Hey, wait a minute! In recent months, the national media
has dwelled on the collapse of the subprime mortgage market
and the surge of foreclosures. But there is another side
to this story that should also be considered.
The Mortgage Bankers Association recently released its
National Delinquency Survey and the numbers are not what
you may think. True, the rate of loans falling into
foreclosure last quarter was the highest in the survey's
54-year history. 8.4% of subprime loans were more than 90
days late or already in the foreclosure process. That
statistic is sobering, but it misses the point. If 8.4%
are seriously delinquent or in foreclosure, 91.6% of the
sub-prime borrowers are current with their loans and making
their mortgage payments on time. They are enjoying the
benefits of home ownership. Those borrowers were given the
opportunity to own (rather than rent) because of the
availability of sub-prime loans and have successfully taken
advantage of that opportunity. For them, the "American
Dream" has become a reality.
Of course, 8.4% default rate is high, but unanticipated
financial problems happen. After all, people don't buy
homes, take out loans, and then intentionally default.
Usually something serious happens to disrupt the natural
process. Commonly, it is loss of job, divorce, medical
catastrophe, or some other unanticipated financial
emergency that causes people to default. Keep in mind,
though, you don't have to a sub-prime borrower to have
financial problems. Prime borrowers also default on their
loans and lose their homes in foreclosure (no one is immune
in this market). Sure, the percentages are higher for
sub-prime borrowers, but they are typically in a more
vulnerable financial situation. Of course, they have a
higher interest rate and pay a larger mortgage payments
every month, so cut them some slack. Regardless, the
solution is not to cut-off subprime lending, but rather to
embrace these borrowers' unique needs. Particularly now,
lenders need to offer delinquent homeowners programs to
restructure their loans and avoid foreclosure. Let' look
at why.
Delving deeper into the MBA survey, we discover several
surprising facts. For example, the surge in sub-prime
foreclosures last quarter was driven by four large states,
California, Arizona, Nevada, and Florida. If it were not
for the avalanche of foreclosures in those four states,
there would have been an overall drop in the rate of
foreclosure filings nationwide. Thirty-four states
actually reported a decrease in the rate of new foreclosure
foreclosures in the last quarter, and the remaining states
(other than those four) reported only a modest increase.
There is also a wide divergence between fixed-rate and
adjustable-rate loans. The delinquency rate for prime
fixed-rate loans was essentially unchanged from the
previous quarter and the rate for sub-prime fixed rate
loans actually fell! In contrast, the rate of delinquency
for prime adjustable-rate mortgages increased 36% and
sub-prime adjustable-rate mortgages increased 227%.
Clearly, adjustable-rate mortgages ("ARMs") are the culprit
and present a unique problem. But there is nothing wrong
with ARMS, provided they are utilized responsibly. They
have benefits you can't find with fixed-rate loans. They
have lower interest rates and correspondingly lower monthly
payments. They allow borrowers to qualify for loans they
would not otherwise receive (of which the vast majority
successfully pay each month). Plus, it just doesn't make
sense to obtain a 30-year fixed rate loan, when in reality
most people sell or refinance their homes every 5-7 years.
Nationwide, California leads the way with over 17% of all
sub-prime adjustable rate mortgages. Similarly, California
has over 19% of the foreclosures for sub-prime ARM loans.
In fact, the same four culprits; California, Nevada,
Arizona and Florida, have more than one-third of the
nation's sub-prime ARMs, more than one-third of the
foreclosures started on sub-prime ARMs, and most of the
nationwide increase in foreclosures.
Another factor to consider is the distinction between
owner-occupied and investor (non-owner occupied) borrowers.
A majority of the delinquencies and foreclosure starts can
be attributed directly to non-owner occupied loans. This
is because investors are notorious for defaulting on
mortgages when the market dips and they see the value of
their properties evaporating. Further exacerbating the
problem, investors' share of defaulted loans was 32% in
Nevada, 25% in Florida, 26% in Arizona, and 21% in
California. Yep, those same four states. Those rates are
high compared with a rate of only 13% for the remainder of
the country. And those percentages will certainly increase
as property values continue to decline.
One more thing. The media has been quick to blame mortgage
brokers for "forcing" borrowers into sub-prime
adjustable-rate loans. I laugh every time I hear that.
Anyone who has ever been a mortgage broker knows that you
can't force a loan on borrowers, prime or sub-prime. It
doesn't work like that anymore. Homeowners are more
sophisticated than ever before. They have access to the
internet, television and the mass media, and analyze
available loan programs. They understand the difference
between fixed-rate and adjustable-rate loans, between
amortized and interest-only payments, and between "stated"
and full documentation. They shop and explore
alternatives. Ultimately, they select the loan they want,
not their mortgage broker. Regardless of what the media
says, that process works successfully for the vast majority
of American homeowners.
All tolled, the sub-prime mortgage crisis is bad, but not
nearly as bad as the media would have you believe. If you
dig deeper into the survey, and segregate the four problem
states, subprime ARMs, and investor loans, you will
discover that with the vast majority of American
homeowners, default and foreclosure are not issues. At
least not yet.
----------------------------------------------------
This article was written by Lloyd Segal, mortgage banker,
attorney, author, public speaker, and amateur economist.
As an eternal optimist, Lloyd can find "good news" in
almost anything. Lloyd is also the author of "Stop
Foreclosure Now" and puts on monthly foreclosure workshops
for investors and realtors.
http://www.ForeclosureWorkshop.net
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