New Hampshire Mortgage Defaults to Increase

The New Hampshire housing market will see foreclosures continue to increase into 2008 as subprime mortgages continue to fail, a study released yesterday said.

Despite the increase, foreclosures will not rise to the level they hit during the early 1990s, and will not drag down New Hampshire banks, according to the study by Brian Gottlob of PolEcon Research in Dover.

“The health of New Hampshire banks, unlike the 1990s, is not at risk,” Gottlobb said. He said he thinks foreclosures will peak by mid-2008 and end the year at about 2,100 statewide.

Banks hold about a 28 percent share of the mortgage market, but account for only 3 percent of foreclosures, his study showed. Bad credit mortgages, most written by mortgage companies and brokers, account for 70 percent of foreclosures although they account for just 13 percent of mortgages in place across the state.

Foreclosures will hit the real estate market, cutting demand for homes by 10 to 15 percent through 2008, Gottlob’s study said. He warned that if housing prices fall by 10 percent, foreclosures will increase by about 80 percent.

Bankers yesterday said that the problem will work itself out. They said things will get worse if lawmakers make changes that tighten credit.

The reason behind this rash of foreclosures is different from the 1990s housing market collapse. Rather than a weak economy, the loans are going bad because they were risky to start with, as housing prices rose and mortgage companies rushed to lend money to borrowers whom banks rejected. So far, the conventional New Hampshire mortgage market has seen little impact.

The subprime loans carry adjustable rates and can be written in a variety of ways - no down payments, no income documentation or principal payments, perhaps without escrowing for taxes or insurance. Any one factor creates a risk of default, Gottlob said, but many of the lenders layered on the risk.

The number of subprime mortgages in the New Hampshire market increased more than ten-fold since 1999, from 1,700 loans to 22,000 by early 2007.

Gottlob said mortgage credit quality has been eroding for the past two years as housing prices stagnated and began to fall. His figures show 19 percent of subprime borrowers are behind on their mortgage payments, compared to 2 percent of more traditional home loans. In the first quarter of this year, New Hampshire was slightly above the national average in mortgage loan delinquencies, at 2.9 percent.

Not all subprime borrowers squeak into mortgages with bad credit and low income.

Some higher income families push the limits of their borrowing power in order to buy as big a house as possible. That allows them to make money in the short term if housing prices rise, but creates high risk of default when prices fall.

The subprime industry has collapsed in recent weeks as investors refused to buy packages of risky mortgages out of fear they would turn into bad loans. The industry slowed its lending, and a number of companies have gone into bankruptcy or closed their doors.

Gottlob said that close to one in five of those who signed subprime adjustable rate mortages will see their interest rate increase by 50 to 100 percent at the end of the introductory two years.

The problems have caught the attention of Congress and presidential candidates.

Sen. Hillary Clinton said this week she’ll bring legislation in September aimed at predatory lending.

The New Hampshire Legislature this year passed regulations that got tough on the foreclosure rescue industry, which held itself out as a solution to those in trouble with subprime loans. Consumers complained that so-called rescue companies used shoddy and deceptive business practices that left them without a home or the equity they had built up. The new law carries penalties that include fines and jail time.

NHBA chairman Stephen Christy said yesterday that lawmakers should think hard before going after subprime lending and not confuse it with predatory lending.

The Legislature could make things worse by making it harder for banks to structure mortgage refinancing options.

Gottlob agreed that if troubled borrowers can’t refinance their existing subprime loans, “you’d be in essence dooming them to foreclosure.”