doing that, and homeowners are struggling to find another source of income in that time frame.

Some holders of conventional mortgages are so underwater that they are walking away.

“Banks make business decisions, and so do individuals. They’re coming to the conclusion that it’s worth the hit to their credit to give the house back,” said Ian Hirsh of Fortress Credit Services in Las Vegas.

Michael Joe of the Legal Aid Center of Southern Nevada said last week he talked with a homeowner who said he could rent a house across the street exactly like the one he owns for $1,000 a month less than his mortgage payments — leading him to wonder whether it’s worth hanging onto the house.

A foreclosure will affect your credit for seven years, but Hirsch said as people feel trapped in their houses they are becoming less and less concerned with credit ratings.

A foreclosure hit on a credit report in 2008 or 2009 “won’t be all that uncommon and certainly not the end of the world for their credit,” he said. “In a couple of years it will almost be something that is a satisfactory explanation in and of itself: What happened to their credit? Oh, they owned a house in Las Vegas.”

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