Academic journal article ABA Banking Journal

New Foreclosure Phenomenon: Amid a Mortgage Boom, There Have Been Three Years of Record Foreclosures. Subprime Is a Key Reason, but Is the Cycle Ending

Academic journal article ABA Banking Journal

New Foreclosure Phenomenon: Amid a Mortgage Boom, There Have Been Three Years of Record Foreclosures. Subprime Is a Key Reason, but Is the Cycle Ending

Article excerpt

Five hundredths of one percent may not seem like much to the average person. To an economist, specifically the Mortgage Bankers Association's chief economist, it's enough to assume that years of worsening mortgage foreclosures have come to an end.

The number of now foreclosure proceedings has risen consecutively since the second quarter of 2000.

That was when the internet bubble burst, marking the start of the current economic downturn in the U.S. and the first test of subprime mortgage lending, which really only took root after the last recession of the early 'Nineties.

By mid-2002 foreclosures were at their worst level ever since MBA began tracking them in 1972.

By mid-2003, however, the latest available data point, the percentage of loans entering the process of foreclosure had dropped by five basis points, to 0.32%.

"That's a pretty' big drop for that indicator," MBA's Doug Duncan said, upon releasing the second-quarter data, in mid-September. Foreclosures are slow to register, he explained. The lengthy legal lead-up to repossession proceedings means that the percentage of loans entering foreclosure "usually move just two or three basis points in either direction."

The total stock of homes in foreclosure declined marginally to 560,000 out of 50 million mortgages. MBA doesn't track how loans exit foreclosure.

Even though marginally mo,-e borrowers did begin to fall behind on their mortgages in the second quarter, Duncan foresees no more than a possible upward blip in next quarter's new foreclosures, followed by a long-term decline. He adds that future foreclosures hinge oil unemployment levels.

High flyers without wings

MBA's expectation is not shared by companies privy to the jumbo-loan market, rather than the conventional mortgage market, which MBA's data reflects.

Eastern Savings Bank, a $700-million asset thrift outside Baltimore, lends nationally to high flyers operating on one wing--perhaps a $3-million homeowner" without a nickel in the bank," explains Jonathan Feldman, senior vice-president of workouts.

Eastern Savings makes low (60-70%) loan-to-value mortgages but still has unusually high delinquencies. Of its loans, 16% were delinquent at least 90 days in 2000, before the national foreclosure problem began, 23% at the start of this year, and a marginally improved 21% by mid-year.

Feldman recognizes his niche is atypical, adding, however, "A lot of people hale credit that's beyond, their means.", a Sacramento-based company, has for 11 years been gathering data from local courts and elsewhere for would-be buyers of pre-foreclosed property. Interviewed before the release of MBA's latest data, Alexis McGee, president, said the late stages of the foreclosure cycle, and have lot been reached anywhere nationally. "In California, we're seeing the hey inning of a three- or four year cycle."

Feldman adds, "A lot of foreclosures have been avoided because properties are appreciating, and that might not last."

Counterintuitive trend

The past few years have been a notable period ill mortgage history because foreclosures have been at record levels, paradoxically alongside record origination levels and escalating home prices.

An increase in foreclosures historically has indicated a troubled housing market, since a hot market would enable a homeowner facing default to sell quickly and avoid foreclosing.

The difference in today's foreclosure pattern is substantially explained by subprime lending, which is facing it's first test in an economic slowdown.

Over-leveraged buyers some perhaps on 125% loan-to-value mortgages, may have no equity left.

Unemployment hovered around a nine-year record in September while personal bankruptcy, filing last year were at a 22-year high.

Pockets of reportedly high foreclosures include wealthy Silicon Valley in California, heart of the ailing tech sector, and in poorer parts of New York. …

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