filed under: Mortgages
WASHINGTON (June 4) - The foreclosure hammer is hitting ever harder. People lost their homes at the highest rate on record in the first three months of the year, and late payments soared to a new high, too - an alarming sign that the housing crisis and its damage to the national economy may only get worse.
Dumping more empty homes on an already glutted market also is likely to put a further drag on home prices - extending a vicious cycle.
Slumping home values are being blamed in large part for the rising tide of foreclosures. Troubled borrowers are left owing more to the bank than their homes are worth. They can't sell without taking a huge financial hit, so they just walk away.
In fact, Americans' equity in their homes - usually their single biggest asset - now has dropped to the lowest level on record in figures going back to the end of World War II. Homeowners' portion of equity fell to 46.2 percent, which means the amount of debt tied up in their homes exceeds the equity they have built up.
Watching their home values sink, consumers have pulled back on spending, a factor in the economy's slowdown. Buoyed by rebate checks, shoppers did get back in the buying groove in May, but analysts predict that consumers - pounded by galloping gasoline prices - will still be cautious.
"The economy is treading water, and the housing market is one of the undercurrents trying to pull it down," said Stuart Hoffman, chief economist at PNC Financial Services Group.
Nearly 1 percent, or roughly 447,723 loans, fell into foreclosure during the January-to-March period, the Mortgage Bankers Association said Thursday in its quarterly snapshot of the mortgage market. That surpassed the previous high of 0.83 percent over the last three months in 2007.
The report also found that more homeowners slipped behind on their monthly payments. The delinquency rate jumped to 6.35 percent - or 2.87 million loans - compared with 5.82 percent for the previous three months. Payments are considered delinquent if they are 30 or more days past due.
Both the rate of new foreclosures and late payments were the highest on record going back to 1979.
With prices expected to keep dropping, foreclosures and late payments "are going to continue to go up," Jay Brinkmann, the association's vice president of research and economics, told The Associated Press.
Homeowners with tarnished credit who have subprime adjustable-rate loans took the hardest hits. Foreclosures and late payments for these borrowers also swelled to all-time highs in the first quarter.
The percentage of subprime adjustable-rate mortgages that started the foreclosure process climbed to 6.35 percent. The rate was 5.29 percent in fourth quarter, the previous high. Late payments rose to 22.07 percent from 20.02 percent, the previous high.
The association's survey covers just over 45 million home loans.
More problems also cropped up with loans to more creditworthy borrowers.
The percentage of such loans falling into foreclosure was 0.54 percent, compared with 0.41 percent at the end of last year. Late payments rose to 3.71 percent from 3.24 percent.
The numbers were higher for those prime borrowers with adjustable rate mortgages. Initially low rates reset to much higher ones, making it difficult, if not impossible, for homeowners to keep up with monthly mortgage payments. The proportion of those loans falling into foreclosure jumped to 1.55 percent from 1.06 percent. The delinquency rate rose to 6.78 percent, compared with 5.51 percent.
"The number one problem is the drop in home prices," Brinkmann said. Declining prices, especially in newer built areas, "are hurting people's ability to recover when they run into trouble - a divorce or loss of job," he said. "In other days, you could sell the home. But because home prices have fallen so much, in many of those cases, the homes are going into foreclosure."
California, Florida, Nevada and Arizona accounted for 89 percent of the total increase in new home foreclosures, he said. Those are places where prices have fallen sharply and there was a lot of home building, creating too much supply, Brinkmann said.
"These extra inventories from foreclosures complicate what is already a heavily built situation," said David Seiders, chief economist at the National Association of Home Builders.
After a five-year boom, the housing market fell into a deep slump two years ago. That dragged down sales, and prices with it. As the value of homes plummeted, many newer homeowners found themselves owing more on their mortgages than their homes were worth.
Nearly 8.5 million homeowners had negative or no equity in their homes at the end of March, representing more than 16 percent of all homeowners with mortgages, according to Mark Zandi, chief economist at Moody's Economy.com. He estimates that will increase to 12.2 million, or almost one out of every four homeowners, by the end of June.
Nearly three in 10 people say they are worried their home's value will decline over the next two years, according to a recent Associated Press-AOL Money & Finance Poll. Sixty percent said they definitely won't buy a home in the next two years. That's up from 53 percent two years ago.
As foreclosures and late payments climbed, financial companies took multibillion-dollar losses when their investments in mortgage-backed securities soured. A credit crisis spread, crimping other types of financing. The fallout plunged Wall Street in turmoil, disrupting the normal functioning of markets.
All those troubles have pushed the economy to the brink of a recession. Employers, cutting costs, have eliminated more than a quarter-million jobs in the first four months of this year.
To bolster the economy, the Federal Reserve made aggressive interest rate cuts. But with inflation on the rise, Fed Chairman Ben Bernanke this week sent his strongest signal yet that the central bank's rate-cutting campaign is coming to an end.
The Bush administration has urged lenders to freeze rates for some homeowners and encouraged lenders to rework mortgage terms so troubled borrowers can stay in their homes.
A congressional plan that includes a foreclosure prevention program has stalled as lawmakers figure out how to pay for it.
Associated Press Business Writer J.W. Elphinstone contributed to this report.