Rise in foreclosures might only graze S.D.

South Dakota probably will skirt a forecasted spike in home foreclosures, some state banking experts say.

Nationwide, billions of dollars in subprime adjustable rate mortgages are approaching their first resets that are expected to balloon house payments by hundreds of dollars.

Those loans, called subprime ARMs, were popular when mortgage interest rates were at historical lows. They often were issued to borrowers with damaged credit at a time when lenders relaxed their standards on loan qualifications. Now, those standards have tightened again and could push the ability to refinance into fixed-rate mortgages out of reach for many.

More popular elsewhere

In South Dakota, the effect should be less harsh. The ARMs were a tough sell to South Dakotans who traditionally are more conservative borrowers and less transient home buyers, said Paul Olson, area sales manager for Wells Fargo home mortgage.

For the most part, South Dakotans didn't take out mortgages in hopes that home values would increase faster than rising interest rates, allowing borrowers to sell, or "flip" their homes quickly before their loans reset, Olson said.

"That's fine until the property values turn and you can't sell your house quickly," Olson said. "They were speculating on the market and they are getting burned on it."

Bump in state's rate

South Dakota did see an increase in the percentage of subprime ARMs loans in foreclosure in the past year, according to the Mortgage Bankers Association's National Delinquency Survey.

The foreclosure rate for subprime ARMs was 7.85 percent in the fourth quarter of 2006, up from 4.35 percent in the fourth quarter of 2005, according to the survey.

Nationally, the rates of foreclosures are expected to continue rising through the first half of 2007, according to a March 29 report by Credit Suisse.

Modifications cheaper

Loan modifications, such as extending the term of the loan, could help some borrowers, Olson said. Another option, refinancing, becomes more difficult for subprime ARM borrowers because they must again go through credit worthiness checks, which they might not pass, he said.

"When you do a modification, it's just one piece of paper, changing a rate, or the number of years," Olson said. "The cost is definitely cheaper if you do a modification."

Staving off foreclosures

Those modifications, along with increasing home values and continued growth of Sioux Falls could help minimize foreclosures in the state, said John Sondey, a professor of economics and public finance at South Dakota State University. Still, loan modifications might not help those with too large a loan for a home with too little value. But lenders often will work with borrowers and make loan modifications to avoid foreclosure - a costly and time-consuming process, he said.

"The question is, are they avoiding foreclosure now only to get creamed in the future?" Sondey said. "Or will this stem the tide?"

Modifications also might help the increasing number of South Dakotans whose subprime ARMs have slipped into delinquency. In South Dakota, past-due subprime ARMs increased in the fourth quarter of 2006 to 15.9 percent, up from 12.87 percent in the fourth quarter of 2005, according to the National Delinquency Survey.

A lender's ability to modify loans might help keep national foreclosure rates from surging beyond forecasts, according to a Credit Suisse report.

Reach Matthew Gruchow at 331-2301.