Loan woes sting more borrowers
MORTGAGES: Homeowners who took exotic packages feel pinch as late payments and foreclosures rise to a record.09:04 PM PDT on Friday, September 5, 2008
WASHINGTON - The source of trouble in the mortgage market has shifted from subprime loans made to borrowers with bad credit to homeowners who had solid credit but took out exotic loans with ballooning monthly payments.
The Mortgage Bankers Association said Friday that more than 4 million American homeowners with a mortgage -- a record 9 percent -- were either behind on their payments or in foreclosure at the end of June.
Second Wave
"The problem that policymakers and Wall Street once assured us was 'contained' to subprime mortgages has proven to be anything but," Mike Larson, a real estate analyst with Weiss Research, said in a research note.
As the economy falters and home prices keep falling, concern is building about a second wave of mortgage defaults flooding the market through 2010.
On Friday, the Labor Department said the nation's unemployment rate rose to a five-year high of 6.1 percent in August.
A drop in income -- whether through a lost job, divorce, death of a spouse, or health problems -- is the No. 1 reason people fall behind on their mortgages and lose their homes.
In California, 3.86 percent of home loans were in the foreclosure process at the end of the second quarter. Also in the second quarter, 1.82 percent of the state's outstanding mortgages entered the first stage of foreclosure, with lenders issuing notices of default. Comparable figures for the second quarter and a year ago were not available.
Lending Practices
But mortgage defaults and foreclosures in many areas, especially California and Florida, can also be blamed on egregious lending practices and rampant speculation by homebuilders and small investors alike.
"We are unlikely to see a national turnaround until we see a turnaround in the two largest states," with the most outstanding home loans, said Jay Brinkmann, the Mortgage Bankers Association's chief economist.
The latest quarterly figures broke records for late payments, homes entering the foreclosure process and for the inventory of loans in foreclosure. The trade group's records go back to 1979.
The percentage of loans at least one month past due or in foreclosure was up from 8.1 percent in the January-March quarter, and up from 6.5 percent a year ago, using figures that were not adjusted for seasonal factors.
New foreclosures rose from the first quarter in 35 states and Washington, D.C. The biggest increases were in Nevada, Florida, California, Arizona, Michigan, Rhode Island, Indiana and Ohio.
New foreclosures actually declined in Texas, Massachusetts and Maryland. Both Maryland and Massachusetts recently passed laws to slow the foreclosure process and give borrowers more time to catch up on their payments.
Almost 500,000 homeowners, or about 1 percent, entered the foreclosure process in the second quarter.
Subprime Delinquencies
But for the first time since the mortgage crisis started, delinquencies on subprime adjustable-rate loans declined. While more than one out of every five homeowners with a subprime ARM is still in default, that portion dipped 1 percentage point from the first quarter to 21 percent.
What's driving up the delinquency rate now is the number of homeowners with risky, adjustable-rate prime loans made with little or no proof of the borrowers' income or assets.
More than one out of 10 borrowers with a prime ARM is now delinquent or in foreclosure. That portion, 11.3 percent, was up from 9.7 percent in the first quarter, and is expected to rise as more homeowners see their monthly payments spike.
Many of these loans allowed the borrower to pay only the interest on the loan for a fixed period. Others gave the borrower the option to "pick-a-payment," adding any unpaid interest to the principal balance.
'Liar Loans'
Defaults on these mortgages, which earned the nickname "liar loans" because borrowers often did not document their incomes, are costing Fannie Mae and Freddie Mac billions of dollars.
With home prices plummeting, particularly in California, Nevada, Arizona and Florida, many borrowers with these exotic loans now owe more on their homes than they are worth.
Worse still, these loans reset to higher monthly payments when borrowers reach maximum debt limits -- typically around 10 to 25 percent more than the original loan.
Those resets can increase the borrower's monthly payment by more than $1,000 a month on average, Fitch Ratings said in a report this week.
And almost half of these pay-option loans are expected to reset to higher monthly payments by the end of 2010, Fitch said.
Staff writer Leslie Berkman contributed to this report.
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