By Nick Carey
HINSDALE, Illinois (Reuters) – Less than a year ago, few people in this affluent Chicago suburb expected the subprime U.S. housing crisis would hit close to home.
“We thought Hinsdale was virtually immune and we wouldn’t see any foreclosures, but we have,” said Dave Hanna, managing partner of Chicago-based Prudential Preferred CRE and president of the Chicago Association of Realtors. “Nowhere is immune.”
With a pretty red-brick downtown lined with stores, good schools and a railway line to nearby Chicago, Hinsdale has been popular among wealthy doctors, lawyers and executives.
It has also seen a 37 percent jump in foreclosure filings this year, according to research firm RealtyTrac, and local data shows the average home sale price has fallen to $1.07 million from $1.15 million in September 2007.
The consequences of years of devil-may-care mortgage lending during the U.S. housing boom were first felt among America’s poorer home owners. But if that is where it started, it did not stop there.
“People think this is just a lower-income problem,” said Mabel Guzmann, a Century 21 realtor in Chicago. “It’s not.”
Guzmann was recently called in to try to sell a $1.2 million home in foreclosure, but found it riddled with mold.
“There are few buyers for properties like that,” she said.
Along with their less moneyed fellow citizens during the housing boom, many wealthy Americans leveraged their home equity to buy anything from a car to stocks.
“High income does not necessarily mean smart or responsible,” said Michael Lefevre, head of the National Association of Mortgage Professionals (NAMP), a trade group.
He argues for financial literacy classes at U.S. high schools.
Now the market is awash with excess properties, depressing prices so much that many Americans owe more than their homes are worth. A sinking U.S. economy and huge job losses — more than 10 million out of work by December — have not helped.
Observers forecast it will take the overall market a long time to recover. In the meantime, it could be difficult to sell expensive homes: buyers may find getting a mortgage tough.
“I think it’s going to get worse,” Lefevre said. “2009 is going to be ugly.”
Many of America’s wealthier homeowners are already feeling the pinch. According to research firm First American CoreLogic, in August 2008, 5 percent of U.S. jumbo prime mortgages — those over $417,000 — were behind payments 60 days or more.
That was higher than the 3 percent of normal prime mortgage loans 60 days or more behind, but well below the 29.5 percent delinquencies seen for subprime loans, or the 15.4 percent rate for Alt A mortgages, which are a step above subprime.
But that 5 percent rate for jumbo delinquencies was more than three times the 1.4 percent rate in August 2007.
“Jumbo prime mortgages have seen the biggest increase in delinquencies of any category over the past year,” said Sam Khater, chief economist of First American CoreLogic. “The worst affected areas are states like California that have seen sharp price declines. But few areas are unaffected,” he said.
The squeeze many wealthy Americans find themselves in is that they borrowed far too much against those homes.
“People bought the boom on the assumption property values would continue to rise and they leveraged their homes to increase their wealth,” said Dennis Hedlund, founder of iEmergent, a forecaster for mortgage and real estate companies.
“People have seen the value of their assets, including stocks, decline. But their debts haven’t,” he said.
That has left many affluent borrowers trying to offload homes via a bank-approved short sale — taking an offer for their home below what they paid to avoid foreclosure. But that process has been criticized in recent months as being too slow, or because banks insist on unrealistically high offers.
“Many banks still have no effective system in place to deal with short sales,” said Ron Rosen, a realtor in Lighthouse Point, Florida.
But Prudential Preferred CRE’s Hanna said he has seen an improvement in how Illinois banks handle short sales, as he feels the impact of the crisis has sunk in for more bankers.
“A few months ago, these bankers maybe saw the secretary down the hall lose her home, but they couldn’t relate to that,” he said. “Now, it’s maybe the guy in the office next door. It has just become a lot more personal.”