The following is taken from a talk delivered recently by Ellen Seidman Director, Financial Services and Education Project, New
Just released Census data for 2006 tell us that there are about 75 million household who own their own home, a 67.3% homeownership rate. The rate is 73% for non-Latino whites, 46% for African Americans, and 49% for Latinos. About 68% of these homeowners carried a mortgage, and about 26% of those also carried a second mortgage, a home equity line, or both.
About $10.4 trillion of 1-4 family mortgage debt is outstanding. Estimates of how much of this is sub-prime vary, but a good estimate is that about 20% is sub-prime, i.e., it carries an interest rate at least 200 basis points above comparable Freddie Mac prime loans, and another 13% is “Alt-A.”. Most of these are adjustable rate mortgages (ARMs), and many have such additional risk factors as:
- Initial teaser rates—of which about $263 billion reset between January and August of this year, with an additional $700 billion scheduled to reset between now and the end of 2008, which is estimated to be a total of at least 2 million loans.
- Options to pay interest only, or even less than that, for some period
- No escrows
- Prepayment penalties
- No or low documentation, even for wage earners (often called “liar loans”)
- Simultaneous second loans (“piggy-back” loans) that mean there is effectively no equity in the house
Whereas in 2003, about 9% of the single family mortgage debt issued was subprime ($342 billion), by 2006 that had skyrocketed to 23% ($644 billion). More than half that was refinance. In fact, the Center for Responsible Lending (CRL) estimates only 11% actually went to first-time homebuyers to buy their home.
Although subprime loans are only about 20% of outstandings, by the end of 2006, 60% of new foreclosure filings were of subprime loans. CRL estimates that 20% of all subprime loans originated in 2005 and 2006 will end with foreclosure or other involuntary home loss (e.g. deed in lieu of sale). Even Lehman Brothers thinks the rate for the 2006 cohort will approach 30%.
Both foreclosures and their precursor, delinquencies, continue upward. By August 2007, foreclosures were up 115% from the prior year, and 36% from the prior month. In the second quarter of 2007, almost 15% of subprime loans (17% of subprime ARMS) were more than 60 days overdue, and over 9% more were either 90 days or more overdue, or in the process of foreclosure. Both are way up from 2006, and the increase is much higher than for prime loans.
State and local differences are large and important. Nationally, in August 2007 one out of 510 households was in foreclosure, but this ranges from one in 27,940 in
To put the first group into perspective, nationally, real house prices rose 86% between the fourth quarter of 1996 and the first quarter of 2006, while real rents rose only 4%. Since the peak, real house prices have already declined 3.4%. The national situation is not good. However, the situation in the boom states is worse. For example, from June 2000 to June 2006, prices in
The result of this kind of house price run up is that, notwithstanding strong state economies, homeowners are paying a huge share of income for housing. In California, with a median home price of $536,000 (compared to the national median of $185,000), more than half of the homeowners pay more than 30% of their income for housing, and 22% pay more than 50%. If those payments become unsustainable—which can happen for any number of reasons, including a mortgage reset but also such normal human events as death, divorce, disability and unemployment—the price decline makes it unlikely they will be able to get out of the situation by selling or refinancing.
In the other group, prices didn’t increase as much, but they have nevertheless also turned negative. And moreover, these states have high and increasing unemployment rates, increasing the likelihood that someone hit with higher payments will not be able to make them, and will also not be able to refinance or sell. In July 2007, with the national unemployment rate at 4.6%,
With respect to individuals, it’s important to remember that for most low-wealth people, and most minorities, virtually all their net worth is represented by home equity. For example, according to 2004 Survey of Consumer Finances the median net worth for the bottom quartile by wealth is $1,700; within that group, the median value of houses owned is $65,000, and median debt on it is $60,700. For non-whites or Hispanics, the median net worth is $24,800; within that group, the median value of houses owned is $130,000 and debt on it is $63,900. For these people, and indeed for most of the middle class, losing their house means losing everything they’ve built up, their credit standing and their hope for the future.
The situation is exacerbated by the fact that high-cost loans have been made disproportionately in low-income and minority communities. Just-released 2006 Home Mortgage Disclosure Act (HMDA) data show that 53.7% of home purchase loans (52.8% of refinance loans) to African Americans and 46.6% of home purchase loans (37.7% of refis) to Latinos were high cost, compared to 17.7% of purchase loans (and 25.7% of refis) for whites. In census tracts with incomes under 50% of the area median, 46.5% of loans were higher-priced (compared with 18.3% for tracts over 120%); in tracts with over 80% minority population, incidence was 46.6%, compared with 21.7% for tracts with a minority population of less than 10%. Other sources indicate that over 1/3 of both interest only and payment option borrowers had incomes under $70,000 and over 12% had incomes under $48,000.
It is also important to understand the effect of all this on communities. During the 1980s and 1990s, major strides were made by cities, banks and credit unions, community development corporations, community development financial institutions, and other community based organizations around the country in stabilizing and bringing back communities that had seen substantial disinvestment in the 1960s and 1970s. This was especially the case in the Northeast and
A foreclosed house is more than a financial statistic; it generally turns into a vacant house, which in turn reverses gains in community stability, results in increased crime, costs city governments money in both increased expenses and decreased taxes, and reduces nearby property values. The best estimate of total costs per foreclosed and vacant house to local government is about $20,000. Dan Immergluck at Georgia Tech, one of the best researchers on this topic, has shown that a single foreclosure lowers the value of homes within one city block by .9% and by 1.4% in low and moderate income communities. In another study, he has also demonstrated the close, positive relationship between foreclosures and increases in violent crime.
One of the implications of this is that, while I think it is totally appropriate to focus attention, and especially any outside funds, on owner-occupants, and in particular lower income owner-occupants and those who appear to have been misled, confused or only mildly excessively optimistic, the community effects are there no matter who owns the house. In many ways, the fact that in 21% of California serious delinquencies and new foreclosures and 32% of those in Nevada are in investor-owned homes (compared to 13% in the rest of the country), makes the problem for communities in those states harder, not easier, because these are the people who will walk away quickly, from multiple properties, and create vacancies and no tax revenues.