Subprime loans face big hikes
By
Ron Scherer Thu
Aug 30, 4:00 AM ET
New York -
Millions of homeowners around the nation are now getting the news in the
mail: The interest rate on their home loans is going up, possibly to
double-digit levels.
The hardest hit
are expected to be people who have less-than-stellar credit and cannot
afford to make the new payments. An increase of several hundred dollars a
month will force them either to get relief or to default. The prospect of
significant and growing losses has already rocked Wall Street and shaken
up the broader mortgage markets. And, concerned about the human suffering,
policymakers are already searching for ways to help people out.
"The meltdown in
the subprime market is the biggest threat to the housing market and the
broader economy," says Mark Zandi, chief economist at Moody's Economy.
com. "It is at the vortex of the problem."
Over the next
several months, banks will be changing the "teaser rates" that homeowners
received two years ago.
The peak for
resetting loans will be in October, when the rates on some $50 billion
worth of mortgages are likely to rise by 2 percentage points or more. This
could mean a rise of several hundred dollars a month for many borrowers.
For example, on
a $210,000 loan balance (the average subprime amount in 2006), the
additional 2.5 percentage point increase on the interest rate adds about
$4,560 a year, or about $380 a month, estimates James Kragenbring, senior
investment officer at Advantus Capital Management in St. Paul, Minn.
That means the
median household would have to devote an extra 9.5 percent of income just
to pay the extra interest.
"Given the
debt-to-income ratio of the typical subprime borrower at the time they
received their loan, it is unclear where the extra cash flow will come
from," says Mr. Kragenbring.
Interest costs
rise faster than pay
It probably won't come from a pay raise, if recent trends continue. Last
year, median household income rose 0.7 percent to $48,201, the US Census
Bureau reported Tuesday.
"If mortgage
payments are rising faster than the 0.7 percent average growth rate, then
they are rising faster than incomes and that could create problems," says
Chuck Nelson, of the Census Bureau.
It's already
creating problems in Buffalo, N.Y.
"If the borrower
is on Social Security, the most their income is rising is 3 percent a year
and the mortgage payments are rising much faster than that," says Carol
Brent, staff attorney of Legal Services for the Elderly.
She says she has
clients whose monthly income is $800 a month but whose mortgage payments
have now mushroomed to $500 a month. "No one looked at the affordability
factor."
As the interest
rates have climbed, the percentage of delinquencies is on the rise. Of the
loans made in 2001, nearly 30 percent are now at least 60 days past due.
Loans made last year now have nearly a 15 percent delinquency rate, a
faster growth rate than any other year (see chart at left). Mr.
Kragenbring says the most recent loans in 2007 are not performing much
better.
Community groups
report that lenders are still making loan offers with unrealistic rates.
One group in New York City says it has seen postcards advertising a teaser
rate of 1.5 percent. But under that scenario, the borrower is paying less
than the full amount of interest owed, which increases his debt. "What
they don't tell you is [that] these very low monthly payments ... are
rapidly building up debt and then they reset at an unaffordable level,"
says Oda Friedheim of the Legal Aid Society in Queens.
After
foreclosures, vacant homes
The rising level of delinquencies is leading to a sharp rise in
foreclosures. In Buffalo, Ms. Brent says there are now 23,000 vacant
homes, many of them emptied by foreclosure procedures. "We are trying to
work with the attorneys who are seeing the light because of the number of
foreclosures," says Ms. Brent. "We are working on ways to structure
repayment plans so the borrowers are not back in foreclosure in two
years."
The defaults are
now taking place much faster than a few years ago, says Sarah Ludwig,
executive director of the Neighborhood Economic Development Advocacy
Project, which works with community groups in New York City.
"In Queens, the
time frame in which people are defaulting has gone from four years to two
years," says Ms. Ludwig. "That means some defaults are taking place right
away."
Refinancing is
not a significant option for many borrowers. "What I hear is that there is
very little activity in the subprime market, especially where questions of
credit quality have grown in rapid proportions," said David Seiders, chief
economist for the National Association of Home Builders, in a press
conference on Tuesday.
Kragenbring says
the volume of subprime loans now being made is tiny compared with last
year. And lenders are finding it tough to find buyers for the new loans in
the secondary market. "To me, that makes the subprime market virtually
nonexistent," he says.
Subprime lenders
First Franklin, owned by Merrill Lynch, and EquiFirst, owned by Barclays,
maintain they are still making loans. However, they refused to comment
about where they were receiving funding for the loans. On Tuesday,
EquiFirst announced an unspecified number of job cuts.
If the market
for subprime debt returns, Kragenbring expects three major changes. First,
loans will be for a fixed interest rate, not the adjustable version. "It
will help match the time people live in the house and the borrowers will
pay less fees," he says. Second, lenders will require much better
documentation of income. Third, borrowers will be borrowing a smaller
percentage of the value of their homes.
"It's clear to
me that in the future there will be different loan products and less
leverage on the individual property," Kragenbring adds".
Jay A Hendrick
William Davis Realty
8856
Coleman Blvd
Frisco,
Texas 75034
Cell: 214-336-7088
Voice/Fax: 972-248-5991
jay@foreclosuresfrisco.com
www.ForeclosuresFrisco.com
www.RealEstateDal.com
Member: NAR TAR
CCAR ABR SFR TAHS
