The affects of the recent financial crisis have been felt at multiple levels of the economy, perhaps most significantly in the housing market. North Dakota real estate has been impacted as one would have expected, with average home prices falling in line with national averages. The two most active areas of growth, and the locations with the highest average home values are Fargo and Bismarck. Ultimately, the mortgage and foreclosure options and procedures apply to all areas of the state and understanding them is important to navigating the North Dakota real estate market.
After the fallout from the 2008 great recession, the prices of homes in North Dakota have declined by 20 to 30%, depending on which part of the state one focuses on. The rural parts of the state have remained more stable, but the highest concentration of highly valued home is around the two largest cities, Fargo and Bismarck. Recent data shows that the average home value for the state was between $175,000, and $220,000.
The interesting phenomenon in North Dakota is the large portions of the state have revealed no homes on the market in recent research. This is explained, in part, by the unpopulated areas of the state, but the other, more interesting explanation, is that the state is very stable. This information gives experts two primary clues: on the one hand, residents may be attempting to weather the storm; on the other hand, a lack of active homes for sale means that data is more likely to be skewed. The boom in fracking oil and natural gas resources has caused a significant increase in rents around energy exploration areas like the Bakken Shale formation.
Traditional Mortgages – Under the most common type of mortgage in the United States, a lender supplies the borrower with the money needed to by a property and then places a lien against that property until the debt is retired. The lender is known as the mortgagor and the borrower is known as the mortgagee. In the event of a default, these parties have opposing interests and must involve a court to resolve the dispute (see the discussion of judicial foreclosures below). This is the only type of mortgage available in North Dakota.
Other types of mortgages, specifically deed in trust mortgages, are not permitted in North Dakota. This means that only judicial foreclosures are permitted (see the section on foreclosure below). This is important to understand, because it affects the types of mortgages available to some extent. It also has a dramatic affect on foreclosure procedures and the recourse available to lenders when borrowers default.
Fixed Rate Mortgages – The 30-year fixed rate mortgage is the most common mortgage type in use today. Also available with a 15-year term, a fixed rate mortgage gives the borrower a set monthly payment for the duration of the loan. The rates on this type of loan tend to be somewhat higher than those on adjustable rate loans because the lender has no way to reset the loan if rates in the general market rise significantly. To offset this risk, lenders charge a higher rate at the time of the loan as a form of protection.
Adjustable Rate Mortgages (ARMs) – As was mentioned above, an adjustable rate mortgage usually offers a lower initial interest rate because after the initial reset date, the lender has the ability to receive a higher rate if rates in the general market have risen. Lenders are in the business of profiting from lending capital at market rates, so the protection afforded by a rate linked to the general market is of value to the lender. The two dates of importance are the initial reset date and the subsequent reset dates; the longer the borrower has before the initial reset, the more protection he or she has from shifts in the market. Likewise, subsequent reset dates (usually every year thereafter) are important because they define how regularly the parties have interest rate exposure.
This type of mortgage is an attractive option to various borrowers, but should be of particular interest to individuals that foresee either a need or a desire to move quickly. While ARMs usually start at a lower rate, in rising markets they can end up with higher rates after several reset dates. If for example, an ARM starts 2% below the available fixed rate and rises at 1% per year, the break-even point will come 5 years after the loan is initiated. Under these circumstances, selling before the 5 years has elapsed makes the ARM less expensive. While there is no reason that an ARM must increase rapidly, but when figuring worst-case, this is an advisable practice. One must then make an honest assessment as to whether the property will be sold within the break-even period.
Interest-Only Loans – An interest-only loan is designed with two primary goals for the borrower: to minimize taxes and to minimize payments. Under this structure, the borrower is only responsible for making interest payment for some initial period. After this period ends, the principal repayment period begins, and the monthly payment amount often increases significantly. From the tax perspective, this structure front loads the interest paid – interest paid on one’s primary residence is completely tax deductable. These loans are far less common than they once were, taking much blame for the recent sub-prime debacle. Many critics have asserted that because of the significant jump in the monthly payment amount, many borrowers were allowed to undertake mortgages they could not afford. Compounding the problem is the fact that when the reset occurs, the borrower has not reduced the principal balance on the loan at all. If the loan goes to foreclosure, the amount to be repaid is usually very high. In an environment of falling prices, this intensifies the problem.
Flexible Payment Loans – Flexible payment loans are available only in very rare instances currently because the very premise of their genesis has evaporated. Under this type of loan, the borrower was left to exercise his or her discretion in making payments. Amounts ranging from full principal and interest payments all the way to skipped payments were allowed. The premise relied upon by the lender was that real estate prices could only rise. The property was therefore such high-quality collateral, that foreclosure was a nuisance but not an economic danger. As the prices of homes began to fall, lenders found that the collateral they had relied upon was not sufficient. Hence, these loans are increasingly rare.
Home Equity Lines and Loans – A home equity line of credit is called a revolver and, like a credit card, it may be drawn upon and paid down on a flexible schedule. A home equity loan, usually used for home improvement, is a lump-sum payment to the homeowner. Both are issued based on the value of the property involved. A home equity loan is sometimes used in conjunction with a traditional loan for higher-priced property. Rates charged on loans over $417.000 (referred to as jumbos) tend to carry higher rates. When a conforming loan is combined with a home equity loan, the blended rate is often more attractive than the higher jumbo rate.
Overall, the procedures designed by each state’s legislature are designed to both protect the rights of the parties involved, and to ensure the orderly functioning of the system.