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Home foreclosures up, especially for `subprime' borrowers

WASHINGTON—Consumers with shaky credit and high-interest home loans were the driving force behind a national increase in mortgage-delinquency and foreclosure rates late last year, the Mortgage Bankers of America reported Tuesday in an annual survey.

The new findings and a federal investigation into accounting irregularities at a large mortgage lender, which specialized in those so-called subprime borrowers, are fueling fears of a meltdown in the mortgage sector that provides loans to people with poor credit histories.

Stock prices plunged overall Tuesday as investors' concerns about high-risk mortgages mounted. Equities for subprime lenders continued to suffer. The Dow Jones Industrial Average closed down more than 242 points, the second-largest decline of the year.

The new survey data also underscore the shaky state of the housing market as it undergoes a correction after years of rising prices. As home values increased, lenders provided more subprime loans to high-risk borrowers. Many of the loans were structured to require low monthly payments in the early years that rise sharply over time.

Nearly 4.95 percent of all home mortgages in the survey were delinquent—30 or more days past due—in the fourth quarter of 2006. That's up from 4.67 percent in the previous quarter, and is the highest rate since 4.97 percent in the second quarter of 2003. Delinquency on subprime mortgages increased to 13.33 percent in the fourth quarter from 12.56 percent the previous quarter, the survey found.

The seasonally adjusted percentage of foreclosures that were begun in late 2006 set a new survey record, accounting for 0.54 percent of all loans in the survey. New foreclosures filings accounted for 2 percent of all subprime loans in the survey.

The 13.5 percent delinquency rate for all Federal Housing Administration loans was also an all-time high for the Mortgage Bankers of America's National Delinquency Survey.

The survey evaluates more than 43.5 million loans, of which 33.3 million are prime loans, about 6 million are subprime loans and about 4 million are government loans.

For all the delinquency and foreclosure measures, subprime loans had rates higher than the previous quarter and the previous year, due mainly to problems among borrowers with adjustable-rate mortgages, said Doug Duncan, chief economist with the Mortgage Bankers of America. Adjustable-rate mortgages have built-in rate and payment increases.

"When you see subprime borrowers who don't manage credit well, who have adjustable terms in their mortgages and the underlying interest rates rise, then their payments are going to rise and that will lead to an increase in delinquencies," Duncan said.

Up to 2.2 million families with subprime mortgages could lose their homes to foreclosure in the next five years, said Christian Weller, senior economist with the Center for American Progress, a research center in Washington.

Weller blamed that on overzealous lenders extending liberal credit to unworthy homebuyers. Federal banking regulators recently urged lenders to evaluate the creditworthiness of subprime borrowers more carefully in light of the high delinquencies and foreclosures.

More than 1.2 million residential foreclosures were filed in 2006, a 42 percent increase over 2005, Weller said.

New Century Financial Corp., one of the largest subprime mortgage lenders, is under investigation by the Securities and Exchange Commission and the U.S. Attorney's Office. The probe of the Irvine, Calif., company stems from faulty accounting, which overstated the value of its loan portfolio. The New York Stock Exchange has suspended trading in New Century shares, which have lost nearly all their value after trading for more than $50 a share last year.

Another subprime lender, Accredited Home Lenders Holding Co. of San Diego, said it might be forced to cut jobs as it sought to raise more money. Lenders require adequate liquidity to retain and sell the loans they originate.

Experts such as Weller say the problems in the subprime sector could hurt the profits of other companies with ties to that industry. Prime lending outfits own many subprime lenders.

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(c) 2007, McClatchy-Tribune Information Services.

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