The Mortgage Bust Goes On

Forbes ^ | December 19, 2006 | Matthew Swibel

[GodGunsGuts]

The Mortgage Bust Goes On

Matthew Swibel, 12.19.06

WASHINGTON, D.C. - A record-high 19% of high-cost mortgages originated during the past two years will end in foreclosure, a consequence of the growth in risky mortgage products, according to new data compiled by an industry group.

The nonpartisan Center for Responsible Lending predicts 2.2 million households in this mortgage segment, known as subprime borrowers, either have lost their homes or hold mortgages doomed for foreclosure in the next few years. This estimate comes a week after a grim survey from Fitch Ratings, which studies residential mortgage securities, showing a 16-fold increase in past-due subprime loans in the third quarter of 2006, compared with 1998.

Subprime borrowers, who typically pay interest rates 2% to 3% higher than those with good credit, currently account for a quarter of all mortgage originations.

In Pictures: Ballooning Foreclosure Rates "This is the largest rash of mortgage foreclosures in the modern mortgage market," says Michael Calhoun, president of the Center for Responsible Lending.

The worst-hit areas for rising foreclosures include cities in California, Nevada, New York, New Jersey and the greater Washington, D.C., area that recorded steep housing price appreciation in the past few years. As the market cools, homeowners will find it harder to tap their homes for bigger lines of credit or to take cash out in refinancing.

Here comes the pinch: To manage household debt, Americans have used such moves to pull over $2 trillion out of their homes in the past five years. In the first six months of 2006, consumers extracted over $500 billion.

The sharp increase in foreclosures poses "a serious threat to neighborhood stability," said Pat Vredevoogd, president-elect of the National Association of Realtors, in a conference call with reporters on Tuesday. "It can cause all homes in the neighborhood to lose value."

The deterioration of homeowners' ability to keep up with mortgage payments will add oomph to calls on Capitol Hill for new regulation of mortgage lenders and brokers. "There is considerable discussion by incoming House Finance Committee Chairman Barney Frank [D-Mass.] to enact a predatory lending law for these mortgage lending problems," says Keith Ernst, senior policy counsel for the Center for Responsible Lending.

The Senate Banking Committee's agenda under Sen. Chris Dodd, D-Conn., will scrutinize the home-buying process, too. "The amount of household and mortgage debt as a percentage of disposable income is at its worst levels in over a quarter of a century--putting countless Americans on the financial brink," Dodd told a press conference earlier this month. "In many respects, the American Dream is at risk in a way it has never been before. I do not intend to preside over its demise, but rather to do everything possible for its revival."

The growing chorus of concern over mortgage costs and foreclosures could ensnare more than just the lenders like Countrywide Financial, Wells Fargo and H&R Block who peddle adjustable-rate mortgages with low teaser rates and interest-only features. On Wall Street, risky mortgages get bundled into large pools of mortgage-backed securities, which now account for 23% of all bond market debt outstanding, making it the largest single segment of the U.S bond market.

Increased regulatory oversight could lead to a demand that mortgage servicers give greater flexibility to delinquent borrowers to avoid foreclosure. This would increase a pool's income, but it would also raise its servicing costs--something investors dearly want to avoid.

[giznort]

Would more than 9 out of 10 be 10?

[GodGunsGuts]

ping

[fhlh]

The deterioration of homeowners' ability to keep up with mortgage payments will add oomph to calls on Capitol Hill for new regulation of mortgage lenders and brokers. "There is considerable discussion by incoming House Finance Committee Chairman Barney Frank [D-Mass.] to enact a predatory lending law for these mortgage lending problems," says Keith Ernst, senior policy counsel for the Center for Responsible Lending.

Ahhhh yes.. get the government involved to save us from ourselves...

[giznort]

Hey, my comment got posted to the wrong article. I was in the article about the premarital sex survey. Sorry.

[Always Right]

Here comes the pinch: To manage household debt, Americans have used such moves to pull over $2 trillion out of their homes in the past five years.

And during that past 5 years, Homes have appreciated over $10 Trillion, so homeowners have only tapped into 20% of their appreciated equity.

[randog]

The folks in my town are still hoping against hope--putting their houses on the market for 2x-3x what they're worth and hoping the Kalifornians will show up to pounce on an "investment property". This charade has been going on for over a year now.

[Oldexpat]

Risky mortgages drove the prices of housing up by allowing people to qualify for houses they couldn't afford..now they will drive them down and everyone is going to suffer.
No money down..low starting interest..no allowance for taxes etc.
These were all bad practices that must come to an end.
10% down minimum..plus escrow accounts for taxes and no promotional rates or negative amortization. That would trim house prices and make them a lot more affordable and encourage saving for down payment.

[GSlob]

Must be a freudian slip, as you were reading of subprime borrowers screwing [themselves].

[brownsfan]

When you hear the same thing from lots of sources, more often than not it's true. One thing I heard from lots of people early on is: Never, ever borrow against your home, or roll debt into a mortgage unless it's your last option.

People want everything now. Kids who are 25 want a home bigger, newer and nice than mom and dad's house. The concept of a starter home is lost on most people now.

So, they make a deal with the devil. (Not literally, but in terms of shaky financial activity). Well, the bill is coming due.

[Fee]

Historically lenders will screw the consumer if left unsupervised by government. The Bible even acknowledges that the lender will be used to enslave you. (Check out Proverbs).

[Obadiah]

Here we go...the set up serve for Democrats to come in and overhaul the mortgage lending industry under the guise of helping the poor, down-trodden and helpless consumer who is preyed upon. Of course, Barney Frank and Dodd's "fix" will result in higher mortgage rates for everybody else and a severe tightening of access to credit. This of course will choke the economy and bring it to its knees.

Chris Dodd and Barney Frank, their from the government and they intend to "help".

[Fairview]

You're enjoying this, aren't you?

[GnuHere]

More than 9 out of 10 grandparents having premarital sex were also subprime borrowers! I know it 'cause I read it in a study.
/s

[djf]

Well, if one wants to be charitable, they can say it was loose lending policies that led up to this.

The lending that happened amounted to a kind of bidding war between the institutions. A house worth 100K in a certain market suddenly zoomed to 200K in short order. And there was nothing to justify the increase save what the institutions were willing to lend on it.

So now because of these policies, literally millions of people face foreclosure and possible bankruptcy. Years of destroyed credit.

And the lenders sit back, after having the sheriff toss the schmucks stuff on the sidewalk, and say "Don't blame us!" "They knew all about it!" "It's not our fault!!"

And you know what? Some of the lenders might take serious financial hits because of it. And before you can say "cheese", the gummint will be in there filling up there back pockets like the S&L debacle.

Meanwhile, the schmuck is sitting in a Barcalounger on the sidewalk, with basically a negative credit rating now, without a pot to whiz in.

And the bankers and Wall Streeters will still be eating lobster and flying first class.

[GodGunsGuts]

No, I'm not. Now, if you are wondering if "I told you so" occasionally pops up from my subconscious re: the fatal optimists who tried to argue that housing fundamentals were just fine, the answer is yes. Now that the housing decline is on everyone's radar screen, it's time to start finding articles that point to the least painful way out of this mess (or even how to profit from it).

[finnman69]

the ponzie scheme was just this:

1. buy maximum house on mimimum payments and no money down
2. wait 2 years for appreciation or flip to a new buyer
3. move up to bigger house with mimimum payments and no money down

All of this is dependent on home price appreciation and a steady flow of buyers. Now that sub-prime lenders are tightening standards, and there are fewer buyers who can not really 'afford' the entry costs with even the riskiest most toxic loans, the conveyer belt is jammed and support for these prices is disappearing.

[finnman69]

You mean taking a out a 30 year loan on a trip to Hawaii and a car that may last 7 years is a bad idea?

[brownsfan]

"Well, if one wants to be charitable, they can say it was loose lending policies that led up to this. "

I'd say it was financially uneducated consumers who were impatient to have it all now that caused this. One thing that our school systems lack is financial education. Kids should be taught about the magic that is interest. The power of financial discipline. As a parent, I've tried to give that to my kids.
ARMs are evil for your primary dwelling. Less than 10% down is asking for a financial bloody nose. Paying over 40% of your income for your mortgage is just plan stupid. But people are doing all of that and more. I don't blame the lenders on this one. It's the uneducated consumers. If you don't understand what you're signing up for, you probably shouldn't sign up.

[Uncledave]

Hey Barney and Chris -- how about lowering taxes so people can better afford their housing?!