The results of the latest quarterly survey of delinquency and foreclosure rates by the Mortgage Bankers Association helped send stocks down Tuesday, reflecting investors’ views that the crisis in subprime lending won’t be confined to real estate.
The MBA survey found that 4.95 percent of mortgage loans were 30 days or more past due in the fourth quarter of 2006, up from 4.67 percent the previous quarter and approaching the 4.97 percent late-payment rate in the second quarter of 2003.
A record .54 percent of mortgages entered the foreclosure process in the fourth quarter, raising the total percentage of loans in foreclosure to 1.19 percent, a 14-basis-point increase from the previous quarter. Late payments for subprime loans hit 13.33 percent, up from 12.56 percent in the third quarter, and the delinquency rate for subprime adjustable-rate mortgages hit 14.44 percent, a four-year high.
The survey received more than the usual amount of attention because of the deepening problems in the subprime lending industry. Higher delinquency and default rates have forced some originators to repurchase loans from investors who buy mortgage-backed securities on the secondary market, and many subprime lenders are no longer able to obtain financing for their loans.
The Dow Jones Industrial Average fell more than 240 points Tuesday, in part because the MBA survey confirmed fears that problems in subprime lending are worsening, stock market analysts said.
The meltdown in subprime lending could have broader impacts on the economy, as mortgage lenders tighten restrictions on a broad spectrum of loans including those made to small businesses, said Christian E. Weller, senior economist at the Center for American Progress.
Small businesses create more than half of all new jobs, Weller said, and spend more on new technology relative to their size than larger companies. While small businesses have had good access to credit for the last couple of years — with many owners borrowing against their homes — they will be the first to be hit by the tightening of credit. That will affect employment and investment in new equipment.
A Federal Reserve survey of senior loan officers found smaller banks are tightening lending more and earlier than large banks, Weller said. Since small businesses tend to borrow more from small banks, they are already feeling the pinch.
In the housing market, the problems in subprime lending aren’t likely to be confined to entry-level homes, Weller said.
“With subprime lenders pulling back, it means fewer people can enter the market, because people looking to sell their homes have a harder time doing so, or must lower their price,” Weller said. “Prices stagnate, there are fewer home sales, home construction and home equity cash outs.”
Weller called the economic impacts of the fallout from subprime lending a “Jenga effect” — a reference to the Hasbro game in which players attempt to remove pieces from the lower levels of a tower of wooden blocks without toppling it.
“The reason I call it the Jenga effect, rather than a house of cards, is we know the bottom is being pulled out, be we don’t know if the whole thing is going to come crashing down on us.”
Weller and the Center’s economic policy analyst, Almas Sayeed, spoke to reporters Tuesday in a conference call to publicize the release of a new report that urges lawmakers to step up efforts to help subprime borrowers stay out of foreclosure.
The report, “From Boom To Bust: Helping Families Prepare for the Rise in Subprime Mortgage Foreclosures,” examines state and local foreclosure prevention programs, and recommends the federal government provide grant funding to step up public awareness campaigns, foreclosure prevention counseling, legal aid services, and low-interest mortgage assistance.
Such programs should provide aid to families while their mortgages are renegotiated or the property is sold on the market, Weller and Sayeed said, allowing families to salvage their credit and preserve their ability to become homeowners in the future.
Loan funds for families facing foreclosure can pay for much of their operating costs themselves because they generate money for originating new loans. A loan fund in Pennsylvania uses payments from previous loans to originate 74 percent of new loans, they said.
All told, the crisis in subprime lending will put about 300,000 homes on the market through foreclosures, said Lawrence Yun, senior economist with the National Association of Realtors. At the same time, Yun said, reduced access to credit will cut the number of home sales by 20,000 units per quarter in the second and third quarters.
Yun said it’s difficult to forecast what over what time frame those 300,000 homes will come on the market — whether in the next year or over a longer period of time. But with NAR forecasting 7.14 million home sales this year, Yun said the impacts on the housing market of foreclosures and tightening of credit will be “modest.”
NAR today projected home prices will appreciate at 1.2 percent in 2007. That’s down from an earlier estimate of 1.9 percent, but better than last year’s 1 percent gain.
“Subprime is filtering into the overall housing market, but very modestly,” Yun said.
Unlike past housing recessions of the early ’80s and ’90s when unemployment was a problem, 2 million new jobs have been created in the last 12 months, Yun said.
“We believe this job-creating environment will be the mitigating factor,” he said, with bargain hunters entering the market to buy up excess inventory.
Mark Zandi, chief economist at Economy.com, holds a less rosy view, predicting that 500,000 people will lose the ability to finance a home purchase because of the tightening of credit, and that the U.S. will see 800,000 subprime defaults this year.
Areas still recovering from Hurricane Katrina and Midwestern “Rust Belt” states that have lost jobs in manufacturing are currently seeing the highest rates of delinquencies and foreclosure.
The MBA survey found the highest foreclosure inventory rates in Ohio (3.38 percent), Indiana (2.97 percent), and Michigan (2.39 percent). The states with the highest overall delinquency rates were hurricane-ravaged Mississippi (10.64 percent) and Louisiana (9.10 percent), followed by Michigan (7.87 percent).
But some experts expect the impacts of the subprime lending crisis will also be felt in areas that saw extreme price run-ups, such as California and Florida.
In the Naples, Fla., market, Amerivest Realty founder Joe Ballarino said “the market has bottomed out, or is bottoming out now. Consumer confidence is swinging toward the positive side.”
If a wave of foreclosures had hit last year, Ballarino said, “That might have been a problem, because buyer confidence wasn’t there. But the confidence is back — people are buying. In the Naples market, pending sales are already well above the trend line.”
Ballarino said outside of areas that saw heavy activity in condo conversions, “there is very little price depreciation going on. For the overall market, they have just leveled off — the appreciation is not there right now.”
The impacts of the tightening of credit will mainly be felt by investors who overextended themselves, Ballarino predicted.
While some of the properties they purchased will end up in foreclosure, “the average consumer won’t get the opportunity to see most of those deals happen.”
Other investors, he said, “will eat most of those deals up before the market gets to see them.”
“This whole market has always been about the investors and the speculators — the run up, the run down and the aftermath,” Ballarino said. Unfortunately, first-time home buyers are affected because they have to stretch a little harder to make that first home purchase.
Glenn Cohen, founder and chief executive officer of Deerfield Beach, Fla.-based Expert Real Estate Services, said the availability of 100 percent financing created a “false cushion” that allowed entry-level buyers to purchase homes that would otherwise have been above their means.
“I think a good number of buyers on the lower end of the price range became somewhat dependent on 100 percent financing, and that will have a definitive impact on home sales, and the volumes of home sales,” Cohen said. “The markets that ran up the highest have taken affordable housing further and further away from people who are renting. The response (to the run-up in prices) became 100 percent financing, and that’s evaporating.”
In areas where prices are already correcting, Cohen said, the tightening of credit and the curtailment of 100 percent financing will accelerate the process.
“It’s a good thing,” Cohen said. “If we ever want to get back to a healthy 7 million units (of housing sales nationwide) a year, there needs to be more affordability in the marketplace,” Cohen said.
In areas where prices for entry-level homes haven’t surpassed the conforming loan limit, there’s renewed interest in loans backed by the Federal Housing Administration.
“Interestingly enough, we’re seeing FHA come back to life,” Cohen said. “They will do 97 percent (financing) and it’s not credit score driven. If you can document your income and the requirements they ask for, you can go FHA.”
That’s not an option for many buyers in California, where the conforming loan limit — $417,000 — is well below the median home price. The limit — which is intended prevent government-sponsored mortgage repurchasers Fannie Mae and Freddie Mac from financing too many luxury home purchases — puts an even tighter rein on FHA, which can only insure loans up to 87 percent of the limit. That means FHA can’t back single-family home loans greater than $362,790.
The FHA insured only 5,000 mortgages in California in 2005, a 95 percent decline from the 109,000 loans it guaranteed in 2000.
“Our (home) prices are just above their limits, that’s really the problem,” said Leslie Appleton-Young, chief economist for the California Association of Realtors. Although she said it’s hard to gauge what the impacts of the subprime lending crisis will be on the California housing market, “I’m hard-pressed to describe a scenario where the median home price in California plummets by $80,000 (and becomes eligible for FHA-backed loans). We’ve been trying for years to have categorized as a high-cost state like Alaska and Hawaii, but the issue has been tied up with GSE reform.”
After getting bogged down in Congress last year, compromise legislation to overhaul oversight of the government sponsored entities Fannie and Freddie has been introduced in the house and is the subject of a committee hearing Thursday.