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Subprime Loan Impact
The foreclosure-start rates in 34 states declined during the second quarter of this year, but the national average rose again to record levels because of problems in Arizona, California, Florida and Nevada, according to the Mortgage Bankers Association.
The national mortgage delinquency rate is 5.12% of all loans being delinquent (at least 30 days past due on payment). And 1.4% of all loans had started foreclosure.
The findings also confirm a widening problem with ARM adjustable rate loans issued to subprime bad credit borrowers. 18 states now have delinquency rates on adjustable rate subprime loans of 19% or higher. Mississippi and West Virginia each had more than 26% of these loans delinquent.
Nationally, 16.95% of subprime adjustable rate loans were delinquent in the second quarter, up from 10.13% during the first three months this year. Helping to drive this rate were problems in Arizona, California, Florida and Nevada, which were hot markets that are now cooling. These four states account for more than a third of outstanding subprime adjustable rate loans.
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Homeowners, struggling to deal with sharp increases in their adjustable mortgage payments, got hit with a record number of foreclosure notices in the spring as the crisis in subprime bad credit lending intensified.
The problem was the most severe in the industrial Midwest and former housing boom areas such as California and Florida, but economists warned the situation will get worse in coming months as an estimated 2 million adjustable rate mortgages taken out with low introductory interest rates reset to much higher rates.
The crisis is most severe in subprime mortgages, loans provided to borrowers with bad credit, but it is now spreading to other types of mortgages.
The rising defaults in subprime mortgages have roiled global financial markets in recent weeks, sending stock prices on a roller coaster ride as investors wonder which big bank or hedge fund will be the next to report huge losses from subprime mortgages that were bundled into securities and resold to investors.
Both President Bush and Federal Reserve Chairman Ben Bernanke tried to calm fears late last week. Bernanke pledged the central bank would "act as needed" to limit any adverse economic effects from the market turmoil. Bush announced changes in the Federal Home Administration insured-loan program to help combat the expected wave of foreclosures and also answer attacks from Democrats that his administration has been slow to respond to a growing crisis in mortgage foreclosures. Democrats criticized Bush for not going far enough and vowed to push more aggressive legislation through Congress, not only to help homeowners facing foreclosure but also to attack predatory lending practices they contend led to the crisis. Sen. Charles Schumer, the chairman of the Joint Economic Committee, said the new mortgage delinquency numbers should serve as a wake-up call to Congress and the administration that urgent help is needed. Schumer is seeking $300 million in federal support for nonprofit mortgage counseling groups which he said were "the best defense against the coming storm of foreclosures throughout the country."
Private economists warned the worst slump in housing in 16 years and the turbulence in financial markets from a resulting serious credit squeeze could push the economy into a recession as more borrowers fall into default, dumping even more homes onto an already glutted market.
Defaults are not expected to peak until next year, reflecting a wave of introductory mortgages that are just now resetting from low "teaser" rates. Those resets can in many cases mean an extra $250 to $300 in higher monthly payments on the typical $1,200 monthly mortgage.
The MBA survey found that the delinquency rate, which tracks the number of people who are behind in their payments but have not yet entered the foreclosure process, was also up sharply during the spring. It rose to 5.12% of all loans, the highest level in five years and up from 4.84% in the first quarter.
The delinquency rate for subprime loans increased more sharply to 14.82% - up from 13.77% - in the first quarter. That marked the second-highest subprime delinquency rate on record after a 14.96% rate in the spring of 2002.
The delinquency rate for prime loans, offered to borrowers with good credit histories, also increased, but by a much smaller amount. It rose to 2.73%, up 2.58% in the first quarter.
Now with the inventory of unsold homes at record levels, many speculators are defaulting on their mortgages. Those defaults are dumping more homes on an already glutted market.
"With so much supply out there to compete against, borrowers who can't pay their mortgages are behind the eight-ball," said Mike Larson, a real estate analyst at Weiss Research. "They can't sell to get out from under their obligations. As a result, more end up tumbling into foreclosure."
During the five-year housing boom, which ended last year, prices in the hottest areas surged as investors bid up the price of homes hoping to quickly resell them for a profit. Now with home sales falling, the inventory of unsold homes rising and prices stagnant, some speculators are choosing to default on their mortgages.
Democrats blamed predatory lending practices for a large part of the current problems and said they planned to introduce bills aimed at halting such practices as aggressive marketing of subprime loans to unqualified borrowers.
Federal and state banking regulators issued guidance this week encouraging lending institutions to work with borrowers to restructure loans at more favorable terms rather than foreclosing on the existing mortgages.
The Federal Reserve and other banking regulators issued special guidance Tuesday urging loan service companies to work with borrowers in danger of defaulting on their home mortgages.
The guidelines are not mandatory, but the regulators expressed hope that companies that collect payments on mortgages would heed the advice.
Sheila Bair, chairman of the Federal Deposit Insurance Corp., said mortgage collectors have the authority under existing accounting and tax rules to help deserving borrowers.
"More and more consumers with subprime and hybrid mortgage products are facing the very real prospect of losing their homes through foreclosure as their payments reset and become unaffordable," Bair said in a statement. "It is vital that mortgage servicers work proactively with borrowers facing much higher payments as their interest rates reset."
The banking regulators' guidance issued by the Fed and other agencies followed President Bush's announcement Friday that his administration was putting forward proposals aimed at preventing defaults expected over the next two years as the housing industry endures a serious downturn.
The effort by Bush and the banking agencies is an attempt to deal with growing anxiety as more and more homeowners worry about losing their homes because they can no longer pay the mortgage.
An estimated 2 million adjustable rate mortgages are scheduled to reset by the end of 2008, going from low introductory interest rates to higher rates.
Already there have been a rising number of defaults of subprime mortgages, loans that were extended to borrowers with weak credit histories. Those increasing defaults have roiled financial markets in recent weeks as investors worried about whether the credit markets will be destabilized by a rising tide of bad loans.
The problem facing many homeowners with adjustable-rate mortgages? Those mortgages are now resetting at higher interest rates that in some cases are causing monthly payments to double or even triple.
The guidelines were aimed at addressing the fact that in many cases the company in charge of collecting monthly mortgage payments is not the same company that originated the loan.
The guidance said appropriate strategies to ward off defaults could include modifying the terms of the loan or deferring payments. Those modifications could include converting the loan from an adjustable rate loan, one in which the interest rate resets at periodic intervals, to a fixed-rate mortgage that would prevent the monthly payments from rising.
Other possible modifications would include extending the length of the loan and rolling the amount of payments the borrower has missed into the total loan amount that must be paid off.
"Reworking these loans will achieve long-term sustainable obligations to provide stability to borrowers, investors and the marketplace," Bair said.
Democrats who have criticized the administration's handling of the foreclosure problem said more must be done.
"Today's statement by the financial regulators comes very late and only underscores the failure of this administration over a period of years to protect homeowners from predatory lending practices," said Senate Banking Committee Chairman Christopher Dodd, D-Conn.
Sen. Charles Schumer, D-N.Y., said it was a good move to get federal regulators to jawbone lenders and banks to help families get out of bad subprime mortgages. But he said more federal resources must be devoted to helping local nonprofit groups that specialize in providing counseling to prevent foreclosures.
"These groups are effective mediators between the private sector and families who need loan modifications," said Schumer, who has won Senate Appropriations Committee approval for an additional $100 million to support foreclosure prevention counseling.
The joint statement encouraged the mortgage servicing companies to consider referring borrowers in trouble to qualified homeownership counseling services.
Fed Governor Randall Kroszner said the joint guidance was meant to encourage the companies that collect payments on mortgages packaged into certain debt securities and sold in debt markets to "reach out to financially stressed homeowners."
"Keeping families in their homes is a matter of great importance to the Federal Reserve," said Kroszner, one of the Fed board members who has taken the lead in dealing with the mortgage crisis.
In addition to the Fed and the FDIC, which insures deposits at financial institutions, the other groups who issued the statement were the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the National Credit Union Administration and the Conference of State Bank Supervisors.
The worst is still ahead. At least 1.5 million households with adjustable-rate loans made in 2005 and 2006 - collectively valued at $353 billion - will jump to much higher rates this year and throughout next year.
As homeowners try to refinance out of adjustable-rate mortgages into fixed-rate products, they're finding that lending standards have tightened in response to criticism that home lenders had lowered their standards in 2005 and 2006. And since home values are falling, many troubled homeowners can't refinance because they now owe more than their houses are worth.
"The more people who owe more than the value of their house, the more incentive to go into delinquency or foreclosure," Duncan said. "Both of those factors will drive delinquency and foreclosures higher than we had anticipated."
Even adjustable-rate loans given to prime borrowers, those with the best credit, are experiencing unprecedented problems. The number of these loans considered seriously delinquent increased slightly in the second quarter to 2.02% nationwide.
It's a different story for fixed-rate loans. Serious delinquency rates - more than 90 days past due - for fixed-rate home loans made to prime borrowers remain around historical norms and fell slightly for subprime borrowers during the second quarter of this year, to 5.84%. That contrasts sharply with the 12.4% of subprime adjustable rate loans that are seriously delinquent.
Across a broad range of loan types, the highest overall delinquency rates were in Mississippi at 9.33%, Michigan at 7.55% and Louisiana at 7.29 %.
Leading the list of states with foreclosed properties was Ohio, at 3.6% of all loans, followed by Indiana at 3.01% and Michigan 2.77%. Michigan led the list of states with new foreclosure starts, at 1% of outstanding loans, followed by Ohio at .98% and Indiana at .91%.
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