Perhaps no financial word has such an underlying tragic sting in American society as "foreclosure" - losing one's home through inability to make required mortgage payments.
Unfortunately, foreclosures have been rising as many families have been caught up by job loss or other adverse financial circumstances.
"We're at a point now in California where for many families, almost anything bad that occurs" can result in foreclosure, says Michael Drawdy, vice president of loss mitigation at Weyerhaeuser Mortgage Company, in Woodland Hills, Calif. "Ten or 15 years ago, that just wouldn't have been the case."
What happened in many California communities, and some housing markets elsewhere in the United States, is that property values dropped sharply. If a family suddenly has to sell a home because of difficult financial circumstances, it often can't make enough through the sale to satisfy the remaining balance on the mortgage. Thus, often the only way out is for the homeowner or lender to move to foreclosure.
Bankruptcies, which are not necessarily linked to home foreclosures, are also up. More than 1 million filings are expected in 1996, an all-time high, according to the American Bankruptcy Institute.
"Total [mortgage] delinquencies have been rising" and will probably continue to do so for the next few years, says Douglas Duncan, senior economist at the Mortgage Bankers Association, a trade group in Washington.
As of March 31, 4.46 percent of all single-family home loans were delinquent - meaning a mortgage payment was 30 or more days late. A year earlier, the delinquency rate was 3.94 percent, near a 22-year low. The rate is based on a survey of 40 percent of all mortgage loans in the US.
Foreclosures occur less often than delinquencies. A little less than 1 percent of all outstanding loans are in foreclosure. Lending agencies started foreclosure paperwork on 0.38 percent of all loans during the first three months of the year. That's up from 0.33 percent as of the same period in 1995, Mr. Duncan says.
One factor expected to propel a higher delinquency rate in the next few years, he says, is the slightly lower quality of many loans: As new lenders entered the booming home-mortgage/refinancing market in the early 1990s, there was a loosening of underwriting standards. Many loans were written that might not have been made in earlier periods. Mortgage originations peaked in 1993, with new loans valued at about $1 trillion. The annual amount fell to $768 billion in 1994 and about $600 billion in 1995.
Traditionally, lenders have been tough on homeowners not making loan payments. Once a monthly payment was missed, the bank or other financial lender would shift the loan account over to a "collection department," which would immediately start pursuing the homeowner for repayment. After several consecutive months of missed payments - the number varying by law from state to state - the house would be taken over in foreclosure.
Now, banks are shifting away from the hard-nosed concept, Mr. Drawdy says. For example, Weyerhaeuser Mortgage Company, a subsidiary of the Weyerhaeuser forest-products company in Tacoma, Wash., seeks to work with homeowners to avoid foreclosure if at all possible.
"Some companies still cling to the old habit [of toughness]. But many are now trying to avoiding foreclosure, whenever possible," Drawdy says. Early intervention, in trying to avoid foreclosure, aids both the borrower and lender, he says. The borrower, it is hoped, can avoid losing the home and having a foreclosure reported on his or her credit record. The lender attempts to find a way to avoid having to take back the house and sell it at a loss, while also incurring bookkeeping, maintenance, and other expenses.
The new concept, gaining popularity in the US for about two years now, is called "loss mitigation."
*Second of two columns on homeownership. The first ran Aug. 20.