In Michigan, Ohio and Indiana, the majority of homeowners who are falling behind on their mortgages are suffering from problems linked to job losses in the auto industry. About 20% of the nation's homes in foreclosure are in one of those three states.
Jesse Jackson, head of the Rainbow/PUSH Coalition, toured cities in Michigan last week and will meet the Fed chairman Tuesday. "This is a huge economic tsunami that has the potential to really sink the economy," he told USA TODAY.
In Michigan, 71% of African-Americans who bought or refinanced their home last year received a subprime loan, according to an analysis of federal loan data for Genworth Financial. gnw
At the same time, in California, Florida and Arizona — the states with the most new defaults — many in default can't refinance because home prices are falling, and they owe more to the bank than their homes are worth.
Katrina Vizinau of Community Housing Development of North Richmond, Calif., says about 90% of the people who call her group for help aren't able to refinance, because lenders say they have little or no equity in their homes. Further, many of her clients are late on their mortgage payments, meaning their credit scores have taken a hit.
As federal regulators seek a coordinated response, Vizinau has had better responses from such major lenders as Bank of America bac and Wells Fargo. wfc Most of Vizinau's clients are black and Latino. But she sees some older borrowers who were persuaded to refinance to tap into home equity.
"What really breaks my heart is, it's not like they have time to start all over," she says. "They've used all the cash that they took out. They're just stuck, and they're just waiting. … They can't refinance because they're on a fixed income."
Bair, the FDIC chair, wants lenders to take a more sweeping approach, instead of painstakingly reassessing each individual mortgage. She wants them to quickly move the estimated 80% of borrowers who have kept up their monthly payments at the starter rate of their ARMs into fixed-rate loans.
"We have a mounting crisis here, and we need to take a systematic approach," Bair says. In the future, she says, the financial industry clearly needs tighter lending standards. But for borrowers who are already in high-cost adjustable-rate products, "I don't think you need to re-underwrite those loans. You have a two- or three-year payment history."
Concern among loan servicers
Some loan servicers, including Litton Loan Servicing, say Bair's plan would expose them to lawsuits from mortgage investors if the servicers reduce the interest rates on loans that aren't at serious risk of default. "The loan servicer has to walk the line of having a fiduciary duty to the investor and, at the same time, help homeowners stay in their house," Litton says. "We are required to look at each loan individually."
A report from Moody's last month found that lenders modified a scant 1% of subprime ARMs. But Countrywide's CEO of Loan Administration Steve Bailey argued that Moody's analysis was flawed. Moody's took a static sample of loans and looked at how many had been restructured three months after the loan reset.
Countrywide's own sample of 100 subprime ARMs showed that 43% of borrowers had paid off their loans eight months later, and 39% were still making their payments on time.
What's more, Bailey says, many people forget that job loss or a reduction in income, followed by illness and divorce, are the most common reasons why people default on mortgages. In July, Countrywide found only 1.4% of borrowers had fallen behind as a result of a higher payment tied to an ARM reset.
But Michael Kanef of Moody's says the increase in payment puts more stress on the borrower and raises the risk that the borrower will default in the future.
Bailey counters: "If the primary driver of foreclosures is a significant reduction of income, and property values do not continue to appreciate, that is going to make foreclosures continue to rise, and there really isn't anything to fix that."