Shock to the System
Statistics and projections foretell a dicey next few years for the housing and lending industries.
68.8 PERCENT: The homeownership rate in the U.S. at the end of '06 versus 65.4 percent in '96.—U.S. Census Bureau
$1.3 TRILLION: The amount invested in subprime mortgages in 2006, representing between 13 percent and 14 percent of mortgages outstanding, versus $200 million in 2001.—First American LoanPerformance
$1.1 TRILLION TO $1.5 TRILLION: Total adjustable-rate mortgages whose interest rates could reset this year. Between $500 billion and $800 billion won't be refinanced to lower rates.—Mortgage Bankers Association
20 PERCENT TO 30 PERCENT: What an interest-rate reset can add to a homeowner's monthly mortgage payment if not refinanced.—First American LoanPerformance
$75 BILLION: What investors in bonds backed by mortgages stand to lose as a result of loan defaults and lender failures.—Bloomberg News
1 IN 21: The number of homes in Detroit that foreclosed in 2006, 4.5 times the national average. Michigan's attorney general says the state's foreclosure rate rose 55 percent in 2006 and is expected to increase at a higher rate this year.—National Law Review
16,000: The number of mortgage-related jobs lost nationally in 2006, 12,000 of which were in California alone.—MortgageDaily.com
887,000 UNITS: The projected number of new-home sales in 2007, from 1.123 million in 2006, with 236,000 units of that reduction attributable to tightening lending standards.—Credit Suisse
Helping Hand
Everyone seems to be looking for ways to keep foreclosures from spiraling out of control.
Federal Reserve Board chairman Ben Bernanke told a conference audience on May 17 that he did not expect problems in the subprime mortgage market to significantly spill into the rest of the economy. You'd never know that from the blizzard of measures proposed or initiated this spring by government officials, consumer groups, and mortgage bankers, all attempting to defuse what threatens to be a foreclosure time bomb.
Two days before Bernanke spoke, a coalition of more than 100 legal, housing, and consumer advocacy organizations sent letters to six major mortgage lenders asking them to suspend foreclosures on home loans in California for the following six months. Members of Congress had already called for a national foreclosure moratorium, and Senate Democrats proposed bills aimed at preventing foreclosures through assistance that would allow owners to refinance their loans. States with high foreclosure rates—including Ohio and California—also were devising ways to funnel funds to help cash-strapped homeowners at risk of defaulting.
Fannie Mae and Freddie Mac, the country's two largest mortgage holders, are reaching out to distressed homeowners with multibillion-dollar programs that would make available loans with terms that are easier for homeowners to pay over longer time periods. And several giant banks have carved out “workout” divisions to help homeowners restructure their loans to avoid foreclosure. Two of those banks—Citigroup and Bank of America—formed Neighborhood Assistance Corp. of America, through which they've pledged up to $1 billion to offer below–market rate loans.
Some solutions include educational components. By the end of this year, Wells Fargo Financial expects 45,000 nonprime home buyers to be enrolled in the “Steps for Success” consumer education program it started in October 2006, which the bank expanded to alt-A mortgage holders in March 2007. The program is designed to help mortgage customers better manage their credit and to make people “more aware about borrowing,” says Stephanie Christie, senior vice president of Wells Fargo's Home Credit Solutions division in Carlsbad, Calif.
The bilingual program provides annual credit reports, toll-free access to credit specialists, financial literacy instruction tools, and automated mortgage payment and banking services. Christie describes “Steps” as a “lifeline” for people who are seeking objective advice about managing their credit. She also thinks it might help builders sell homes and cultivate repeat business down the road.