Subprime mortgage ‘meltdown’ not as bad in NH
By DENIS PAISTE
New Hampshire Union Leader Staff
Tuesday, Dec. 11, 2007
Manchester – Foreclosures on home loans, led by troubled subprime mortgages, will dog the state for another 24 to 30 months, according to a new report by the New Hampshire Housing Finance Authority.
An average of 300 new subprime loan foreclosures a month will continue through next fall, according to the study, principal author of which, Dan Smith, is a senior research analyst with the housing agency.
During the two-year period beginning April 2007, the study estimated 6,700 subprime loans will go into foreclosure.
“It’s likely to get a little worse before it starts getting a little better,” Dean J. Christon, NHHFA executive director, said yesterday.
However, the study to be released today, http://www.nhhfa.org/rl_subprime.cfm, found that New Hampshire’s foreclosure rate is slightly better than the average for New England, the U.S. and the other New England states except Vermont.
The study found that during the April through June quarter this year, a subprime adjustable rate loan was more than 25 times more likely to enter foreclosure than a prime, fixed-rate loan.
“While subprime loan products account for only 12 percent of conventional mortgage loans, they account for 65 percent of foreclosure initiations,” the study says.
One such foreclosure will take place later this week, when the Goffstown home owned for 15 years by Ben and Kathleen Watson is scheduled for auction.
Kathleen Watson said the family refinanced in 2001 to a subprime loan, shortly after a workplace accident disabled her husband. The mortgage company has been helpful and recently converted the adjustable-rate loan to a 30-year fixed loan, she said.
But the family just can’t make the $2,200 monthly payment, said Watson, who recently was diagnosed with cancer. The subprime market has dried up, so the Watsons can’t refinance with easier terms. And prices have dropped so much that she can’t sell their 200-year-old colonial — along with its custom-made cabinets, windowseats, trim and floors — for the $300,000 that’s owed on the mortgage.
Her husband only recently returned to work.
“We have nowhere to go,” she said.
Subprime loans
To put the subprime loan issue into perspective, subprime loans represent about 36,000 loans out of a total of about 293,000 properties with loans in the state.
Although foreclosure will be a huge problems for individuals affected, their number is too small to have a significant effect on the overall marketplace, Christon said.
Prime loans still represent the vast majority of home loans in the state, more than four out of five, at 84.2 percent, in the second quarter this year. In the study, prime loans are broadly defined as those to borrowers with good credit, verifiable income, assets and liabilities, a down payment, occupying the home being purchased or refinanced, and where the loan amount is no more than $417,000.
Subprime borrowers are those with poor credit, large loan amounts and high debt-to-income ratios.
The growth in subprime loans came as median New Hampshire home prices rose 75 percent between 2000 and 2005, pushing affordability through a conventional mortgage out of reach for many.
The study showed the median home price ranged from 2 to 2.7 times median family income between 1992 and 2000 but shot up to 3.25 times median family income in 2003 and 3.7 times by 2005, when median family income was $68,000.
To meet the needs of subprime borrowers, mortgage companies began offering adjustable-rate mortgages with initially low rates, low documentation loans, 100 percent financing and negative amortization loans.
Subprime loans grew from 2 percent of New Hampshire mortgage loans in 1998 to 12 percent by the middle of this year. About half have adjustable rates.
“Between 2004 and 2007, the delinquency rate for prime fixed rate mortgages increases only slightly, while the delinquency rate for subprime adjustable rate loans more than doubled,” the study said.
The study projects the number of subprime loans will fall steadily, dropping from 36,300 in the second quarter of 2007 to about 17,900 in the second quarter of 2009.
The study showed home prices in New Hampshire fell 2.5 percent in mid-2007 from their peak in 2006. “Adding more properties to the inventory on the market will continue the downward pressure on prices,” the study said.
The pace of sales is down by more than 25 percent since the peak in 2004 and 2005 and housing inventory is now in excess of 13 months, the study said.
That weakening of the market means many folks who run into difficulty paying their mortgage can’t sell their way out as they might have two years ago.
Who’s hurt, who’s not
New Hampshire banks have been largely unscathed by subprime foreclosures, Gerald H. Little, president of New Hampshire Bankers Association.
Little said the new study confirmed the findings of a report on foreclosures prepared for the association by Brian Gottlob and released in August.
“New Hampshire banks did not participate generally in the subprime lending market so as far as their customers and portfolios, we’re not seeing any increase in foreclosures driven by those issues,” Little said. “In fact, most of the banks that I’ve been speaking with are telling me their foreclosure rates tend to be quite normal.”
“That has a lot to do with the fact that they tended to stick with very strong and traditional underwriting guidelines in the loans that they were originating; by and large they were underwriting loans to fairly predictable Fannie Mae, Freddie Mac secondary market standards.”
The new housing finance agency report showed there has been a slight uptick in foreclosures for traditional mortgages. However, only two out of every 100 prime fixed rate loans were delinquent in the second quarter of 2007.
Besides causing many homeowners to lose their homes, the wave of subprime defaults this year has taken down lenders like Atlanta-based SouthStar Funding LLC, which ceased mortgage lending operations in April, and caused major Wall Street institutions like Goldman Sachs, Bear Stearns, Morgan Stanley, and Lehman Brothers to write down billions of dollars in bad debt.
Stricter standards
New Hampshire Housing Finance Agency has stricter lending standards than many of the subprime lenders, limiting its ability to help those facing foreclosures on subprime loans.
“It’s difficult to structure a rescue product because many of these people are in way over their heads,” Christon said. “We continue to look at that, but we don’t have a product ready.”
He said it’s too early to gauge how successful a voluntary program announced by President Bush last week will be.
Christon urged borrowers to seek counseling at the first sign they are having trouble paying. “The earlier, the better,” he said.
Last week, New Hampshire Banking Department set up a mortgage hotline for consumers, 1-800-437-5991.
The department also continues Consumer Outreach sessions to review mortgage documents and answer questions.
Union Leader reporter Mark Hayward contributed to this report.