Aline van Duyn, Financial Times
Wayne B, a 62-year-old executive who works at an airport, and his wife Orapin, a dental assistant, are about to do something odd. The couple, with a pristine credit history, have decided to default on their $500,000 (£325,000, €370,000) mortgage on a townhouse in Livermore, a respectable city in California’s San Francisco Bay area.
It is not that they are unable to afford the $4,600 monthly mortgage outgoings: they have never missed a payment. But the house they bought for $582,000 in May 2006 – at the peak of the US housing boom – is now not likely to be worth more than $315,000.
“The process towards a default has started,” says Wayne, whose lender does not yet know it will soon be left nursing losses on yet another foreclosed house – and one whose owner, among the top-rated in terms of creditworthiness, is an implausible-sounding default risk. “We plan to retire in four years and will not be able to afford the mortgage payments then,” he explains. “The loss if we sell will be so large that, after doing a lot of research, we have made a business decision to walk away.”
The high level of foreclosures in the US – the handing over of homes to banks that lent people money to buy them – has been a huge burden on the economy, has kept house prices on a downward spiral and has resulted in misery and anxiety for millions of people. In some areas so many homes have been abandoned that the entire community has fallen apart as schools close, public services are cut and homes are ransacked for fittings or taken over by criminals. That has also sent property values plunging for those people still in their homes and paying mortgages.
Stemming foreclosures is a key policy objective of President Barack Obama’s administration. Various programmes are being worked on to modify people’s mortgages in an attempt to reduce payments so that the mortgages are not defaulted on, but so far with only limited success.
The US housing crisis and the foreclosure wave have also been the fuel behind hundreds of billions of dollars in losses for banks and investors around the world – owners either of the defaulted mortgages themselves or of securities linked to their value. Famously, the biggest source of losses came from subprime mortgages – loans given in cavalier fashion to people with poor credit histories. When those borrowers began to default, it triggered the most widespread collapse of housing prices across the US seen since the 1930s.
Prices are still falling. So the extent of losses banks and investors will have to take on mortgages that are still being paid every month, but may not be for longer, hangs large over the US economy. Without a recovery in house prices, consumer spending and confidence in the US is expected to remain muted, reducing the potential for economic growth.
Further losses on mortgages could result in more pain for banks, too, reducing the amount of new credit that they can make available to consumers and businesses. This, in turn, would have knock-on effects for the global economic outlook, as the US remains one of the biggest drivers of international trade and commerce.
The behaviour of people like Wayne could therefore be crucial. With a growing number of Americans facing negative equity – where the mortgage exceeds a property’s current market value – and becoming ever more pessimistic about the prospects of house prices recovering to make up that difference, they are surrendering to foreclosure even though they can still meet the repayments.
The trend is clear in recent rates of non-payment, or delinquency, on mortgages. In January, delinquencies on outstanding “jumbo” mortgages – big loans granted to people with good credit histories – rose to 9.6 per cent, according to Fitch Ratings. Many of these problem loans, which have gone unserviced for 60 days or more, were taken out after 2005. And non-payment is increasing not just in hard-hit states such as California: in New York, Florida, Virginia and New Jersey they are all on the rise too.
“These are all states where many of the mortgage holders are educated people and it is easy to connect the dots and conclude that these people are deciding it is no longer worth paying a mortgage if they are under water,” says Ivy Zelman, a housing market analyst.
She expects US house prices could fall another 10 per cent under the combined weight of the build-up of unsold foreclosed houses, cash-strapped people unable to keep paying mortgages and people facing negative equity deciding simply to hand over their home to their banks.
A close look at mortgage payment trouble spots shows that the higher the negative equity, the higher the rate of non-payments. Fitch has found that for all the mortgages provided in the private market, householders with no equity have a delinquency rate of nearly 40 per cent, double that of homeowners who have a stake in their property.
Read more here: http://www.ft.com/cms/s/0/a93abcea-1fe7-11df-8deb-00144feab49a.html
