Lava loan meltdown


POSTED: Sunday, July 19, 2009

Tim Callahan and George Ventura didn't get burned by lava after buying their Kehena Beach dream home in 2007, but now that they want to move, they could get scorched by new mortgage regulations.

Mortgage giant Fannie Mae officially declared in its June selling guide that it would no longer purchase or securitize mortgage loans in the Big Island's lava zones 1 and 2, where the probability of lava flows is greatest. Kehena Beach Estates, where Callahan and Ventura live, sits in close proximity to Kilauea, one of the world's most active volcanoes.

“;Properties in lava zones 1 and 2 are not eligible due to the increased risk of property destruction from lava flows within these areas,”; Fannie Mae's June directive states.

Ventura, who easily obtained a mortgage when he and his partner bought the property, said he is concerned the ruling will decrease investment in the community, which is known for its affordable housing and emphasis on sustainable living practices.

Others, from Hawaii's congressional delegation to real estate professionals and Hawaii residents, have echoed his concern and protested the rule enforcement, which makes it more difficult for people to affordably finance their homes.

“;I think Fannie Mae has made a misstep in that they should be trying to support more investment in this type of community,”; Ventura said.

The Big Island has been divided into nine lava zones, with zone 1 being the riskiest for lava flows, since a U.S. Geological Survey came out in the mid-1970s. In the past, the zones have been used to determine insurance risk and lending practices; however, the map, which was updated in 1991, had relatively low impact during the previous real estate cycle when conventional lending standards were their most lax. As a result, the Puna district, where housing is more affordable, saw a corresponding real estate boom despite the fact that all neighborhoods are in lava zones 1, 2 and 3.

“;We love lower Puna for its spectacular scenery, great ocean breezes, affordability and eco-consciousness,”; Ventura said. “;Kehena Beach Estates, where we live, has the additional benefit of having a lot of old-growth trees and jungles, which provides a good habitat for local birds and animals.”;


In the last decade, as more buyers fell in love with Puna's rustic charm and affordability, the median price paid for single-family homes increased threefold. In 2005 a third of the 3,000 residential permits granted on the Big Island were in Puna, according to Hawaii County planning records.

Real estate agent Denis Fuster, who represents the Kehena Beach couple and lives in lava zone 1, is worried that firmer underwriting will make the market fall further. During the last boom, there were plenty of companies that would underwrite mortgages in the region, Fuster said. As the lending market has tightened, real estate activity and loans have dwindled, he said.

After hearing about Fannie Mae's decision to take a firmer position, Callahan and Ventura dropped the price of their home to $299,000 from $319,000.

“;We knew that this could make it harder to sell,”; Callahan said.

Fannie Mae has inexplicably signaled out the Big Island and turned a blind eye to similar districts built around active volcano zones on Maui and in Alaska, Washington and Oregon, said John Dirgo, broker/owner of Aloha Coast Realty.

“;You can be sitting on the side of a volcano in Oregon and still get a loan,”; Dirgo said. “;It doesn't make any sense.”;

Such complaints have prompted Hawaii's congressional delegation to draft a letter expressing concern about how Fannie Mae's announcement will affect the Big Island's affordable housing, said Peter Boylan, press secretary for U.S. Sen. Daniel K. Inouye's office in Washington, D.C.

While conventional loans are still available for some buyers in lava zones 1 and 2 through the U.S. Department of Agriculture and Freddie Mac, many are concerned that this could change, Dirgo said.

“;One of the conditions that the government is putting on Fannie Mae and Freddie Mac is that they need to adopt a common set of rules,”; Dirgo said.

Linda Wong, broker at Hilo-based Home Mortgage Professionals Inc., said lenders often work in tandem. The Veterans Administration, which runs the VA loan program, has pulled out of lava zones 1 and 2 as well, and it is rumored that Freddie Mac might follow suit, Wong said.

“;It would be devastating to our market,”; she said.

Across the U.S., tighter underwriting has in some cases exacerbated foreclosures, said Daren Blomquist, marketing communications manager for RealtyTrac, an online marketplace that tracks foreclosures in the U.S.

“;The tougher the financing standards, the narrower your market of buyers,”; Blomquist said.

According to RealtyTrac, Kailua Kona, Waikoloa, Hilo and Pahoa were in the top 10 ZIP codes for June foreclosure activity in Hawaii.