Broker Pushing Clients Away From Housing Purchases in North County

For the past five years, Joseph Galascione, president of ERA Metro Realty of San Diego, has issued a quarterly report to clients, sorting out loans he considers to be at high risk, medium risk and low risk for foreclosure.

“We use that information to help predict the number of potential foreclosures on the horizon,” said Galascione, whose firm employs 50 agents. “Many clients are investors. And it’s helpful to them to decide where to purchase.”

In the new report, five of the eight cities in the county with the highest number of potentially defaulting loans were in North County.

“So we’re pushing our clients away from North County,” he said.

In the third quarter, 5,300 mortgages will adjust upward in the county, and he expects half to go into default , meaning homeowners can’t handle the adjustment, won’t get refinancing and will walk away from the property.

Therefore, Galascione is advising clients “to be cautious” about buying in the third quarter.

“We feel this is not the bottom of the market, and there will be a continued decrease in values until the glut of foreclosures is absorbed into the market.”

On the brighter side, Galascione pointed to opportunities in income properties, especially two-unit to four-unit buildings because of high rents, low vacancy rates and available financing, especially for owners who live in the buildings.

Hitting Bottom

When he drafted his June report, he said he expected the crisis to hit bottom in the spring of 2009 , six months after the peak in September adjustments.

But he said he now expects it to be longer for those homes to be “reabsorbed” or purchased. He said demand will be hurt by rising interest rates caused by the crisis that’s hit Fannie Mae and Freddie Mac, which are holding trillions of dollars in U.S. mortgage debt.

Congress mandated the two provide housing market funding. Fannie Mae , the Federal National Mortgage Association , was started during the Depression in 1938, and was a government agency for its first 30 years. Freddie Mac , the Federal Home Loan Mortgage Corp. , was started in 1970.

The two, which have lost 70 percent of their shareholder value recently, will have to borrow at higher rates to cover mortgage losses, and pass the cost onto homebuyers, he said.

The two, which guarantee 70 percent of all outstanding U.S. mortgages, are essential to the housing industry, analysts say.

“In order for the housing market to survive you would have to have Fannie and Freddie,” said Rick Jarrett, vice president of McMillin Mortgage in San Diego. “You wouldn’t (otherwise) have any secondary market to sell mortgages. We’d reach a point where Banks do real estate loans and exhaust their deposits to fund loans.”

Brink Of Failure

However, the current crisis has pushed the two lending giants to the brink of failure.

Congress is expected to step in and offer assistance to lenders and homeowners facing foreclosure.

The bill now under consideration would help homeowners shift into Federal Housing Administration-insured loans with 30-year, fixed-rate mortgages, which are safer loans that offer more stability, compared to adjustable rate loans that have low teaser rates and later readjust upward, often leaving homeowners owing more than the home is worth.

However, the congressional bill has critics.

Lenders must agree to write down their balances to 90 percent of the current appraised value of the homes, and pay fees to the FHA based on the home’s appraised value.

Borrowers must agree to pay an annual premium to the FHA and share with the government profits that are realized from selling or refinancing their homes.

“I don’t feel that any of the steps the government is trying to make are going to have an impact on these bad notes,” Galascione said. “The Banks need to feel the pain, the faster the better.”

Other critics point to the voluntary nature of the program.

“A few people will get helped, but the way these programs work is that a fair number of people do not qualify,” said Dan Seiver, a San Diego State University finance professor. “Even if they do, if the lender doesn’t want to take a 10 percent haircut, the deal doesn’t get done.”