Defaults fluster economy
A shaky housing market may weaken as risky loans fall to foreclosure.
By CHRISTINA REXRODE
Published March 16, 2007
The bill is coming due on subprime loans.
They're being blamed for a variety of problems this week, including the Dow's tumble on Tuesday and the record number of home foreclosures announced the same day.
During a speech Thursday in Boca Raton, former Federal Reserve Chairman Alan Greenspan said that defaults on subprime mortgages could negatively affect the broader economy if home prices continue to drop.
Subprime loans, which carry higher interest rates, are made to people with poor credit ratings. Florida, which accounts for one-tenth of the country's subprime loans, could face more pain than most.
"There's clearly some elements of a crisis," said Mark Vitner, Wachovia Corp.'s senior economist.
What's the problem with subprime lenders?
Some of the biggest, such as New Century Financial Corp., are facing serious financial problems. Fremont Investment & Loan, for instance, placed most of its Tampa staff on paid leave after its California-based parent company said it wants to quit making subprime loans.
Why are these lenders facing financial problems now?
When the housing market was booming, lenders didn't mind making these risky loans. They knew that if borrowers got in trouble, they could refinance fairly easily.
Also, lenders knew that borrowers are much less likely to default on their home loans when their home's value is rising. "If you have a $130,000 mortgage, but the house is worth $150,000, you will do everything possible to avoid defaulting, because you'd be giving up $20,000," said David Denslow, an economist at the University of Florida.
But housing prices are stagnating. So are more people defaulting on their mortgages?
Yes. On Tuesday, the Mortgage Bankers Association announced that home foreclosures hit a record high in the fourth quarter of last year. The percentage of delinquent mortgage payments also rose, and the association said that subprime and federally financed loans were the main culprits. Delinquencies on subprime loans are running at a record high of about 13 percent.
What does this mean for Florida?
Since Florida's housing market soared particularly high in the first half of this decade, it fueled an especially large number of risky, subprime loans. So, the state could see an especially large number of foreclosures and delinquencies. Recent numbers released by the Mortgage Bankers Association suggest this trend is already starting: Behind West Virginia and Maine, Florida had the largest quarter-to-quarter increase in delinquent mortgage payments.
Will it be harder for me to get a housing loan?
If you have a poor credit rating or can't make a 10 percent to 20 percent down payment, then yes, it probably will. Subprime lenders will tighten their underwriting standards, and analysts speculate that some of them are on the cusp of bankruptcy anyway.
What will this do to housing prices?
More stringent standards for getting a loan will likely translate to fewer home buyers. And an increasing number of foreclosures will translate to more houses for sale. Combine those two factors, and you're looking at a continued housing bust.
If you're planning to sell your home, don't expect to sell quickly or to get your initial asking price, said Don Schlagenhauf, an economist at Florida State University.
Why would lenders cater to people with poor credit in the first place? Isn't that risky?
Yes, but it also can be lucrative. Subprime lenders typically charge interest rates as much as 4 percentage points higher than lenders who deal with home buyers who have good credit.
Fast Facts:
BY THE NUMBERS
Florida is hot spot for subprime loans
States with the highest percentage of subprime mortgages
Mississippi20 percent
Tennessee18.5 percent
Florida16.7 percent
Louisiana16.5 percent
Indiana16 percent
Source: First American LoanPerformance
Area subprime rate
In the Tampa Bay area, 15.7 percent of all mortgages at the end of 2006 were subprime.