Subprime, FHA, VA Loans Mortgage Weak Spots
Julavits, Robert, American Banker
Existing conventional mortgages may weather the economic storm, observers say, but FHA, VA, and subprime home loans look vulnerable to delinquency, default, and loss -- and could cause the collapse of some lenders.
"That one-third of the (home mortgage) market is at significant risk," said Mark Zandi, the chief economist at Economy.com. "We'll see significant losses, and maybe even a few smaller lenders go belly up."
He and other economists cited rising unemployment as well as declining income among many homeowners still on the job.
In addition, lenders that originate and service FHA and VA mortgages will have to clean up after defaults and shoulder losses from higher servicing costs, observers say.
The government eventually covers defaulted FHA and VA loans, but lenders must keep paying interest and principle to investors in securities backed by the loans. Also, a systematic worsening of loan performance raises servicing costs.
Lost overtime in many industries has seriously affected income, Mr. Zandi said, and some workers have taken pay cuts just to hold on to their jobs. The plunge in purchase-loan applications in recent weeks suggests that home sales will further weaken in the months ahead, he said, and housing prices are also starting to soften.
"The weight of the deteriorating job market is overwhelming the benefit of the lower fixed-mortgage rates," Mr. Zandi said. "Incomes are being disrupted, and if you combine that with weaker home-price growth, that suggests that we'll see an increase in mortgage credit problems."
Sung Won Sohn, the chief economist at Wells Fargo & Co., pointed out that delinquency has risen sharply on FHA mortgages, though only slightly on conventional loans.
According to the Mortgage Bankers Association's latest data, delinquency on FHA and VA loans surged 79 and 41 basis points, respectively, to 10.79% and 7.63% in the second quarter. The rate for conventional loans was up just 16 basis points, to 2.93%.
Many of the government-backed loans are made to first-time homebuyers or those who would have trouble borrowing in the conventional market, Mr. Sohn said, and …
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: Subprime, FHA, VA Loans Mortgage Weak Spots. Contributors: Julavits, Robert - Author. Magazine title: American Banker. Volume: 167. Issue: 214 Publication date: November 7, 2001. Page number: 1. © 2009 SourceMedia, Inc. COPYRIGHT 2001 Gale Group.
This material is protected by copyright and, with the exception of fair use, may not be further copied, distributed or transmitted in any form or by any means.