New York and the rest of America are out of sync once again. Foreclosure figures, a key indicator of the trajectory of the real estate market, are falling in the city and state while they rise in the rest of the country, confounding bearish analysts and economists.
But many holders of adjustable rate mortgages, or ARMs, a variable rate loan that New Yorkers sought in high numbers during the housing boom, could soon be exposed to rising interest rates as the period of their mortgage that has a set rate expires. Exposure to higher payments could land some ARM holders in trouble and push foreclosure numbers up.
New York’s high property prices amplified the appeal of other formerly obscure types of loans, sometimes called “toxic mortgages,” which include interest-only loans and payment-option mortgages, which require low payments during the loan’s early years and rise over time.
In September, five federal agencies, including the Federal Reserve, issued new guidelines governing ARMs, payment-option and interest-only mortgages, which state regulators are expected to use as a blueprint for monitoring the industry.
Figures buttress their concern. Nationwide, foreclosures peaked at 117,150 in February 2006, dropped to 88,194 in June and climbed to 112,510 in September, according to figures compiled by RealtyTrac.com.
In New York, statewide statistics compiled by RealtyTrac.com defy national trends. Foreclosures in February 2006 reached 5,205, dropped to 3,907 in June, bounced to 4,537 in August, then fell to 3,622 in September.
“New York City represents a classic case of Economics 101,” said Rick Sharga, vice president at RealtyTrac.com. As long as property values remain strong due to high demand, “the fallout of a higher default rate will have much less impact than in, say, Detroit, where values have gone down and unemployment has risen.”
In the five boroughs, the number of foreclosure auctions dipped in the third quarter, according to PropertyShark.com. The downturn is surprising, since the steady increase in the Federal Prime Rate from its historic lows in the early 2000s led to fears that foreclosures would follow an anticipated rise in payments, though mortgage rates have come down recently.
New York City foreclosures dropped from 948 in the first quarter to 762 in the third quarter. Numbers for the year to date follow virtually the same trajectory as the last three quarters of 2005, according to the Web site. There were 949 foreclosures in the second quarter of 2005, a figure that dropped to 771 in the final quarter of 2005.
“The recent run-up in New York City real estate and the lengthy court system, combined with the fact that most ARMs have not yet adjusted upwards, have created a declining number of foreclosures in the near term,” said Ryan Slack, CEO of PropertyShark.com. “But foreclosures are expected to rise in the next two years.”
Not everyone in the industry agrees.
“Housing is not as bad as it seems,” said Billy Procida, CEO of Palisades Financial in Englewood, N.J. “This hand-wringing is all due to hype. The media scares people, so in turn, the guys who sit on bank boards hear nightmare stories and at the next meeting they say that housing is in trouble, so they stop doing housing. The perception is not reality.”
The New York market’s resilience will help weather a rise in interest rates, because prices will stay relatively high and there aren’t as many buyers who own properties as investments.
“Even people who took out exotic mortgages aren’t being killed yet because interest is still historically low,” said Andrew R. Berman, a professor at New York Law School who specializes in real estate. “The rental market is so strong and the vacancy rate is so low that people’s cash flow on properties that generate rental income can offset any mortgage interest debt they have to service.”
Despite the spread of creative financing tools and the potential for a rise in foreclosures, the situation feels familiar to Procida. “This happens every seven, eight or nine years,” he said.
Go to chart: Foreclosure auctions scheduled in New York City