Foreclosures Happening Earlier Than Projected

A today in the Baltimore Sun, which we found via , suggests that foreclosures may be increasing faster than anticipated in some widely-cited mortgage market analyses.

There are two troubling data points in this article. The first is that foreclosures are increasing at a rapid pace in the suburbs, a year-to-year rise of 15% compared to 4% in the city. And in case you imagine that these “suburbs” are marginal neighborhoods, guess again. In Montgomery county, one of the wealthiest areas of the nation, foreclosures have increased by 30%. The article stresses that this isn’t a lower-income-cohort phenomenon:

Suburbia wasn’t immune to foreclosures before. In the Baltimore area, the number of filings was higher at the start of the housing boom several years ago, improving as escalating home prices gave homeowners more options – refinance or sell for a quick profit.

But the sharp increase in foreclosures since then – here and in other affluent areas – seems like a new problem, said Rick Sharga of RealtyTrac Inc., a California company that tracks foreclosures. He thinks middle- and upper-middle-income homeowners have overextended themselves, betting on rising income and home equity – and losing those bets…..

Despite the opulence of some homes in foreclosure, their owners typically have something in common with people struggling to stay above the poverty line, advocates say: They’re so financially stretched that a single unexpected expense can be disastrous.

More troubling, in my mind, the second news item, namely, that some borrowers who took out adjustable-rate mortgages that had “teasers,” meaning low introductory rates, are defaulting before the mortgages reset. Now these may be isolated cases, but the Sun story also discusses speculative buys, and rising defaults even at mortgagors that didn’t offer subprimes:

Brett Carter, president of First Mariner Mortgage, whose loans are primarily on Mid-Atlantic homes, sees a mix of homeowners in trouble and investors who speculated badly. “They can’t sell their property and they can’t refinance their property and they can’t get a tenant, and you’re seeing them throw up their hands and say, ‘You know, I’m out,'” Carter said.

If Baltimore is representative of the rest of the country, the fact that some borrowers are defaulting before reset points to more stress among borrowers than some analysts have anticipated. One , by Chris Cagan at First American CoreLogic, reassured many investors because it projected losses of $112 billion spread over six or seven years. We looked at his report earlier and found several key assumptions to be optimistic, and Dean Baker of Beat the Press similarly with his projection that housing prices would remain flat in 2007 (Baker expects a decline).

We didn’t question Cagan’s assumption about defaults not occurring till mortgage payments reset; that seemed reasonable. But if defaults happen earlier, simply because borrowers can just barely service their debts and any shock will push them into arrearage, that has cascading effects: it means more foreclosures overall, and more property on the market in a concentrated period of time, which depresses prices. The fact that this is happening at a wide range of price points means these defaults will have a broader effect on the housing market than contemplated earlier. Borrowers in trouble will be less likely to escape foreclosure by selling the house themselves and paying off the bank, since in a weak market they will be less likely to fetch enough to cover the mortgage and selling costs. And homeowners who need to sell for routine reasons will also suffer due to the number of houses on offer. And as we have pointed out repeatedly before, a housing recession has a more pronounced impact on consumer spending than a stock market decline.

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