Late Florida Home Loan Payments, Delinquencies on the Rise

Prices are rising.
Florida home loan lenders are growing aggressive.
More and more owners are falling into debt and coming up late with their mortgage payments.

The results of these patterns? Recent studies by several Wall Street firms point to increasing delinquency rates on Florida home loans issued last year, a period when lenders were pushing hard to keep business going as interest rates and home prices were rising. The increase in late loan payments comes as more buyers have been forced to stretch financially to afford ever costlier houses in recent years, and many homeowners have increased debt by tapping their home’s equity.

Granted, mortgage delinquencies remain low by historical standards. But experts worry the trend could worsen. With the housing market cooling and interest rates rising, “by the end of the year you could see a substantial increase in delinquency rates” for mortgages, says Thomas Lawler, a former Fannie Mae economist and now a private housing consultant.

Typical delinquency rates on Florida home loans

Mortgage delinquencies historically peak around three years after loans are made. These are considered the “danger years” on any adjustable Florida home mortgage loan. However, some borrowers with adjustable-rate mortgages could see problems sooner. Others, who took out exotic mortgages such as interest-only loans and option ARMs that hold down monthly payments in their early years, could run into trouble later, when payments reset.

Borrowers who took out home loans in the past two years are likely to be more vulnerable if home prices fall because they could wind up owing more than their home is worth. Twenty-nine percent of borrowers who took out mortgages last year have no equity in their homes or owe more than their house in worth, according to a study completed this year by Christopher L. Cagan, director of research and analytics for First American Real Estate Solutions. That compares with 10.6% of those who took out Florida home loans in 2004.

An analysis by Bear Stearns found that delinquencies on adjustable Florida home loans originated in 2005 were in most cases far higher than on loans issued in previous years at the same point in their life cycle. “The numbers are clearly worse,” says Gyan Sinha, a senior managing director at Bear Stearns.

More evidence of Florida home loan delinquencies

A separate study by Credit Suisse reached similar conclusions. That study looked at borrowers with good credit who were at least 90 days late on their mortgages. It found that borrowers who took out adjustable-rate mortgages in 2005 were three times as likely to be delinquent on their payments after the first year as those who took out ARMs in 2003 and 2004.

The higher delinquency rate for ARMs could be a sign that many financially strapped borrowers have turned to these loans to boost affordability, says Satish Mansukhani, head of mortgage strategy at Credit Suisse. The findings are “an early warning signal that merits watching,” he says.

In another sign that some borrowers who stretched are now feeling pinched, a study by Lehman Brothers of subprime borrowers found that the increase in delinquencies is being driven by home buyers, rather than by people who are refinancing, and by those with little equity in their homes. All three studies by the Wall Street firms looked at mortgages sold to investors who buy mortgage-backed securities and excluded Florida home loans purchased by mortgage giants Fannie Mae and Freddie Mac.

Overall, roughly 4.7% of residential mortgages were delinquent in the fourth quarter, the Mortgage Bankers Association says. That is up from 4.44% in the third quarter and 4.38% at the end of 2004, it says.

Looser standard for Florida home loan lending

Mortgage lending standards tended to be looser in 2004 and 2005 than in the previous three years, according to surveys done by the Federal Reserve Board. One example: Piggyback loans have become more common, enabling borrowers to use as much as 100% debt to finance a home purchase.

The pattern also held true for jumbo Florida home loans — currently mortgages above $417,000 — and for most mortgages issued to borrowers with good credit who don’t fit traditional lending standards, such as those who don’t provide full documentation when taking out a loan. The Bear Stearns analysis looked at loans that were considered at least 60 days past due.

Borrowers with interest-only loans and option ARMs, popular affordability products, have generally had lower delinquency rates early in the loan’s lifecycle than those with other types of mortgages, in part because their initial payments are relatively low. But there are some indications that this is changing.

Gail Burks, president of the non-profit Nevada Fair Housing Center, says borrowers are coming into her office who are having trouble making their payments as soon as a year or two after taking out a mortgage. “It’s more of the newer, exotic [mortgages] where the payment has changed and they are now pretty much priced out of the loan,” she says.

A recent analysis prepared for The Wall Street Journal by LoanPerformance, a unit of First American Corp., found that borrowers with jumbo loans who took out interest-only Florida home loan and option ARMs in 2003 and 2004 are more likely to be 30 or 90 days late on their payments than borrowers with more traditional mortgages.

What’s being done to fix this problem? Lenders are getting creating, coming up with options such as the 50-year Florida home loan. The more time you have to pay off the mortgage, the less you owe per month and the less likely you are to be late.