By Melissa Wirkus
Orange County is one of the many areas throughout California that experienced
huge price appreciations during the housing boom.
It is also one of the most expensive areas to reside in the whole United
States of America.
During the housing boom, many people got into homes they probably normally
could not have afforded due to new
mortgage products and lax lending standards.
Now the people who busted their wallets to get into their dream home
in the OC may now be struggling to stay in them.
An October 20, 2006 article by Jonathan Lanser of The Orange County
Register, “Novel mortgages blamed,” looks into how an expected
increase in mortgage defaults and delinquencies may or may not have
an effect on their local economy.
But a new study shows that these mortgage defaults and foreclosures
will not have as big of an effect on the local economy as originally
expected.
“Recently, I discovered data from First American Loan Performance
suggesting that so-called borrowers with ‘exotic mortgages’
– loans that delay
big house payments – were paying their mortgage bills better than
homeowners with more standard financings.”
“However, that could be changing as the discounts wear off. A
fresh study by researcher Chris Cagan at another First American unit
in Santa Ana predicts trouble for a hunk of borrowers who took out exotic
and other relatively new-styled mortgages.”
According to Cagan, 18,601 of these “exotic” loans will
default in Orange County within the next five years. What’s even
more is that the county has a whopping 79,000 of these loans at risk.
He also predicts that bankers and investors will lose $3.9 billion on
these defaulted
mortgages.
“Cagan insists that's a manageable pain. ‘It will sting
those borrowers,’ Cagan says. ‘But it won’t break
the economy.’”
There are some borrowers that are going to be even more likely to default
and are at an increased risk depending on their specific situation.
Cagan discusses three specific types of borrowers that are more likely
to go into default:
“Users of so-called ‘teaser loans’ – deals with
highly discounted initial payments – whose down payment equaled
15 percent or less of the purchase price. These borrowers face steep
jumps in payments when their starter discount ends.”
“Owners with more traditional adjustable-rate loans who put down
5 percent or less. Such borrowers may lack the equity required to refinance
their loans when they face more modest jumps in payments.”
The last type of borrower that is most likely to go into default is
a “sub-prime” borrower, who does not have a good credit
history or financial past and could be overwhelmed by the loans.
“Cagan thinks the regional housing
market will be slowed, not slaughtered, by this wave of mortgage
woes. He sees these defaults and foreclosures as a normal part of the
economic cycle after sharp increases in home prices over the past decade.
‘We will muddle through,’ he says.”