Finding Bright Spots Among the Dark Clouds

By Kenneth R. Harney
Saturday, September 15, 2007

Just how bad is the foreclosure situation? If you caught summaries of the latest delinquency and foreclosure numbers released by the Mortgage Bankers Association, you could only conclude: Yikes, it is getting scary out there.

The percentage of U.S. home loans entering the foreclosure process last quarter hit its highest level in the history of the survey, which dates to 1953. In some states, the mortgage crisis is particularly severe. In Ohio, 5.2 percent of all home loans were either three months past due or in the foreclosure process. Michigan and Indiana were not far behind. In Michigan, one of every 100 houses had foreclosure actions initiated in the three-month period covered by the survey.

News like that is obviously tragic for the families involved and demonstrates that the combination of job layoffs and exotic loans extended to financially strapped home buyers can be highly toxic.

But from a national perspective, how bad is the situation? Not as bad as it may sound. Drill down into the latest delinquency and foreclosure numbers, and you'll find that for the overwhelming majority of homeowners across the country, delinquency and foreclosure are not issues -- at least not yet.

Remember that mortgage delinquency problems affect only people with outstanding loans and that more than one in three homeowners own their properties debt-free. Of the remaining two-thirds -- the latest survey examined 44 million of them -- prime loans that are at least 30 days past due constitute just 2.6 percent nationwide. In other words, among mortgages made to borrowers with good credit at application, 97.4 percent are continuing to be paid on time.

In some states, delinquencies among prime borrowers are far lower -- just 1.35 percent in Oregon, 1.39 percent in Washington state, 1.89 percent in Virginia and 1.9 percent in California. Prime-credit borrowers who took out fixed-rate loans in most states are performing even better than prime borrowers as a whole -- just over 2 percent on average nationally and barely more than 1 percent in California, Oregon, Hawaii and Washington, are paying late.

The numbers get more sobering when you look at borrowers with subprime mortgages: 14.5 percent nationwide are behind on their payments by at least 30 days. That's more than five times the rate of delinquency among prime borrowers. On the other hand, it means 85.5 percent of subprime borrowers are still paying on time every month.

High housing costs and local economic conditions are key factors for subprime homeowners. In California, where borrowers with prime credit outperform most of the country in on-time payments, 12.6 percent of subprime homeowners are now late, and 8.4 percent are 90 days or more delinquent or are already in the foreclosure pipeline.

In economically stressed Michigan, more than one in five subprime homeowners are delinquent. In Ohio, Indiana and Illinois, delinquency rates exceed 15 percent.

The numbers get even worse when you look at the performance of subprime borrowers who took out adjustable-rate loans, such as the notorious "2/28" mortgages that allow low monthly payments for the first two years but then reset upward with a big jolt at the beginning of the third. In West Virginia, 26 percent of owners with subprime adjustables are past due; in Mississippi, it's almost 27 percent.

What about the record jumps in new foreclosure filings? Here again, you've got to look closely at the hard data in the survey. In 34 states, the rate of new foreclosures actually decreased. In most other states, the increases were minor -- except in California, Florida, Nevada and Arizona, where they were attributable in part to investors walking away from condos, second homes and rental houses they bought during the boom years.

Doug Duncan, chief economist for the Mortgage Bankers Association, said that without the foreclosure spikes in those states, "we would have seen a nationwide drop in the rate of foreclosure filings." In Nevada, for instance, non-owner-occupied (investor) loans accounted for 32 percent of all serious delinquencies and new foreclosure actions. In Florida, the investor share of serious delinquencies was 25 percent; in Arizona, 26 percent; and in California, it was 21 percent. That compares with a rate of 13 percent for the rest of the country.

Bottom line: The scary foreclosure and delinquency rates you're hearing about are for real. But they're highly concentrated -- among loan types, local and regional economies, and are especially prevalent among investors in formerly high-flying markets who are throwing in the towel.

Kenneth R. Harney's e-mail address is

© 2007 The Washington Post Company