Homeowners bail on loans due to more than just mortgage-rate resets
By: Rachel Beck, AP Business Writer
By RACHEL BECK
AP Business Writer
NEW YORK (AP) — If the government really wants to stop home foreclosures from surging, here’s a simple plan: Boost Americans’ income, put more funding toward medical research and insist on marriage counseling for all. And then start buying up land to raise housing prices.
As far-fetched as all that may sound, such efforts would do more to curb default rates than the Bush administration’s plan to freeze adjustable mortgage rates in the coming years for a limited number of subprime borrowers.
Data from Countrywide Financial Corp., the nation’s largest mortgage lender, backs up this point. The No. 1 reason its customers have been defaulting on mortgage loans is because their income was cut. That accounted for almost 60 percent of its loan defaults in the first 10 months of this year; add in sickness and divorce and the total jumps to more than 80 percent.
Way down on the causes-for-foreclosures list at Countrywide — just under 2 percent — is a payment adjustment.
In other words, there’s little evidence so far that the mortgage mess is a product of cash-strapped home owners being crushed by resets on adjustable-rate mortgages, or ARMs, that send their monthly payment soaring.
That could change as ARM rate resets pick up speed in the months ahead.
Bank of America estimates that will peak next year, with $361 billion subprime ARMs shooting higher, and $148 billion will reset in 2009. Still, the Countrywide data give a clear view of what may really be pushing some homeowners over the edge.
That undermines the notion that the government’s biggest move yet to deal with the credit and housing crisis will have a dramatic impact — or lessen the chances that the economy will fall into a recession just as the presidential election year begins.
The “Hope Now” program unveiled last week by President Bush and U.S. Treasury Secretary Henry Paulson is aimed at helping home buyers with spotty credit histories who chose ARMs that had low “teaser” rates for two to three years. The idea is to freeze rates on these loans at their current 7 to 9 percent range — well below the 11 to 13 percent rates they would reset to in subsequent years.
Those eligible must be subprime borrowers who took on a mortgage from Jan. 1, 2005 through July 31, 2007, live in their homes, have low credit scores and are current on their payments. They must be able to prove they can’t afford the higher mortgage rates when they adjust.
Some 1.2 million households could be affected by the plan, at least by the government’s estimates. Analysts see the numbers coming in much lower at around 350,000, given the strict eligibility requirements.
Whatever the number, the Countrywide data provides stark evidence that this plan will serve at best as a Band-Aid on a gaping wound, as does a new Federal Reserve Bank of San Francisco study that showed changes in home prices are “far and away the best single predictor” of subprime delinquencies.
It suggests that once a home’s value falls below the amount owed on a mortgage, borrowers tend to then view the default option as being “in the money” and exercise that option.
Current conditions indicate just that. Housing wealth fell in the third quarter for the first time since 1993, by $128 billion, according to Merrill Lynch, as increases in mortgage debt outstripped the value of real estate assets.
“Unless the government is going to establish land banks to prevent continued house price deflation, it really is questionable as to whether this ’Hope Now’ policy is really going to stop a ’Foreclosure Later’ environment,” said David Rosenberg, Merrill Lynch’s chief North American economist.
He noted that home prices have dropped 5 percent so far this year and his firm is forecasting another 10 percent decline from current levels in the coming year.
Evidence that those who have had their mortgages modified as they moved toward foreclosure still go on to default is adding to such worries.
Consider that during a housing boom, re-default rates two years after a loan modification are close to 25 percent in the conventional mortgage market and 40 to 60 percent in the weaker mortgage areas, including subprime and Alt-A, according to Joshua Rosner, managing director at the independent research firm Graham Fisher & Co.
If that happens in the best of times, think about what could go on now as prices are tumbling. That means this mess could drag on for years.
Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org
Published in The Messenger 12.19.07