Doesn't Look Good For Marginal Borrowers
(12/06)
Jeffrey
Taylor, S.J. Fowler/MVAC Real Estate
Americans who have stretched themselves financially to buy a
home or refinance a mortgage have been falling behind on
their loan payments at an unexpectedly rapid pace.
The surge in mortgage delinquencies in the past few months
is squeezing lenders and unsettling investors world-wide in
the $10 trillion U.S. mortgage market.
Sub-prime mortgage originations climbed to $625 billion in
2005 from $120 billion in 2001, according to Inside Mortgage
Finance, a trade publication. Like other types of mortgages,
sub-prime home loans are often packaged into securities and
sold to investors, helping lenders limit their risks.
Based on current performance, 2006 is on track to be one of
the worst ever for sub-prime loans, according to UBS AG. "We
are a bit surprised by how fast this has unraveled," says
Thomas Zimmerman, head of asset-backed securities research
at UBS.
Though delinquency rates on sub-prime mortgages originated
in the past year have soared to the highest levels in a
decade, economists don't expect any significant harm to the
nation's economy or financial systems. But if late payments
and foreclosures continue to rise at a faster-than- expected
pace, the pain could extend beyond homeowners and lenders to
the investors who buy mortgage-backed securities.
Several lenders are already feeling the sting. H&R Block,
which operates Option One, a major sub-prime lender, said
last week that its mortgage-services unit posted a pretax
loss of $39 million in the fiscal second quarter ended Oct.
31, compared with a year- earlier pretax profit of $48.8
million. The Kansas City- based tax-services company said
last month it is considering selling Option One, which has
been struggling with higher interest rates and defaults, and
is closing 12 branch offices.
On Friday, KeyCorp said it reached a deal to sell its
sub-prime Champion Mortgage business. Analysts at Friedman,
Billings, Ramsey & Co. put the price for the company's
sub-prime mortgage operation at $130 million, "far below"
the $200 million to $250 million they expected.
Soaring delinquencies are making some lenders more cautious,
which is likely to put further pressure on the weak housing
market.
In October, borrowers were 60 days or more behind in
payments on 3.9% of the sub-prime home loans packaged into
mortgage securities this year, UBS says. That's nearly twice
the delinquency rate on new sub-prime loans recorded a year
earlier.
Because of the way mortgage-backed securities are
structured, investors who buy investment-grade securities
aren't likely to be hurt if losses are close to
expectations. But if losses on the underlying mortgages
substantially exceed expectations, some investors who buy
the riskiest slices of sub-prime securities are likely to
rack up losses. These include hedge funds and investors who
buy collateralized debt obligations, pools of debt
instruments that are often snapped up by foreign buyers.
Foreclosures May Jump As ARMs Reset,
Monday, June 19, 2006 By J.W.
ELPHINSTONE AP Business Writer
(AP) - NEW YORK-In 2003, Anita
Britten refinanced her two-story brick cottage in Lithonia,
Ga. using a hybrid adjustable rate mortgage, or ARM. Her
lender reassured her that she could refinance out of the
riskier loan into a traditional one when her interest rate
started to reset. Three years later, Britten can't get a new
mortgage and her monthly payment has jumped by a third in
six months. She can't afford her payments and may face
foreclosure if her financial situation doesn't change.
As more ARMs adjust upward and
housing prices begin to dip, many Americans like Britten
can't refinance and are finding themselves trapped in
too-high monthly payments. For those who can't make their
payments, foreclosure - the legal process by which the
lender reposseses the house because the owner has defaulted
on payments - is the only way out. Foreclosure figures just
released by the Mortgage Bankers Association show that
foreclosure activity fell in the first quarter of 2006 over
the first quarter of 2005 for all loan categories except
subprime loans. The MBA didn't specify how many of subprime
loans were adjustable rate mortgages.
But while a strong economy
helped hold down the foreclosure rate in the first quarter,
homeowners and experts fear the market has turned and
numbers are headed upward. In the last several years,
millions of Americans took equity out of their houses and
refinanced when interest rates were at historical lows and
housing prices were at record highs. Many of them chose to
refinance into hybrid ARMs that lenders were aggressively
pushing. ARMs, which featured a low introductory interest
rate that resets upward after a set period of time, were
easier to qualify for than traditional fixed-rate loans.
ARMs are now starting to fall by
the wayside as the difference in interest rates narrows. The
average rate on a 30-year fixed rate loan in May was 6.60
percent compared to 5.63 percent on a one-year ARM,
according to Freddie Mac. In 2003, rates on a 30-year fixed
were at 6.54 percent, while ARMs carried a 3.76 percent
rate. This year, more than $300 billion worth of hybrid ARMs
will readjust for the first time. That number will jump to
approximately $1 trillion in 2007, according to the MBA.
Monthly payments will leap too, many beyond what homeowners
can afford.
For example, Britten's monthly
payment jumped from $1,079 to $1,340 at the beginning of
this year. It rose again on June 1 by another $104 and is
scheduled to increase again in December. Britten, who is
also paying off student loans, went to a credit counseling
service to help her avoid foreclosure. "I've gotten rid of
all my credit cards and I'm not supposed to refinance for
another year," she said. "All I can do is tread water right
now."
"ARMs are a ticking time bomb,"
said Brad Geisen, president and chief executive of property
tracker. "Through 2006 and 2007, I'm pretty sure we'll see a
high volume of foreclosures." Last year, foreclosures hit a
historical low nationwide at about 50,000. But that number
has more than doubled since then, according to Geisen. And
delinquency rates appear to be rising, as well. While
delinquency rates fell for most types of loans from the
fourth quarter of 2005 because of a stronger economy,
delinquencies for both prime and subprime ARM loans
increased year-over-year in the first quarter, according to
the MBA.
The hardest hit states so far
are those that have experienced the roughest times
economically. Michigan, Texas and Georgia lead the pack,
specifically around Detroit, Dallas and Atlanta, whose major
employers have run into strikes, bankruptcies and industry
downturns. But as the housing market slows, experts expect
foreclosures to skyrocket in those areas that have
experienced the highest appreciation rate - like California,
Florida, Virginia and Washington, D.C. "There is a direct
correlation between foreclosure sales and market activity,"
said Dr. James Gaines, a research economist at The Real
Estate Center at Texas A&M University. "If the rate of
appreciation is not there, then there is an increase in
foreclosure sales." Gaines pointed out that although
California's default notices are rising by the thousands,
actual foreclosure sales remain in the hundreds. Because of
California's still-active housing market, homeowners there
can sell their properties before going into foreclosure.
On the flip side, in less active
markets like Texas and Georgia, homeowners can't find a
buyer in time and are forced into foreclosure. But as the
housing cools in these once hot markets at the same time
that ARMs reset, many homeowners may be unable to dump their
properties before going into foreclosure, Gaines predicts.
Additionally, Gaines pointed out that these same real estate
markets also boasted a higher percentage of ARM
originations, because most buyers could only get into their
homes using an unconventional loan. California, where the
median home price reached $468,000 in April, leads the
nation in the percentage of homes purchased with adjustable
rate mortgages. Nationwide, ARMs account for 24 percent of
all home loans. "In our zeal to make mortgage lending more
available to a greater number of people, it's normal to
expect the foreclosure rate to go up," Gaines said.
Even investors in foreclosures
are having a harder time finding good deals, as the housing
market cools. Many homes that do end up in foreclosure
auctions are saddled with more than one mortgage and have
little or no equity - so the investors take a pass. Falling
home values are also affecting homeowners' ability to
refinance into a traditional 30-year fixed rate loan to
avoid foreclosure. In 2002, Christopher Jones, 32,
refinanced into a hybrid ARM with plans to refinance again
when the rate started to readjust. At the time, his downtown
Atlanta house appraised for $108,000. Now, his monthly
payments have shot up, but Jones can't sell his house for
more than $84,000 and he can't get an appraisal for more
than $85,000. The appraisal firm told Jones that the value
of houses in his neighborhood have fallen victim to a
cooling market. With no other options left, Jones has
decided to pack it in and foreclose on the house. "I'm just
going to take the loss," he said. "That's all I can do."
Some homebuyers, especially
first-time buyers, may not have fully understood the risk of
ARMs. In the rush to close on a house sale, especially in
the frenzied market of the past few years, many first-time
buyers often failed to get the full details of their loan
from their mortgage broker. "Sometimes buyers are very
optimistic of how much mortgage they can handle, especially
in a strong housing market with aggressive marketing of
riskier mortgages," said Suzanne Boas, president of Consumer
Credit Counseling Services of Greater Atlanta.
When Dora Angel of DeSoto, Texas
bought her first home in 2003, she paid $141,000 for the
brand new three-bedroom, two-bath home. At the time, her
mortgage payment was $1,400 a month. Angel originally
thought that she had a fixed-rate loan. But about five
months ago, she noticed that her monthly payment kicked up
to $1,900. She only made the monthly payments by sacrificing
payments on her credit cards, which pulled down her credit
rating. Now, Angel can't continue paying $1,900 each month,
but, because of her credit ranking, she doesn't qualify for
a fixed-rate mortgage. "I was a first-time buyer. I was
blind. I didn't know what questions to ask," she said. "And
the mortgage brokers are there telling you what you want to
hear just to get you in the mortgage."
Unfortunately, during a runaway
market, many buyers, sellers and mortgage brokers were more
excited about making deals than making smart deals, and the
fallout has just begun. "We are on the front of this ARM
problem. It will roll out over the next several years," Boas
said. "Owning a home is the American dream, but losing one
is the ultimate nightmare."
Catherine Reagor,
The Arizona Republic, Apr. 26, 2002 12:55 PM
(Please use the hyperlink attached to the title to read this
article. If that hyperlink is not working the following is a
copy of the article.)
The economy is
down and the number of people in danger of losing their houses
is up. But unlike the recession of the late 1980s, which cost
many their houses, there's more help available for those who
can't keep up with their mortgages. "Homeowners in trouble
have options," said Bill Mahoney of Century 21 Metro, which
has a pre-foreclosure division. "They don't have to just turn
the keys over to the lender."
Housing analysts
agree that the sooner people deal with their inability to make
mortgage payments, the better chance they have of keeping
their house or at least selling it on their own. Besides
selling quickly or agreeing to a voluntary pre-foreclosure
sale, many homeowners are finding that more lenders are now
working with them to defer payments, lower interest rates or
modify mortgages in other ways so they can stay in the house
and make up the difference later. "The first thing a homeowner
having trouble should do is contact their lender," said
Christopher Combs, a Phoenix real estate attorney who works
with consumers. "It's often in lenders' best interest to keep
the owner in the house, paying what they can."
Most lenders are
being prompted by mortgage giants Fannie Mae and Freddie Mac,
as well as the U.S. Department of Housing and Urban
Development, to keep homes off the auction block. Fannie Mae
has a program called Home Saver Solutions, which allows loans
to be modified when people miss several payments. Nearly
16,000 homeowners received help last year from Fannie Mae.
Some mortgages,
like those issued through the Federal Housing Administration,
come with stipulations that require lenders to allow borrowers
to defer payments for three months in difficult times.
Unfortunately for homeowners, government-backed loans also can
encourage lenders to foreclose after three months in order to
guarantee that they get their money back. Help may buy
delinquent borrowers only a little time, said Jay Butler,
director of the Arizona Real Estate Center at Arizona State
University. Some people are so deep in debt, they can't hold
on to their houses, he said.
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HUD PUBLISHES NEW RULE TO PROTECT HOMEBUYERS FROM PREDATORY
LENDING PRACTICES,
Arizona
Journal of Real Estate & Business, September 2004.
WASHINGTON - As a part of an
ongoing effort to curb predatory lending and increase
accountability in its mortgage insurance programs, the
Department of Housing and Urban Development published a
final rule that makes the lenders accountable for appraisals
on mortgages insured by the Federal Housing Administration
(FHA). The rule will become effective August 19,
2004.
"Holding lenders accountable when
appraisers they select engage in fraudulent activities is
another step this administration is taking to protect
homebuyers, particular minorities, from unscrupulous
predatory lending practices," said Assistance Secretary for
Housing- Federal Housing Commissioner, John C. Weicher.
"Predatory lending has no place in the FHA market or any
other part of the real estate market."
Predatory lending results when
home purchasers become unwitting victims of lenders, sellers
and appraisers, often working together. The
unsuspecting homebuyers either purchase homes with sales
prices far in excess of the fair market value, or are
substantially overcharged with costs associated with
obtaining a mortgage.
The final rule, "Lender
Accountability for Appraisals," makes the lenders
accountable for the quality of appraisals performed by the
appraisers the lender hires. It strengthens
HUD's regulations concerning the lenders' responsibilities
when they select appraisers to determine the market value of
properties that will be security for FHA-insured mortgages.
The rule will help assure that homebuyers will receive
accurate statements of appraised values on homes they
purchase using FHA mortgage insurance. For more
information about HUD and its programs go to
www.hud.gov
and www.espanol.hud.gov.
FREE CREDIT
REPORTS START DECEMBER 1
Beginning
on December 1, 2004, free annual credit reports will be made
available upon consumer's request, pursuant to the Fair and
Accurate Credit Transactions Act of 2003 (“FACT”).
The reports will be available across the country in four
stages: Dec. 1, Alaska, Hawaii, and other Western states;
March 1, Midwestern states; June 1, Southern states; New
England and other Eastern states, Sept. 1.
Consumers will be able to request their reports from all
three major credit reporting agencies, at a special web
site, www.AnnualCreditReport.com.
The credit report will appear
on the screen and may be printed out. Or, they may call
1-877-322-8228, or write to Annual Credit Report Request
Service, P.O. Box 105281, Atlanta, GA 30348-5281.
