Foreclosure Monitor: What can underwater mortgages tell us?

Three zip codes in Lynn are among the top 20 in the state in terms of having homes in which the amount of the mortgage is higher than the value of the home, according to a Seattle-based real estate data service.

In a survey of 127 U.S. metro areas, Zillow.com estimates that 18 percent of homes purchased between 2004 and 2008 had negative equity, commonly known as underwater loans.  Zillow.com also reported that the number of underwater loans ranged from 13 percent in the Pittsfield metro to 28 percent in the Boston-Cambridge-Quincy metro to 40 percent in the Worcester metro. At the zip code level, Lynn’s 01901 topped the Massachusetts list at 66 percent, according to Zillow. See the accompanying chart for more detail.

The Zillow report is similar to a March 3 Banker & Tradesman report that said that nearly 18 percent of all Massachusetts homeowner mortgages are underwater, with the highest concentrations in Dorchester (66 percent), Lawrence (65 percent) and Brockton (64 percent). While estimating home values is not a perfect science, gauging the number of underwater loans can be helpful in predicting future foreclosure rates and where high concentrations of foreclosures may occur. 

In a 2008 paper titled Negative Equity and Foreclosure: Theory and Evidence, the Federal Re-serve Bank of Boston fore-casted that 7 to 8 percent of the 94,600 Massachusetts home-owners with negative equity in the fourth quarter of 2007 were likely to be foreclosed.

This analysis was based on an examination of the number of Massachusetts homeowners with negative equity that were foreclosed in the real estate crash of the early 1990s. Based on recent economic data, the Federal Reserve authors have since predicted that the percent of foreclosures for negative-equity homes could reach 10 percent.

Signs that foreclosure filings are slowing

While year-to-year foreclosure rates reflect a surge in foreclosures, month-to-month data indicate that foreclosures in Massachusetts may be slowing. According to Warren Group data, 12,554 foreclosure deeds had been filed in the year ending February 2009 up from 8,613 in the year ending February 2008, a 46 percent increase. A foreclosure deed is the final step in the foreclosure process.
 
However, 823 foreclosure deeds were filed in February 2009, down 16 percent from January and down 4.3 percent from February, 2008.  Also, the Federal Reserve Bank of Boston reported that from Q3 to Q4 2008, Massachusetts foreclosure proceedings decreased from 0.7 percent to 0.6 percent.  The national rate is 1.1 percent.

RealtyTrac ranked Massachusetts 27th among the states in total foreclosure activity for Q1 2009. With a 9 percent decline in foreclosure activity from Q4 2008, Massachusetts was one of 23 states to show a decline.

The news on delinquencies is not as good. Mortgage Bankers Association/Haver Analytics 60 day + delinquency data shows that delinquencies continue to increase for all major loan categories during Q4 2008, with 23 percent of Massachusetts sub-prime adjustable loans in delinquency (up from 18 percent in Q3), compared to 17 percent for the nation. 

Massachusetts home prices dip less than other regions 

In a recent survey of 20 major U.S. cities, Boston home prices continued to erode, although not as much as other major cities.

According to the latest S&P/Case-Schiller index, Boston showed a 7.2 percent decline from February 2008 to February 2009, the third lowest decline of all the cities surveyed. Only Dallas (-4.5 percent) and Denver (-5.7 percent) fared better. Prices in Greater Boston are now at February 2003 levels. Overall, prices declined 19 percent in the 20 cities surveyed.
 
As for Massachusetts as a whole, the Massachusetts Association of Realtors (MAR) reported that March sales prices declined 19 percent family homes, and down 14.9 percent for condominiums. 

While the inventory of homes on the market in March 2009 decreased 21 percent from March 2008, demand has not improved enough to create a balanced market. The months to absorb the inventory declined from 14.2 months in March 2008 to 12.3 months this year. MAR considers inventories of 7.5 to 8.5 months to be a balanced market.

Nationally, the Federal Housing Finance Agency reported that home prices for sales in all of 2008, as compared to 2007, increased in only six states. This represents a deterioration in conditions from the year ending Q3 2008, when 20 states had annual price increases.

Prices declined 5.5 percent in Massachusetts up to Q3 2008, ranking 31st among the states. Of the other New England states, only Vermont (-3.2 percent) and Maine (-5.1 percent) fared better. Prices declined 6.5 percent in Connecticut, 7.6 percent in New Hampshire and 9.4 percent in Rhode Island, compared to an 8.3 percent national decline.  The states with the biggest price decreases continue to be Arizona (-20.6 percent), Florida (-24 percent), California (-25.5 percent) and Nevada (-28.2 percent). 

Alt-A and sub-prime delinquency rates continue to climb

As reported in the last Foreclosure Monitor, Massachusetts ranks in the middle of all states in the proportion of homes with risky sub-prime and Alt-A mortgages, but delinquency rates of these loans are higher than other states.  In the Federal Reserve Bank of New York’s most recent analysis of First American Loan Performance data, this pattern held from October 2008 to January 2009.

During this period the number of outstanding Alt-A loans declined 2.7 percent and the number of sub-prime loans declined  5.1 percent.  This is to be expected as homeowners refinance or homes are foreclosed.

The bad news is that delinquency rates continue to climb.  In July 2008, 4.8 percent of Alt-A loans and 13.7 percent of sub-prime loans were at least 90 days late. This increased to 7.1 percent and 18.8 percent, respectively, in January 2009. While Massachusetts improved from the third worst in Alt-A 90-day delinquencies in October to fifth in January, Massachusetts continues to have the highest 90-day delinquency rate for sub-prime loans.

Although the percent of outstanding owner-occupant Alt-A and sub-prime loans increased from October to January, for sub-prime loans, this was a small 0.1 percent, and Massachusetts performance compared to other states has improved, improving one position in the rankings for both Alt-A and sub-prime foreclosures.

Lawrence seeing most concentrated foreclosure activity

Table 3 provides a snapshot of foreclosure petitions for 2007 and 2008. In 2007, Lawrence topped the list, with 50.4 units affected per 1,000 units, 3.8 times the statewide rate. Five of the top 20 communities were in Worcester County (Fitchburg, Winchendon, Athol, Worcester and Templeton), with three each in Essex Country (Lynn, Lawrence and Haverhill) and Plymouth County (Brockton, Carver and Whitman).

From 2007 to 2008, statewide foreclosure petition activity declined 25 percent, largely due to the May 1, 2008 implementation of the 90-day right-to-cure period. The immediate effect of the law was a 77 percent decline in petitions from May to July 2008 compared to May to July 2007. Once the first 90-day period ended, petitions increased, although not to the same level as before, as there were 33 percent fewer petitions in December 2008 to February 2009 than in December 2007 to February 2008.

Given this, petition foreclosure rates decreased in 2008 for many communities in the top 20 as well as for the state as a whole. In 2008, Lawrence remained at the top of the list, despite a 25 percent decline in foreclosure petitions. Petition activity declined in 15 of the municipalities, with the biggest declines in Fitchburg (-38 percent), Winchendon (-37 percent), Mashpee (-36 percent) and in Brockton and Springfield (both down 34 percent). Petition activity remained unchanged in Everett, but increased in Marlborough (19 percent), North Brookfield (24 percent), Douglas (5 percent) and Framingham (16 percent).

While South Shore suburbs such as Carver, Holbrook and Whitman are no longer in the top 20, additional Worcester County towns appear in the list, with seven communities (Fitchburg, Athol, North Brookfield, Winchendon, Worcester, Douglas and Southbridge). Framingham and Marlborough appear on the list, and with Lowell and Everett, bring to four the number of Middlesex County communities in the top 20.

A break-down by zip code (table 4, above) clarifies foreclosure geography and allows for neighborhood analysis. All of the top 20 zip codes with the greatest foreclosure petitions rates, except Ashby, are in dense, urban areas. Lawrence’s 01841 continues to lead the list, despite a 22 percent decline in petitions from 2007 to 2008.

While 18 of the 20 zip codes  saw a decline in petitions, zip codes in Springfield’s 01108 and  01109 declined 37 percent and declines were less in Everett’s 02149 (-2 percent), Chelsea’s 02150 (-4 percent), Lynn’s 01905 (-5 percent) and Lynn’s 01902 (-8 percent).

At micro level, Lawrence neighborhood continue to suffer

As reported in the last Monitor, a neighborhood analysis based on Census block groups reveals that Lawrence continues to dominate the top 20, with eight block groups, down from 11 at the end of the Q3 2008. Springfield, dropped from four block groups to one. Worcester and Brockton both contain three block groups, up from one each, and a Framingham block group makes its first appearance in the list.

Single families jump in Q4

Due to the implementation of the 90-day right to cure in May 2008, the number of foreclosure petitions dropped 25 percent for residential property types from 2007 to 2008. 

After the first 90 days had elapsed, the number of foreclosure petitions increased 29 percent from Q3 to Q4 2008. This increase was led by a 42 percent increase for single-family homes. Single-family homes made up 64 percent of Q4 petitions, compared to 58 percent in Q3. During this same period, petitions increased six percent for condominiums, 14 percent for two-family homes and 11 percent for three-family homes.