New foreclosures set hottest pace
Posted on Saturday, September 6, 2008
Foreclosures accelerated in the second quarter to the fastest pace in nearly three decades as interest rates increased and home values fell, prompting more Americans to walk away from homes they couldn’t refinance or sell.
New foreclosures increased to 1. 19 percent, rising above 1 percent for the first time in the survey’s 29 years, the Mortgage Bankers Association said Friday. The total inventory of homes in foreclosure reached 2. 75 percent, almost tripling since the five-year housing boom ended in 2005.
The share of loans with one or more payments overdue — although not in foreclosure — rose to a seasonally adjusted 6. 41 percent of all mortgages, an all-time high, from 6. 35 percent in the first quarter.
In a related development, shares of mortgage giants Fannie Mae and Freddie Mac tumbled in after-hours trading Friday after a report by The Wall Street Journal that the government may soon step in to provide a financial boost to the two companies.
Details of the plan, which could be announced this weekend, were still being hammered out but are expected to include executive changes at both companies, the Journal said on its Web site. Treasury Secretary Henry Paulson met with Federal Reserve Chairman Ben S. Bernanke, Fannie Mae Chief Executive Officer Daniel Mudd, Freddie Mac CEO Richard Syron and Federal Housing Finance Agency Director James Lockhart in Washington, according to the Journal. Mudd and his aides have also been meeting at the Federal Housing Finance Agency, which oversees the two firms, with catered food scheduled for delivery at the agency through the weekend. In after-hours trading, Fannie Mae’s shares plunged $ 1. 70, or 24 percent, to $ 5. 34. Freddie Mac’s shares fell 95 cents, or almost 19 percent, to $ 4. 15. The news also followed the report by the Mortgage Bankers Association.
Fannie Mae and Freddie Mac, the nation’s largest buyers and backers of mortgages, lost a combined $ 3. 1 billion between April and June. Half of their credit losses came from these types of risky loans with ballooning monthly payments. Fannie Mae, or the Federal National Mortgage Association, is the government-formed corporation established in 1938 to purchase both governmentbacked and conventional mortgages from lenders and securitize them. Freddie Mac, or the Federal Home Loan Mortgage Corp., was created by Congress in 1970. It also buys mortgages, pools them and sells them as securities to investors, like Fannie Mae. Both are government-sponsored enterprises and are stockholderowned companies.
ARKANSAS FIGURES In Arkansas during the second quarter, 1. 21 percent of loans in the state were in foreclosure, down slightly from 1. 23 percent that were in foreclosure in the first quarter this year. An additional 6. 1 percent were past due by more than 30 days in the second quarter, up from 5. 48 percent that were delinquent in the first quarter. There were more than 312, 000 mortgages in Arkansas during the second quarter, which means almost 3, 800 loans were in foreclosure. About 19, 000 Arkansas mortgages were past due. Scott McElmurry, chief operating officer at Bank of Little Rock Mortgage, said he expects to see more mortgage delinquencies in the next several months. McElmurry said many adjustable rate mortgages that were made two and three years ago have recently reset to higher interest rates. Some homeowners who can’t make the higher payments — and can’t sell their houses — likely will get behind on their payments in coming months and could face foreclosure early next year, McElmurry said.
“But our experience has been that there haven’t been a lot of adjustable rate mortgages in Arkansas,” McElmurry said.
The Census Bureau estimates that about 40 percent of Arkansas’ households are paid off and do not even have a mortgage. One firm that tracks mortgages — First American CoreLogic of Santa Ana, Calif. — estimates that almost twothirds of Arkansas homes don’t have a mortgage.
Nationally, the source of trouble in the mortgage market has shifted from subprime loans made to borrowers with poor credit to homeowners who had solid credit but took out exotic loans with ballooning monthly payments. CALIFORNIA, FLORIDA WORST The problem is concentrated in a handful of states, the worst being California and Florida. The real estate markets in those two states were fueled by some of the riskiest lending practices and rampant speculation during the housing boom that has turned into a devastating bust.
“That’s clearly the problem,” said Jay Brinkmann, the association’s chief economist. “The national numbers are driven by the two largest states” with the most outstanding home loans.
Also tumbling home prices are making it difficult for even the most creditworthy owners with adjustable-rate mortgages to sell or get a new loan as their financing costs rise, Brinkmann said. Prime adjustable rate mortgages accounted for 23 percent of new foreclosures and subprime adjustable mortgages 36 percent, he said.
“People chose the lowest payment option to get into some of the very expensive housing markets and now that prices are coming way down, they can’t sell and they can’t afford the higher payments,” Brinkmann said.
More than one out of 10 borrowers with a prime adjustablerate loan is now delinquent or in foreclosure. That portion, 11. 3 percent, was up from 9. 7 percent in the first quarter and is expected to continue rising as more homeowners see their monthly payments spike.
The three-year-old housing slump has slowed growth of the world’s largest economy, caused more than half a trillion dollars of losses at banks such as Citigroup Inc. and UBS AG, and crimped earnings for companies such as Home Depot Inc. and Lowe’s Cos. that rely on home purchases to fuel demand.
The drop in home sales and values, along with tighter credit conditions and higher energy costs, probably will “weigh on economic growth over the next few quarters,” Federal Reserve policymakers said last month when they decided to hold their benchmark rate at 2 percent. The central bankers cut the rate seven times in the last year in an attempt to avert a recession.
The Fed probably will keep the rate level for the next few months, according to the price of Fed funds futures.
Sales of previously owned homes fell to a 10-year low in the second quarter and the median price for a single-family house dropped 7. 6 percent, according to the National Association of Realtors in Chicago.
About 75 percent of U. S. banks surveyed indicated they tightened standards on prime mortgages, up from 60 percent in the previous survey, the Federal Reserve said on Aug. 11.
The Mortgage Bankers report is based on a survey of 45. 4 million loans by mortgage companies, commercial banks, savings and loans, credit unions and other financial institutions. Information for this article was contributed by Kathleen M. Howley of Bloomberg News, David Smith of the Arkansas Democrat-Gazette and Alan Zibel of The Associated Press.
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