Who Loses Their Homes in Colorado?

    A funny thing happened on the way to the capitol. The Colorado Banker’s Association has jumped on the bandwagon of informing state legislators about Colorado’s foreclosures crisis, something that usually encourages regulatory legislation. This takes the form of a new report analyzing foreclosures in Colorado. 

    Of course, it really isn’t that simple.  It turns out that the wave of irrational exuberance that has driven the latest wave of foreclosures has had far more to do with fly by night mortgage brokers and subprime lending outfits, than it has with their industry.  Their goal: To seize the opportunity to limit competition that is giving their business a bad name.  Trouble At The Bottom Of the Market

    The banker’s conclusions are broadly consistent with what The Denver Post, the Rocky Mountain News, and business oriented publications have been saying for some time now.

    Foreclosures are dominated by mortgages recently given to people buying modest homes whose ability to handle those obligations was doubtful from the start, often by marginal lenders.

    The median loan amount for residential loans in foreclosure was $158,925 and was less than three years old at the time of foreclosure.  At the time of foreclosure an average of 97% of the original loan remained unpaid.

    In the same time period, according to the U.S. Census Bureau, the 25th percentile value of owner occupied housing units in Colorado was $159,900, the median value was $223,300, and the 75th percentile was $330,000.

    Taken together with Denver Post data that showed that seven in ten foreclosed upon houses in the Denver metro area were no down payment loans, it is clear that it is the start home and small home market that is driving the foreclosure wave.

    The study notes, as have others, the high delinquency rates for subprime loans.  One in 123 prime loans were seriously delinquent (more than 90 days overdue) in Colorado in the third quarter of 2006, compared to one in 14 subprime loans.  About 13% of home loans in Colorado are subprime, a market that banks usually do not participate in directly, even if their “affiliates” do.

    Some observers have hypothesized that foreclosures are being driven by the first jump from a fixed rate to an adjustable rate mortgage, although the banker’s data doesn’t strongly back that up.  While a disproportionate share of loans that go into foreclosure are adjustable rate, this may be more a symptom of generally overextended homeowners, than it is an actual cause of foreclosures.

    Most adjustable rate mortgages are fixed for at least the first three years of the loan, and most foreclosures are already in the works by then.  Also, surprisingly, the interest rates being paid on loans in foreclosure were not much higher, on average, than the market rate.  None of the loans in the banker’s sample of 397 foreclosures had interest rates of 13% of higher, and the average was close to 7%.  The interest rates of loans in foreclosure didn’t differ significantly by type originating institution.

    According to the bankers, 77% of loans in foreclosure, by value, are originated by by mortgage companies, 4.4% by “bank affiliates” (usually a polite name for subprime mortgage divisions) and 18.4% of foreclosures are conventional bank loans, despite the fact that about 58% of all loans are originated by banks.  Banks, excluding “affiliates” are also somewhat more likely to see foreclosures of their loans withdrawn as problems are cured by borrowers, and are somewhat less likely to have originated adjustable rate loans that go into foreclosure.

    Bottom Line

    The implication that the bankers refrained from actually making is that mortgage companies often don’t make the effort to match customers with appropriate mortgages for their means, that traditional bank underwriting departments insist upon.

    The other looming question is whether high home ownership levels, the U.S. is at record high’s on this measure right now, are worth more foreclosures.  For every subprime loan that is seriously delinquent, there are 13 that are not.  Many of those subprime borrowers will manage to make their crushing payments and keep their homes.  Do they benefit from tightening up this market?  Or, are the bankers trying to shut down this market at the expense of people who wouldn’t be their customers anyway and would be able to pay their loans?