Subprime Borrowers Fall Behind on Mortgage Payments

June 14, 2007 — -- If you live in a Rust Belt state, get ready for more bad economic news. On top of disappearing manufacturing jobs, home ownership is now quickly evaporating.

According to the Mortgage Bankers Association, Indiana, Ohio and Michigan accounted for nearly one of every five U.S. homes in foreclosure during the first three months of 2007. Ohio had the highest level of properties in foreclosure for a large state since the Washington-based trade group started its quarterly National Delinquency Survey in 1972.

"The percentage of loans in foreclosure would be well below the average of the last 10 years were it not for Ohio, Michigan and Indiana," said Doug Duncan, chief economist with the association.

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Delinquencies Down Except for Subprime Loans

The news came in the Thursday release of MBA's survey for the first three months of this year. It found that nationwide, 4.84 percent of mortgage loans were more than 30 days delinquent.

While that was a decrease from the previous quarter, it was higher compared with a year earlier when the rate stood at 4.41 percent.

And if you have a subprime loan, the news was definitely not good. The bulk of homeowners who were late making their monthly payments had subprime mortgages, usually provided to customers with poor or risky credit histories.

For all subprime loans, 13.77 percent were delinquent, and 15.75 percent of subprime adjustable rate mortgages were late -- the highest rate on record.

Foreclosures Rise

Foreclosures rose as well in the first quarter of the year. Nationwide, the rate increased to 1.28 percent from 1.19 percent in the last quarter of 2006.

Again, subprime borrowers were more likely to be in some stage of foreclosure, as 5.1 percent of subprime loans were in foreclosure.

Perhaps even more troubling, the rate of properties entering into foreclosure jumped significantly for borrowers holding subprime ARMs. From January to March, 3.23 percent of these homeowners couldn't keep up with the monthly payments, and their homes entered foreclosure. That's up from a rate of 2.7 percent for the last three months of 2006.

Like Politics, All Real Estate Local

In addition to the increases in delinquencies and foreclosures in the economically troubled states of Indiana, Ohio and Michigan, Duncan said the high rate of homes entering into foreclosure appears to be the result of real estate investors' activity.

"The rate of delinquencies is being driven by what is taking place in seven states," said Duncan.

"Information provided to the MBA," he said, "indicates that the foreclosures in Florida, Nevada, California and Arizona are heavily influenced by speculators who are walking away from properties now that home prices have started to fall in areas of those states and the face resets in their adjustable rate mortgages.

The survey reviews nearly 44 million delinquencies nationwide. Of that amount, subprime loans totaled nearly 6 million. According to Inside Mortgage Finance, as of March 2007, just over 10 percent of the $10.4 trillion in outstanding loans were subprime.

Worse before better?

While the rates reported Thursday set new records in several areas, the worst may be yet to come.

"Mortgages usually default over three to five years," said Zach Gast, an analyst at the Center for Financial Research and Analysis. "We are talking about six months in a lot of these loans. We're not in the end game right now, we are at the very beginning."

A study released in March by First American CoreLogic estimated that 1.1 million adjustable rate mortgages will end in foreclosure over the next six to seven years as monthly payments increase -- in some cases doubling. This represents 13 percent of all ARMs issued from 2004 to 2006 and includes both prime and subprime loans.

Trying to refinance will be difficult, especially for homeowners who had risky credit to start with and obtained subprime loans or loans that required little to no documentation.

"Because interest rates are higher and underwriting standards are tighter, people who got themselves into problems with a mortgage, a home, won't be easy to remedy," said Guy Cecala, publisher of Inside Mortgage Finance, a trade publication. "In many cases, the home is worth less than the mortgage, or lenders are not willing to make loans that they may feel are even riskier than the ones they have on the books."

Congress has considered taking steps to help distressed homeowners and to protect future borrowers from getting into trouble with home loans.

Additionally, the Federal Reserve and other federal agencies that oversee the lending industry are considering revising standards to strengthen underwriting and increase financial disclosures to consumers.

The Federal Reserve held a hearing Thursday to gather information on whether it should use its rule-making authority to stop certain lending practices deemed unfair or deceptive.