Looser Mortgage Lender Standards Blamed for Rise in Deliquencies

It’s not just in California where mortgage defaults are on the rise - this is a growing problem nationwide.

A major reason, according to many insiders?

The slower housing market and weaker credit standards are beginning to take their toll on owners and lenders, as the number of past-due mortgages continued to increase in the three months ending Sept. 30, according to data from Equifax Inc. and Moody’s Economy.com Inc.

This latest bump is noteworthy because it does NOT follow the typical trend of a weaker economy. In the past, bad credit mortgages cause problems when people lose their jobs and simply can’t afford bills every month.

By contrast, the latest increase appears to be more closely tied to looser lending standards, borrowers tapping their equity and slowing home-price growth.

Aggressive Mortgage Practices Are Tied to Late Loan Payments
“We’re seeing rises in delinquencies and loan losses that are unrelated to what’s going on in the job market,” says Mark Zandi, chief economist of Moody’s Economy.com. “It’s very unusual.”

Around 2.33% of mortgages were delinquent at the end of the third quarter, the highest level since 2003. Among the areas that saw the biggest jump in the delinquency rate since the end of last year were Stockton and Merced, Calif., and Las Vegas-Paradise, Nev.

Delinquency rates were highest in McAllen-Edinburg-Mission, Texas; Brownsville-Harlingen, Texas; and Detroit-Livonia-Dearborn, Mich.

A separate report released yesterday by the federal Office of the Comptroller of the Currency found that lenders continued to ease credit standards over the past year. They’ve been desperate to attract home mortgage applicants.

It’s an understandable practice, but still a troubling concern. Lenders need clients. But these clients are attracted by initially low rates on resources such as option adjustable rate mortgages.

Once rates reset, unfortunately, borrowers are left in danger of default.