Despite Interest Rate Cuts, Foreclosures Hit Record High
Friday, June 6, 2008
Even though lower interest rates have made many adjustable-rate mortgages more affordable, foreclosures continue to reach new heights as more than 1 million homeowners face losing their home, according to industry figures released yesterday.
That's because what began as a mortgage crisis focused largely on subprime borrowers has spread and is being fed by the slowing economy it helped create. Borrowers once considered the most creditworthy have been hamstrung by declining home prices, making it difficult to refinance their home to dodge a financial crunch.
About 2.47 percent of home mortgages were in foreclosure during the first quarter of the year, up from 1.28 percent during the comparable period last year and the highest point since the Mortgage Bankers Association began compiling figures in 1979. Another 6.35 percent of home mortgages were delinquent but not yet in foreclosure, up from 4.84 percent last year, the survey found. Taken together, that means that almost 9 percent of mortgages nationally were in trouble, even though sharp Federal Reserve interest rate cuts have cushioned payment increases for some homeowners.
More than 60 percent of the loans entering foreclosure are adjustable-rate mortgages, but the problem does not appear to be the "rate shocks" widely forecast about a year ago. Many of "the loans went bad before any of the resets took place, which is why talking about carving out solutions for just ARM reset problems is misplaced," said Guy Cecala, publisher of Inside Mortgage Finance.
A borrower with a typical-size subprime ARM could expect payments to increase about $70 a month if it reset now, compared with about $450 a month if it had reset in December, according to the American Securitization Forum, a financial industry group.
"So we're not going to see rate shocks causing defaults," said Christopher Mayer, real estate professor at Columbia Business School.
Also, while delinquency rates among subprime borrowers continue to rise, prime borrowers are a growing part of the problem, Mayer said. During the first quarter, the number of prime loans that began foreclosure increased faster than subprime loans, according to the Mortgage Bankers Association.
"The recent increases have been coming from the safer group of borrowers. They are the next shoe to come down," Mayer said.
And although the Fed's interest rate decreases have helped some homeowners with adjustable-rate mortgages, those with artificially low teaser or introductory rates are still experiencing significant increases, said Mark Goldman, a real estate finance lecturer at San Diego State University. "Most of the adjustable-rate loans are resetting to very modest rates, but it can still be a big shock," he said.
Even a slight increase in payments, compounded by rising food and fuel prices, can push homeowners to the financial edge, analysts said. "There is no question: The softening economy, gas prices, all that is just throwing more lighter fluid on an already inflamed situation," Cecala said.
For instance, a growing percentage of troubled borrowers who contact the Consumer Credit Counseling Service of Greater Atlanta have reduced income, having lost overtime pay or a second job, according to data collected by the group. Last year, 22 percent of homeowners listed reduced income as the reason they are in distress. So far this year, it is about 28 percent.
In April, clients spent an average of $335 a month on groceries, up from $291 during the comparable period last year. They spent $242 on gasoline this year, up from $181 in April 2007.
Many clients have adjustable-rate mortgages, but that is not necessarily what caused their problem, said Scott Scredon, a spokesman for the counseling service. "Their rate is going up, plus they lost their job. . . . Then you throw in the rising costs of fuel and food, and it takes away more and more of their disposable income," he said.
The intensity of the foreclosure problem, which is expected to worsen, varies across the country. In the District, 2.39 percent of loans included in the survey were seriously delinquent or in foreclosure in the first quarter, according to the Mortgage Bankers Association. That is up from 1.09 percent during the same period last year. In Maryland, 3.02 percent of mortgages were in trouble, compared with 1.21 percent. And in Virginia, the rate rose to 2.52 percent from 1.99 percent.
The bulk of the problem remains in California and Florida, which reported, respectively, that 9.24 percent and 8.25 percent of subprime ARMs were entering foreclosure, said Jay Brinkmann, vice president for research and economics at the Mortgage Bankers Association. "Clearly things in California and Florida are going to get worse before they get better," he said.