Mortgage Stress Seen for '06
Delinquencies on Subprime Loans Likely to Spike, Report Says
By Kirstin Downey
Washington Post Staff Writer
Wednesday, December 7, 2005; Page D02
Mortgage delinquencies among homeowners with high-cost loans will rise by 10 to 15 percent in 2006, as borrowers struggle with higher interest rates, high debt levels and higher energy costs amid flattening home prices, a new report from investment analyst Fitch Ratings predicts. Consequently, overall mortgage delinquencies are likely to rise next year, as well, according to the report's authors.
"We think borrowers will be under more stress and have more propensity to be delinquent," said Glenn Costello, managing director of Fitch, which follows the market for bonds backed by residential mortgages. Recently, prices of such bonds have been falling, particularly those with lower-credit-quality loans.
Most high-rate mortgages, known as subprime loans, have adjustable interest rates, Fitch said. That means borrowers are more sensitive to fluctuations in rates, because rising rates mean their mortgages payments rise as well. About 19 percent of home loans nationwide are subprime, up from about 5 percent a decade ago, as homeowners take on heavy debt burdens. Many people have used the equity in their homes to pay off high-interest credit cards, reducing their monthly obligations, but those with poor credit have done so by shifting to subprime loans. Prime loans, those at the best rates, are given to only borrowers with good credit.
Costello said the increase in subprime lending meant more people could "come under financial pressure" than in the recent past, when home values were rising.
About 4.3 percent of all loans were delinquent in the second quarter of 2005, and about 1 percent of loans had passed the overdue category and were actually in foreclosure, according to the Mortgage Bankers Association. But the rate for subprime loans was much higher -- about 10.3 percent of such loans were in default, and about 3.5 percent were in foreclosure. Most borrowers find ways to catch up on their payments, refinance or sell their homes before they go into foreclosure....
http://www.washingtonpost.com/wp-dyn/content/article/2005/12/06/AR2005120601743.html