Appearing on a recent episode of “Dialogue with Jim Doti”, RealtyTrac CEO James Saccacio cited a number of factors for the more than 60 percent year-to-year increase in foreclosure activity in September 2006. Chief among those — local economic conditions, poor planning for the future by home buyers, and rising interest rates.

Now the stage is set. The nation’s foreclosure total already broke the 1 million glass ceiling in October, and just how high foreclosure levels will go in 2007 is open to debate depending on how steep one believes the downturn will be.

“When I got into this business, back in 2000, defaults were about 1 percent of all first mortgages. Today we’re at 1.5 percent. While it’s not a large number, it’s still a significant move. Do I think the economy is going to crumble? No! Will (the foreclosure rate) go to 2 percent? We’ll have to wait and see,” Saccacio told Doti, an economist and president of Chapman University.

For Esmael Adibi, executive director of the A. Gary Anderson Center for Economic Research at Chapman University, the key concern is all those people who signed up for those “exotic” adjustable-rate mortgages in 2005 and thereafter. In California, for example, 27 percent of all mortgages were so-called “option ARMs,” where the buyer pays 1 percent interest and the underpaid amount gets added to the loan’s principal.

“Our concern is with interest rates not going down, with wages growing very slowly, employment growing slowly, we’re going to see increases in Notices of Default and ultimately foreclosures. The magnitude is very hard to project,” Adibi said.

The problem with so many people signing up for these adjustable loans, according to Saccacio, is that they don’t have enough money set aside for a rainy day if the loan’s interest rate moves higher. And with increased inventory levels and longer marketing times around the country, the prospect of distressed homeowners being able to bail themselves out is statistically against them.

“If you all of a sudden have inventory to sell and the length of time to sell goes up, people with problems are not going to have the ability to move the asset quickly,” Saccacio said. “Sometimes people operate out of fear.”

Expectation is a key factor in the movement of the real estate market up or down. When people expect the market to keep appreciating, prices have gone up 15-20 percent. But now, the level of pessimism will determine how rapidly and how steep the reductions in prices are going to be.

Still, owners of million-dollar properties, generally speaking, will normally have more cushion to work with in cutting prices and staying out of foreclosure than owners of the median-priced homes around the country, Saccacio concluded.

We'd like to hear what you are seeing in your city, county, state or region of the country. Are people being pessimistic about their local real estate market? Or are they just sitting on the fence waiting to see how low the prices will go?

Please feel free to comment on this article, or write an e-mail to us at: editor@foreclosurepulse.com.

Two law suits have been filed against a controversial Illinois law that mandates financial counseling for certain consumers obtaining mortgages or refinancing loans in 10 ZIP code areas in Chicago. The suits — filed by eight consumers and the real estate community — seek to halt the implementation of Illinois House Bill 4050, which took effect September 1.

"It's a discriminatory law," said Julie Santos, a Chicago Realtor and co-chair of the Coalition to Rescind HB 4050, a group formed from several community organizations who are collecting signatures in an attempt to repeal the law. "If the law is good, then make the law apply to all, not just the South Side of Chicago."

The mortgage counseling law is generating a rising chorus of critics — from homeowners, lenders, realtors, investors, consumer rights advocates, title companies and others — who are concerned that the new law could destroy property values in selected minority communities and add an extra layer of bureaucratic red tape.

Limited to just 10 selected zip codes in Southern Chicago, the law targets minority communities where many Black and Latino residents live. Under the law, if a borrower’s FICO credit score is 620 or less, a borrower must get financial counseling sessions from a U.S. Housing and Urban Development-approved counselor to make sure the would-be homeowner knows what he’s getting into. Moreover, the law requires that borrowers give their private information to a state government database.

The suits charge that the law unfairly singles out residents of those zip codes, applies only to state-chartered lenders and disproportionately affects African-Americans and Hispanics, who make up the majority of residents in those areas. Critics allege that the law amounts to state-sanctioned redlining, the illegal practice of refusing to extend credit to borrowers because of their ethnic background or where they live.

Already, the law has chilled the housing market in the predominantly Black and Latino areas, where homeowners in the neighborhood saw a 45 percent drop in home sales in September. The law is also driving out mortgage lenders who fear litigation over the implementation of Chicago law.

RealtyTrac is monitoring the Illinois law because it could have broader implications for real estate buyers, investors and agents. Although the intent of the law was to protect consumers from predatory lenders, it appears to be having the unintended effect of driving down housing sales instead. We want to hear from you. Send us an e-mail to editor@foreclosurepulse.com.

As if it wasn’t bad enough that the local economy has been steadily losing jobs in the automotive sector, Detroit reported the highest foreclosure rate of the top 100 metropolitan statistical areas (MSAs) in the country for the third quarter of 2006 as well.

After two straight quarters when Indianapolis, Atlanta and Dallas led the nation in foreclosure rate, Detroit took over the top spot on the RealtyTrac Q3 2006 U.S. Metropolitan Foreclosure Market Report — followed by Ft. Lauderdale and Denver. Miami, Dallas, Indianapolis, Ft. Worth, Atlanta, Las Vegas and Memphis rounded out the top 10.

Unlike the first two quarters of the year when foreclosure activity was noticeably slowing down in many of the top 100 MSAs, the tide turned during the third quarter with the majority of MSAs now reporting growth in foreclosure activity. This trend corresponds to what RealtyTrac is seeing in the national real estate market where sales volume is slowing down — heading negative in many areas of the country — price appreciation has slowed to either single-digit rates or even negative rates in a few instances, and interest rates on adjustable-rate mortgages are starting to reset to higher levels.

                  Detroit Foreclosure Rate Heat Map -- October 2006

Falling prices, sluggish sales and risky loans that let borrowers pile up debt faster than they can pay it off could put more homeowners out of their houses this year than at any other time this decade.

Yet many homeowners — particularly in California, Florida and Colorado — are still purchasing or refinancing their mortgages with “exotic” loans that may keep their monthly payments low now, but when these gimmicky loans “reset” upward borrowers could lose their homes if they haven’t planned for an increased monthly mortgage payment. While these loans certainly can be used for good, too often consumers don’t fully understand the risks involved. Here are three popular, yet risky loans that the average consumer should think carefully about before jumping into:

1. Adjustable Rate Mortgages (ARMs)
With an adjustable rate mortgage, also called ARMs, borrowers lock in a lower interest rate for the first few years. The loan then readjusts periodically in tandem with often volatile short-term interest rates. The danger with ARMs is that the risk of readjusting upward is often too great to justify the minimal savings — especially if a borrower plans to hold onto the property for at least a couple years. For most borrowers, it’s better to lock in a fixed interest rate on a 30-year loan and never worry about interest rates rising.

2. Option Payment ARM Mortgages
Option Payment ARMs are some of the riskiest mortgages around. They offer borrowers a low initial interest rate and then allow them to choose the amount of monthly payments. Homeowners can opt to pay both the interest and principal on a fully amortized loan. Or they can make a payment that is so small it covers only the interest due on the mortgage. With this loan it can be very tempting to make just that minimum payment. In just a few months homeowners who aren’t fiscally disciplined could find themselves "upside down" with this type of loan, and owing more money than they borrowed.

3. Interest-Only Mortgages
The interest-only mortgage gives the homeowner an option to pay just the interest on the mortgage. As the name implies, borrowers don't pay down any principal for the first three, five, seven or 10 years of their loan. But after the initial "interest only" grace period expires, the monthly payments balloon to cover the remaining interest and all of the principal owed on that mortgage. People who take on these loans are more likely to go into foreclosure because their monthly payments can quickly balloon out of control. For more details, read "Could you handle an interest-only loan?"

Today, when borrowers apply for a loan, they have more choices than ever before.  But before homebuyers choose either a traditional fixed-rate mortgage or an adjustable-rate mortgage, they should make sure they understand their risks and how they work.  Buyers who intend to own a home for a short time, or can handle higher payments in the future, may consider ARMs.

But homebuyers who plan to be in their homes for years, or do not expect a significant increase in income by the time the monthly payments go up, should carefully consider the risks and advantages of adjustable-rate loans.

At RealtyTrac, we want you to know the facts. For more information on mortgages, read our Mortgage and Financing FAQ.