High-Cost Mortgages Putting Many Homeowners at Risk
Thursday, December 14, 2006
A record number of homeowners with high-cost mortgages have fallen behind on their payments or are facing foreclosure, a side effect of the growth in lending to people with poor credit, according to an industry group survey released yesterday.
About 16 times as many of these high-cost loans, known as subprime loans, are past due as in 1998, when the industry began tracking subprime statistics as part of its quarterly delinquency analysis.
"We've got a lot of people out there who overstretched to afford the higher home prices," said analyst Grant Bailey, who studies residential mortgage securities at Fitch Ratings. "There are going to be a lot of buyers who are challenged. . . . The ultimate consequence is that the bank takes the property, takes ownership, and the buyer is evicted."
About 223,000 households with subprime loans lost their homes to foreclosure in the third quarter of 2006, and about 725,000 had missed payments, according to the quarterly survey from the Mortgage Bankers Association, which analyzed about 42.6 million mortgages, including 5.8 million that were subprime. Subprime borrowers generally pay interest rates about 3 percentage points higher than "prime" borrowers with good credit.
The deterioration in the subprime market is likely to continue for several years, industry analysts said. They note that the growth of this sector has contributed to near-record homeownership levels, but it has also left some owners unable to handle the payments. Analysts expect more foreclosures in 2007 and 2008 because many subprime loans are low for a time and then adjust up.
About 12 1/2 percent of all subprime loans were delinquent in the third quarter, up from 11.7 percent in the second quarter, the Washington-based bankers association reported. About 3.86 percent of homes bought with these loans were seized by the lenders, up from 3.56 percent in the previous quarter. That compares with less than 5 percent of all mortgage loans that are past due, and about 1 percent that are in foreclosure.
"It's almost certain that the number of delinquent subprime loans is higher than it has ever been," said Douglas Duncan, the association's chief economist. "The number of borrowers is much larger than it has ever been."
Some subprime borrowers may hurt themselves further by seeking out even higher-cost loans to bail themselves out, said Allen Fishbein, director of housing and credit policy at the Consumer Federation of America. "Once people fall behind on their mortgages, they are more likely to become victims of predatory lenders," he said. "They take an offer to finance into affordable loans -- but get themselves even deeper into debt."
Seven years ago, only about one loan in 20 was subprime, because lenders sought to avoid making loans to people who would be less likely to repay. But lenders who wanted to expand into new markets found that investors liked these loans because they carry high interest rates. In the past two years, about one-fifth of all loans originated were subprime, said Keith Ernst, senior housing counsel at the Center for Responsible Lending, a nonprofit group that works against predatory lending practices.
"At its best, the subprime market is providing credit to people who couldn't get it in the prime market, but at its worst, it is providing unaffordable loans," Ernst said.
The Mortgage Bankers Association reported that mortgage delinquencies had increased across the board. It blamed that on low introductory interest rates that have risen, putting pressure on households with adjustable rate mortgages, as well as on the slowdown in housing prices. When housing prices flatten or fall, homeowners find it harder to sell their homes quickly to stave off foreclosure. And those who bought their homes during the recent housing price boom might not have enough equity to refinance or sell their homes and pay off their mortgage balances.
About 1.05 percent of all loans outstanding have moved beyond delinquency and into foreclosure, the industry group reported, a slight increase. The states with the most problems are in the industrial Midwest and in areas most affected by Hurricane Katrina.