Ohio AG Dings Mortgage Servicers for Poor Performance, OSU Study Shows Real Homeowners Smaller Share of Larger Housing Crisis

OhioNewsBureau

Columbus, Ohio: As Congress and President Bush barnstorm their way toward an agreement that may forestall the near-term collapse of our economy, news from two fronts on subprime loans and the mounting mortgage and credit crisis it has unleashed that's got the nation in a fever and other nations catching our cold, forecasts that while our economic times may be bad, things may get worse. With today's report that auto sales fell 30% in September for several auto manufacturers, the getting worse part of our free fall seems just around the corner.  

A new nationwide study released Monday on the financial situation of Americans, showed homeowners grappling with mortgages for their own residences represent a far smaller percentage of the overall mortgage crisis than previously thought.

In separate but related news, the Ohio Attorney General (OAG) issued a media release on the contents of a third report of a State Foreclosure Working Group that began as a cooperative dialogue of state officials and mortgage servicers in September 2007.

OSU Study Says Big Losses Come from Commercial Real Estate Loans, Speculators

The results, according to two researchers from The Ohio State University (OSU) in Columbus who co-authored the study, suggest that the biggest losses of this mortgage crisis come from commercial real estate loans and loans for houses bought as investments or built on speculation.

Both study co-authors, Randall Olsen, professor of economic and director of the Center for Human Resource Research and Lucia Dun, professor of economics, said their findings, derived from the nearly 12,500 randomly selected Americans interviewed since early 2005 for Consumer Finance Monthly, the only data set that has regularly and consistently looked at household balance sheets during the recent upheaval in the nation’s economy, believe people who have mortgages on homes they live in have been "more conservative and careful about their money than some of the big financial institutions."    

Banking on the credibility of their source, Olsen said, "These are the best numbers available about what we can expect to see in the developing housing mortgage crisis."

For Olsen and Dunn, whose report was sent to OhioNewsBureau via a media release from OSU, their focus was homeowners who had a loan-to-value ratio of 80 percent or higher – meaning they had earned little equity in their home – and who were also 60 or more days late on their house payments.

“These are the homeowners who are close to the edge and are at the highest risk of defaulting on their loans,” Olsen said in the release. He said the percentage of people in that category was at 8.5 percent in 2007-08, up from 3.4 percent in 2005-06.

The researchers assumed that all of those homes would go into foreclosure, and that these homes would then lose a total of 60 percent of their value. Under those assumptions, there is a potential total of $90 billion in mortgage losses on borrowers in trouble during the 2007-08 period, and possibly twice that much – or $180 billion – if one uses the higher late payment rates seen during the second quarter of 2008.

The study also makes a point that Americans who have "fared the worst in relative terms economically are the wealthy," who Olsen said lost a larger percent of their net worth compared to those in mortgage trouble that were not in the top 5 percent of the nation's most wealthy (8.6% to 6.7%).

“You can imagine that these wealthy households are probably the ones who are most involved in the risky investments in real estate and elsewhere,” Olsen said in the release.  “They are the ones who have the biggest stake in dollar terms in bad loans.”

Loan Work-Outs Not Working Out Well

Since October 2007, the State Foreclosure Working Group (SFWG), which includes the OAG has been collecting data from the largest subprime mortgage servicers, with 13 of the largest 20 servicers participating, representing approximately 60 percent of subprime mortgage loans serviced.

Calling efforts “Disappointing,” state officials said eight out of 10 seriously delinquent homeowners are not on track for loan work-outs or any loss-mitigation that would enable them to avoid foreclosure.

Industry measures to keep homeowners out of foreclosure have slipped. The group of state attorneys general and state banking regulators working to prevent home foreclosures, said "too many homeowners face foreclosure without receiving any meaningful assistance by their mortgage servicer...a reality that is growing worse rather than better, as the number of delinquent loans, prime and subprime, increases.”

The group's report -- “Analysis of Subprime Mortgage Servicing Performance ” -- was based on data collected from subprime mortgage servicers for the period February through May 2008.“While some progress has been made in preventing foreclosures, the empirical evidence is profoundly disappointing,” it concluded.

From the SFWG report:  

"Servicers appear to have reached the ‘low-hanging fruit’ of subprime loans facing interest rate resets, while not developing effective approaches to address the bulk of subprime loans which are in default before interest rate resets." Based on the rising number of delinquent prime loans and projected numbers of payment option ARM loans facing reset over the next two years, we fear that continued reactive approaches will lead to another wave of unnecessary and preventable foreclosures.

"...the number of loans on track for a loan modification has declined precipitously” in recent months. “The mortgage industry’s failure to develop systematic approaches to prevent foreclosures has only spurred declines in property values and further increased expected losses on mortgage loan portfolios."  

Consensus comments said mortgage servicers have "relied on the same approach used before the foreclosure crisis," producing "record levels of unnecessary foreclosures that have accelerated declines in property values that have affected all of us."  

Richard H. Neiman, Superintendent of Banks for New York, said, "We will never succeed in righting the economy and stabilizing the markets, unless all institutions, regardless of charter type, work together to implement sustainable solutions to avoid unnecessary foreclosures," as reported by the OAG.

Major findings of the third report of the SFWG:

1. Nearly eight out of ten seriously delinquent homeowners are not on track for any loss mitigation outcome.  

2. New efforts to prevent foreclosures are on the decline, despite a temporary increase in loan modifications through the 2nd Quarter of 2008.

3.  One out of five loan modifications made in the past year is currently delinquent.

4. Three hundred thousand subprime loans are in the process of foreclosure as of the end of May 2008.  

The group hopes that recently enacted federal legislation to provide a new federally-guaranteed refinance program (Hope for Homeowners) will increase the level of refinancing for poorly performing subprime loans. It hopes recent federal government interventions in the mortgage and financial markets will offer an opportunity to develop more options for homeowners and better systematic loan modification approaches.

John Michael Spinelli is a former Ohio Statehouse government and political reporter and business columnist. He now serves as the OhioNews Bureau Chief for ePluribus Media Journal. Find ONB archives here.
Photo credits: (c) 2008 AnHarris, istockphoto

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