Reduction in mortgage debt improves finances for Sonoma County homeowners

Sonoma County households spent a decade getting their personal finances in order after the Great Recession, an achievement economists say can help the county survive financial damage from the coronavirus pandemic and wildfires, as long as residents don’t take on too much new debt.

Last year, county residents had about half the consumer debt they carried during the 2007-2009 downturn, according to the Federal Reserve. The central bank has begun tracking household debt compared to income at the county level nationwide, because the institution’s analysts have discovered that benchmark has a big effect on how well regions can recover from recessions.

Credit is vital to an economy and people’s well-being. It helps businesses and individuals overcome obstacles and build wealth. But in times of financial crisis, like today, too much debt can become an unmanageable burden.

“We’re specifically watching how people are managing their debt. It’s intriguing to see how educated they are in household finances because of the Great Recession,” said Sonoma State University economist Robert Eyler, dean of the School of Extended and International Education. “How they manage debt is a key to the health of our local economy.”

For most households, debt falls into seven categories: mortgage, second mortgage or home equity loan; home equity line of credit; student loan; personal loan, including payday and installment borrowing; automobile loan; credit card; and retail charge card.

At the national level, new borrowing during the pandemic has varied. Mortgages have surged. Home equity lines of credit have been flat, as have student and auto loans. Credit card debt has tanked, in part because people are staying home. Other consumer borrowing is down, according to economic and national financial media reports.

In Sonoma County, Press Democrat research found a similar range of debt usage. Mortgages, by far the largest debt shouldered by most, are increasing mostly at reasonable levels with sensible financial terms, a stark contrast to the high-risk mortgage mania that helped bring about the previous recession. But other types of debt are more vulnerable to the needs and whims of borrowers and lenders.

The biggest component of most Americans’ borrowing is for housing, which accounts for 72% of the debt in Sonoma County, according to Experian, a formidable national credit reporting agency. Mortgages have sometimes been a particular risk for local homeowners, because the county’s housing prices can be highly volatile and significantly out of line with personal and household incomes.

Last year’s county median, or mid-level, price of a single-family home — $650,000, as reported by Rick Laws of Compass real estate brokerage in Santa Rosa — was about eight times the median annual income of local households. By comparison, a house typically costs only three to four times median incomes nationwide, analysts reported.

Although housing in Sonoma County is expensive, local households have made the most progress paying off home loans compared with other forms of consumer debts in recent years.

Some of this came at the expense of people forced out of homes they could not afford. Lenders initiated foreclosure proceedings on 31,742 residential properties countywide from 2007 to 2013, equivalent to 15% of the county’s housing stock, and many of these struggling homeowners lost their homes. Since then, stung by financial losses and restrained by stricter regulations that followed the mortgage meltdown more than a decade ago, borrowers and lenders alike have been more cautious about managing mortgage debt.

In 2019, borrowers across the county obtained 16,293 home loans totaling $6.95 billion, according to federal mortgage data. It is a fraction of the amount borrowed at the peak of mortgage and home equity debt in Sonoma County in 2003, when borrowers secured 56,226 mortgages for a total of $13.8 billion.

“Before the Great Recession a lot of people viewed their home as a piggy bank. That no longer is the norm,” said David Williams, chief marketing and human resources officer at Community First Credit Union in Santa Rosa. “I’m not saying there aren’t people like that, but for the most part people are looking at their home as shelter.”

One result of less borrowing and rising home prices is county homeowners have much lower levels of debt on their homes, on average, than a decade ago. This summer, local homeowners with mortgages owed balances equal to 45% of the value of their property, down sharply from 2009, when 77% of their property’s value was encumbered, according to CoreLogic, which analyzes housing and insurance data.

Through dogged determination, Mark Reab, a Forestville general contractor, has knocked down his mortgage balance to an amount that’s 48% of the current value of his house.

Reab, 56, was 19 when he bought his first house, in Santa Rosa for $96,000. He lived there for 25 years, then rented it and bought a home in Windsor. But he decided he preferred Forestville, and in 2006 he bought a $570,000 house there with first and second mortgages totaling 90% of the property value, a common structure in those days. He put 10% down, helped by the sale of his Santa Rosa house.

In 2006, when a mid-priced home in Sonoma County was $585,000, according to Laws of Compass real estate, Reab’s Forestville house was a worth a little under the median. It seemed like a smart place to be, because Reab was aware that home prices were down slightly from a peak of $595,000 in 2005.

However, in 2007 local housing prices fell another 5.5%, then the recession hit in December, and home values plunged an additional 29%.

“I could see everything was going down, and I was losing everything I had worked for since I was 19,” Reab said.

He hired a loan modification company to help him adjust the terms of his home loans, which some lenders began offering to help people stay in their homes during the mortgage crisis. Then driving home from work one day, he heard on the radio that officials of that financial services company had been arrested for fraud. He went to see a financial advisor who told him, “All you can do is walk away. You’re too far upside down,” because he owed so much more on the Forestville and Windsor houses than they were worth.

Instead of giving up, Reab started calling major banks himself, in the early morning hours before work for an hour a day. He called day after day, week after week, trying to get loan modifications. He worked long construction hours and kept making monthly mortgage payments. Finally, in 2010 and 2011 modifications came through for both properties.

“I decided, ‘I can do this,’ ” Reab said.

In 2016, the year Sonoma County homes recovered to 2006 values, Reab refinanced the Forestville home with Hans Bruhner, mortgage advisor and branch manager for Finance of America Mortgage in Sebastopol. Today, Reab owes $341,000 on a 30-year mortgage for a house he estimated is worth $710,000.

“It makes me really happy to see Mark in such a strong position compared to where he started in 2006.” said Bruhner, a 28-year mortgage veteran.

Having less mortgage debt is a strong position for homeowners during a recession because if home values start falling, they’ll have a decent chance to still owe less than their home is worth and will be less vulnerable to default and foreclosure, economic research shows. That translates into stability for renters, too, when landlords are secure.

“Housing debt is the largest debt people have, and if that becomes difficult to manage, people are more likely to lose financial stability. We haven’t seen that yet. That debt currently is not at risk as in the housing crisis of 2008-2010, but risk exists,” Eyler said. “The real big problem coming is, if people have to start piling on more debt, to stay in their homes. That is really where the danger comes.”

A decade ago, after the collapse of the local mortgage market, soaring foreclosures exposed Sonoma County to outside investors who snapped up housing at depressed prices. Between 2010 and 2014, the county added almost 5,000 rentals, according to U.S. Census Bureau data.

“I used to walk my neighborhood and identify the homes that had been foreclosed upon. It was obvious because the landscaping was overgrown,” emailed Noreen Evans, a Santa Rosa attorney who had a painful front row seat as an assemblywoman representing the North Bay during the financial crisis. “I always wondered what happened to those houses, whether they were purchased by corporate landowners or what?”

“The bad loans we had then cost tens of thousands of families their homes and made a large number of the new millionaires on Wall Street,” said retired Santa Rosa mortgage broker Ann McGinley of the national housing market.

High mortgage debt prior to the financial crisis, and the ensuing housing collapse, plus loss of wealth were key reasons Sonoma County unemployment almost tripled during the crisis. Residential foreclosures were nine times higher and area bankruptcies were nearly six times higher.

“It was awful, horrible,” said McGinley, who teaches continuing education classes for real estate agents. “In 2007, we started keeping tissues on our desks for clients, as ordinary office supplies.”

So far despite the pandemic, mortgages are providing support for the local economy, not land mines. Foreclosures in the county for the first nine months of 2020 only totaled 254, compared to 7,062 for the same period in 2009, according to Attom Data, a provider of nationwide property figures. Reason: Lower debt levels and loan deferrals many lenders are offering.

“Property values will likely remain strong. I haven’t heard any economists talking about decreasing property values, and we aren’t seeing it,” said Ron Felder, chief financial officer of Redwood Credit Union in Santa Rosa.

That’s different from the previous recession, when county home prices fell 29% in the first year, 2008, and another 17% by 2011, said Laws of Compass real estate.

“Housing is holding up now. I’m still hearing multiple offers. I think builders were more cautious because of the Great Recession so there is no supply glut,” said Michael Sullivan, chief credit officer at Exchange Bank. “Anecdotally we are hearing about people relocating out of the city (of San Francisco) to move up here, since they may not be required to go back to their office for the foreseeable future, if ever.”

Mary Fricker is a retired Press Democrat business reporter. You can reach her at mfricker@sonic.net.