House Defaults go hand in hand with equity issues

Aug 27, 2005

Aug. 27, 2005, 7:41PM


House defaults go hand in hand with equity issues

Financing, taxes and poor planning doom many buyers

Copyright 2005 Houston Chronicle

Foreclosures by subdivision: Listings of 162 area subdivisions with 10 or more foreclosures in 2004. The neighborhoods account for nearly one-third of the 8,300 foreclosures in Harris, Fort Bend and Montgomery counties during the year.

The stories of Houston-area neighborhoods with elevated foreclosure rates shared some common themes.

A Chronicle analysis found 163 neighborhoods in Harris, Montgomery and Fort Bend counties with 10 or more foreclosures.

This story looks at a sampling of five neighborhoods — excluding mobile home communities — that were chosen because they were above the median foreclosure rate and were geographically dispersed.


Foreclosures in 2004: 32

Homes: 1,321

Rate: 2.4%

Typical prices: $60,000-$130,000

Change in median price per square foot in 2004: -2.4%

Among the 163 subdivisions with 10 or more foreclosures, the median foreclosure rate was 1.6 percent and the average rate was 2.5 percent.

Observers of these five neighborhoods repeatedly blamed a combination of personal financial stress and declines in resale values for rising foreclosures.

They pointed to homeowners, including low- to moderate-income, first-time buyers stretching to get into their first homes, experiencing payment shock in the early years of their mortgages.

"If you have increases in taxes, increases in insurance, your note has gone up since the day you purchased the house, you're paying more and more every month," real estate appraiser Frank Lucco said.

Flat or depreciating home prices can make a foreclosure look like the only option for those who are unable to make the payments, even though it will be a serious blot on their credit record.

Instead of seeing their increasing payment rewarded with the home price rising above the loan amount — known as building equity — average prices in the neighborhoods profiled here declined — with the drops ranging from 2 percent to 7 percent last year compared with the previous year.

Those who contributed little money upfront have less reason than someone who put up a big down payment to hang on through the hard times. There's no down payment to lose and the high cost of selling a house adds to the pressure.

A seller without equity can expect to bring a chunk of change to the closing table. Transaction costs can hit $8,000 to $10,000 on a $100,000 house.

In addition to commissions and fees, a seller may have to spend thousands more for fresh paint or carpet to compete with all the brand-new entry-priced houses going up outside the Beltway.

Maria Willmore-Bennett of Re/Max Professional Group in Northwest Houston said if a borrower has 100 percent financing with closing costs rolled in, "you're setting up your buyer for failure. ... There is no equity."

Here's a closer look at five neighborhoods:

Sterling Green South

Flat prices and rising taxes contributed to the rate of foreclosures in Channelview's Sterling Green South.

Last year, homeowners handed back the keys to 32 houses, or 2.4 percent, of the homes in the subdivision of about 1,320 homes near Beltway 8 and Wallisville Road.

Of those, nearly all of the loans were made within the last five years, according to records from Foreclosure Information & Listing Service.

The number of foreclosures was a 60 percent jump over the 20 that occurred in 2003.

The story was the same in neighboring Sterling Green, which experienced 33 foreclosures in 2004 and 18 in 2003.

Leticia Hernandez, a real estate agent with Re/Max All American who specializes in foreclosures and sells homes in the neighborhood, thinks high taxes and poor planning contribute to foreclosures.

Owners have a hard time building equity because there's no appreciation in the marketplace, Lucco said.

The average sale price in the last 12 months was $96,636 in Sterling Green South, virtually the same as the average of $96,776 in the corresponding period three years ago.

And rising payments can be a catalyst for trouble.

"The taxes are just too high and they can't afford it," Hernandez said.

The tax rate of $3.36 per $100 of property value — $3,360 on a $100,000 home — is nearly 17 percent higher than the rate in Woodforest, an older neighborhood nearby.

Foreclosed houses in Sterling Green South are popular among bargain hunters who are willing to do repairs themselves.

"They're looking for a good bargain," Hernandez said. "Why would they pay $130,000 when they can pay $96,000?"

Twenty-two-year resident Mary Evans noted many houses were custom-built from the ground up after a tornado demolished over 400 houses in 1992.

She doesn't see the fore- closures as a big problem.

"Every now and then I'll see a 'for sale' sign go up," Evans said.

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