The dream of home ownership could turn into a living nightmare for millions of Americans in the next couple of years as home foreclosures are expected to skyrocket.
Alarmed lawmakers, such as Republican Senator Richard Shelby of Alabama, say the recent spike in home repossessions is just "the tip of the iceberg."
The fizz came out of the US housing boom last year after several years of stellar growth, fuelled in part by a speculative binge, but also by sales of "exotic mortgages" including adjustable rate mortgages (ARMs).
Consumer advocates say such loans are costing many working class families an "ARM and a leg," and that buyers were often unaware ARMs can start out with a low "teaser" interest rate that fast kicks into a much higher rate.
Pressure is mounting on Congress to rein in unscrupulous lenders.
"Predatory practices need to end immediately and solutions must be designed to help the millions of distressed Americans who have mortgages they cannot afford," said Kirsten Keefe, a consumer lawyer and the executive director of Americans for Fairness in Lending.
Democratic presidential contender Senator Chris Dodd says the emerging "crisis" could see over two million Americans lose their homes to foreclosure in the next few years. Such grim predictions are backed by some industry analysts.
Over 500,000 mortgages, or 1.19 percent of all loans, were in foreclosure at the end of the fourth quarter 2006, according to the Mortgage Bankers Association which reported over 43 million loans in total outstanding at the end of last year.
A main focus has been "subprime" loans, or mortgages marketed to people with poor credit histories, now seeing the worst problems.
Jennie Haliburton, a 77-year-old widow, told a congressional hearing chaired by Dodd on Thursday that she took out an ARM loan with Countrywide Financial Corporation, one of the US' biggest mortgage lenders, without realizing her monthly repayments would leap from an initial 700 dollars to 1,100 dollars.
Federal banking regulators have also told Congress they are worried about rising foreclosures, especially in the subprime sector.
Mortgage executives promised Congress they would tighten up their standards, but cautioned against tighter regulation.
Top Federal Reserve officials have tried to soothe fears about the housing downturn and the National Association of Realtors (NAR) reported a surprise 3.9 percent rise in February existing home sales Friday.
But, as the sum of delinquent mortgage loans has swelled to around 150 billion dollars' worth, some like Democratic senator Robert Menendez believe the country could be on the cusp of a foreclosure "tsunami."
Pessimists seeking evidence of a gathering storm do not have to look far.
Several mortgage lenders, who mainly sold subprime loans, including People's Choice Home Loan, Inc., Ownit Mortgage Solutions Inc., and ResMae Mortgage Corp, have filed for bankruptcy in recent months.
British banking giant HSBC has set aside over 10 billion dollars to guard against sour home loans, and H&R Block Inc announced over 15 million dollars in mortgage-related losses earlier this month.
Aside from rising consumer complaints, such as those voiced by Keefe and Haliburton, concern is also increasing that major Wall Street banks could see their profits dented by the mortgage market.
A spokeswoman for Dodd said the senator is mulling whether to back legislation to improve lending standards and media reports suggest House lawmakers are moving to author a bill to check industry excesses.
Speculators "flipped" houses to make a quick profit during the boom, but the NAR report showed prices in some regions have fallen.
As a result, some speculators could owe more to a mortgage firm than they might be able to sell their properties for.
The wealthy are also feeling the squeeze and being forced to offer sales "carrots," such as a new Porsche, golf membership or free plasma televisions in a bid to sell million dollar mansions.
Some analysts argue, however, that it is not all doom and gloom.
Standard mortgage rates have fallen to near historic lows, according to the NAR which said rates on a 30-year conventional fixed rate mortgage had dropped to 6.16 percent in the last week, down from an average of 6.29 percent in February.
Saturday, November 26, 2011
Is the Foreclosure Crisis Real?
Know anyone dealing with foreclosure right now? You may—if you live in the Midwest, or in overheated real estate markets like California, Florida, Nevada, and Arizona. The rest of you are probably wondering what all the fuss is about.
Here's something to confuse you further: On Thursday, June 14, the Mortgage Bankers Assn. announced that the delinquency rate for mortgage loans on residential properties fell 11 basis points in the first quarter of 2007, to 4.84%, from 4.95% in the fourth quarter of 2006.
In the same period, the percentage of outstanding loans in the foreclosure process (not included in the delinquency rate) rose 9 basis points, to 1.28%. The rate of loans entering the foreclosure process increased four basis points, to 0.58%. True, this is a record high. But is it as high as you thought?
A Big Crisis in a Few States
The outlook for the housing market seems to get worse with each passing day, and the flames of panic are being fanned by reports of skyrocketing foreclosure rates and stories of desperate homeowners. On June 12, the yield on the 10-year Treasury note hit a five-year record high of 5.265%, sending stocks plummeting and aggravating fears about rising mortgage rates. The same day, Irvine (Calif.)-based RealtyTrac reported that foreclosure activity shot up 19% in May from April. But RealtyTrac's list of the states with the highest foreclosure rates in May was little changed from April or March, suggesting that the foreclosure crisis is limited to certain areas.
"The bulk of the country is not in this circumstance," says MBA Chief Economist Douglas Duncan. And the bulk of the mortgage market, he says, is "very healthy." The MBA attributes most of the first-quarter increase in foreclosure starts to a boost in activity in California, Florida, Arizona, and Nevada. "Without these four states, foreclosure starts would have declined," Duncan predicts. In fact, 24 U.S. states saw a decline in foreclosure starts, while the rest of the states saw what the MBA describes as "negligible" increases.
For total foreclosure inventory for the quarter (1.28% of all loans) the blame fell on Ohio, Indiana, and Michigan. These three states account for just 8.7% of all mortgages in the county, according to the MBA, but they account for 19.9% of the total loans in foreclosure and 15% of all the foreclosures started in the first three months of 2007. Without these three states, Duncan predicts that the portion of loans in foreclosure in the U.S. would be 1.12%—below the 1.19% average of the last 10 years.
Soured Speculators and Subprime Borrowers
In the first quarter, foreclosure starts increased 19 basis points in Nevada, 13 basis points in Florida, 12 basis points in California, and 7 basis points in Arizona, according to the MBA. These areas have been heavily influenced by speculators who drove up home prices in the first part of the decade. Now that home prices have started to fall, the MBA says these investors are walking away from properties, especially as they face resets for the adjustable rate mortgages they took out for the homes. Homeowners in Florida are also facing higher insurance bills, the association says.
As for the worsening problems in the subprime market, well, that's Nevada, Florida, California, and Arizona's fault, too. The rate of foreclosures started on subprime ARMs jumped to 3.23% from 2.7% in the first quarter of the year, but 26 states had decreases in subprime foreclosure starts, according to the MBA. Again, Duncan says the national rate would have decreased were it not for the increases in those four states.
In Ohio, Indiana, and Michigan, problems with late payments and defaults extend across all loan types, according to the MBA survey. Sluggish income growth and job loss are the culprits here; all three states have suffered declines in manufacturing employment. Duncan notes that Michigan has lost nearly 300,000 jobs since 2001—more than the number of current jobs in Wyoming.
Recovery Predicted for Late in 2007
Though high foreclosure rates are largely confined to the seven states highlighted in the MBA survey, foreclosure is still a very real and serious problem for the country, says Moody's Economy.com's Pat McPherron. "The idea that there's a hump and we've passed it, that everything's fine and it's just these states that are having trouble—I'm not ready to buy into that," he says, citing higher gas prices and rising interest rates.
McPherron suspects that the reason delinquencies fell in the first quarter may have to do with a change in the loans that MBA members serviced in that period. Eighty subprime lenders have gone out of business since late 2006, the MBA estimates, and others including Accredited Home Lenders (LEND) and Fremont General (FMT) have stopped making the risky loans.
But even with the first-quarter decrease in delinquencies, the MBA expects to see a "modest increase" in late payments over the next two quarters, with an increase in foreclosures on a lag. The association expects the housing market to recover in late 2007.
"I don't feel that the problem has been bypassed yet," says McPherron. "I think it's still pending, and it's going to get worse."
Indeed, the foreclosure situation could get much uglier in states like Nevada, Florida, California, Arizona, Ohio, Michigan, and Indiana. But the rest of the country might not notice.
Click here to see the 10 U.S. states with the highest foreclosure rates.
Here's something to confuse you further: On Thursday, June 14, the Mortgage Bankers Assn. announced that the delinquency rate for mortgage loans on residential properties fell 11 basis points in the first quarter of 2007, to 4.84%, from 4.95% in the fourth quarter of 2006.
In the same period, the percentage of outstanding loans in the foreclosure process (not included in the delinquency rate) rose 9 basis points, to 1.28%. The rate of loans entering the foreclosure process increased four basis points, to 0.58%. True, this is a record high. But is it as high as you thought?
A Big Crisis in a Few States
The outlook for the housing market seems to get worse with each passing day, and the flames of panic are being fanned by reports of skyrocketing foreclosure rates and stories of desperate homeowners. On June 12, the yield on the 10-year Treasury note hit a five-year record high of 5.265%, sending stocks plummeting and aggravating fears about rising mortgage rates. The same day, Irvine (Calif.)-based RealtyTrac reported that foreclosure activity shot up 19% in May from April. But RealtyTrac's list of the states with the highest foreclosure rates in May was little changed from April or March, suggesting that the foreclosure crisis is limited to certain areas.
"The bulk of the country is not in this circumstance," says MBA Chief Economist Douglas Duncan. And the bulk of the mortgage market, he says, is "very healthy." The MBA attributes most of the first-quarter increase in foreclosure starts to a boost in activity in California, Florida, Arizona, and Nevada. "Without these four states, foreclosure starts would have declined," Duncan predicts. In fact, 24 U.S. states saw a decline in foreclosure starts, while the rest of the states saw what the MBA describes as "negligible" increases.
For total foreclosure inventory for the quarter (1.28% of all loans) the blame fell on Ohio, Indiana, and Michigan. These three states account for just 8.7% of all mortgages in the county, according to the MBA, but they account for 19.9% of the total loans in foreclosure and 15% of all the foreclosures started in the first three months of 2007. Without these three states, Duncan predicts that the portion of loans in foreclosure in the U.S. would be 1.12%—below the 1.19% average of the last 10 years.
Soured Speculators and Subprime Borrowers
In the first quarter, foreclosure starts increased 19 basis points in Nevada, 13 basis points in Florida, 12 basis points in California, and 7 basis points in Arizona, according to the MBA. These areas have been heavily influenced by speculators who drove up home prices in the first part of the decade. Now that home prices have started to fall, the MBA says these investors are walking away from properties, especially as they face resets for the adjustable rate mortgages they took out for the homes. Homeowners in Florida are also facing higher insurance bills, the association says.
As for the worsening problems in the subprime market, well, that's Nevada, Florida, California, and Arizona's fault, too. The rate of foreclosures started on subprime ARMs jumped to 3.23% from 2.7% in the first quarter of the year, but 26 states had decreases in subprime foreclosure starts, according to the MBA. Again, Duncan says the national rate would have decreased were it not for the increases in those four states.
In Ohio, Indiana, and Michigan, problems with late payments and defaults extend across all loan types, according to the MBA survey. Sluggish income growth and job loss are the culprits here; all three states have suffered declines in manufacturing employment. Duncan notes that Michigan has lost nearly 300,000 jobs since 2001—more than the number of current jobs in Wyoming.
Recovery Predicted for Late in 2007
Though high foreclosure rates are largely confined to the seven states highlighted in the MBA survey, foreclosure is still a very real and serious problem for the country, says Moody's Economy.com's Pat McPherron. "The idea that there's a hump and we've passed it, that everything's fine and it's just these states that are having trouble—I'm not ready to buy into that," he says, citing higher gas prices and rising interest rates.
McPherron suspects that the reason delinquencies fell in the first quarter may have to do with a change in the loans that MBA members serviced in that period. Eighty subprime lenders have gone out of business since late 2006, the MBA estimates, and others including Accredited Home Lenders (LEND) and Fremont General (FMT) have stopped making the risky loans.
But even with the first-quarter decrease in delinquencies, the MBA expects to see a "modest increase" in late payments over the next two quarters, with an increase in foreclosures on a lag. The association expects the housing market to recover in late 2007.
"I don't feel that the problem has been bypassed yet," says McPherron. "I think it's still pending, and it's going to get worse."
Indeed, the foreclosure situation could get much uglier in states like Nevada, Florida, California, Arizona, Ohio, Michigan, and Indiana. But the rest of the country might not notice.
Click here to see the 10 U.S. states with the highest foreclosure rates.
Foreclosures hit some cities harder than others
Foreclosure rates continued to rise in the third quarter in most of the top 100 largest metropolitan areas of the country, according to the latest data from RealtyTrac, a Web site that logs foreclosure filings.
Stockton, Calif., saw the highest rate of foreclosures — with one filing for every 31 households — a rise of 32 percent from the second quarter and more than five times the rate of last year’s third quarter. Foreclosures in Detroit were up 92 percent from the second quarter of this year; the pace in California's Riverside-San Bernardino area rose 39 percent.
The adage that real estate is all about “location, location, location” seems to be playing out in the foreclosures now facing millions of American homeowners as foreclosure rates in the third quarter varied widely from one region to the next. Cities in California, Florida and Ohio accounted for 17 of the top 25 metro area foreclosure rates, according to RealtyTrac.
Other cities in the top 10 highest foreclosure rates were Fort Lauderdale, Fla.; Las Vegas; Sacramento, Calif.; Cleveland; Miami; Bakersfield, Calif.; and Oakland, Calif. California cities accounted for seven of the top 25 metro foreclosure rates, while Florida and Ohio each accounted for five of the top 25 spots.
The report found there were still parts of the country that have so far largely escaped the problem of surging foreclosures, including Virginia and North and South Carolina.
Much of the risky lending that helped fuel the housing boom dried up this summer when investors lost their appetite for these loans, after tens of billions of dollars worth of mortgage-backed paper all but evaporated. The credit scare has thrown a chill on all mortgage lending, threatening to proloing the ongoing housing slump.
Mortgage giant Countrywide Financial said Tuesday that it financed $22 billion worth of home loans last month — down 48 percent from a year ago. The lender, which was one of the biggest suppliers of subprime loans to borrowers with risky credit backgrounds, said it wrote just $42 million worth of subprime loans in October. That’s down from $3.3 billion a year ago.
Congress and the White House continue to look for ways to hold back the rising tide of foreclosures being created by a wave of “resets” on adjustable-rate mortgages. Many of these ARMs will jump over the next two years from low, initial teaser rates, resulting in high payments that many homeowners’ will be unable to afford.
Though lenders are now shunning stretched borrowers with risky credit, millions of existing loans with two- and three-year introductory rates will begin resetting next year.
Federal Reserve Chairman Ben Bernanke told lawmakers in Washington last week that nearly 2.3 million subprime mortgages will reset at higher rates through the end of next year. An estimated 1 million to 2 million borrowers will be unable to avoid foreclosure.
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A lot depends on how much further and longer the housing slump continues to depress home prices. It’s also far from clear how many borrowers will be able to work out arrangements to modify loan terms to keep them from losing their homes.
When foreclosure can’t be avoided, the losses extend beyond the borrower losing a home. The foreclosure process typically costs lenders added legal fees, taxes due until the property is sold and lost equity in a house that must be priced to sell in a falling market. The added inventory of unsold homes further weakens local housing markets, depressing the value of other nearby homes.
Overall, the coming rise in home foreclosures is expected to drag down property values by some $223 billion, with the most severe impact in minority communities, according to a report released this week from the Center for Responsible Lending.
The group estimates that roughly one in three households will see their property values drop by $5,000 on average as mortgages written in 2005 and 2006 reset at higher interest rates.
Property values and tax revenues will decline most sharply, the center said, in neighborhoods with lots of minority residents, who received a disproportionate share of such mortgages. The report's authors said that properties that go unsold in the foreclosure process can also raise the risk of fire and vandalism.
"These foreclosures are wiping out wealth that people often took a lifetime to build," said Martin Eakes, the center's chief executive. "Many families will never achieve homeownership again."
Lenders are also posting huge losses as the easy money lending spree that fueled the housing boom continues to unwind. This month alone many major banking companies including Citigroup, Merrill Lynch, Morgan Stanley and Bank of America have reported billions in losses on investments backed by mortgages.
In his testimony last week, Bernanke told Congress that the losses from the current turmoil in the mortgage market could eventually approach those seen in the late 1980s, when the savings and loan industry collapsed under heavy wave of real estate defaults, some of them the result of fraudulent transactions.
This time around, bad mortgage debt may cost banks as much as $400 billion by the time the credit crisis is over, Deutsche Bank wrote in a research report Monday.
Stockton, Calif., saw the highest rate of foreclosures — with one filing for every 31 households — a rise of 32 percent from the second quarter and more than five times the rate of last year’s third quarter. Foreclosures in Detroit were up 92 percent from the second quarter of this year; the pace in California's Riverside-San Bernardino area rose 39 percent.
The adage that real estate is all about “location, location, location” seems to be playing out in the foreclosures now facing millions of American homeowners as foreclosure rates in the third quarter varied widely from one region to the next. Cities in California, Florida and Ohio accounted for 17 of the top 25 metro area foreclosure rates, according to RealtyTrac.
Other cities in the top 10 highest foreclosure rates were Fort Lauderdale, Fla.; Las Vegas; Sacramento, Calif.; Cleveland; Miami; Bakersfield, Calif.; and Oakland, Calif. California cities accounted for seven of the top 25 metro foreclosure rates, while Florida and Ohio each accounted for five of the top 25 spots.
The report found there were still parts of the country that have so far largely escaped the problem of surging foreclosures, including Virginia and North and South Carolina.
Much of the risky lending that helped fuel the housing boom dried up this summer when investors lost their appetite for these loans, after tens of billions of dollars worth of mortgage-backed paper all but evaporated. The credit scare has thrown a chill on all mortgage lending, threatening to proloing the ongoing housing slump.
Mortgage giant Countrywide Financial said Tuesday that it financed $22 billion worth of home loans last month — down 48 percent from a year ago. The lender, which was one of the biggest suppliers of subprime loans to borrowers with risky credit backgrounds, said it wrote just $42 million worth of subprime loans in October. That’s down from $3.3 billion a year ago.
Congress and the White House continue to look for ways to hold back the rising tide of foreclosures being created by a wave of “resets” on adjustable-rate mortgages. Many of these ARMs will jump over the next two years from low, initial teaser rates, resulting in high payments that many homeowners’ will be unable to afford.
Though lenders are now shunning stretched borrowers with risky credit, millions of existing loans with two- and three-year introductory rates will begin resetting next year.
Federal Reserve Chairman Ben Bernanke told lawmakers in Washington last week that nearly 2.3 million subprime mortgages will reset at higher rates through the end of next year. An estimated 1 million to 2 million borrowers will be unable to avoid foreclosure.
Advertise | AdChoices
A lot depends on how much further and longer the housing slump continues to depress home prices. It’s also far from clear how many borrowers will be able to work out arrangements to modify loan terms to keep them from losing their homes.
When foreclosure can’t be avoided, the losses extend beyond the borrower losing a home. The foreclosure process typically costs lenders added legal fees, taxes due until the property is sold and lost equity in a house that must be priced to sell in a falling market. The added inventory of unsold homes further weakens local housing markets, depressing the value of other nearby homes.
Overall, the coming rise in home foreclosures is expected to drag down property values by some $223 billion, with the most severe impact in minority communities, according to a report released this week from the Center for Responsible Lending.
The group estimates that roughly one in three households will see their property values drop by $5,000 on average as mortgages written in 2005 and 2006 reset at higher interest rates.
Property values and tax revenues will decline most sharply, the center said, in neighborhoods with lots of minority residents, who received a disproportionate share of such mortgages. The report's authors said that properties that go unsold in the foreclosure process can also raise the risk of fire and vandalism.
"These foreclosures are wiping out wealth that people often took a lifetime to build," said Martin Eakes, the center's chief executive. "Many families will never achieve homeownership again."
Lenders are also posting huge losses as the easy money lending spree that fueled the housing boom continues to unwind. This month alone many major banking companies including Citigroup, Merrill Lynch, Morgan Stanley and Bank of America have reported billions in losses on investments backed by mortgages.
In his testimony last week, Bernanke told Congress that the losses from the current turmoil in the mortgage market could eventually approach those seen in the late 1980s, when the savings and loan industry collapsed under heavy wave of real estate defaults, some of them the result of fraudulent transactions.
This time around, bad mortgage debt may cost banks as much as $400 billion by the time the credit crisis is over, Deutsche Bank wrote in a research report Monday.
Mortgage foreclosure trend rises
Late mortgage payments in the United States shot up to a 3 1/2-year high in the final quarter of last year and new foreclosures surged to record levels as borrowers with tarnished credit histories had trouble keeping up with monthly payments.
The Mortgage Bankers Association, in its quarterly snapshot of the mortgage market released yesterday, reported the percentage of payments that were 30 or more days past due for all loans tracked jumped to 4.95 per cent in the October-to-December quarter.
That marked a sharp rise from the third-quarter's delinquency rate of 4.67 per cent and was the worst showing since the spring of 2003, when the late-payment rate climbed to 4.97 per cent.
The association's survey covers 43.5 million loans.
The latest snapshot of the mortgage market stoked Wall Street investors' worries about troubles facing "subprime" lenders who lend to people with poor credit. The Dow Jones industrials fell 242.66 points.
The percentage of mortgages that started the foreclosure process in the final quarter of last year rose to 0.54 per cent, a record high. The previous high, 0.50 per cent, occurred in the second quarter of 2002 as the economy was recovering from the blows of the 2001 recession.
Delinquency and foreclosure rates were considerably higher for higher-risk subprime borrowers, especially those with adjustable-rate mortgages.
Lenders to subprime borrowers – people with blemished credit histories – have been battered. Rising interest rates and weak home prices have made it increasingly difficult for these borrowers – especially those with adjustable-rate mortgages – to keep up with their payments. Delinquencies and foreclosures in the subprime mortgage market are spiking.
The late-payment rate for all subprime loans jumped to 13.33 per cent in the fourth quarter, up from 12.56 per cent in the prior period and the highest in four years. The delinquency rate for subprime borrowers with adjustable-rate mortgages was even higher – 14.44 per cent, also the highest in four years.
"Unfortunately, it appears delinquency rates will likely worsen before they improve," said Gina Martin, an economist at Wachovia Corp. Economics Group.
The rate of all subprime loans starting the foreclosure process at the end of last year was 2 per cent, the highest in three years. The percentage of subprime adjustable-rate mortgages entering foreclosure soared to 2.70 per cent, the second-highest on record.
Meanwhile, in Washington, the U.S. Congress is eyeing tougher standards for risky, higher-interest home loans as lenders to the so-called subprime market see their own financing dry up.
Major banks cut off credit this week to New Century Financial Corp., a prominent subprime mortgage lender that announced yesterday it is the target of a U.S. Securities and Exchange Commission investigation into accounting errors that inflated the value of the company's loan portfolio.
Also yesterday, shares of Accredited Home Lenders Holding Co. sank to a new low after the company said it needed help raising money as the value of its loans sinks.
Two weeks ago, mortgage giant Freddie Mac said it would no longer buy loans for which borrowers qualify based on teaser rates that are held low for two or three years – a common practice in the subprime market.
Instead, it will require lenders to consider whether a borrower can make their payment when the teaser period is over.
The House subcommittee that oversees financial institutions is scheduled to hold a hearing later this month on the mortgage industry's turmoil.
Earlier this month, the five federal agencies that regulate banks, thrifts and credit unions called on lenders to exercise caution in making subprime loans and to closely evaluate borrowers' ability to repay them.
The Mortgage Bankers Association, in its quarterly snapshot of the mortgage market released yesterday, reported the percentage of payments that were 30 or more days past due for all loans tracked jumped to 4.95 per cent in the October-to-December quarter.
That marked a sharp rise from the third-quarter's delinquency rate of 4.67 per cent and was the worst showing since the spring of 2003, when the late-payment rate climbed to 4.97 per cent.
The association's survey covers 43.5 million loans.
The latest snapshot of the mortgage market stoked Wall Street investors' worries about troubles facing "subprime" lenders who lend to people with poor credit. The Dow Jones industrials fell 242.66 points.
The percentage of mortgages that started the foreclosure process in the final quarter of last year rose to 0.54 per cent, a record high. The previous high, 0.50 per cent, occurred in the second quarter of 2002 as the economy was recovering from the blows of the 2001 recession.
Delinquency and foreclosure rates were considerably higher for higher-risk subprime borrowers, especially those with adjustable-rate mortgages.
Lenders to subprime borrowers – people with blemished credit histories – have been battered. Rising interest rates and weak home prices have made it increasingly difficult for these borrowers – especially those with adjustable-rate mortgages – to keep up with their payments. Delinquencies and foreclosures in the subprime mortgage market are spiking.
The late-payment rate for all subprime loans jumped to 13.33 per cent in the fourth quarter, up from 12.56 per cent in the prior period and the highest in four years. The delinquency rate for subprime borrowers with adjustable-rate mortgages was even higher – 14.44 per cent, also the highest in four years.
"Unfortunately, it appears delinquency rates will likely worsen before they improve," said Gina Martin, an economist at Wachovia Corp. Economics Group.
The rate of all subprime loans starting the foreclosure process at the end of last year was 2 per cent, the highest in three years. The percentage of subprime adjustable-rate mortgages entering foreclosure soared to 2.70 per cent, the second-highest on record.
Meanwhile, in Washington, the U.S. Congress is eyeing tougher standards for risky, higher-interest home loans as lenders to the so-called subprime market see their own financing dry up.
Major banks cut off credit this week to New Century Financial Corp., a prominent subprime mortgage lender that announced yesterday it is the target of a U.S. Securities and Exchange Commission investigation into accounting errors that inflated the value of the company's loan portfolio.
Also yesterday, shares of Accredited Home Lenders Holding Co. sank to a new low after the company said it needed help raising money as the value of its loans sinks.
Two weeks ago, mortgage giant Freddie Mac said it would no longer buy loans for which borrowers qualify based on teaser rates that are held low for two or three years – a common practice in the subprime market.
Instead, it will require lenders to consider whether a borrower can make their payment when the teaser period is over.
The House subcommittee that oversees financial institutions is scheduled to hold a hearing later this month on the mortgage industry's turmoil.
Earlier this month, the five federal agencies that regulate banks, thrifts and credit unions called on lenders to exercise caution in making subprime loans and to closely evaluate borrowers' ability to repay them.
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