Foreclosures rising among high-risk US mortgages
One of the great legacies of the housing boom of the past six years is that almost everyone – even people with questionable credit – has access to a mortgage.Skip to next paragraph
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But now, some housing advocates contend, all that easy credit is on the verge of creating the worst mortgage crisis since the 1980s. The reason: A rising number of homeowners are shouldering mortgages they can no longer afford. For example:
•In 2004, John Silva refinanced the modest home he and his wife own in Willow Springs, N.C. Today, with their mortgage at almost 10 percent, he worries he's just a "hiccup" away from foreclosure.
•Ten months ago, newly divorced Tammy Myers got a no-down-payment loan to buy a house in Denver. The interest rate is now so high it's difficult to make her monthly payment.
•Susie Smith – a retired social worker who's too embarrassed to use her real name – almost lost the house in St. Paul, Minn., she had lived in for most of her life. That was after she refinanced it and her monthly payments more than doubled from $675 to more than $1,400 a month.
Across the nation, foreclosures and defaults are rising as mortgages that were once affordable are now expensive albatrosses as the introductory "teaser rates" that made the loan possible end and higher interest rates kick in. Some housing specialists worry that the mortgage industry – with more than 20 companies already in bankruptcy – will raise its lending standards so high that would-be homeowners with less-than-perfect credit will be frozen out. There is even some concern that the pullback in lending will extend the slump in the nation's housing market.
"It's the most serious threat to the economy," says Mark Zandi of Moody's Economy.com. "It has the potential to set the housing market back another big notch since there could be a whole class of people who can't get credit."
At issue is a class of mortgages that lenders call "subprime" because they do not qualify for the lowest or prime interest rate. These are designed for high-risk borrowers, those with fixed incomes, or those who have had credit problems in the past. Since 1998, more than 6 million Americans have borrowed in this way, according to the Center for Responsible Lending (CRL). The majority of these loans are adjustable-rate mortgages (ARM) that are tied to changes in interest rates.
That's a dramatic increase in only a decade. In 1995, subprime mortgages represented a niche market: less than 5 percent of mortgages originated. Today, Wall Street analysts estimate they make up from 18 percent to 24 percent.
Advocates contend they've made it possible for millions of Americans who in the past would not be able to qualify for a mortgage to own their home. But critics contend they've also become open to abuse, in part because qualification standards are now so low.
Deregulation has allowed the mortgage industry to create products like the no-down-payment mortgage and the even riskier "no documentation" loan where all borrowers have to do is state their income without providing proof of their ability to repay the loan.
"There was a real rush to make these loans and make as many loans as they could," says Jordan Ash, director of the ACORN Financial Justice Center in Minneapolis, a national low-income housing advocacy organization. "That's because the mortgage companies could sell them off right away" to Wall Street investors.
Investors profited from the high interest rates that consumers were paying.
"Wall Street wanted the mortgage brokers to keep making loans even though they were riskier and riskier," says Ira Rheingold, executive director of the National Association of Consumer Advocates in Washington, D.C. "They didn't care that ... people were getting loans they couldn't afford because there was so much money to be made."
Abuses got so bad that some lenders were making loans to borrowers who ended up defaulting on their very first payment, according to housing experts.
While the housing market was soaring, lenders shrugged off borrowers' problems because the value of the property was rising. But now that the housing market is in a tailspin in some areas, as many as 2.2 million people could end up losing their homes, worth a total of $164 billion, according to CRL. Another report, by Lehman Brothers, concluded that as many as 30 percent of people who obtained subprime loans in 2006 may end up defaulting on them.
"Many families are going to lose their homes," says Deborah Goldstein, executive vice president of the CRL in Durham, N.C. "There's a need for federal regulators to address the kinds of abusive mortgage practices that we're seeing."
Last fall federal regulators started to step in, requiring lenders to disclose more clearly the benefits and risks of some subprime loans to borrowers. On Tuesday, Freddie Mac, a quasi-public backer of home loans, announced it would cease purchasing the riskiest subprime mortgages. This week, Fannie Mae, another quasi-public housing organization, said it is working on "rescue" products to try to help troubled borrowers.