Mortgage Delinquencies Rising

From the Wall Street Journal
By RUTH SIMON
May 18, 2006; Page D1

"Soaring housing prices and aggressive mortgage lending have saddled home buyers with ever greater levels of debt, and early signs are now emerging that more people are unable to keep up with their monthly mortgage payments."

"Recent studies by several Wall Street firms point to rising delinquency rates on home mortgages that were issued last year, a period when lenders were pushing hard to keep business going as interest rates and home prices were rising. The increase in late loan payments comes as more buyers have been forced to stretch financially to afford ever costlier houses in recent years, and many homeowners have increased debt by tapping their home's equity. Analysts say that laxer lending standards on the part of mortgage lenders also resulted in higher debt loads, which some borrowers are now struggling to repay."

"Mortgage delinquencies historically peak around three years after loans are made, which means some of the more aggressive loans made last year might experience their biggest problems in 2008. However, some borrowers with adjustable-rate mortgages could see problems sooner. Others, who took out exotic mortgages such as interest-only loans and option ARMs that hold down monthly payments in their early years, could run into trouble later, when payments reset. Still, there are early signs that even some of these non-traditional mortgage loans are starting to be squeezed by rising interest rates."

"Borrowers who took out mortgages in the past two years are likely to be more vulnerable should home prices fall because they could wind up owing more than their home is worth. Twenty-nine percent of borrowers who took out mortgages last year have no equity in their homes or owe more than their house in worth, according to a study completed this year by Christopher L. Cagan, director of research and analytics for First American Real Estate Solutions, a unit of First American Corp. That compares with 10.6% of those who took out loans in 2004."

"An analysis by Bear Stearns found that delinquencies on loans originated in 2005 were in most cases far higher than on loans issued in previous years at the same point in their life cycle. "The numbers are clearly worse," says Gyan Sinha, a senior managing director at Bear Stearns. The reason: Lenders were "able to generate a lot more volume in the face of rising rates" by loosening lending standards, Mr. Sinha says. "More aggressive lending was clearly taking place," he says."

"A separate study by Credit Suisse reached similar conclusions. That study looked at borrowers with good credit who were at least 90 days late on their mortgages. Credit Suisse found that borrowers who took out adjustable-rate mortgages in 2005 were three times as likely to be delinquent on their payments after the first year as those who took out ARMs in 2003 and 2004. Payments on ARMs can adjust after as little as a month, or after several years, depending on the terms of the loan. (The study didn't include borrowers with option ARMs.)"

"Overall, roughly 4.7% of residential mortgages were delinquent in the fourth quarter, the Mortgage Bankers Association says. Excluding the effects of Hurricane Katrina, delinquencies were 4.55%. That is up from 4.44% in the third quarter and 4.38% at the end of 2004, it says."

"Mortgage lending standards tended to be looser in 2004 and 2005 than in the previous three years, according to surveys done by the Federal Reserve Board. One example: Piggyback loans have become more common, enabling borrowers to use as much as 100% debt to finance a home purchase."

"And with competition for borrowers increasing and profit margins shrinking, the move toward looser standards is continuing. Roughly 10% of mortgage lenders said they had eased credit standards in the three months ended April, according to a Fed survey released this week. Only one of the 53 banks surveyed reported any tightening of standards."