Homeowner experiment faces test under dragging economy,
boston.com
By Steven Syre & Charles Stein, Globe Staff, 12/9/2001
Over the past decade the United States conducted a great experiment in social policy. The goal was to boost the number of American homeowners. The method involved changing the rules of the game. By relaxing traditional standards - on the size of the downpayment and the income and credit history of the borrower - the government and a determined group of activists hoped to make homeowners of people who historically had been left out in the cold.
The results speak for themselves. The ranks of homeowners grew by 8 million between 1994 and 2000. A record 67.8 percent of American households now own their own homes. And many of the newcomers to the housing market are immigrants, Hispanics, and blacks, the very people the experiment was designed to help.
There is only one problem. The experiment was conducted under ideal laboratory conditions. The economy in the 1990s was terrific, jobs were plentiful, and home prices rose. ''Prosperity covers up a lot of mistakes,'' said Nicholas Retsinas, director of the Joint Center for Housing Studies at Harvard University.
Now that prosperity has given way to recession, the homeowning experiment will be tested under harsher real world conditions. On Friday the government reported that the nation's jobless rate in November reached 5.7 percent, the highest level in six years.
Karl Case isn't sure how things will turn out, but said, ''What I've seen so far makes me very nervous.'' Case is an economics professor at Wellesley College and a real estate specialist. He spoke right after the Mortgage Bankers Association last week released numbers that showed a rise in mortgage delinquencies. In the third quarter, 4.87 percent of American mortgage holders were at least 30 days late on their payments, the highest level of delinquencies since the fourth quarter of 1991.
On the face of it, the numbers aren't that worrisome. More homeowners were behind on their payments during much of the 1980s. But Case and others say the recent rise in delinquencies doesn't reflect the economic downturn. They say that loan problems are a lagging indicator, which means the true impact of the recession on the numbers may not be visible for another six months to a year.
Still there are already hints of trouble to come. In two government loan programs for lower-income borrowers, one run by the Federal Housing Administration, the other by the Veterans Administration, the delinquency rates in the third quarter were 11.36 percent and 8.11 percent, respectively. The delinquency rates were also high in a category of mortgages known as subprime, high-interest loans made to borrowers with poor credit histories. ''The problems are more pronounced in the more risky category of mortgages,'' said Mark Zandi, chief economist at Economy.com, a Pennsylvania forecasting firm.
The expansion of housing in the 1990s was based on the notion that making mortgage loans was not as risky as we thought it was. Activists across the country complained that the rules of the housing game were too restrictive and unfair to minorities. Prodded by the activists in cities like Boston, and later by the Clinton administration, the mortgage industry loosened up and made loans to people who in previous times would have been denied credit.
''The lenders stretched and the borrowers stretched,'' said Harvard's Retsinas.
The stretching took different forms. More mortgage loans were made to low-income borrowers. Between 1993 and 1999 loans to those borrowers nearly doubled, according to the Joint Center for Housing. Loans were also made with progressively smaller downpayments. Last year 16 percent of all borrowers put down 5 percent or less on their mortgages. Retsinas said more loans were also made to borrowers in two-income families. The two incomes made it possible for those families to qualify for loans. But if one of those two earners loses a job, there is no margin for error. ''We lack the cushion we once had,'' he said.
And then there is subprime lending. In the early 1990s it barely existed in the mortgage market. Last year subprime lenders made $160 billion worth of home loans, a blend of new mortgages and refinancing. The loans, which are heavily concentrated in minority neighborhoods, typically carry double-digit interest rates to compensate for the higher risk. As of September, 7.1 percent of subprime mortgages were at least three months in arrears, up from 5.5 percent at the beginning of the year, according to LoanPerformance, a San Francisco research firm.
No one is pushing the panic button yet. In fact, economists and those who study the mortgage market say there are forces at work that could minimize the problem. For one thing, home prices are still rising. In that kind of environment, buyers behind in their payments could always sell their homes and walk away with some equity. Lenders in a world of strong home prices are apt to be more patient with delinquent borrowers because they know their loans are safe. So far, at least, foreclosures are still few and far between.
Another plus: The economy, while weak, is not in the danger zone. November's 5.7 percent jobless rate is well below the 7.8 percent peak that was reached during the recession in the early 1990s.
But this recession isn't over. The jobless rate will almost certainly rise in the months to come. If the recovery proves to be a weak one, the jobless rate could rise for most of the next year. Should that happen, the combination of a high unemployment rate and lots of stretched borrowers could prove lethal to the housing market.
The housing experiment is a work in progress. Let's hope it is still working and there is progress to report a year from now |
