Sunday, March 27, 2005

Study: Buyers in "bubble" markets are doing well

Kenneth R. Harney

Though some economists are concerned about American homeowners' rising debt burdens — especially in high-cost, high-inflation markets — a new study suggests that those worries may be misplaced: Homeowners in so-called "bubble" markets such as California, Nevada, New England, Florida, the Mid-Atlantic and the District of Columbia are more likely to pay their mortgages on time than are homeowners in parts of the country with lower housing-inflation rates.

In California, where house prices have ballooned at double-digit rates for five years, just 2.04 percent of mortgage borrowers were behind on their payments in the final quarter of 2004, according to new loan-delinquency data compiled by the Mortgage Bankers Association. The national average during the same period was 4.6 percent.

In Texas, by contrast, where prices and inflation rates have been much lower, 6.8 percent of homeowners were behind on their payments. In Mississippi, 8.8 percent of owners were delinquent, and in Louisiana, 7.2 percent paid late.

In high-priced Massachusetts, where aggregate housing-price inflation has led the nation over a 20-year period, 3.2 percent of homeowners were delinquent. In the District of Columbia, where home prices rose by an additional 23 percent last year, 3.7 percent of borrowers paid mortgages late.

Delinquency rates in high-cost New York, New Jersey and Florida were about 4 percent, well below the national average, while rates in Georgia (6.3 percent), Tennessee (6.4 percent) and West Virginia (6.6 percent) were much higher.

The new national delinquency and foreclosure figures, which cover payment performances on nearly 39 million outstanding mortgages, also documented wide variances among credit categories of homeowners and the types of loans they get. For example, if you are what the mortgage industry classifies as a "prime" borrower — you have a solid credit history and you qualify for the best rates available — you are far more likely to pay your loan on time than "subprime" borrowers, no matter where you live.

Nationwide at the end of last year, according to the mortgage bankers' delinquency study, just 2.4 percent of all prime mortgage borrowers were behind on their payments, compared with nearly 11 percent of subprime borrowers with less favorable credit histories and scores. Subprime borrowers were more than seven times more likely to be 90 days delinquent than prime borrowers, and eight times more likely to be in foreclosure proceedings.

Homebuyers who take out loans insured by the Federal Housing Administration (FHA) are most likely to let their payments slip. Nearly 13.2 percent of all FHA borrowers were delinquent at the end of 2004, according to the study, and 3.1 percent were three months or more behind.

That's not surprising, because the FHA program seeks to assist first-time buyers with moderate incomes. The FHA program is also lenient on credit-history problems, offers minimal down payments and relaxed standards on household debt-to-income ratios.

Borrowers with adjustable-rate mortgages (ARMs) — including popular interest-only and "option" payment loans — were only slightly less likely to pay on time than borrowers with fixed-rate mortgages.

In California, where interest-only mortgages have been a key factor in lowering monthly payments on high-cost houses, just 1.4 percent of prime borrowers were behind on their loans in the last quarter of the year. Contrast that with low-cost, low-inflation Iowa, where more than 3 percent of prime ARM borrowers were delinquent, and Nebraska, where the late-payment rate was 3.9 percent.

Worst on-time payment rate in the country on prime adjustable-rate loans: Mississippi, where more than 8 percent of homeowners with such loans were delinquent. Worst for subprime ARMs: West Virginia, with 21 percent behind.

The latest homeowner delinquency study contains an important national finding: Despite rising levels of home-mortgage debt around the country, on-time payment performance overall in 2004 was better than in the three preceding years. Households may be saddled with big mortgages in some of the biggest-ticket markets, but they seem to be handling those burdens and sending in payments on time.

As long as interest rates remain low and employment growth continues, that could suggest bursting bubbles are nowhere in sight.