George Downey Shared blame
Far more Massachusetts homeowners are in jeopardy of losing their properties now than they were a year ago at this time, with Boston hit especially hard.
Statewide, lenders filed 12,945 petitions to foreclose between January and June this year, compared with 7,777 during the same months in 2006, a 66 percent increase, according to The Warren Group, parent company of Banker & Tradesman. Petitions to foreclose, filed at Massachusetts Land Court, are the first formal step taken by lenders in a foreclosure proceeding.
Suffolk County saw the highest percentage increase in petitions to foreclose on the Massachusetts mainland. Boston, Chelsea, Revere and Winthrop registered a 92 percent increase, with lenders filing 1,549 petitions so far this year compared to 808 at the same time in 2006. Dukes County – essentially the six towns on the island of Martha’s Vineyard – saw a 125 percent increase, but a total of only 27 petitions to foreclose have been filed there so far this year.
Foreclosures are more prevalent in lower-income neighborhoods, and Suffolk County’s average income of $41,517 in 2004 was the second-lowest in the state. That likely is a major factor in the large increase in foreclosure activity, according to Julia Reade, a senior research associate with the Federal Reserve Bank of Boston.
Middlesex and Worcester counties recorded the largest sheer numbers of foreclosure petitions so far this year.
Middlesex County, where homeowners faced 2,024 petitions to foreclose through the midway point this year, and Worcester County, where 1,956 have been filed, collectively account for 31 percent of the state’s total foreclosure petition in 2007.
“Suffolk County has a [large] population, but a greater percent are renters,” Reade pointed out, suggesting one reason the sheer number of petitions could be greater in Middlesex and Worcester counties, where more people own their homes.
The increase in petition filings statewide is a good indication that foreclosure problems may worsen for many Bay State homeowners in the coming months.
“Petitions are the best measure of homeowner distress,” said Reade, explaining that while an auction notice is a step much closer to actual foreclosure, many petitions have equally unpleasant outcomes that still result in the loss of a home. Those include short sales, in which a lender accepts the proceeds of a sale worth less than the original loan amount; and deeds in lieu of foreclosure, in which the homeowner is not actually foreclosed but turns ownership over to the lien holder and still suffers damage to their credit.
The increase in homeowners’ financial distress is blamed in part on falling home values, which make them less likely to be able to sell or refinance a home. Adjustable-rate loans resetting to higher levels also are putting increased payment pressure on many borrowers, especially those with shaky credit who used high-cost subprime mortgage products to purchase homes.
Lenders also are experiencing difficulties, with California-based Countrywide Financial Corp., one of the nation’s largest lenders, announcing last week that its second-quarter profits fell by 33 percent due to rising loan defaults.
Within lower-income communities especially, high-cost loans are directly tied to increased foreclosure activity, said Reade.
Future Shock
But most petitions filed by lenders don’t result in foreclosure, Massachusetts Mortgage Bankers Association Executive Director Kevin Cuff pointed out.
“People are thinking that with 20,000 [petitions filed], 20,000 people are losing their homes. That’s not the case,” he said. “In fact, sometimes it results in a refinance, short sale or another negotiated strategy.”
But Reade, who recently prepared an analysis of foreclosure data across New England, said petitions are a better measure of homeowner distress than foreclosure auction notices or actual foreclosure deeds.
“If someone has a horrible short sale, it won’t show up as a foreclosure,” she explained, but that doesn’t mean the homeowner hasn’t suffered significant loan-related financial problems.
Jim Campen, professor emeritus of economics at University of Massachusetts-Boston and creator of an annual report analyzing mortgage lending patterns in greater Boston, observed several patterns in The Warren Group data.
Most notably, he said, the percentage of foreclosure petition activity by county in Massachusetts corresponds much more closely to the percentage of high-cost loans made in those areas rather than the percentage of total lending activity.
For example, Middlesex County recorded 15.6 percent of the total petitions to foreclose filed statewide through June. The county accounted for 21.3 percent of total home loans in 2005, based on Home Mortgage Disclosure Act data, but 16.4 percent of HMDA-defined high-cost or subprime loans, closely matching current foreclosure petition activity share in the state.
In two other counties – Hampden and Norfolk – where the percentage of total loan share differed greatly from the percentage share of foreclosure petition activity, the correlation between high-cost loans and foreclosure petitions remained closely tied. Norfolk County this year has seen 7.7 percent of foreclosure petition activity and, according to the latest HMDA data, 7.3 percent of the state’s high-cost loans. The county, however, accounted for 10.4 percent of total loans in the state in 2005.
“That means where there are higher levels of subprime loans, there are more foreclosures,” explained Ren Essene, a research analyst with Harvard University’s Joint Center for Housing Studies in Cambridge.
“Some of these loans probably never should have been made,” said Essene. Most of the failing loans were made very recently – within the last couple of years, she said.
Subprime loans are more likely to fail no matter what, Essene pointed out, and have higher interest rates to match the risk. But the more “creative, untested products are failing at a higher rate.”
Essene said regulatory solutions such as new guidance on the types of loans that can be offered and to whom, and lender-government partnership offerings of enhanced loan products meant to help people out of inappropriate loans, will have a measured effect over time.
But, she predicted, things will get worse before they improve.
“I don’t think we’ve seen the topping out of the problem,” she said. “We’re going to see continued foreclosures because of the new products and underwriting terms that have been push-marketed – and buyers suspending some level of belief” in their ability to pay.
Over the next six months to a year, she said, “we’re going to see a continued rise in foreclosures, because of the time lag corrections will take.”
The marked increase in petitions to foreclose statewide in the first half of this year also is indicative of more foreclosure difficulties down the line.
Cuff offered a more optimistic view, explaining that one of the reasons for rising foreclosure activity is the traditional life-circumstance changes experienced by borrowers, such as divorce or job loss, he said. Because there have been so many more loans in recent years, he suggested, a greater number of borrowers are correspondingly experiencing payment difficulties for those reasons and not necessarily because of poorly structured loan terms. Since fewer mortgage originations are taking place today, the number of those with “traditional” repayment problems will decrease over time, he said.
George Downey, the founder and owner of Braintree-based Harbor Mortgage Co., one of Massachusetts’ oldest licensed lender-brokers, said lenders and borrowers both need to take a lesson from what’s happening today.
“Shame on the industry,” he said, for coming up with “so-called creative products” that negative-amortized and virtually led some borrowers into a hole. But borrowers also share some of the blame for incurring debt they should have known they couldn’t afford, he said.
