By Dina ElBoghdady and Nancy Trejos
Washington Post Staff Writers
Friday, June 15, 2007
The percentage of U.S. mortgages entering foreclosure in the first three months of the year was the highest in more than 50 years, according to the Mortgage Bankers Association.
As the association released its numbers, the Federal Reserve held a hearing to determine whether regulators could do anything to crack down on abusive lending practices, which have exacerbated the problem
The problems arose last year as the housing market softened, driving down home prices and making it more difficult for cash-strapped borrowers to sell their homes or refinance their way out of trouble.
The most dramatic fallout took place in the subprime market, which caters to people with blemished credit or other factors that make them a risk to lenders.
Those borrowers entered foreclosure at a rate of 2.43 percent, up from 2 percent the previous quarter. The percentages seem small, but they are far above norms, particularly in a healthy economy. The concern is that the mortgage industry's troubles could damage the economy if they are not contained.
For more credit-worthy, prime borrowers, foreclosures rose slightly, to 0.25 percent, in the first quarter from 0.24 percent in the previous one.
New foreclosures for prime and subprime borrowers combined hit record highs. They rose to 0.58 percent on a seasonally adjusted basis, compared with 0.54 percent in the previous quarter and 0.41 percent a year earlier.
The high translates into about 254,591 mortgages, or one in 172 loans, the association said.
The problems weren't uniformly spread around the country. Doug Duncan, chief economist for the mortgage bankers group, said the rate of new foreclosures would have dropped had it not been for big jumps in California, Florida, Nevada and Arizona. He said high rates in Ohio, Michigan and Indiana also drove up the overall percentage of loans in foreclosure.
Some who track the industry say the worst is yet to come.
"We think we're just starting to see the tip of the iceberg," said Karen Weaver, global head of securitization research at Deutsche Bank Securities. "We believe more and more [subprime borrowers] will default, and that's a process that we think will happen over two years."
Others disagree. Among them is Michael D. Youngblood of FBR Investment Management, who said the deterioration of subprime loans has slowed significantly in the past four months. He predicts "a slow upward drift" of default rates for the next nine months, before the rates recover to current levels, absent sharply higher joblessness or interest rates.
Many borrowers fall into the subprime category because of a one-time setback such as job loss or illness, Youngblood said. But with time, they repair their finances, which means that not everyone who is missing payments will necessarily lose their homes. "It's wrong to assume that once you're a subprime borrower, you're always a subprime borrower," he said.
One major issue is what happens with adjustable-rate mortgages. These mortgages gained popularity during the housing boom, especially with subprime buyers. They often have low introductory rates that later spike, sometimes doubling a monthly mortgage payment and creating payment shock.
A study released this year by First American CoreLogic concluded that the jumps in monthly payments would result in 1.1 million foreclosures in the next six to seven years, assuming average home prices stay the same as they were in December.
The study, which analyzed 8.4 million loans made from 2004 to 2006, said that while the fallout will hurt the affected borrowers, it most likely would not break the economy.
As the problems deepened over recent months, legislators and regulators have weighed in with proposals on how to curb the damage.
Democratic lawmakers have blasted the Federal Reserve for a "pattern of neglect" that fostered the crisis. Yesterday, the Fed invited consumer groups, lenders and other experts to weigh in on how it can rewrite its rules to prevent predatory lending.
"We must determine how we can weed out those abuses while also preserving incentives for responsible lenders" so that risky borrowers still have a chance of homeownership, said Randall S. Kroszner, one of the board's governors.
The board focused on whether to crack down on the use of prepayment penalties and loans that require little or no documentation of salaries. It solicited opinions on whether escrows for taxes and insurance should be required. It also questioned whether loan officers should be required to make sure potential borrowers are capable of paying back the loans they are applying for.
No consensus was reached on any of the topics, and Fed officials declined to comment on yesterday's foreclosure numbers.