California Mortgage Defaults: A Threat to the Economy?
Later today, the San Diego City-County Reinvestment Task Force will examine how deeply the recent spike in California home loan foreclosures has affected the region’s neighborhoods.
“What does it mean to the local economy?” task force director Jim Bliesner asked of the increase in foreclosures. “Are specific segments of the population suffering disproportionately?
“If there is a large volume of properties being foreclosed on, what does that say about the safety and soundness of the lenders and the practices of the mortgage lending industry as a whole?”
The panel, charged with spurring financing for affordable housing and economic development in low-investment areas, will discuss how lenders are responding to the rise in bad credit mortgage loan failures here and around the country.
Some analysts say many borrowers whose adjustable subprime loans are about to reset at higher rates may not be able to go through with mortgage refinancing due to tightening underwriting standards.
Steve Bouton, a banking consultant who works with the task force, said subprime lending has had a detrimental impact on low-, moderate-and middle-income neighborhoods. His report will examine loan defaults by census tract.
City Councilman Tony Young, co-chairman of the task force, said the San Diegans he represents in District 4 are feeling the pain. The district includes Alta Vista, Broadway Heights, Emerald Hills, Mount Hope, Oak Park, Encanto, Greater Skyline Hills, Valencia Park and Paradise Hills.
“Many of the neighborhoods I represent are being affected negatively,” Young said. “Some of our citizens are in deep trouble. I want to find out what effect it will have on San Diegans as a whole, in regard to housing.”
Critics link rising foreclosures to the widespread use of adjustable-rate mortgages that offer low monthly “teaser” payments before adjusting upward. They are widely used in the subprime market. In early 2005, when the local housing boom was approaching its peak, adjustable loans accounted for 84 percent of purchases, according to DataQuick Information Systems.
Earlier this week, lending giants Fannie Mae and Freddie Mac announced the development of new loans to help borrowers at risk of default. Edward Leamer, director of the UCLA Anderson Forecast, said the move comes “a little too late.”
“We should have had some kind of system in place a year or two ago to prevent people from getting in over their heads,” Leamer said. “Buyers assume (that) if they can qualify for the loan, they can afford the product.”
Failing California mortgage loans remain a small segment of the overall mortgage market in the southern part of the state, Leamer noted. “Not enough homes are going to be foreclosed on for the economy to go into the tank, but it will be tough for individuals caught in this trap.”
At Union Bank of California, senior economist Keitaro Matsuda agreed that foreclosures pose no threat to the economy. “As long as economic and job growth continue, I don’t think it is going to be a serious issue,” he said.
SOURCE: The Union-Tribune