Picture this: A father loses his job unexpectedly and is unable to make his family’s mortgage payments. Suddenly, a two-income household is whittled down to one income and it’s just not enough. Or, a serious illness in the family wreaks havoc on the finances and mortgage payments are missed.
In each scenario, the homeowner falls into delinquency and eventually forecloses.
The subprime mortgage market has taken off at an all-time record and resulted in jumps in foreclosures, Frank Nothaft, chief economist with Freddie Mac, told CSG’s Financial Services Working Group Wednesday.
The subprime mortgage market accounted for 14 percent of all loans outstanding in the U.S. and those made up more than 50 percent of all foreclosures last year, Nothaft said. And even though the housing market has suffered from oversupply and a drop in home values, the nation is still a year away from hitting the trough, he said.
Freddie Mac is predicting a 3 percent to 4 percent drop in home prices next year, based on a national index.
And if home values are falling, the value of a home may be less—sometimes much less—than the mortgage of a home. The result: Foreclosures.
After all, bad things happen to good people, Nothaft said. In fact, unemployment and illness are the top two hardship reasons for foreclosure. Those two reasons account for two-thirds of all delinquency cases, Nothaft said.
Rising foreclosures, falling home values and oversupplied markets are themes surfacing across the country. At the same time adjustable-rate mortgages and interest-only loans saw popularity unheard of in recent years.
“The response to lack of affordability and the affordability crisis that occurred ... (translated to) products that helped homebuyers keep initial payment as affordable as possible,” Nothaft said. “There’s nothing wrong with the product, but that doesn’t mean that the product is suitable for every loan application that comes in.”
That’s how the subprime market got so large, he said.
State government officials acknowledged the negative impacts of a mortgage meltdown in their states at the CSG session, “Mortgage Meltdown: Implications for State Finances.”
Rep. Jim Davnie of Minnesota said initially officials in his state thought the dramatic increase in foreclosures was a problem mostly affecting urban areas. But as Minnesota lawmakers studied the problem more closely, they found that it wasn’t.
Instead, they saw a disconnect between the mortgage broker and the consumer—where increasingly the broker’s interest was not whether the mortgage was a sound financial decision for the consumer, but rather the broker was interested in the fee he or she would get from the transaction, Davnie said.
Products developed by the financial services sector have only gotten more complex over the years, leaving consumers open to making less-than-informed decisions, according to Davnie.
The result: A mortgage meltdown.
While states like Minnesota acknowledge the phenomenon, representatives from the Mortgage Bankers Association preferred to call it a “market adjustment,” and a “meltdown” only in a few states.
Those states experiencing the highest appreciation in recent years in home values saw the worst of the so-called mortgage meltdown. Florida, California and Nevada are among those states.
But in Oklahoma, for example, 92.9 percent of home mortgages have no delinquency of any kind and payments are going on as planned, according to David Feisal of the Oklahoma Mortgage Bankers Association.
Oklahoma was the second state in the nation to pass anti-predatory lending legislation in 2000, he said.
Governors are now taking action to combat the issues with the subprime market. Eleven states have governors working on the issue, said Paul Richmond of the Mortgage Bankers Association in Washington.
In Minnesota, the attorney general created a predatory lending study group and the state has also created five foreclosure work groups. Those groups led to legislation banning negative amortization loans in the state, where the payment made by the borrower is less than the accrued interest and the difference is added to the loan balance, according to Davnie.
“It’s a crisis,” Davnie said.
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Posted by: mortgage claims | February 16, 2008 at 01:07 AM