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Equity Now In The News - 2005

The Real Deal - New York Real Estate
Vol.3 No.5 May 2005

Foreclosure fears cloud market horizon

By Alison Gregor

Residential foreclosure rates are expected to increase this year, causing heartache and trouble for some homeowners and investors, and opportunity for others. Brokers say they're seeing some lenders use what they call predatory tactics as the credit cycle tightens, with some buyers entering into adjustable rate mortgages and interest-only loans they may not be able to afford.

Many buyers starting to get caught in the credit crunch used historically low interest rates to simply live well beyond their means, refinancing the loans on their appreciating real estate every year or so to supplement their incomes, said Michael Moskowitz, founder and president of Equity Now, a residential real estate lender in Manhattan.

"Once real estate either stops appreciating or deflates 5 percent to 10 percent, six to nine months later you're going to see a substantial increase in foreclosures," he said.

For example, a buyer who bought a home for $150,000 in the mid-1990s that is now worth $600,000 could conceivably still owe $450,000 on the home due to refinancing, even taking into account improvements on the space, he said.

An increase in interest rates could upset some of these borrowers' precarious financial balances, as mortgage market pricing catches up to the Federal Reserve Board's policy of gradual but frequent interest rate hikes. The Federal Funds Rate, which affects fixed-rate mortgages, is now at 2.75 percent; adjustable-rate mortgages are tied to the 10-year Treasury bond, which now yields 4.36 percent. The average 30-year fixed rate mortgage was at 5.91 percent in mid-April, according to Freddie Mac data.

While some market watchers anticipate interest rates of as much as 7.5 percent by the end of the year, Moskowitz said he believes an increase of half a percent is more realistic.

"The economy is going to slow down," he said. "We're paying through the nose for oil, and the economy's not going to take off."

"But I think even if rates go up even half a percent, that could put some damper on price appreciation."

The number of foreclosed residential properties listed for sale in the U.S. grew 50 percent from February to March to 28,190 properties, according to data compiled by Foreclosures.com. It is one of the largest monthly gains seen by the real estate market tracker since 1999.

As more owners default, it may pose an opportunity for potential homebuyers and investors, who can purchase a foreclosure at rock-bottom prices. Because homes sold at auction due to default are public information, potential buyers can find them listed in their newspaper's classified ads or even call up the real estate owned (REO) departments of local banks.

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