Teaser loans not a serious problem

Q: I keep reading that home prices aren't expected to decline in the Seattle area. Aren't you overlooking the possible effect of "suicide loans" — those adjustable-rate mortgages that are common and dangerous? I think the interest rates on those loans will go so high that many will be forced into foreclosure. Won't that produce a glut of for-sale homes that will force prices down?

A: Let's start with the basics on those adjustable-rate loans.

The riskiest are teaser-rate loans. These start at an exceptionally low interest rate (like 2 to 4 percent), then reset upward later to a higher rate that can double the borrower's monthly payment. Obviously borrowers who can't refinance out of these loans are at great peril — particularly if their loan has allowed them to make interest-only payments, their home hasn't appreciated much and they have little equity to work with.

However, it's not a given that foreclosure is in their future. If the local economy is robust, jobs are plentiful and housing demand is strong about the time their loan resets, holders of teaser-rate loans have options. They may be able to increase their income and keep the house or find a buyer and escape foreclosure.

These loans can reset more than once, from one to 10 years after origination — meaning there's no one point at which distressed sellers will flood the market. Obviously, it's impossible to forecast whether the economy will be good years from now, allowing them to ride it out. Maybe it will. Maybe it won't.

Loan Performance, a San Francisco-based mortgage-information provider, calculates that teaser-rate loans comprise 13 percent of mortgages in the Seattle-Bellevue-Everett area. Since January 2005, teaser-rate foreclosures have consistently been lower than 1 percent a month.

The most recent data, for June, shows just 0.07 percent of such loans were in foreclosure. In hard numbers, this means about five loans for the entire metro area.

The highest Seattle-area foreclosure rate, from 0.95 to 1.55 percent a month recently, has been for the more common fixed-rate loans.

"Teasers have not caused a serious problem in 2006, and I don't expect them to," said mortgage-market analyst Christopher Cagan, director of research and analytics at First American Real Estate Solutions in Orange County, Calif.

"People who bought in 2003 or sooner have plenty of equity, so they can refinance or sell or do something. It's the people who bought at the top of a market in 2004, 2005 or 2006 who are on the margin of it."

It will be two or three years before those borrowers' honeymoon periods are over and we'll begin seeing whether they can survive, Cagan said.

"Remember that even if a person gets in trouble, it takes six months to a year to lose a house, and people try to work it out," he said.

His bottom line: Teaser foreclosures will happen and will have some effect, "but they won't dominate the economy."

Q: A Seattle town house was advertised as having a two-car garage. Turns out the garage is only able to accommodate a Toyota Corolla by a few inches, and a Camry can't fit at all. Is there a city code that defines how large a two-car space must be? Also, is there any recourse for a buyer who bought the town house and planned to park two cars there?

A: Seattle city code requires residences to have an 8-foot-wide parking space for one car (indoor or outdoor), so anything beyond that is furnished solely at the discretion of the builder, said Alan Justad, spokesman for the Seattle Department of Planning and Development.

As for recourse, the only two options are reversing the sale (called a recession) or getting the seller to build you a larger garage. Neither is likely to happen, Seattle attorney Brian Ritchie said.

Recession is rare, he said, and only granted in cases where the property has a significant defect that's known but not disclosed.

For example, a seller knows but doesn't reveal that a home is highly contaminated because it's been a meth lab.

In your situation, the garage's size is easily seen, so it isn't a hidden defect. Moreover, you had the opportunity to do an inspection, so the responsibility was yours to determine whether the garage was big enough.

Still, did the developer misrepresent the property? Ritchie doubts so. "If you can fit in two cars of any size, then it's a two-car garage," he said.

Q: The back of my property borders isolated school-district property. Near the property line are trees that appear to be dead. I'm afraid they could do serious damage to my house and fence. Should I inform the school board, inform my insurance company (I'm afraid they might drop me) or remain quiet?

A: Because the dead trees aren't yours, you don't have to worry that your insurance company will drop you, said Karl Newman, president of the Northwest Insurance Council.

However, he doesn't see any point in going to the company first because he doubts they'd have much leverage in this situation.

Instead, Newman suggests you directly contact the principal, if the trees border a school, or the school-district maintenance director if the land lacks a school building.

Your concerns may get more attention if you put them in the form of a cordial but businesslike letter, rather than simply phone. And if you do want to involve your insurance company, you can always address a copy of your letter to it.

Home Forum answers readers' real-estate questions. Send questions to Home Forum, Seattle Times, P.O. Box 1845, Seattle, WA 98111, or call 206-464-8510 to leave a question on a recorded line. The e-mail address is erhodes@seattletimes.com. Sorry, no personal replies. More columns at www.seattletimes.com/columnists.