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Business Foreclosure editorial note :
Business Foreclosure editorial note : |
interest rate freeze
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NEW YORK (AP) — If the government really wants to stop home foreclosures from surging, here's a simple plan: Boost Americans' income, put more funding toward medical research and insist on marriage counseling for all. And then start buying up land to raise housing prices.
As far-fetched as all that may sound, such efforts would do more to curb default rates than the Bush administration's plan to freeze adjustable mortgage rates in the coming years for a limited number of subprime borrowers.
Data from Countrywide Financial Corp., the nation's largest mortgage lender, backs up this point. The No. 1 reason its customers have been defaulting on mortgage loans is because their income was cut. That accounted for almost 60 percent of its loan defaults in the first 10 months of this year; add in sickness and divorce and the total jumps to more than 80 percent.
Way down on the causes-for-foreclosures list at Countrywide — just under 2 percent — is a payment adjustment.
In other words, there's little evidence so far that the mortgage mess is a product of cash-strapped home owners being crushed by resets on adjustable-rate mortgages, or ARMs, that send their monthly payment soaring.
That could change as ARM rate resets pick up speed in the months ahead. Bank of America estimates that will peak next year, with $361 billion subprime ARMs shooting higher, and $148 billion will reset in 2009. Still, the Countrywide data give a clear view of what may really be pushing some homeowners over the edge.
That undermines the notion that the government's biggest move yet to deal with the credit and housing crisis will have a dramatic impact — or lessen the chances that the economy will fall into a recession just as the presidential election year begins.
The "Hope Now" program unveiled last week by President Bush and U.S. Treasury Secretary Henry Paulson is aimed at helping home buyers with spotty credit histories who chose ARMs that had low "teaser" rates for two to three years. The idea is to freeze rates on these loans at their current 7 to 9 percent range — well below the 11 to 13 percent rates they would reset to in subsequent years.
Those eligible must be subprime borrowers who took on a mortgage from Jan. 1, 2005 through July 31, 2007, live in their homes, have low credit scores and are current on their payments. They must be able to prove they can't afford the higher mortgage rates when they adjust.
Some 1.2 million households could be affected by the plan, at least by the government's estimates. Analysts see the numbers coming in much lower at around 350,000, given the strict eligibility requirements.
Whatever the number, the Countrywide data provides stark evidence that this plan will serve at best as a Band-Aid on a gaping wound, as does a new Federal Reserve Bank of San Francisco study that showed changes in home prices are "far and away the best single predictor" of subprime delinquencies.
It suggests that once a home's value falls below the amount owed on a mortgage, borrowers tend to then view the default option as being "in the money" and exercise that option.
Current conditions indicate just that. Housing wealth fell in the third quarter for the first time since 1993, by $128 billion, according to Merrill Lynch, as increases in mortgage debt outstripped the value of real estate assets.
"Unless the government is going to establish land banks to prevent continued house price deflation, it really is questionable as to whether this 'Hope Now' policy is really going to stop a 'Foreclosure Later' environment," said David Rosenberg, Merrill Lynch's chief North American economist. He noted that home prices have dropped 5 percent so far this year and his firm is forecasting another 10 percent decline from current levels in the coming year.
Evidence that those who have had their mortgages modified as they moved toward foreclosure still go on to default is adding to such worries.
Consider that during a housing boom, re-default rates two years after a loan modification are close to 25 percent in the conventional mortgage market and 40 to 60 percent in the weaker mortgage areas, including subprime and Alt-A, according to Joshua Rosner, managing director at the independent research firm Graham Fisher & Co.
If that happens in the best of times, think about what could go on now as prices are tumbling. That means this mess could drag on for years.
Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org
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If more people had paid closer attention to what was going on, particularly the long-range implications that were so predictable, perhaps the economic crisis now created by the highly questionable lending practices of the subprime loan industry could have been prevented.
Now, with foreclosures reported at a record pace, we haltingly support the Bush administration's mortgage-relief agreement -- tardy though it may be.
The plan will save thousands of owners from losing their homes by strong-arming some lenders into freezing the low interest rates to some borrowers not already in arrears. Fewer foreclosures are a good thing for everybody except speculators, and the freeze may help prevent the housing crisis from becoming a full-blown economic disaster.
Subprime refers to the credit status of the borrower rather than the interest rate on the loan itself. In practice, it involves the questionable practice of high-interest lending to people who are risks to begin with because of their credit and financial history. Thus, they are prime candidates for default, seizure of collateral and foreclosure.
And therein is the irony of this whole mess.
The numbers are staggering. The ranks of those who fell into foreclosure in the third quarter hit a record high of 351,000 nationwide, according to a Mortgage Bankers Association survey. And 5.6 percent of all those paying loans are behind on their mortgage payments, the highest level since 1986.
Foreclosures increased among all kinds of mortgages, but the percentage was highest among subprime adjustable-rate loans. These mortgages made up 6.8 percent of all outstanding loans but accounted for 43 percent of those entering foreclosure.
The Washington Post reported that under the Bush plan, 600,000 holders of subprime loans would be put on track to refinance, but with no guarantee they could avoid a prepayment penalty. Another group of homeowners, thought to be fewer than 600,000, would qualify for an interest rate freeze for five years.
Only those who took out subprime loans between 2005 and this summer, live in those homes and have credit scores below 660 will be able to obtain a rate freeze with little hassle.
But the plan announced by the president will not help another 600,000 subprime mortgage holders who are at serious risk of losing their homes by the end of 2009. Nor would it aid anyone who is in foreclosure.
For them the bubble has burst and the American dream of owning a home has become a nightmare.
There's plenty of blame to go around. The Bush administration and Congress ignored the development of the subprime loan industry and other shaky home finance instruments that precipitated the foreclosure crisis. Tighter government regulation was necessary, as were smarter business practices on the part of lenders (Washington Mutual just announced the slashing of 3,150 jobs and its stock dividend).
And let's not forget the consumers who failed to heed one of the basic rules of investing: If something sounds too good to be true, it probably is.
The administration plan may be too little, too late for many homeowners. But some definitive, aggressive action must be taken to turn things around, given the drastic and far-reaching implications for the national economy.
We just wish more people in the right places had paid better attention before things spiraled out of control.
* Members of the Yakima Herald-Republic editorial board are Michael Shepard, Sarah Jenkins and Bill Lee.
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