America’s middle class, already burdened by a trifecta of economic pressures—a slowing labor market, record high levels of household debt, and increasing interest rates—can now add rising mortgage delinquency rates to their list of financial woes.
New reports from the Center for Responsible Lending and Mortgage Bankers Association at the tail end of last year showed that delinquencies on mortgages are rising sharply, often due to high-interest, predatory mortgages.
Center for American Progress Senior Economist Christian Weller also detailed recent disturbing trends in a report released at the end of last year on “The End of the Great American Housing Boom.” Examining recent data, Weller found that, at the same time that growth in homeownership rates slowed, homeowners’ equity share in their own homes dropped sharply for a significant number of Americans, many of whom have fallen victim to predatory lending practices.
The Senate Banking, Housing, and Urban Affairs Committee has picked up on this trend, and will hold a hearing tomorrow to discuss solutions for bringing the American Dream back within grasp amid rising home foreclosures and dangerous lending practices.
Weller explains that heightened vulnerability is pushing homeowners to pile on debt faster than their homes are appreciating. Just under 50 percent of all homeowners in 2004 met at least one of four possible vulnerability measures—mortgage payments of at least one-third of income, variable interest rate debt of at least 50 percent of income, home equity below 25 percent of their home’s value, and homes accounting for at least 90 percent of families’ total assets. This was up from 39 percent in 2001, and has likely increased since then.
Increased reliance on variable interest loans is an important driving force behind the increased vulnerability. A growing share of families are using adjustable rate mortgages and home equity lines, which offer initially lower rates that grow over time, to finance their homes. Adjustable rate mortgages and home equity lines grew to account for 25 percent of total mortgage debt in 2004, as compared with only 16 percent of the total mortgage debt in 2001.
Many families now facing foreclosure also fell prey to predatory lending practices, including sub prime and exotic mortgage products unsuitable to the borrower’s needs. Many of these loan products allow families to reduce their initial loan payments, but they also expose families to sharply higher future payments,when interest rates increase or balloon payments come due.
Not all adjustable rate mortgages and home equity lines of credit are high-risk, but the steep built-in rate and payment increases, prepayment penalties, limited income documentation, and a lack of escrow for taxes and insurance built into many of these practices have led to the recent rise in foreclosures.
These factors lead to a higher risk of default regardless of the borrower’s credit score. But African American and Hispanic homeowners, who often take out subprime loans because of limited access to other loan products, poor credit histories, and a number of other factors, are particularly affected.
Efforts to reduce the risks for borrowers at the national level have so far been slow. The Senate Banking, Housing, and Urban Affairs hearing tomorrow is a good start, but new congressional leaders must act more quickly than their predecessors to regulate lenders who each year push the American Dream further our of reach for many Americans.
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