Signs of self-imposed restraint on lending guidelines showed up this week in a somewhat surprising corner of the industry: the subprime market.

Reuters reported yesterday that Fremont Investment and Loan, the nation's fifth-biggest originator of subprime loans last year, was able to lower its early default rate from nearly 6 percent in mid-2006 to 3 percent through measures that included cutting ties with about 8,000 brokers whose loans were identified as contributing to the lender’s high default rate

Fremont also cut down on the number of so-called stated income loans, which allow borrowers to obtain a loan without proof of income, and reduced the number of 80-20 loans, in which borrowers simultaneously take out a first and second loan at the time of purchase. Both of these loan types are common, especially in markets where rapid home price appreciation in the past five years has compensated for the default risk inherent with such loans.

The push to lower defaults is driven by the asset-backed bond market, which packages and sells loans like those originated by Fremont. But more of those loans were returned to Fremont in 2006, resulting in a $16.4 million loss over the first nine months of the year, Reuters reported.

Fremont’s actions seem to contradict the belief that loan originators — especially those of the subprime variety — are concerned with only one thing: selling more loans. Instead, Fremont's bottom line appears to be the catalyst behind its efforts to reduce defaults, even if that means tightening lending standards. Maybe the free market does work after all.

A rising number of Americans — particularly those who took out riskier adjustable-rate and subprime mortgages — are increasingly defaulting on their loans, according to figures released this week by RealtyTrac, providing striking evidence that a growing number of borrowers are at risk of losing their homes.

Foreclosure filings jumped 42 percent nationwide in 2006, accelerating a trend that began in 2005 as home sales started to cool. Last year, 1,259,118 U.S. properties entered some stage of foreclosure, up from 850,000 properties in 2005, according to RealtyTrac research.

Many economists and analysts are not worried about the recent increase. But if the number of defaulting ARMs and subprime loans continues to escalate, it could trigger a rise in foreclosure filings and drag down home values.

The Center for Responsible Lending predicts that one in five subprime mortgages initiated in the past two years will end in foreclosure, leaving more than 1.1 million borrowers homeless. Since as much as $1.3 trillion in risky ARMs and subprime loans are due to reset this year, this could spark a skyrocketing surge of delinquencies and foreclosures.

"As more and more of these loans re-set this year, we may see a rise in foreclosure filings," said James J. Saccacio, chief executive officer of RealtyTrac. “It’s true that foreclosures could have a negative impact on the housing market if they continue to increase at this rate.”

Read the full report.

More than 1.2 million foreclosure filings were reported nationwide during 2006, up 42 percent from 2005 and a foreclosure rate of one foreclosure filing for every 92 households, according to the RealtyTrac 2006 U.S. Foreclosure Market Report released yesterday.

The number of total foreclosure filings rose from about 885,000 in 2005 to 1,259,118 in 2006. The 2006 total represents more than 1 percent of U.S. households.

Colorado documented the nation’s highest state foreclosure rate, with total foreclosure filings representing 3 percent of the state’s households. Georgia and Nevada posted the second and third highest state foreclosure rates.

Texas reported 156,876 foreclosure filings during the year, the most of any state and nearly 13 percent of the national total. California and Florida ranked second and third in total foreclosure filings for the year.

Detroit’s 40,219 foreclosure filings in 2006 represented nearly 5 percent of the city’s households — the highest rate among the nation’s 100 largest metropolitan areas. Foreclosure rates in Atlanta and Indianapolis ranked second and third for the year.

View full report.

The Federal Home Loan Mortgage Corporation (better known as Freddie Mac) has just released the results of its 23rd Annual Adjustable-Rate Mortgage survey of prime loans. Based on data collected between December 18 and December 21, 2006, the survey cited three major conclusions:

• That the overall market share of adjustable-rate mortgages (ARMs) as a whole declined in 2006 as the savings gap in interest rates between ARMs and fixed-rate mortgages shrank;
• Lenders offered greater incentives (discounts) in 2006 in order to maintain the flow of ARM originations coming in the door; and
• Hybrid loans — particularly the very popular 5/1 ARM where the teaser interest rate is fixed for five years before the lender can push the interest rate upward — became the most popular type of ARM in 2006.

In fact, the survey found that 5/1 hybrids accounted for 40 percent of all loan originations last year. That is a stark contrast to 1999 when two out of every five ARMs were traditional one-year adjustables. The initial interest rate on the 5/1 hybrid ARM in 2006 was 5.96 percent (0.5 percent above the rate on the traditional one-year ARM, and 0.2 percent below a 30-year fixed-rate mortgage).

Five out of every six lenders who offered ARM products had a 5/1 hybrid ARM available, while only 52 percent of all lenders offering ARMs had a one-year traditional ARM product available.

As Frank Nothaft, Freddie Mac VP and chief economist explains it, “A 5/1 hybrid ARM provides the consumer the comfort of knowing that the interest rate will be fixed over the first five years of the loan. However, the interest rate may jump as much as five percentage points on the fifth anniversary.”

And that is why RealtyTrac has been warning that many home buyers maybe find themselves in financial distress this year or next. It is the potential for problems created by these hybrid or “option” loans (as they are known), that economists and financial experts have been concerned about. Home buyers who utilized these loans to finance a home purchase in either 2005 or 2006 are probably at the greatest risk of going into foreclosure if they cannot afford a mortgage payment that could be 25-50 percent higher when the interest rate adjusts upwards.

RealtyTrac tallied nearly 1.3 million properties entering foreclosure nationwide during 2006 — a large increase from 2005 when approximately 850,000 properties went into foreclosure. Based on the continued popularity of these hybrid loans over the past few years, there is no reason to conclude that the level of foreclosure activity around the country should dissipate anytime soon.

The 5/1 hybrid ARM has been very popular, particularly with families planning on having the mortgage for five years or less before refinancing. But for those families whose household income has not kept pace with the rising costs of living, there may be some tough years ahead — in the short term at least. And these are some of the homeowners that subscribers to RealtyTrac will be set to help out of a financial crisis once they have been identified.

U.S. foreclosure activity dropped 9 percent in December, backing down from a November foreclosure total that was the year’s highest. But the 109,652 new foreclosure filings during the month still represented a 35 percent increase from December 2005 and marked the fifth consecutive month with a foreclosure total above 100,000, according to the RealtyTrac U.S. Foreclosure Market Report released today.

Colorado, Nevada and Georgia posted the nation’s three highest state foreclosure rates despite decreasing foreclosure activity in all three states. Colorado’s foreclosure rate of one new foreclosure filing for every 376 households was nearly three times the national average.

Texas foreclosure activity increased 4 percent, helping the state reclaim the top spot from California in terms of total foreclosures. California foreclosure activity dropped 34 percent from the previous month, but the state’s foreclosure total was still the nation’s second highest.

Read full report.

 

U.S. Foreclosure Rates - December 2006

Through November, RealtyTrac tallied nearly 130,000 properties that entered some stage of foreclosure in California alone during 2006; accounting for roughly 11 percent of the nation’s foreclosures for the same period.

A dubious honor at best, the Golden State maintained a level of foreclosure activity during the past year that kept it in the nation’s upper echelon in terms of state foreclosure totals. The state hit its peak towards the end of the year, taking the nation’s top spot for September, October and November.

Economic data released recently by forecasters at the A. Gary Anderson Center for Economic Research at Chapman University in Orange, Calif., seem to indicate that California is economically sound and stable. That said, foreclosure levels for 2007 are more likely to be a continuation of 2006, rather than a reprise of the early 1990s when foreclosures were rampant due to extensive job losses, high interest rates, high inflation and a resulting recession.

This time around, the “r” word is only being used in a cautionary stance if unforeseen circumstances arise. “Slowdown” is the term of choice these days. Still, enough of the prime indicators are projected to turn and remain negative — or slightly positive at best — this year to conclude that the flow of California foreclosures will at least remain steady.

Only a slight uptick in job creation throughout California is expected, along with low housing affordability, a larger inventory of unsold houses, declining home prices, lower sales volume and less residential construction. At the end of the day, it will all amount to an economic environment in 2007 that will not be kind to distressed homeowners who need to sell to avoid foreclosure.

Even with interest rates remaining at or near historically low levels — thanks to the Federal Reserve — Esmael Adibi, director of the Anderson Center, is concerned about the resetting of mortgage rates on very risky adjustable-rate mortgages — particularly the interest-only and option loans home buyers have used to purchase more home than they could realistically afford during the past couple of years.

Although, it is understandable how so many potential homeowners would want to try and stretch their family budgets to own a home in California by utilizing one of these risky loans, affordability is still a major issue. The fact is that it takes 50.8 of the median family income to buy a median-priced home in the state compared to only 23.1 percent of the median family income to purchase a median-priced home at the national level, Adibi noted.

At the end of the day, it appears as if expectations that home prices will continue to go upward and build up more equity in 2007 is a gamble that is going to backfire on many of these short-term homeowners, resulting in opportunities for investors, real estate professionals and home buyers to purchase California homes at bargain prices.

A new and exciting interactive 3-D mapping tool has arrived here at RealtyTrac. RealtyTrac members can view these new maps by clicking the map icon next to any property on the Search Results Page or by clicking the map links on any Property Details Page.

The new map experience is a vast improvement, and is unique among all national foreclosure services, giving RealtyTrac customers remarkably clear and detailed images, and a distinct advantage over investors and home buyers using other services.

When RealtyTrac visitors enter the map page, they will see icons representing all of the foreclosure properties in the RealtyTrac database that are located within the map area. Site users will be able to use aerial imagery and interactive mapping features to look for homes in a two dimensional street level map, a top-down aerial satellite view or a 3-D birds-eye view.

“High-definition interactive mapping is revolutionizing how the real estate industry and consumers look for homes," said James J. Saccacio, chief executive officer of RealtyTrac. "Our customers now have the ability to immerse themselves in a high-resolution, 3-D mapping environment, and actually conduct their property search without ever leaving the map.”

This technology gives RealtyTrac subscribers and agents useful new ways to map properties and better visualize their surroundings from multiple vantage points. Moreover, on-screen navigational tools enable users to move in different directions or zoom in closer to a particular property or zoom out for a broader view.

At RealtyTrac, we are constantly developing and adding new features to help improve the RealtyTrac customer experience. Let us know what you think. Feel free to either post a comment directly to this blog, or send us your thoughts and feedback to editor@foreclosurepulse.com.

The cooling real estate sector will continue to plague the national economy next year, but enough positive economic fundamentals remain in place to counteract forces threatening to push the U.S. housing market into a full tailspin, according to forecasters at Chapman University in Orange, Calif.

That means 2007 should be a good year for anyone involved in the foreclosure sector of the market — whether they are real estate agents, potential home buyers or real estate investors.

Some highlights of the Chapman forecast:

• The sky isn’t falling, but housing prices are projected to decline 2.2 percent on average next year, after an almost 50 percent run-up in appreciation between 2001 and 2006, says the Chapman Economic & Business Review December 2006.
• Housing starts are expected to remain down in many parts of the country, due to increased marketing time and inventories of unsold homes that grew from a 3.7-month supply in 2005 to a 7.3-month supply in 2006 at the national level. That is still much lower, however, than the market’s peak of an 11- to 12-month supply back in the early 1990s, when foreclosures were rampant.
• Mortgage rates increased 15 percent between 2005 and 2006, but economist and Chapman President James L. Doti expects the Federal Reserve to hold fast in 2007, keeping the much-watched Federal Funds Rate (the short-term rate at which banks lend money to each other) at or near its current 5.25 percent.

Lower home prices and slower sales activity, combined with growing inventories of unsold housing, will make it more difficult for distressed homeowners to sell off their properties to avoid foreclosure. Higher mortgage rates will have an effect too — as rates are reset to higher levels on those “exotic” adjustable mortgages.

Therefore, looking at the year over year growth between 2005 and 2006, and the expected increase in foreclosures due to the upward adjustment in interest rates on adjustable loan products, we expect the supply of foreclosure information reported on the RealtyTrac website to continue to grow next year.