Foreclosure news, American home mortgage news.
Every cloud has a silver lining. Though the rate of loans entering foreclosure hit an all time high at .58% at the first quarter of this year and delinquencies are on the rise, there remains to be great hope in pockets around the country. According to the latest MBA National Delinquency Survey, twenty-four states actually saw a reduction in foreclosure starts and relative improvements in delinquencies. Chief economist, Doug Duncan, suggested that the number of loans in foreclosure would be below the ten year average if it were not for activity in Ohio, Michigan, and Indiana. Duncan also claimed that national rate of foreclosures started would have decreased if it were not for major increases in Arizona, California, Florida, and Nevada. Apparently these areas have unique states of affair, and are not representative of the country at large and rightly skew the numbers. Duncan affirms “while foreclosure starts increased slightly from last quarter, thus setting another record, most of the increase was due to only four states, California, Florida, Nevada, and Arizona.” There are a few major factors influencing this trend. In addition to a rise in insurance costs, investors and borrowers are beginning to get out of properties in states with falling home prices. Compounding this issue are aggressive resets in the ARMs used for initial funding.
In one quarter the rate of foreclosures started on subprime adjustable increased from 2.7% to 3.27%. In fact, half of the states in the union showed rate decreases. Once again, the national foreclosure rate decreased if it were not for the usual suspects (Ca,Fl,Na,Az). According to Duncan “If house prices, overbuilding and investor participation in those markets is greater rather than lesser, it will delay the pace of recovery and continue the pace of foreclosures. What we do not know yet is the degree to which those investors have reacted. It is possible in an attempt to cut their losses they have moved rapidly to drop the property. The bulge in new foreclosure starts is reflecting that. If there are fewer of those incidents foreclosure starts could start to fall."
Indiana, Michigan, and Ohio are proving to be drastically influential. In the first quarter of 2007, these three alone account for 8.7% of the mortgage loans assigned nationally, 19.9% of the nations loans in foreclosure, 15% of the foreclosures started. If it were not for the heavy statistical weight of these three states, foreclosure rates would be below the 10 year average. Duncan claims that the “level of foreclosures and foreclosure starts for those three states exceed what occurred in Texas during the oil bust of the mid-1980s, and Ohio is the highest ever seen in the MBA survey for a large state." What’s worse, these effects generalize to all loan types. According to Duncan, a major contributing factor involves a serious declined in manufacturing employment in these states. “While we have seen some pickup in service sector employment, that employment is not often in the areas where job losses occurred and the wages are often lower.
For example, while we have seen increases in employment in places like Cincinnati, Columbus, Ann Arbor and Indianapolis, we have seen job losses in Detroit, Flint, Cleveland and Muncie." One and a quarter percent of all loans went into foreclosure in the first quarter of 2006. There was an increase of nine basis points from the last quarter, and 30 for the year. This increase in foreclosures has resulted in an industry wide revamp of loans for delinquent borrowers interested in keeping their homes. "The lender loses, the borrower loses and the investor loses if the loan goes into foreclosure. Each loss is in the $40,000- $50,000 range. For borrowers who are having trouble making payments due to circumstances beyond their control, servicers are working with those folks to keep the property," quips Duncan.
Over the last year, delinquencies increased 43 basis points and are down 11 from the final quarter of last year. Compared to the last quarter, delinquency rates are up 30 points for prime adjustable and 131 basis points for subprime I adjustable. Prime fixed delinquency rates decreased 8 points while there was a 16 point increase for fixed sub primes. There were also global increases for foreclosure inventory rates. Prime loans increased by four points and 57 points for subprime. VA loans went up four points while FHAs remained stagnant.
Risk is no longer a theme for investors, an attitude that will likely trickle down into the market. 80 major lenders have left the subprime arena since the end of last year. Duncan insists that we will see growth in 2007, but it will not affect the housing market until the end of the year. "There are significant inventories in California, Florida Arizona, and Nevada that support that. Inventory must be worked off in certain sections of the country before recovery takes place. Home prices will be flat over the next few years. It's not a trend, but we are seeing delinquencies move down in the first quarter. We believe there is likely to be a modest increase in delinquencies over the next few quarters before a slowdown dissipates." We must consider the extent of the resetting of the teaser and index in subprime ARMs. The teaser will probably be the trump card, thus stimulating delinquencies. "A lot of borrowers are refinancing out of those loans, and there is a lot of work by servicers in restructuring loans, particularly in the subprime arena." This is a review of an article titled “New Foreclosures Reach Record” by Harmon, J. originally printed in Mortgage Servicing News, Aug2007, Vol. 11 Issue 7, p1-30
