Home Foreclosures Hit Fresh High

Troubles Could Deepen As Effects of
Higher Rates And Tighter Credit Kick In

DAMIAN PALETTA AND JAMES R. HAGERTY
Wall Street Journal 15jun2007

WASHINGTON — A record number of homeowners entered the foreclosure process during the first quarter, topping the previous high set in the final quarter of 2006 and reflecting continued stress on the jittery housing market, according to a report released by the Mortgage Bankers Association.

The trade group's chief economist, Doug Duncan, predicted that delinquencies would likely rise, peaking later in the year. He also said rising foreclosures probably wouldn't peak until next year. "Our view is that we will probably see modest increases in delinquencies and foreclosures for the next couple of quarters," Mr. Duncan said.

Borrowers are having more trouble meeting payments as house prices flatten or decline in much of the country and as many loans that had low introductory rates reset to sharply higher ones.

Seasonally adjusted, 0.58% of loans entered the foreclosure process last quarter, compared with 0.54% in the fourth quarter of 2006 and 0.41% in last year's first quarter. The rates for the past two quarters are the highest in the survey's 37-year history. The MBA reported that the spike in foreclosures was much steeper in California, Florida, Arizona and Nevada than in other areas. Mr. Duncan said some speculators are walking away from properties in the face of falling prices and higher borrowing costs.

The percentage of loans now in the foreclosure process rose to 1.28%, up from 0.98% a year earlier. That's still well below the 1.51% recorded in the first quarter of 2002, in the wake of a brief recession.

Foreclosures were at an unusually low level at the height of the housing boom a few years ago because people who fell behind on payments generally could sell their houses for more than they owed, or could refinance into loans with easier terms. That has become far more difficult.

In a research note, economists at Goldman Sachs noted that the first-quarter data reported yesterday don't fully reflect the effects of tighter credit, which started taking hold late in the quarter. The figures also don't reflect the recent surge in interest rates, which will push up costs for borrowers with adjustable-rate mortgages. "So future reports are likely to show further deterioration, perhaps at a faster rate," the Goldman report said.

One factor likely to restrain rises in the foreclosure rate, at least in the near term, is the willingness of many loan servicers — the firms responsible for collecting payments — to lower interest rates or stretch out payment schedules for some borrowers who fall behind. An April report from Credit Suisse mortgage analysts in New York forecast "an impending flood of loan modifications." But these payment-lowering plans sometimes merely delay foreclosure rather than prevent it.

The MBA reported that troubles in Ohio, Michigan, Indiana, California, Florida, Nevada and Arizona weighed down the broader housing and foreclosure numbers. Job losses in the Midwest have pushed up foreclosures there, and the housing market has quickly deteriorated in the other four states.

For example, in Ohio, nearly 20% of subprime adjustable-rate mortgages were either 90 days or more past due or in foreclosure — almost double the national average and five times the rate in Utah.

The delinquency rate on prime loans rose in the first quarter to 2.58% from 2.25% a year earlier. For subprime loans, the rate increased to 13.77% from 11.5%. Delinquency rates on prime adjustable-rate mortgages rose to 3.69% from 2.3% a year earlier. On subprime ARMs, the rate climbed to 15.75% from 12.02%.

—Benton Ives-Halperin contributed to this article

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More Trouble in Subprime Mortgages

VIKAS BAJAJ / New York Times 15jun2007

WASHINGTON, June 14 — Delinquencies and foreclosures among homeowners with weak credit moved higher in the first quarter, particularly in California, Florida and other formerly hot real estate markets, according to an industry report released on Thursday.

The report, published by the Mortgage Bankers Association, came as the Federal Reserve held a hearing on what regulators could do to address aggressive abusive lending practices. Also Thursday, the latest survey showed that mortgage rates this week reached their highest level in almost a year; the national average for a 30-year mortgage was 6.74 percent, up from 6.53 percent last week, according to Freddie Mac, the mortgage giant.

The delinquency report presented a mixed picture. It indicated that more homeowners with tarnished, or subprime, credit are likely to have trouble making house payments, especially as interest rates rise. But it also suggested that, at least so far, the problems have not extended very far into the larger pool of prime borrowers, whose interest rates are lower because of their stronger credit.

At the end of March, the percentage of all loans that were delinquent or in foreclosure, 6.12 percent, was little changed from the end of last year and up from 5.39 percent from March 2006.

The national numbers benefited from a decrease in the defaults among loans insured by the Federal Housing Administration. The agency and the lenders it works with have been restructuring two out of every three loans in foreclosure, said Douglas Duncan, chief economist with the Mortgage Bankers Association. And it appears similar efforts to renegotiate mortgages to keep borrowers in their homes may also be holding down defaults overall.

“We are seeing more loan modifications and foreclosures and once loans go through either of those processes the loans go out of those databases,” said Mark Zandi, chief economist at Moody’s Economy.com. But he cautioned “they might come back. The recidivism on those loans is very high.”

For subprime borrowers, the outlook remained bleak.

Nearly 19 percent of all subprime loans, or 1.1 million mortgages, were either delinquent by more than 30 days or in foreclosure, up from 17.9 percent at the end of last year. About 140,000 subprime mortgages entered foreclosure, a process that can last several months, in the first three months. About 20,000 of those were in California.

“The storm of foreclosure is happening silently across the country,” said Martin D. Eakes, chief executive of the Center for Community Self-Help, a nonprofit organization based in North Carolina that operates a credit union and the Center for Responsible Lending.

Mr. Eakes, who was speaking at the Fed hearing, criticized the central bank for failing to use its authority over mortgage lending to curb practices that, he said, caused the current problems by giving people loans they could not afford.

Fed officials did not directly respond to the complaints. But in opening remarks, Randall S. Kroszner, a governor on the Fed’s board, said the central bank shared responsibility over mortgage lending with other state and federal regulators.

“Rising foreclosures in the subprime market over the past year have led the board to consider whether and how it should use its rulemaking authority to address these concerns,” Mr. Kroszner said. “In doing so, however, we must walk a fine line. We must determine how we can help to weed out abuses while also preserving incentives for responsible lenders.”

The Fed first heard from a panel of mortgage lenders and non-profit housing groups and in the afternoon from a panel of state regulators, attorneys general and academics.

In the morning, representatives from mortgage companies and an association of mortgage brokers parried, mostly in good humor, with people representing nonprofit housing groups that are the leading advocacy voice speaking on behalf of subprime borrowers.

The opposing sides appeared to agree that the mortgage industry got carried away in the recent housing boom but disagreed sharply on the scope of the problem and what should be done.

The nonprofit housing advocates attacked no-documentation loans, in which lenders do not verify that borrowers earn incomes listed on loan applications; prepayment penalties, which make it more expensive to refinance; and underwriting practices that overlook whether borrowers can ultimately repay their loans.

Lenders generally argued against new regulations, saying that most of the practices being criticized may have been abused but can be very effective in helping lower-income borrowers if used prudently.

“There are folks that do this business the right way,” said Pablo Sanchez, a national mortgage production specialist with JPMorgan. “I would hate to have this as the last record that this is all the lenders’ fault.”

source: 15jun2007

Foreclosure Math:
4 + 3 = 1 Big Mess

PETER COY / Business Week 14jun2007

In foreclosure mathematics, 4 plus 3 equals 1, as in one big mess. At least that's the way it seemed at today's conference call for journalists by the Mortgage Bankers Association.

Four is the number of big states—California, Florida, Nevada, and Arizona—where the share of mortgage loans entering the foreclosure process leaped in the first quarter of 2007. The spate of actions in those four states caused the national rate of foreclosure starts to rise to 0.58% seasonally adjusted, breaking the record set in the previous quarter. Without them, the foreclosure start rate wouldn't have set a record, the bankers said.

Three is the number of states—Ohio, Michigan, and Indiana—with an exceptionally large share of loans already in some stage of the foreclosure process. While they account for just under 9% of the nation's overall mortgage loans, they account for about 20% of the loans that are in foreclosure. Without them, the share of loans in foreclosure nationwide would have been below the average of the last 10 years (1.12% vs. a 10-year average of 1.19%), the bankers said.

The mortgage bankers' point seems to be that mortgage problems are highly concentrated and not a national crisis.

Of course, excluding those seven states from the Union may be an easy mathematical exercise but doesn't have much bearing on real life. The pain they're experiencing is real even if it isn't equally shared in the rest of the country.

Footnote: The Mortgage Bankers Association quarterly numbers are less current, but more accurate, than the monthly estimates put out by RealtyTrac, which Chris Palmeri wrote about a couple days ago.

source: 15jun2007