Hot market not prone to foreclosures

By Andy Gross - THE GARDEN ISLAND
Posted: Tuesday, Aug 23, 2005 - 05:11:32 am HST

Nationally, high home prices are causing more first-time buyers to put less cash down and rely upon various mortgage packages to secure their purchase.

Industry analysts fear this might lead to foreclosures. Locally, experts said that is not likely to happen here, given Kaua‘i's hot housing market and strong demand for inventory.

"Hawai‘i has minimal foreclosures. Nobody else comes close," said Ian Emberson, senior loan officer for Bank of Hawaii.

Debi Jennison, Kaua‘i manager and loan consultant for Amera Mortgage Corporation, agreed. She said she did not think this was the case given Hawai‘i's very strong economy. She said the risk of foreclosure is greater in a more depressed economy.

Gayle Ishima, president of the Mortgage Bankers Association of Hawaii, said even in a worst-case scenario for a buyer, they could always sell their home and salvage most of their investment, rather than face foreclosure.

While Jennison allowed that things can always happen, such as hurricanes, she said it is her view market values will stay strong.

Diego Lopez, owner and president of Global Mortgage Group, a 37-year-veteran of the business, said he had seen foreclosures before, and did not rule out the possibility of more if the market softened.

"We've been lucky the last five or six years," he said.

Jennison said the high-priced market is having an impact on would-be buyers and the mortgage strategies they are contemplating.

"The prices are so high, that even a 5-percent cash down-payment is a lot of money," she said.

The median cost of a single-family residential home on Kaua‘i in July was $700,000. A 5-percent payment on a $700,000 home would be $35,000, which is a lot of cash.

According to information from the National Association of Realtors, the median price of an existing home nationally is $219,000. A 5-percent down payment would be about $11,000.

"A lot of people work and save up $10,000 or $15,000, and it's not enough on Kaua‘i," Jennison said.

Lopez said a 95-percent or 100-percent loan was always a riskier proposition for the buyer than leaders of the lending institution, which have pre-determined risk factors.

"The main problem is the payments. If it is at a high interest rate and fully amortized, the first and second mortgage payments can be very high," he said, referring to buyers who might have been used to paying $900 per month suddenly facing $2,400 mortgage payments.

Lopez gave a profile of the 100-percent, first-time, no-cash buyer on Kaua‘i. He said the model is someone who is earning anywhere from $4,000 to $5,000, a month, married, maybe a parent.

Lopez said this is an individual earning a good monthly income who can not save enough money given Kaua‘i's high cost of living. Lopez said these buyers earn enough money to make the monthly payments, but do not have enough in reserve to put much cash down.

He said a 100-percent loan would likely result in two different, "piggy back" loans. One would be an 80-percent loan with an interest rate of 6 percent or a bit higher. The second, 20-percent loan would be offered at a much higher rate, perhaps more than 10 percent. Lopez said he advises these buyers to refinance after a year, when their homes have appreciated about 20 percent, bringing their payments more into line.

Emberson said buyers of more high-end properties tended to put more cash down, but some buyers fell into the 10-percent range.

Ishima, chief operating officer of Hawaii Home Loans Inc., agreed that most purchasers of higher-end properties, or those more than $1 million, tended to put more cash down as a rule.

According to a study by SMR Research, about 38 percent of home buyers who purchased homes in the first half of 2005 put down less than 5 percent of the purchase price.

Industry analysts have argued that one potential negative for home buyers who put little or zero cash down is that they could wind up owing more on their house than what they paid for it.