NEW YORK -- The shifting foundation of the U.S. housing market is sticking buyers with their old homes for longer, pushing many to slash prices and take on even more debt in the form of so-called bridge loans.
The danger is that loan terms vary and can be costly. The low rate for a top-quality borrower matches the prime rate, or 8.25 percent - well above the 6.72 percent average 30-year loan from mortgage-finance company Freddie Mac.
"These loans are more for the individual who is in dire straits, who has bought a house and can't sell" the existing home, said Bob Moulton, president of Americana Mortgage Group in Manhasset, New York. "That person ends up carrying the new house, the old house and the bridge loan. I'm seeing the reliance on bridge loans now more than ever."
June existing home sales fell to the slowest pace since January, and prices posted the slimmest gains in 11 years, the National Association of Realtors said this week. Sales of new homes also fell in June, the Commerce Department said, and unsold inventories of all houses are piling up.
"Bridge financing is necessary in a short-term situation, but if a homeowner carries the bridge financing for an excess period of time, he could be forced to sell at a lower price, contributing to softer sales prices," Moulton said.
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The record five-year seller's spree has clearly become a buyer's market. Yearly double-digit price surges were seen as unsustainable, and rising mortgage rates hurt affordability.
On top of higher rates on bridge loans, prepayment penalties can erode profits on the sale of the existing home.
"Let's say you're one of lucky ones that sells their house, gets the appreciation and wants to pay the bridge loan off quickly. The average, I believe, is about 6 percent prepayment penalty," said Mitch Freifeld, president of Global Branch Solutions in Clearwater, Florida, which has about 400 broker offices nationwide. "So, if you borrowed $200,000 you're paying $12,000 to get out of that loan."
BRIDGE OVER TROUBLED WATERS
At the same time, bumped-up demand for bridge loans may not bode ill for the overall housing market, some industry experts contend. Buying a new home nearer the realistic price of the existing house can help owners avoid a bridge loan, or better manage one if they need it.
"Prices increased so fast, and it carried on for so long, that the equity positions people have are still pretty good ... even if you adjust the price down by 15 percent these people are still doing really well," said Ned Redpath, owner and president of Coldwell Banker Redpath, Hanover, New Hampshire.
In the worst case, he says, renting the unsold house could help temper any losses until the spring buying season or a steadier market returns.
More people face these funding decisions as homes linger on the market. Some economists now predict a longer, deeper housing correction as buyers hold out for lower prices.
"While the MBA hasn't collected data on bridge loans, the slowing market may be an impetus for some pickup in this loan type as borrowers see their current properties stay on the market longer," said Doug Duncan, chief economist for the Mortgage Bankers Association, an industry trade group. "It may be a productive strategy if the cost of the bridge loan is less than the foregone profit from lowering the sale price and selling the current property faster."
Sellers seem slow to realize their homes are overpriced, realtors and economists say. Also, those locked into new homes cannot take their existing houses off the market simply because prices slump.
"What scares me is that you're in a market now where we all know is that real estate is inflated, maybe 20 to 30 percent, and the market is slowing down, so some people are going to get caught out there," Freifeld said. "People are still falsely thinking that the market's the same, and trying to upgrade to a larger house because they feel they have all this appreciation in the house they're in."
Lenders charge more for bridge loans because of the added risk: the loans are a borrower's third layer of debt.
"Let's face it, a primary residence is the last debt you're ever going to be late on," said Dave Savage, chief executive of MortgageCoach, an Irvine, California-based company that provides mortgage-planning software to loan officers.
The older home often becomes unoccupied. If an owner's finances sour, they might first default on the older home.
STAYING ABOVE WATER
Homeowners can avoid bridge loans by refinancing their existing loans to tap into their equity, or by opening a credit line. But it can get more difficult and costly if they try this after the home goes on the market, experts said.
The rise in bridge loans "is further evidence of a slowing in the market, and of the lack of planning that most homeowners do in making these types of decisions," Savage said.
Despite worries about a prolonged housing slide, industry experts hope the market stabilizes before bridge loans turn into delinquent or foreclosed mortgages.
"My hope is that the market turns around quick enough that not too many people will get hurt," Freifeld said.
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