Job losses, low home equity result in more late mortgage payments
BY KENNETH HARNEY ; Published Saturday, Aug. 11, 2001, in the San Jose Mercury News
WASHINGTON -- If you took out a new home mortgage last year, you have a dubious distinction: You are part of a ``vintage'' of borrowers causing ripples of concern.
That's because American home-loan borrowers of the year 2000 are falling behind on their monthly payments at a higher rate than any comparable group in nearly a decade. They also began their mortgages with the lowest equity stakes on record -- 41 percent of them put less than 20 percent down and 15 percent of them put 4 percent down or less. And they have larger loans than any annual group of borrowers before: More than twice as many on average are carrying $250,000 to $1 million mortgage debt loads as home buyers from previous years.
New borrowers from 2000 who took out ``subprime'' mortgages -- high-rate home loans designed for buyers with imperfect credit histories -- are performing even worse. Overall loan delinquencies on subprime mortgages are up 21 percent and are substantially higher than delinquency rates in the previous three years.
This data comes from the country's largest monitor of home-loan repayments, Mortgage Information, which analyzes the monthly payment records and loan characteristics of more than 32 million active home loans -- well over 75 percent of all home mortgages outstanding.
The company's proprietary Loan Performance System database includes current loan records from the portfolios of most major mortgage lenders and investors. Repayment patterns on home mortgages offer key early warning signals of economic distress. So-called ``vintage analyses'' of annual groups of borrowers help lenders adjust credit terms for new applicants, as well as prepare for higher delinquency rates.
Dan Feshbach, president and chief executive of San Francisco-based Mortgage Information, is the nation's premier analyst of home loan vintages. Like a connoisseur of Napa fine wines, he can tell you the best vintages of the past decade for mortgages -- 1993 and 1998 borrowers have been the best quality by far. And he can speculate on what's going on with the worst-performing so far, the young vintage of 2000.
Last year's borrowers have fallen ``seriously delinquent'' -- defined as 90 days late on their mortgages -- at a rate twice as high as the previous year and three times as high as the year before. The percentages are small, 0.16 percent vs. 0.07 percent and 0.05 percent, but the total numbers of households and dollars involved are significant.
Feshbach points to underlying economic events and low initial equity stakes as important factors. With unemployment up from 3.9 percent last year to 4.5 percent this month and hundreds of thousands of layoffs nationwide in the past year, ``it's not at all surprising to see'' a deterioration in repayment performance, according to Feshbach.
Low down payments always have been associated with higher delinquency and foreclosure rates, so the fact that nearly 30 percent of vintage 2000 borrowers had initial equity stakes under 9 percent almost guarantees an upward trend in delinquencies.
Mix low equity stakes together with the first economic decline of the past decade and you get vintage 2000.
Feshbach is not the only credit analyst with an eye on rising delinquencies and job losses. Doug Duncan, chief economist of the Mortgage Bankers Association of America, says his group may raise its unemployment-rate projection for the end of the year to 4.8 percent and may lower its projection for national economic growth for the rest of 2001.
If those projections were to prove correct, Duncan says, delinquencies and foreclosures could well increase.
Lurking behind the current numbers is a factor that even national economic databases can't quickly interpret: households' total mortgage debt burdens. Duncan says, ``We really don't know the impact'' on current delinquency trends of households shifting heavier and heavier consumer debt loads into mortgages. Ditto for the hot refinancing trend of ``cashing out'' thousands of dollars for spending money.
Both Feshbach and Duncan emphasize that the overall rates of delinquency among mortgage borrowers -- 4.37 percent of homeowners are anywhere from a couple of weeks late to 90 days or more behind -- are not immediately worrisome. Nor does either foresee a big spike in foreclosures on the horizon.
But both agree that many homeowners have increased the total level of debt borne by their home, and that in a serious economic downturn, that could magnify the extent and severity of delinquencies and foreclosures.
The upshot for you, whatever your vintage: With the economy soft, play it safe. Don't risk losing your house by leveraging it to the hilt -- or beyond.
Kenneth R. Harney is a nationally syndicated real estate columnist based in Washington, D.C.
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