Denver Revisited

When last we checked in on the city of Denver they stood alone as the poster child for home loans gone bad. Rising foreclosure rates, reminiscent of the late 1980s housing bust, were becoming an unsettling reality for market observers who were unable to diagnose what ailed an otherwise healthy economy.

Well, there's good news to report - Denver is no longer the sole poster child.

Reports are now coming in from many other parts of the country telling of loans going bad at alarming rates in places like Atlanta and out West in Las Vegas, Sacramento, and San Diego.

While homeowners in other metropolitan areas garner increasing attention for not being able to make ends meet, the statistics in Denver point to a situation that has not gotten any worse in the last few months. Things have certainly not gotten better, but having become no worse, in today's real estate climate, should be considered good news.

According to this report, while still well below per capita rates of a decade and a half ago, foreclosures in the Mile High City are on track to set new highs in 2006. The first half total of 9,500 real estate foreclosures was spread equally between the first and second quarters, a total that while more than a third higher than during the same period last year, showed no increase from one quarter to the next.

But, as in other parts of the country, some observers are confused by rising foreclosure rates in an economy that is otherwise statistically sound - low unemployment, robust growth, and low consumer prices. They wonder if continuing trouble with homeowners making mortgage payments will affect the economic statistics.

Experts are concerned about the number of people in danger of losing their homes because of the impact on a local economy that is otherwise showing strength by most measures.

"I do believe there is a crisis," said Peter Lansing, president of Universal Lending, who served on a foreclosure task force during the late 1980s. "We do need to do something about it. It is all of our responsibility."

He said lenders, consumers, real estate agents and home builders all share blame.

Experts said foreclosures are being driven by several factors: adjustable rate mortgages that are rising with interest rates; interest-only loans; houses sold to people with less than stellar credit ratings who in previous years wouldn't have qualified for loans; programs allowing homes to be purchased with no down payment; overbuilding; the lack of new, high-paying jobs; and predatory lending and fraud.

If Denver is like nearly every other metropolitan area, the statistically sound economy of recent years likely had a lot to do with the housing boom. It always works that way - when credit is expanded and asset prices rise, people feel wealthier and they spend more.

This has a beneficial effect on the economy until the credit expansion runs its course - you'd think that an expert would at least mention this in passing.

Here's another expert opinion.

Soaring foreclosures are a puzzle because the rest of the economy is doing so well, said Tom Clark, executive vice president of the Metro Denver Economic Development Corp.

"We thought the foreclosures would wash out by the end of the summer, but now with rising rates it looks like that is not going to happen until the first quarter of 2007," Clark said.

"The thing that continues to puzzle me is that all of the other underlying parts of the economy are strong. Our job growth is good, our personal per capita income is among the top in the country, our productivity is going up. Everything is strong except for the rising foreclosures."

It seems that Ben Bernanke and his rising interest rates are ruining the party that Alan Greenspan kept going for eighteen years.

Now this expert seems to have a better grasp on the situation.

Economist Tucker Hart Adams said she has no doubt it will get worse before it gets better. "That's going to be the basis of my next report," Adams said. "I'm trying to figure out how much worse."

She said many homeowners, already stretched by other consumer debt, can't afford to pay hundreds of dollars more per month as their adjustable rate mortgages move upward.

"I think in the '90s, when we had this unprecedented improving economy, we convinced ourselves the good times would never stop," Adams said. "A lot of people in Colorado just got in over their heads."

That's what easy credit does - it gets people in over their heads. Recall that Ms. Adams is often quoted by the Rocky Mountain News regarding their real estate market - she got a bit of an education three months ago, as reported in the last quarterly foreclosure update.

Economist Tucker Hart Adams said that foreclosures are a lagging indicator and will continue to rise even as the economy gets back on its feet.

"I don't know if they're going to continue to rise by 30 percent, but they are going to continue to rise," Adams said.

She said she recently was a guest on Healey's radio show and received a call from a woman who said she and her husband have good-paying jobs but are in danger of losing their home because they had borrowed all of the equity from the house and their credit cards are maxed out.

She wanted advice from Adams.

"I guess you just have to spend less on everything else" in order to keep the house, Adams said.

It seems that this same line of questioning will be heard around the country this summer as rising interest rates take their toll on new American homeowners and more analysts wonder why, in an otherwise healthy economy, people are having such a hard time making ends meet when interest rates are still historically low.