In order to inform congressional decision-making representatives about efforts to address problems in the mortgage markets, the growing issue of poor loan performance and negative home equity in the nonprime mortgage market was addressed in a recent report by the ""Government Accountability Office"":http://www.gao.gov/ (GAO).[IMAGE]
Economic conditions and a weak housing market have contributed to the increase in troubled loans, and falling house prices have left many borrowers in a negative equity position, the GAO said. As a result, these borrowers have become more vulnerable to foreclosure because their ability to sell or refinance their homes is limited if they are unable to stay current on their mortgages.
According to the report, the performance of mortgages in the nonprime market segment worsened during the second quarter of 2009 as the number of loans that completed the foreclosure process or became seriously delinquent increased from the previous quarter. Completed foreclosures increased 9 percent from the first to second quarter in 2009, and seriously delinquent loans jumped 4 percent during the same period. In addition, the number of nonprime borrowers who were current on their loans fell 10 percent. As a result, the serious delinquency rate surged to 26 percent during the second quarter, a 3 percent increase from the previous quarter.
While serious delinquencies were most prevalent among subprime borrowers and for adjustable-rate products, serious delinquencies in the second quarter of 2009 were growing most rapidly for Alt-A borrowers and fixed-rate mortgages. Coming in at 16,000, the number of nonprime loans that were seriously delinquent rose by about 2 percent in the subprime market. Seriously delinquent loans in the Alt-A market jumped to 32,000, marking a 7 percent increase, and fixed-rate Alt-A loans surged 11 percent to 13,000.
The GAO's analysis of borrowers with active nonprime mortgages originated from 2000 through 2007 indicated that a substantial proportion had negative equity in their homes. Using the Federal Housing Finance Agency (FHFA) index, the GAO estimated that one-quarter of nonprime[COLUMN_BREAK]
borrowers with active loans nationwide had negative equity in their homes as of June 30, 2009. In addition, the office found that the incidence of negative equity was highest among borrowers who obtained their mortgages in 2005, 2006, and 2007.
Using the S&P/Case-Shiller index, the report estimated the percentage of borrowers with negative equity for 16 metropolitan areas. These percentages ranged from about 9 percent in Denver to more than 90 percent in Los Vegas. In the 16 metropolitan areas reviewed, GAO's estimates also indicated that nonprime borrowers who obtained their mortgage to purchase a home were more likely to have negative home equity than those who refinanced their mortgage.
Forecasts made by industry experts suggest the weakness in the nonprime mortgage market will persist. In the four studies reviewed by the GAO, two estimated that the number of subprime loans entering foreclosure annually would gradually decline after peaking in 2008 but would likely remain in the hundreds of thousands per year. For example, a Credit Suisse study estimated that 1.9 million subprime loans would enter foreclosure between the third quarter of 2008 and the end of 2012, and about 1.1 million of these foreclosures were predicted to occur from 2010 through 2012. While none of the studies reviewed by GAO addressed the Alt-A market specifically, the authors said the default and foreclosure rates in this market have yet to peak.
Among the factors contributing to future defaults and foreclosures, forecasters identified declining home prices as the most important. In addition, the forecasters said loan performance in coming years would be influenced by factors affecting the affordability of mortgages, such as unemployment, loan resets, and mortgage modifications.
In order to prevent a similar crisis in the future, the House recently passed a sweeping regulatory reform package, the Wall Street Reform and Consumer Protection Act. As part of that package, a provision will create a Consumer Financial Protection Agency to protect borrowers from predatory lending practices associated with many of these nonprime mortgages, Rep. Carolyn B. Maloney (D-New York) said. In order to prohibit banks from offering the unregulated mortgage related securities that led to the financial crisis, the bill will also provide transparency in the over-the-counter derivatives market.
""It is now up to the Senate to act,"" Maloney said. ""As Senators consider this landmark consumer financial protection legislation, let's hope they remember the GAO report, and in particular its map of troubled mortgages. Both serve as powerful reminders that for many American families, the dream of homeownership has turned into a nightmare of foreclosure.""