With the passage of the consumer-unfriendly bankruptcy law and the cram-down rampant, the personal finances of those with limited means are getting more precarious. But even in this Scrooge-y world, there are pockets of sweetness and generosity. At least one group of kind-hearted folks in the finance industry is willing to give customers a break when things don't go their way: America's heart-of-gold mortgage lenders, who are behaving with curious benevolence toward suffering clients. Even as housing prices have risen and grown more unaffordable, and as bankruptcy filings have soared, foreclosure rates have fallen. According to the Mortgage Bankers Association, the foreclosure rate has fallen from 1.49 percent in the third quarter of 2002 to 1 percent in the second quarter of 2005.
It's not very surprising that the industry is cutting slack to borrowers in the region affected by the hurricanes. Government-sponsored lenders Fannie Mae and Freddie Mac have extended through Feb. 28 a moratorium on foreclosures in the Gulf Coast. Freddie Mac also told the companies that service the loans it makes "not to report hurricane-related delinquencies to credit agencies through February 28" and advised them "to forgo collecting penalties or late fees as mortgages are reinstated." Private-sector lender Wells Fargo last week said that through the end of February, it will "not assess late fees, file negative credit reports or place collection calls" to customers with hurricane-damaged homes.
But these moves aren't motivated entirely by the spirit of charity. Across the nation—even in the parts that remained dry last summer—the mortgage industry is working hard to avoid coming down too hard on overextended borrowers. It has nothing to do with the hurricanes and everything to do with a healthy corporate regard for self-interest, stock value, and public image.
Homeowners today are plainly stressed, especially those with less-than-pristine credit. According to the Mortgage Bankers Association, in the second quarter of 2005, the delinquency rate for residential mortgages was 4.34 percent. Some 1.83 percent of loans were classified as "seriously delinquent," meaning that payments were either 90 days past due or the loan was in the process of foreclosure. The delinquency rate for borrowers with adjustable-rate mortgages was 10.04 percent, and the delinquency rate for subprime fixed-rate borrowers was 9.06 percent. In order for the rate of home ownership to rise as it has, more marginal buyers have been drawn into the market. And they tend to fall behind on their payments rather quickly.
The delinquency rate for subprime borrowers would seem to set the stage for a huge rush of foreclosures. But the big lenders have plenty of (mostly short-term) reasons and incentives to avoid taking back the houses of their nonpaying customers. And they're doing everything they can to keep their customers in their homes—even if they're not paying the mortgage on time.
Obviously, it's bad form to foreclose on people who have just lost everything in a flood.But foreclosure—on anyone—is an onerous, time-consuming process. (Read: It costs money.) It also forces banks to get into a business far from their core competency. J.P. Morgan Chase has no clue what to do with a bunch of waterlogged homes in New Orleans. Foreclosure can also prove damaging to mortgage lenders' earnings—and hence to stock prices. When lenders classify a loan as delinquent, they're still holding out the hope that it will be paid back in full. Once a loan is marked as uncollectible—if a lender forecloses or sells it off for pennies on the dollar to a corporate repo man—the bank has to write down the value and take a hit to earnings. According to the Federal Reserve (click here, and go to Table L217), there were $8.82 trillion in home mortgages outstanding in the third quarter. So, even a small uptick in the foreclosure rate would cause the lending industry to write down billions in lost value.
Aside from damaging a bank's balance sheet, getting aggressive on foreclosure can damage a lender's reputation. It's one thing for a credit card company to refuse to boost a credit limit. It's quite another thing to kick somebody out of their home. Doing so is a PR nightmare and an invitation for greater regulatory oversight.
More broadly, though, the hesitancy to foreclose says something about the evolution of the lending industry. Today, when people fall behind on their debts, the industry views it as an opportunity for new business. Mortgage brokers and lenders continually encourage strapped borrowers to roll over their mortgage into a product that allows them to reduce payments but still "remain current." And there have never been more options available—teaser rates, interest-only loans, even so-called negative amortization rates, where borrowers don't even pay the full monthly interest.
All of which means the housing boom is being fueled by the willingness of lenders to let borrowers get behind—and stay behind—on their payments. Homeowners go deeper and deeper in debt and become less and less home "owners," but they get to keep the roof over their heads. It used to be that only gigantic banks and corporations like Citigroup and Chrysler were regarded as too big to fail. Today, the humble homeowner enjoys that status as well.