Home >opinion >online-views >Many subprime borrowers in the US set to lose homes as rates rise

New York: As many as half of the 450,000 subprime borrowers whose mortgage payments increase in the next three months may lose their homes because they can’t sell, refinance or qualify for help from the US government.

“Short of the cavalry riding in over the hill, a lot of these people are just stuck," said Christopher Cagan, director of research and analytics at Santa

No road ahead: Analysts see little impact of Tuesday’s Fed rate cut on borrowers whose mortgages are adjusting. It’s not going to alter the housing situation, or clarify defaults and delinquencies, they say.

The number of borrowers whose mortgage payments jump in the next three months will be the second highest ever for a quarter, according to Credit Suisse Group, Switzerland’s second biggest bank. 27% have already missed a payment, said First American LoanPerformance, which owns the largest database of US mortgages. That makes them ineligible for the federal housing administration (FHA) bailout proposed last month by President George W. Bush.

There’s no lifeline in sight for subprime borrowers, who face an average increase of 26%, or $400 (Rs16,200) a month, according to CoreLogic. Falling prices and a rising inventory of unsold homes make it difficult or impossible to sell or refinance without losing money and government programmes aren’t designed to aid the most desperate.

That leaves foreclosure as the only alternative, and one that will deepen and prolong the worst housing downturn in at least 16 years.

Vanishing equity

Robert Murray of Middletown, New Jersey, said he didn’t pay enough attention when he took out a five-year adjustable-rate mortgage in 2002. This month, his payments ballooned to $1,800 from $1,300. Because he makes about $90,000 a year at his Newark Liberty International Airport maintenance job and hasn’t missed a payment, he said he hoped he might be a good candidate to refinance.

Since the value of his home has declined from the $265,000 he owes on two mortgages, Murray’s equity has vanished. If Murray were to apply for an FHA-insured refinance, he’d be out of luck.

The FHA bailout programme, called FHASecure, requires the borrower to have at least 3% equity in the home. Some borrowers can get a second mortgage in addition to the FHA loan to cover the entire value of their houses. Murray borrowed more than his home is now worth, so he would have to write a check of at least $45,000 to close a refinance. He doesn’t have the cash.

“I’m way upside down," Murray said. “The payments will kill me now. I don’t know what I’m going to do."

Home prices

About 48% of subprime borrowers wouldn’t qualify to refinance into a mortgage that conforms to the underwriting rules established by government-sponsored agencies Fannie Mae in Washington and Freddie Mac in McLean, Virginia, according to a report by New York-based analysts for UBS AG, Switzerland’s largest bank.

“There are a number of people who have mortgage debt that’s more than the value of their house, and a lot of those people are going to walk away," said David Olson, president of Wholesale Access Mortgage Research & Consulting Inc. in Columbia, Maryland. “That will put more homes on the market, which already has too many."

The Federal Reserve’s half-point benchmark interest rate cut on Tuesday will have little impact on borrowers whose mortgages are adjusting, said Ed Leamer, director of the UCLA Anderson Forecast in Los Angeles.

“It’s not going to alter the housing situation, or clarify defaults and delinquencies," Leamer said.

US home prices fell by a record 3.2% in the second quarter, according to the S&P/Case-Shiller Index. Lawrence Yun, chief economist for the Chicago-based National Association of Realtors, has warned that year-over-year prices will fall for the first time since the Great Depression of the 1930s.

Price reductions

It would take 9.6 months to sell off all the existing homes on the market, the longest amount of time in at least eight years, according to the Chicago-based realtors group.

Listings in the Orlando, Florida, area show 26,300 homes for sale, a 20-month supply, said Gary Balanoff, a real estate broker with ReMax Select in Oviedo, Florida.

“I’ve been in business 23 years, and I’ve never seen some of the price reductions we have here," Balanoff said. “It’s painful for people."

Investors, too, seem to be looking to Washington for solutions to subprime problems that may never come, said Andrew Laperriere, a Washington-based managing director at research firm International Strategy & Investment Group. The three rallies in the Standard & Poor’s 500 since its 19 July peak came after Fannie Mae and Freddie Mac suggested on 8 August that they could widen their portfolios, the Federal Reserve lowered its discount rate on 17 August, and Bush’s establishment of FHASecure on 31 August, Laperriere said.

‘No silver bullet’

“There is no silver bullet from Washington that will prevent home prices from falling further," Laperriere said. “A lot of people are operating on a mistaken impression."

The fact that more than a quarter of subprime borrowers default on their adjustable loans before the rates reset makes a political solution less likely, Laperriere said.

“The myth here is that the resets have been the driver of payment delinquencies, but the fact is if the borrower can’t afford the teaser rate payments, then they can’t afford to ever pay back the loan," he said.

FHASecure expands the number of borrowers eligible for FHA-guaranteed loans to include homeowners who are in default. FHA borrowers take out loans from about 8,500 qualified lenders, paying an added insurance premium. Their monthly payments are guaranteed by the FHA, which covers defaults from the pool of insurance payments, using no taxpayer money. In addition to not missing any payments before their mortgages reset and having at least 3% equity in their homes, eligible borrowers must have a job and the income to cover their payments, said Steve O’Halloran, a spokesman for the department of housing and urban development, which oversees the FHA.

FHASecure is expected to help as many as 120,000 borrowers refinance into FHA-backed loans this year, double the number of last year, O’Halloran said.

For now, Murray will struggle to make his monthly payments, foregoing vacations, restaurants and perhaps parochial school for his five-year-old daughter. He yearns for help from the government.

The Federal Reserve Bank pumped $62 billion into the banking system on 9 and 10 August in an effort to soothe a credit crisis. Murray said the Fed should do the same for borrowers.

“If they gave us that money, we’d be able to be out of this predicament," he said.

Subprime mortgages are available to borrowers with bad or incomplete credit histories. They made up about 20% of home loans issued last year and about 11% in the first half of this year, according to Inside Mortgage Finance, an industry newsletter.

The number of adjustable-rate subprime mortgages rose to 72.5%, or $1.26 trillion, of all adjustable-rate loans outstanding in the first quarter, a 17-fold increase over 2001, UBS said.

About 57% of mortgage broker customers with adjustable-rate mortgages were unable to refinance into a new loan in August, according to a study by Campbell Communications, a market research firm in Washington.

Adjustable-rate mortgages to subprime borrowers account for 44% of all new foreclosures, according to the Mortgage Bankers Association in Washington.

Adjustable rate mortgage

“A lot of the folks who are in trouble are in trouble even before their mortgage rate resets," said Bert Ely, a banking consultant in Alexandria, Virginia. “They can’t refinance because they shouldn’t have gotten their mortgages in the first place."

Adjustable rate mortgages of all kinds worth $139.2 billion, the most ever, are scheduled to reset at higher interest rates in the next three months, according to First American LoanPerformance in San Francisco. Subprime adjustable-rate mortgages make up $84.4 billion of that total.

In the third quarter, $136.7 billion of mortgages were slated for reset, with subprime comprising $87.4 billion.

About 2.91 million subprime borrowers have adjustable-rate mortgages, about 90% of which will have reset at higher interest rates by the end of 2008, LoanPerformance said.

Kathleen M. Howley in Boston, Dan Levy in San Francisco and Jody Shenn in New York contributed to this story.

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