Housing Pain Hits Prime Borrowers
Foreclosures Increase
As Troubles Worsen
Outside of Subprime
By RUTH SIMON
June 6, 2008; Page A5
Mortgage delinquencies and foreclosures continued to surpass record levels in the first quarter, as the prolonged decline in home prices and shifting economic conditions trapped a growing number of prime borrowers.
Delinquencies and foreclosures increased at the fastest pace for borrowers with prime adjustable-rate mortgages, according to the Mortgage Bankers Association, though borrowers with subprime ARMs still account for the largest share of troubled loans. The number of new prime ARM foreclosures increased by 29,000 to 117,000 in the first quarter, while the number of new subprime ARM foreclosures increased by 20,000 to 195,000. This is the first time prime foreclosures have grown faster than subprime foreclosures, the MBA said.
The increase in delinquencies has been highest in states where there has been a lot of overbuilding, said Jay Brinkmann, the MBA's vice president for research and economics. New subdivisions in those states have seen the biggest price drops, he said, as builders have cut prices to reduce inventories. That has made it more difficult for borrowers in the same or nearby subdivisions to sell or refinance if they get into trouble. About 10% of the homes built after 2000 are now vacant, according to the Census Bureau, compared with roughly 2% of homes built earlier.
Nationwide, roughly 1.3 million homes were in foreclosure at the end of the first quarter, according to the MBA. The foreclosure rate increased by 0.43 percentage point in the first quarter to 2.47% on a seasonally adjusted basis, while the number of loans that were at least 30 days past due climbed by 0.53 percentage point to 6.35%.
The increases "are clearly being driven by certain loan types and certain states," said Mr. Brinkmann. Four states -- California, Florida, Nevada and Arizona -- accounted for 89% of the increase in foreclosures, he said.
The number of new foreclosures dropped slightly in Michigan, Ohio and Indiana, where delinquencies have been driven by a weak economy, though overall delinquency rates in those states remain high. The slowdown in foreclosures there may reflect increased efforts by mortgage companies to work with troubled borrowers, Mr. Brinkmann said.
Still, the rise in past-due loans was widespread, with delinquencies up year over year in every state except Louisiana. Thirty-nine percent of subprime ARMs and more than 10% of prime adjustables are at least one payment past due. Option ARMs, which carry a low introductory rate but can lead to a rising loan balance, account for much of the rise in delinquent prime ARMs, Mr. Brinkmann said.
The data provide little evidence things will improve soon. Mark Zandi, chief economist at Moody's Economy.com, notes credit-bureau data from April show delinquencies have become "measurably worse" in the second quarter. "The problem now is negative equity combined with a weakening job market," he said, rather than resetting adjustable-rate mortgages.
Falling home prices have exacerbated the problems in the mortgage market by making it more difficult for borrowers who run into trouble to refinance or sell their homes. "The only alternative for them is foreclosure," says Paul Willen, a senior economist with the Federal Reserve Bank of Boston. "That accounts for a lot of what we are seeing."
As the downturn in the housing market deepens, more borrowers who had higher incomes and good credit are getting swept up by the undertow. "Usually these people have things they can draw on that let them hang on longer," such as savings and 401(k) accounts, says Gabe del Rio, vice president of lending and homeownership for Community HousingWorks in San Diego, which provides foreclosure counseling. Many of the more-affluent borrowers coming for help previously worked in the mortgage or real-estate industries, he says.
Falling home prices are also making it more difficult for borrowers to tap their equity to pay bills. At LSS Financial Counseling Service, based in Duluth, Minn., the average borrower seeking foreclosure counseling had nearly $17,000 in credit-card debt, compared with about $13,000 two years ago.
With fuel prices and property taxes rising, "the total household debt is incredible" for many borrowers, says Michael van Zalingen, director of homeownership services at Neighborhood Housing Services of Chicago.
Write to Ruth Simon at ruth.simon@wsj.com