Foreclosures Rise as Home Equity Declines

Not surprisingly, the ongoing decline in home equity has helped the level of foreclosures rise to an all-time high. Without sufficient equity in homes and 100% financing now a thing of the past, borrowers facing re-sets increasingly find themselves without options other than simply walking away from properties. From an L.A. Times story:

Home foreclosures hit new highs and the amount of equity in homes reached new lows as the housing crisis escalated across the country in 2007, new figures showed Thursday.

Nationwide, nearly 6% of all mortgages were delinquent at the end of the fourth quarter and just over 2% were in foreclosure, the Mortgage Bankers Assn. reported.

The number of foreclosures was at the highest level since the association began keeping records in the 1970s...

Doug Duncan, chief economist for the Mortgage Bankers Assn., said the number of foreclosures and delinquencies in four hard-hit states -- California, Florida, Nevada and Arizona -- was high enough to skew the national data, and that the crisis was likely to last longer in those areas.

"It may well be that the rest of the country's housing may be in recovery at the same time you're seeing declines in California and Florida," Duncan said.

One difficulty in stemming the tide of foreclosures is the fact that many Americans have little or no equity in their homes, which makes it harder for them to refinance. The decline in equity is a result of falling home prices as well as the proliferation of no-down-payment loans and home equity loans.

In fact, for the first time since it began keeping track in 1945, the Federal Reserve said Thursday that Americans last year owed more on their houses than they owned.

For the last nine months of 2007, the amount of equity in American homes dropped below 50% of their value, the central bank reported in newly revised figures.

About 35% of American homeowners do not hold mortgages -- they either paid off their homes or bought them outright -- and so the remaining 65% owe significantly more than 50% of their home's value...

(Senator Chris) Dodd and other Democratic lawmakers have been critical of the Bush administration's effort to contain the housing crisis, saying it needs to more seriously consider measures to help distressed homeowners. They have accused lenders participating in the administration's voluntary "Hope Now" program of focusing on repayment options instead of looking to ways to write down the principal of homes.

"These people need help now -- not just 'Hope Now,' " Dodd said in a statement. "Unfortunately, the administration, whose lax oversight led to this crisis, has put only a flimsy plan in place that fails to offer enough of either."

Although the current crisis began with sub-prime loans -- mortgages made to borrowers with low incomes or poor credit -- the MBA survey showed delinquencies and foreclosures on the rise for prime loans as well...

Sub-prime loans made up only about 13% of the mortgages surveyed by the mortgage bankers group, but they were defaulting at a much higher rate than prime loans. Nationally, 28.61% of all sub-prime loans were in trouble, including 35.15% of adjustable-rate sub-prime loans.

All the same, the rate of increase in delinquencies may be eased in coming months because the Federal Reserve has been lowering interest rates, Duncan said. That means that the reset rates may turn out to be close to the initial "teaser" rates for many borrowers.

"The problem will be much less than people thought it would be, though it won't be completely ameliorated," Duncan said in a conference call.