Metro's Mortgage Woes 'Will Get Worse'
2/7/2008
Source: By Carrie Teegarden, The Atlanta Journal-Constitution

The foreclosure tallies keep reaching all-time highs in every corner of metro Atlanta — mostly due to the failure of subprime mortgages.

Georgians with subprime mortgages are more likely than ever before to have fallen behind on their payments. But that's not the most important upward trendline when it comes to the mortgage meltdown.

It is the steep increase in the number of subprime mortgages that created a crisis that has gone global.

In Georgia alone, the number of subprime mortgages increased from just 11,000 in 1998 to more than 200,000 by the middle of last year, according to the Mortgage Bankers Association. While thousands of people who took out subprime mortgages have already lost their homes, there are thousands more with mortgages that are also destined to go belly up.

"Absolutely, it will get worse," said Ira Rheingold, executive director of the National Association of Consumer Advocates. "We have not hit bottom yet."

Statewide, about 19 percent of families with subprime loans were at least 30 days behind with their payments as of the third quarter of 2007. During the same three-month period about 3.3 percent of subprime mortgages were pushed into the foreclosure process — nearly eight times the foreclosure rate for prime loans, according to MBA statistics.

Subprime loans always have been a risky business. The past-due rate for Georgia subprimes has averaged about 14.5 percent over the past decade.

If subprime loans were still a drop in the overall mortgage marketplace, the economy could have withstood such high rates of failure. In fact, subprime mortgages in Georgia posted past-due and default rates in the tough economic times of 2002 that are close to today's rates.

In recent years, rising home prices offered an escape hatch to most subprime borrowers who started to fall behind. Most banked equity shortly after buying the house, so they could easily sell or refinance if they got into trouble.

The crisis was triggered when housing prices stopped rising so rapidly and investors realized how risky the loans really were — especially those made in 2005 and 2006.

Wall Street had mastered the art of packaging thousands of mortgages together in big pools and selling shares of these pools like stocks. When the investors took a close look and understood that lots and lots of loans they were counting on were about to go bad, the value of the investments tanked, even if the majority of homeowners whose mortgages were in the pool were still paying on time.

"Wall Street and the investors and people who bought these bonds and securities suddenly looked and said, 'Wow, the emperor has no clothes,' " Rheingold said.

Before the crisis hit, large investors might have paid something like $107,000 for a $100,000 loan at 9 percent. But overnight the market value of that loan might have dropped to $95,000 or less, said Tony Yezer, an economist who is an expert on mortgage lending at George Washington University.

"That's a lot to lose on hundreds of millions of dollars," Yezer said.

Most experts agree that the downturn is being driven by the sense that many more homeowners will find themselves unable to pay the mortgage.

That prediction is supported by the details of loans that have gone bad across metro Atlanta in recent months.

Rising payments on adjustable-rates mortgages, common in subprime loans, are often blamed for the rise in foreclosures. But many foreclosures in metro Atlanta are on mortgages made in 2006 that hadn't even reset for the first time, said Barry Bramlett, a vice president at Equity Depot, who has compiled foreclosure data for 20 years.

Experts say that illustrates how risky those loans really were, if so many are failing before payments have even gone up. When the payments do rise, as a result of resets in rates, then the fall-out will likely be even more dramatic than the all-time high rates of foreclosure seen in recent months.

The Mortgage Association estimates that there were 103,000 subprime mortgages in Georgia with adjustable-rate features in the third quarter of last year. At that time, about 16 percent of those mortgages were at least 90 days past due or in foreclosure.

"This is not a surprise," said Yezer, the George Washington professor. "If any reasonable person saw the loan files they would say, 'Yeah, you're going to have a 20 percent default rate.' "

Mortgage lenders routinely made loans in 2005 and 2006 without requiring any proof of income or down payments or much underwriting to ensure that the loan had a good chance of success. The loans were made because Wall Street had such a thirst for these investments and paid a premium to those who could deliver the products.

"The mortgage brokers, the mortgage lenders, the investment banks, the ratings agencies, the entity creating the bond — all those people were getting paid every time a loan was getting made, every time a deal was getting made," Rheingold said. "They had no risk."

The impact has already unseated chief executives at some of the nation's top financial firms and created instability in markets all over the world.

Congress is in the midst of considering a bill aimed at slowing down the number of foreclosures; it also is moving quickly on a stimulus package that would give tax filers extra rebates. Consumer advocates say slowing foreclosures is important not just for those in danger of defaulting, but for the rest of the nation's homeowners, whose property values take a hit with every property that forecloses in their neighborhood.

The Center for Responsible Lending, a research organization based in North Carolina, projected at the end of 2006 that 20 percent of subprime mortgages made that year in Georgia would end up in foreclosure.

Ellen Schloemer, the organization's research director, said this week that estimate has started to look optimistic.

"To be honest," she said, "I think our numbers are low."

Schloemer said the great tragedy of the foreclosures is that homeownership rates actually may decline as a result of the subprime meltdown.

"The main benefit that had been ascribed to subprime lending was that it helped a lot of people become homeowners," she said. "That is a goal of our society, and that is the way people build financial wealth and security."

But, Schloemer said, because subprime loans often went not to first-time homebuyers, but to people refinancing or buying a second house, she expects a net loss in home ownership when it's all said and done.

"It's quite disheartening," she said.