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Wednesday, March 22, 2006

CSM: 'Homeowners stretched perilously'

by Calculated Risk on 3/22/2006 01:42:00 AM

The Christian Science Monitor reports: Homeowners stretched perilously. Excerpts:

Fully 27.1 percent of [Boston's] homeowners with a mortgage spent at least half their gross income on housing in 2004, according to the latest census figures available. Those costs, which include utilities and insurance as well as mortgage payments, were more than double the national rate of 11.7 percent and topped New York (25.9 percent), Los Angeles (26.5), San Francisco (20.4), and Chicago (20.3). Of the 25 biggest cities, only Miami had a higher rate (35.8 percent).
Whatever happened to the 33% / 40% guidelines? Lenders used to require that mortgage payments didn't exceed 33% of a borrowers gross income and total debt payments couldn't exceed 40%.
The number of homes sold in Massachusetts dropped a whopping 21 percent in January compared with a year ago, the largest year-to-year decrease in monthly home sales in a decade. As a result, home values have begun to soften. Statewide, they actually fell slightly in January compared with a year ago.

Such pressures are forcing a rising number of homeowners to erase their debts by forfeiting their homes. Foreclosure filings in the county that includes Boston nearly doubled in January from a year ago, ForeclosuresMass. says.
And there is the risk from exotic loans:
Mortgages are also riskier for many today. When 30-year, fixed-rate mortgages were standard, a rise in interest rates would have little effect on current homeowners. But in an era of adjustable-rate loans, it can exact a toll.
"This is the first decade that we have had this culture of pricing risk in home lending," says Susan Wachter, professor of real estate at the University of Pennsylvania. "What happens if someone loses a job?... If you are already spending 50 percent of your income toward a mortgage, there is no cushion."