Just how bad is the foreclosure situation? If you caught summaries of the latest delinquency and foreclosure numbers released by the Mortgage Bankers Association of America, you could only conclude: Yikes, it is getting scary out there:
The rate of American home loans entering the foreclosure process last quarter hit the highest it's been in the history of the survey, which dates to 1953.
In some states, the mortgage crisis is particularly severe. In Ohio, 5.2 percent of all home loans are either three months past due or somewhere in the process of foreclosure. Michigan and Indiana are not far behind. In Michigan, one of every 100 houses saw foreclosure actions initiated in the three-month period covered by the survey.
News like that is obviously tragic for the families involved, and demonstrates that the combination of job layoffs and exotic loans extended to financially strapped homebuyers can be highly toxic.
But from a national perspective, how bad is the situation? The answer is: Not as bad as it may sound. Drill down into the latest delinquency and foreclosure numbers and you'll find that for the overwhelming majority of homeowners across the country, delinquency and foreclosure are not issues - at least not yet.
To begin with, remember that mortgage delinquency problems only affect people with outstanding loans, and more than one out of three homeowners own their properties debt-free. Of the remaining two-thirds of all owners with active mortgage accounts - the latest survey examined 44 million of them - prime loans that are 30 days past due or more constitute just 2.6 percent of all loans nationwide. In other words, among mortgages made to borrowers with good credit at application, 97.4 percent are continuing to be paid on time.
In some states, delinquencies among prime borrowers are far lower - just 1.35 percent in Oregon, 1.39 percent in Washington, 1.89 percent in Virginia and 1.9 percent in California. Prime-credit borrowers who took out fixed-rate loans in most states are performing even better than prime borrowers as a whole - just over 2 percent on average nationally, and barely over 1 percent in California, Oregon, Hawaii and Washington, are paying late.
The numbers get more sobering when you look at how borrowers with subprime mortgages are performing: 14.5 percent of them nationwide are now behind on their payments by at least 30 days. That's more than five times the rate of delinquency among prime borrowers. On the other hand, 85.5 percent of subprime borrowers are still paying on time every month, according to the survey.
High housing costs and local economic conditions are key factors among subprime homeowners. In California, where borrowers with prime credit outperform most of the country in on-time payments, 12.6 percent of subprime homeowners are now late, and 8.4 percent are 90 days or more delinquent or already in the foreclosure pipeline. In economically stressed Michigan, more than one out of every five subprime homeowners is delinquent. In Ohio, Indiana and Illinois, delinquency rates are only slightly lower.
The numbers get even worse when you look at the performance of subprime borrowers who took out adjustable-rate loans, such as the notorious "2/28" mortgages that allow low monthly payments for the first two years but then reset upward with a big jolt at the beginning of the third. In West Virginia, 26 percent of owners with subprime adjustables are past due; in Mississippi, it's almost 27 percent.
What about the record jumps in new foreclosure filings? Here again, you've got to look closely at the hard data in the survey. In 34 states, the rate of new foreclosures actually decreased. In most other states, the increases were minor - except in California, Florida, Nevada and Arizona, where they were attributable in part to investors walking away from condos, second homes and rental houses they bought during the boom years.
Doug Duncan, chief economist for the Mortgage Bankers Association, says that without the foreclosure spikes in those states, "we would have seen a nationwide drop in the rate of foreclosure filings." In Nevada, for instance, non-owner-occupied (investor) loans accounted for 32 percent of all serious delinquencies and new foreclosure actions. In Florida, the investor share of serious delinquencies was 25 percent, in Arizona, 26 percent and in California, it was 21 percent. That compares with a rate of 13 percent for the rest of the country.
Bottom line: The scary foreclosure and delinquency rates you're hearing about are for real. But they're highly concentrated - among loan types, local and regional economies, and especially prevalent among investors in formerly high-flying markets who are finally throwing in the towel.