Bad Credit Home Loan Defaults Continue to Soar

If you thought the housing market was already crumbling amidst a wave of bad credit mortgage foreclosures, things could soon get a whole lot worse.

According to a comprehensive report just released by Democrats on Congress’ Joint Economic Committee, 1.8 million hybrid adjustable-rate mortgages will reset within the next two years. If the housing market remains weak, we may have only seen the first wave of foreclosures on subprime loans.

The study is undoubtedly a bit of posturing from Democrats, including Sen. Charles Schumer of New York, who are pushing for tighter regulation of the mortgage industry and reform of the Federal Housing Authority.

Last month, Democrats introduced a bill designed to increase federal loan limits in expensive states like New York and California, as well as expand the number of zero- and no-down-payment FHA loan products.

According to Mortgage Bankers Association (MBA) Chairman John Robbins, the report overstates the number of foreclosures.

“By relying on faulty, inflated data to draw its conclusions, the report more dire picture of the landscape than MBA’s studies report,” he says.

In particular, Robbins points to a “flawed” foreclosure projections by the Center for Responsible Lending and RealtyTrac.

Harry Dinham, president of the National Association of Mortgage Brokers, points out that a mortgage broker or lender has no interest in seeing a foreclosure, and that they will attempt to prevent one if possible.

But Schumer’s report also relies on data culled by the Department of Labor and the Office of Federal Housing Enterprise oversight.

And it’s probably better to err on the side of overstating the problem than to be understating it, as there is growing concern over the extent to which the market can recover from the bad credit mortgage crisis.

According to the report, foreclosures tend to be most common in “Rust Belt” states such as Michigan, Ohio and Indiana and in the “Sun Belt,” which includes California, Arizona and Florida - but for different reasons.

In the Rust Belt, the loss of manufacturing jobs has slowed economic growth and with it the housing market. For example, in Detroit, the city with the highest percentage of foreclosures nationwide, unemployment was nearly 10 percent last year, about twice the national average.

In addition, the high percentage of delinquencies on subprime loans - as of February, the average was about 20 percent in Michigan, Ohio and Indiana - means foreclosures are likely to continue in 2007.

In the Sun Belt, a surge in population in recent years drove up housing prices, which fell dramatically when the housing market slowed - leaving subprime borrowers in the lurch when they try to refinance before the “teaser rate” expire on their adjustable-rate mortgages.

In the most dramatic case, Arizona, home appreciations slowed by 26 percent in 2006. As in the Rust Belt, delinquencies on subprime loans are increasing, the report says, like the 9 percent increase in the Sacramento housing market from February 2005 to 2007.

Many of these problems are exacerbated by loose regulations on predatory lending. For example, California mortgage licensing only extends to both lending and brokerage companies - not individual brokers and lenders.

Many states, like Colorado and South Carolina, don’t have enforcement mechanisms to rein in predatory home mortgage lenders at all.

The following list shows, in descending order, the 10 states with the greatest percentage of home mortgage loan foreclosures per household.

1. Colorado: For every three households, there was a foreclosure in 2006. The problem was most acute in the Denver-Aurora area, where there were more than 37,400 foreclosures in 2006.

2. Georgia: The greater Atlanta housing market had enough Georgia mortgage foreclosures - nearly 64,000 in 2006 - to top the nation. The sprawling patch of land that includes Atlanta, Sandy Springs and Marietta was second only to the Detroit area in terms of foreclosures per household.

3. Nevada: Home price appreciations fell nearly 15 percent from 2005 to 2006 in Nevada, a state with very few antipredatory lending laws. In the Las Vegas-Paradise area, there was one Nevada mortgage default for every 31 households in 2006.

4. Texas: In the Sun Belt, four of the 10 metro areas with the greatest percentage of foreclosures were in Texas last year. Most occurred in Dallas-Ft. Worth, but San Antonio and Austin also rank high on the list.

5. Michigan: On average last year, there were over 10,000 Michigan mortgage foreclosures in Detroit alone - about five times the national average. High unemployment and the struggling auto industry were prime reasons for this staggering figure.

6. Indiana: Indianapolis ranked just behind Detroit and Atlanta last year in terms of foreclosures per household. Much of it could be due to slow job growth. As recently as February, at least 18 percent of all subprime loans in Indianapolis, Muncie and South Bend were two months or more past due.

7. Florida: As Florida mortgage costs quickly became more than most could bear, home price appreciations dropped by a staggering 19 percent from 2005-2006, one of the steepest declines in the country. Most of the foreclosures in Florida occurred in Miami and Fort Lauderdale.

8. Ohio: Like Michigan and Indiana, Ohio has fallen victim to a decrease in manufacturing jobs in recent years, which undoubtedly contributed to the 23,000 foreclosures in Cleveland last year. All three states have loose regulations for licensing mortgage brokers and lenders.

9. Utah: In Salt Lake City, there was one foreclosure for every 52 households last year. This is most likely due to light regulation of the lending industry. A bill that would deter predatory lending is now pending in the state legislature.

10. Tennessee: In the greater Memphis area alone, there were nearly 20,000 foreclosures in 2006, placing the city at number eight among metro areas with the highest foreclosures.

SOURCE: Forbes