As Foreclosures Rise, Investors Pull Back
From the New York Times:
WASHINGTON — Defaults on home mortgages touched another historic high late last year as foreclosures on adjustable-rate mortgages surged, an industry group reported on Thursday.
The Mortgage Bankers Association reported Thursday that loans past due or in foreclosure jumped to 7.9 percent of the total in the fourth quarter, from 7.3 percent at the end of September and 6.1 percent from December 2006. Before the third quarter, the rate had never exceeded 7 percent since 1979, the earliest year for which figures are available.
The report, along with news that some investors were having trouble paying back their banks, helped drive down the stock and credit markets on Thursday. The Standard & Poor’s 500-stock index fell 2.2 percent and the Dow Jones industrial average fell 1.8 percent.
Though defaults increased across the country, much of the rise came from a handful of large states like California and Florida. Those two states account for about 21 percent of all mortgages but 30 percent of the new foreclosures. Nevada, Arizona, Michigan and Ohio also had high default rates.
Defaults were highest on adjustable-rate mortgages, those that start with lower fixed interest rates but reset to higher, variable rates after a few years. The mortgage bankers group, however, said the “bulk” of the troubled loans have been defaulting even before rates have been reset.
“The massive wave of foreclosure and delinquencies is overwhelming,” said Rod Dubitsky, who heads asset-backed securities research at Credit Suisse. “A large percent of people didn’t have equity to begin with, and their ability to pay was stretched because of stated-income loans,” for which lenders do not verify borrowers’ incomes.
While more than a quarter of loans made to people with blemished, or subprime, credit were past due or in foreclosure, the number of prime adjustable-rate loans in trouble also rose rapidly, to 8.1 percent from 4.3 percent in 2006. By contrast, only 3.1 percent of prime fixed-rate loans were past due or in foreclosure, up from 2.7 percent a year earlier.
The Mortgage Bankers figures are based on a survey of 46 million first mortgages, about 85 percent of all home loans. Among the loans surveyed, about 3.6 million were past due or in foreclosure.
Analysts and industry officials say they expect default rates will continue rising as home prices fall and banks and investors remain unwilling to lend and buy mortgage securities. Reinforcing that view, Citigroup, one of the nation’s largest mortgage lenders, said Thursday that it would reduce its holdings of mortgage and home-equity loans by about 20 percent over the next year.
The Federal Reserve, meantime, released data on Thursday showing American households’ combined net worth fell by $532.9 billion, or 3.6 percent, in the fourth quarter. Falling real estate values accounted for a third of the total decline.
This week, the Fed chairman, Ben S. Bernanke, called on lenders to move more aggressively to reduce the principal on delinquent loans to adjust them for the drop in home prices. He also said the Federal Housing Administration, a government mortgage insurance program, should guarantee more loans. The F.H.A. said Thursday that more than 20 counties across the country would see limits on mortgages backed by Fannie Mae and Freddie Mac rise to $729,750, the maximum set by the economic stimulus bill.
Representative Barney Frank, Democrat of Massachusetts and the chairman of the House Financial Services Committee, plans to unveil the details of a proposal to refinance hundreds of thousands of mortgages and provide the new loan insurance from the F.H.A. He has also said that some of the loans or homes could be bought by the federal government, a step that the Bush administration opposes.
In a speech Thursday, the president of the Federal Reserve of Boston, Eric S. Rosengren, said a more aggressive plan that involves the F.H.A could benefit mortgage investors and borrowers by reducing the costs and delays associated with foreclosure. In exchange for writing down the amount owed on the loans, investors could receive a share of any profits from a sale of the home in the future, he added.
Noting that others had proposed similar ideas, Mr. Rosengren said “there may be a significant cost to delaying needed actions.”
Still, even if politicians move quickly to agree on a plan, it will take time to implement any recovery effort and many delinquent borrowers will not qualify for help.
