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Performance Declining on 2nd Homes

Mortgage lenders that finance vacation homes on the Jersey Shore of the Garden State may have more to worry about this year than just the negative image of beach towns caused by the MTV reality series of the same name.

Delinquency rates on second homes and investor properties are on the rise nationwide with certain New Jersey ZIP codes suffering more than others. According to figures compiled for National Mortgage News by CoreLogic, the national delinquency rate on all investor properties is near an all-time high of 10%.

The figure, however, reflects loans that are 90 days or more past due. A year ago, the rate was 7.83% and 12 months prior was at a very benign 4.7%.

However, just about any Realtor or lender that plays in the second-home market is quick to point out that vacation homes aren't necessarily investor properties-and for lenders and investors that's a good thing, at least according to CoreLogic's numbers. The California-based data cruncher notes that, nationally, the 90-day rate on second homes is at more manageable 6.8%. On the Jersey Shore, which includes vacation towns up and down the coast, owners of second homes aren't doing so badly with the serious delinquency rate at 3.25%. Investor properties, though, are suffering with an 8.92% delinquency rate.

The difference between the two categories is important for servicers. Generally speaking, an investment property entails the purchase of a home where the buyer plans to rent it out, using the monthly income to pay all or part of the mortgage. A second home is usually described as a vacation property (beach, mountain/lake, ski resort) where the owner uses it part of the year and who might occasionally rent it out.

Steve Booth, a Realtor who sells and rents homes in Ocean City of Cape May County, noted that most of the second homes sold in his town are to "fairly well-to-do owners. These are businessmen who may be making less but they're still employed."

According to Booth, Ocean City-which is within two hours of Philadelphia and close to Wilmington-sees very little in the way of foreclosures. "The banks here are likely to negotiate these things through short sales."

Prices in the area peaked about five years ago and are down 20% to 25% from then, but compared to the condo market in Miami, Ocean City looks like a beacon of light. Units in certain Miami-Dade County high-rises are being auctioned off at discounts of up to 70% from their peak, according to some vulture fund managers I've interviewed.

Mortgage bankers are probably losing less sleep over second-home delinquencies than might be expected because underwriters in some markets, including Ocean City, avoided the worst characteristics of subprime. "Ten years ago we had nothing but plain old vanilla fixed-rate loans here," said one Realtor who works the area. "We had some subprime here but not much. I'm glad we're back to where we were 10 years ago."

Today, most originators of second homes on the Jersey shore require at least 20% down. A few lenders, including Citizens Bank of Philadelphia, will allow for a 10% downpayment but only for borrowers with pristine credit.

Investor properties, as I noted, are a different category of second homes and that's where the damage is being felt by servicers, mortgage insurance firms, and to a lesser degree Fannie Mae and Freddie Mac. "Right now about 3% of our guarantees are on investor properties," said a Freddie Mac spokeswoman. "That's down from 7% in 2007." Freddie lumps all non-owner-occupied residences into the investor category and has no distinguishing information on true vacation homes vs. ones where the owner is dependent on rent rolls to make the mortgage.

All totaled, based on Freddie's guarantee figures, at least $500 billion of outstanding residential loans in the U.S. are tied to a second residence. As these loans continue to go south, firms charged with working them out are facing the usual headaches-but an unusual one as well: fraud.

When real estate values were booming, some borrowers, in order to obtain a lower rate, lied to their lender that they were owner/occupants when in fact they planned to rent it out and maybe flip it. With these loans going delinquent in increasing numbers, servicers are now learning the truth, which means the borrower committed fraud. Fraud, as most any seller/servicer knows, is grounds for a loan buyback. And as any mortgage banker worth his beach salt knows, buybacks cost money, vacation home or not.