A wave of foreclosures driven by subprime lending that left homeowners subject to sudden and dramatic increases in their mortgage payments is giving way to a new wave of homes lost for more basic reasons, including lost income and lost jobs.
The worsening foreclosure problem has of late received less attention than some encouraging data on new home sales cited as evidence supporting an economic recovery. But despite those very recent rises in home prices and new home sales, the home foreclosure problem appears to be getting worse. The country’s 360,000 foreclosures in July represented a 7% increase from June and a 32% spike from the year before. A record number of homes are currently at risk of foreclosure and by most accounts the number of homes foreclosed in 2009 is expected to easily surpass the 2008 total.
The Mortgage Bankers Association said recently that the percentage of residential mortgages either in foreclosure or with at least one payment past due hit a record 13.16% in the second quarter and that some 4.3% of all mortgages are now in foreclosure. The group predicts that more mortgages will fall into delinquency throughout this year and next, as more people lose their jobs. As a sign that unemployment is playing a growing role in foreclosures, prime fixed-rate loans now account for one in three new foreclosures, up from one in five last year.
The level and the causes of home foreclosures vary significantly by region, with the highest levels concentrated in a handful of states. Nonetheless, the growing number foreclosures on conventional loans is troubling, since it points to underlying weakness in the economy rather than a more technical problem with the way the home loan was structured.
“If you had a bad subprime loan, but still had a job, it would be easier to modify,” said Don Baylor, senior policy analyst for the Center for Public Policy Priorities in Austin, Texas, and a member of EPI’s Economic Analysis and Research Network (EARN). “But when the foreclosure is a result of lost income, it becomes much harder to keep people in their homes. The banks are much less likely to make loan modifications.”
If the home is ultimately lost to foreclosure, unemployment can make it difficult to find alternative housing, such as a rental property. It can also put up another hurdle toward finding a job in an already tough job market. “Many employers are checking credit,” said Baylor.
Ohio, which came somewhat early to the housing crisis and continues today to see record-setting numbers of home foreclosures, offers another good example of how great the problem remains. “We had 85,000 foreclosures in the state last year and this year we expect 86,000,” said David Rothstein, an analyst for Policy Matters Ohio, which is also a member of EARN. “We are not seeing 10% jumps like we did in past years, but we are not going down. It’s leveling off at the highest level.” Unlike other regions of the country, Ohio’s home market continues to be weighed down primarily by subprime lending, Rothstein said. But he added that the state is starting to see more foreclosures on prime loans, and, like Baylor, said that forbearance is less likely with individuals and families that have no income. Lenders who agree to a forbearance typically do so on the condition that the homeowner will catch up on delinquent payments by a given time, but unemployed homeowners will have a hard time saying when they will have enough money to bring the loan up to date. Ohio’s unemployment has risen dramatically over the course of this recession and its current jobless rate of 11.2% is one of the worst in the country.
Earlier this year, Policy Matters Ohio produced a report on the mounting number of foreclosures in the state, and listed, among other problems, limited success with state and national programs designed to help keep people in their homes. Hope Now, an alliance of lenders and community leaders set up in 2007 in response to the subprime lending crisis with promises to save hundreds of thousands of homes, has, as of March, produced only 25 successfully refinanced loans that did not end up back in delinquency or foreclosure, the report said. It quoted a local county official noting that for every one home saved by a foreclosure prevention program, 10 were lost to foreclosure.
More recent efforts by the federal government to help struggling homeowners modify their loans have also had limited success and, critics say, do not offer lenders enough incentive to assist. As this report notes, six months after the launch of the Home Affordable Modification Program (HAMP) only a fraction of the targeted 4 million workouts had been commenced. “It offers a lot of carrots, but no sticks,” said Rothstein. He said that even when lenders and mortgage service providers are encouraged to work with homeowners, some may continue to see gain from a prolonged foreclosure process. “It can still be in their interest to drag things out. Every late fee, and every missed payment, it all goes into the fees that they collect.” Others note that banks just were not prepared for the onslaught of modification requests and are getting buried under paperwork.
Moreover, even some of the latest home sales and pricing data that were initially considered encouraging, including reports showing June home prices improving in most major cities initially, are not always holding up to closer scrutiny. This story notes that recent price increases do not mitigate the fact that home sales are down 13.4% from a year ago, with a hefty supply of homes sitting on the market.