Foreclosure Woes

I will be focusing many of my future posts on the foreclosure crisis. Here is a good article talking about the record number of foreclosures in the United States.

NEW YORK (CNNMoney.com) — More than one million homes are now in foreclosure, the highest rate ever recorded, according to a trade group which warned Thursday that number will continue to climb. The Mortgage Bankers Association’s first quarter report showed that a record 2.5% of all loans being serviced by its members are now in foreclosure, which works out to about 1.1 million homes. That’s up from the 2% of loans, or about 938,000 homes, that were in foreclosure at the end of 2007.

 

The report also showed that 448,000 homes, or about 1% of loans being serviced, began the foreclosure process during the first quarter. That’s up from about 382,000 homes, or 0.83%, that entered foreclosure in the last three months of 2007. The seasonally-adjusted rate of homeowners behind on their mortgage payments also hit a record high. Nearly 3 million home loans, or 6.4%, have missed at least one payment, while about 737,000 are at least three months past due, but not yet in foreclosure.

Grim numbers

"The figures aren’t surprising, but they’re pretty ugly nonetheless," said Michael Larson, real estate analyst with Weiss Research. "We’re talking higher delinquencies and foreclosures pretty much across the board." And he doubts that there’s much reason to expect the foreclosure crisis to abate until next year at the earliest, adding that it could be a couple of years or more before foreclosure rates retreat to more normal historical averages. "It’s the same story we’ve been seeing for a while now – we had too much reckless lending, and buyers who got over-extended," he said. "We’ve had an unprecedented decline in home prices on a nationwide basis, which is public enemy number one for mortgage loans. And now you’ve got an overall economy that has slowed adding to this toxic stew."

Good credit, bad credit

Much of the problem lies with subprime loans given to borrowers with weaker credit records, especially those loans that had adjustable rates. Nearly four out of ten subprime ARM loans are a month or more late, or in foreclosure. And subprime ARMs account for 39% of the loans that fell into foreclosure during the quarter. Prime fixed-rate loans, which are considered very low risk, have also seen sharp increases in their delinquency and foreclosure rates, although they are performing far better than the riskier loans on the market. There are 431,000 prime loans in foreclosure, a seasonally adjusted rate of 1.2% that is more than double the 0.5% rate a year ago. The report showed about 1.2 million prime mortgages are now a month or more past due, a seasonably adjusted rate of 3.7% of those loans. That’s up from a rate of 2.6% a year ago. According to Jay Brinkman, MBA’s vice president for research and economics, the prime loan segment was hurt by so-called Alt-A loans, which didn’t require income verification for buyers with good credit. Prime loans are also getting into trouble in places such as Florida and California, which have seen sharp home price declines. "You still have people with prime fixed rate loans who lose their jobs, who get a divorce or have an illness come up, and can no longer afford a house," Brinkman said. "In areas where there’s been home price appreciation, you can get out of that with the sale of a home or some other negotiation."

This marks the sixth straight quarter in which a record percentage of loans went into foreclosure.

The trend has led to a widespread decline in home prices, as well as huge losses for banks and other financial firms that issued or invested in the loans.

Nearly half of the homes in foreclosure are concentrated in six states. But those states are undergoing two very different types of housing meltdowns.

California, Florida, Arizona and Nevada have been hit by a hangover after a home building boom in the middle of the decade, which was fueled by rising home prices and investors snatching up real estate using risky mortgages. Those four states have nearly 400,000 homes in foreclosure, or a third of the nationwide total. Roughly 3.6% of all of the loans in these states are now in foreclosure.

"Clearly things in California and Florida are going to get worse before they get better," said Brinkman.

The other two states that are ground zero for the crisis – Michigan and Ohio – have been hit by the more traditional economic woes stemming from rising job losses, particularly in the automotive sector.

Ohio has about 61,000 homes in foreclosure, while Michigan has about 54,000. The foreclosure rate in those two states is 3.9%.

There is a glimmer of good news. The rate of homes going into foreclosure in Ohio and Michigan was narrowly lower than it was in the fourth quarter, and 18 other states also saw a decline in that rate.

Brinkman said he hoped that means the crisis is at or near a bottom in much of the country, and that foreclosure prevention efforts have started to have an effect. But he added that a slight improvement in one quarter doesn’t necessarily mean the end is near.

Indeed, the rate of homes going into foreclosure continued to climb sharply higher in California and Florida, as has the rate of loans in those states that are 90 days or more past due but not yet in foreclosure. Brinkman said that in markets like these, where home prices have fallen so far from the market’s peak, finding solutions to keep a home out of foreclosure are more difficult.

He also added that, given the large impact California and Florida are having on the national foreclosure numbers, and the fact that historically foreclosures peak about three years into the loan’s life, he expects the number of foreclosures will continue to rise.