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Next wave of US housing woes could come from the rich

At risk are owners who bought too many homes or borrowed too much against them

HINSDALE (ILLINOIS) – A HOUSE in the wealthy Chicago suburb of Hinsdale, Illinois, is far beyond the reach of most Americans.

Unfortunately, Hinsdale may also now be too expensive even for some of the people who already live there.

‘There is a section of the population here that overextended themselves to buy here and then keep up the facade of wealth,’ said Ms Sharon Sodikoff of local real estate agency Prudential Homelife Realty.

‘In the next year or so, they will be forced out in dribs and drabs.’

With prices of the average home at around US$1.15 million (S$1.64 million), Hinsdale seems a world away from the sub-prime housing crisis, involving modest homes bought by people with spotty credit histories, that may tip the US economy into recession.

Even here, however, far from the crisis’ epicentre, high-earners with good credit may be heading for trouble as their adjustable rate mortgages adjust beyond their means, local real estate agents and others say.

In a normal housing market, they would be able to sell their property, but now they are stuck.

‘The next wave of problems will come from prime borrowers who have bought too many houses or borrowed too much against them,’ noted Mr Michael van Zalingen, the director of home ownership services at the Neighbourhood Housing Services of Chicago. A ‘prime’ borrower is one with a good credit rating.

Real estate agents point out that some high-income borrowers have already been forced to sell or leave their homes and more will follow, especially those who used their homes as automated teller machines, withdrawing cash via home equity loans.

‘For those who utilised home equity loans for five to 10 years to finance their lifestyle, the chickens are coming home to roost,’ said real estate agent Marki Lemons.

There are also signs some lenders are warily eyeing ‘prime’ borrowers.

Mr Tom Kelly, a spokesman for Chase Home Lending, a unit of JPMorgan Chase, said the company raised its reserves for possible home-equity loan loss for subprime and prime borrowers by US$635 million in the second and third quarters of last year.

‘The concern is people who have borrowed a large percentage of the equity in their homes,’ Mr Kelly said.

‘Now, the value of their homes is falling and they cannot refinance. Some just stop paying and walk away.’

Getting into property during the boom years was easy, with mortgages freely available for no money down.

Then came the sub-prime crisis and the credit crunch, slowing the market, and pushing prices down and unsold homes up.

In Hinsdale, for instance, the supply of homes on the market rose to more than 17 months in early October from less than six months in January 2006.

While it is apparently a buyers’ market, Mr Lawrence Yun, the chief economist at the National Association of Realtors, says high-end borrowers are put off by the high interest rates now applied to so-called jumbo mortgages, those for US$417,000 or more.

‘Potential buyers say, ‘No way am I buying at that price’,’ Mr Yun said. ‘If some borrowers can’t get into the market, there are others who can’t sell to get out.’

Real estate agents say speculative investors who bought to make a profit are also walking away, as the rents they charge fall behind the mortgage payments as their adjustable-rate mortgages readjust.

Unlike sub-prime borrowers, however, wealthy home owners are more likely to try to cut a deal with their lender rather than end up in foreclosure.

Alternatively, they can opt for a short sale.

Under a short sale agreement, the borrower sells below the mortgage value and the lender writes off the difference. The lender gets less than originally anticipated but is not stuck with a foreclosed property.

‘You won’t see many foreclosed homes here because that would involve public embarrassment,’ Prudential Homelife Realty’s Ms Sodikoff said.

‘But they will call their realtor and get them to quietly broker a deal to get out of their homes.’


Source: REUTERS (The Straits Times 18 Jan 08)


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