Rising unemployment, declining home values and adjustable-rate mortgages that are scheduled to reset before the year’s end are building into a toxic storm that will lead to yet another wave of home foreclosures in the D.C. area, though experts disagree about its severity.
Mike Colpitts, editor of Housing Predictor, which forecasts local real estate markets in all 50 states, expects 300,000 more foreclosures to hit the D.C. region from now through 2011. “Some homeowners are in trouble now, but it could take that long to get through the system,” he says. Why? A moratorium on foreclosures that mortgage giants Fannie Mae and Freddie Mac had in place from last fall until the end of March created a temporary lull and a backlog of troubled loans that have yet to be processed.
Recent data indicate the area’s record foreclosure rate has leveled off, says John McClain, deputy director for George Mason University’s Center for Regional Analysis, which monitors the economy for D.C., Maryland and Virginia.
But the foreclosure crisis is spreading beyond subprime loans, the category which was deemed most risky and where the worst of the problem seems to be over.
“The next mini-tsunami would be the alt-A foreclosures,” says Jill Landsman, a spokeswoman for the Northern Virginia Association of Realtors. Alternative A-paper loans — the next rung up the mortgage risk ladder — were written for marginal borrowers with insufficient financial data. Many of these borrowers took out adjustable-rate loans that reset every three years. These borrowers may be unable to refinance when their loans reset in the next six months if their homes are worth less than the mortgage balance — and many are. In some parts of the D.C. area, such as in Prince William County, Va., home values have declined as much as 40 to 50 percent from their peak, Colpitts says.
Even some conventional adjustable-rate loans and 30-year fixed-rate mortgages, that were never considered high-risk, will be in trouble ¬— particularly if unemployment rates continue to rise and home prices fall. Some families that used to have two incomes and now have only one could lose their homes, Landsman says. Colpitts, who predicts area home prices in the metro area will decline an additional 11 percent to 15 percent this year, is especially pessimistic that more defaulting homeowners will walk away from their houses because they have nothing left to lose. “They either didn’t have much of a down payment or lost whatever equity they had, and there isn’t anything to recoup,” he says.
If that happens, wealthy D.C. neighborhoods and close-in suburbs won’t be immune from the crisis, Colpitts predicts, because the most expensive homes will see the steepest price declines. He expects foreclosures to increase this year not only in outlying suburbs like Columbia, Md., but also in nearby D.C. suburbs like Bethesda and Silver Spring in Montgomery County, and Alexandria. In its initial phase, the foreclosure crisis hit Virginia’s Loudoun and Prince William counties the hardest, along with Prince George’s in Maryland.
McClain, however, is cautiously optimistic. He is waiting to see if the Obama administration’s policies designed to encourage loan modification for some homeowners will gain traction. If so, he says, “We could still see foreclosures, just fewer of them.”