Loan defaults increasing

Defaults on loans better than subprime have increased at a faster pace than subprime defaults, thanks to job losses and plunging home values in metro Atlanta.

“It’s clear that delinquency or mortgage distress is still rising” locally, said Sam Khater, senior economist with the national research company First American CoreLogic.

In the metro area in December, 5.9 percent of prime loans, the ones deemed least risky, were in default, Khater said. That’s up from 3.5 percent in December 2007, a 69 percent jump. By comparison, subprime defaults rose 30 percent during that time, Khater said. December data was the latest available.

Subprime, however, continues to be the late-payment leader, by far. Nearly a third of those loans, which are considered the riskiest, were at least 60 days late in the metro area. That’s about on par with the national default rate of 33.3 percent, Khater said.

Loans between prime and subprime, called “alternative-A” loans, also are defaulting at a sharply higher rate than before. “Alt-a” loans were made to special-situation borrowers considered more credit-worthy than subprime borrowers. Sometimes the loans exceeded the customary limit of 80 percent of the value of the property. The loans could take various forms, such as no-documentation or low-documentation, interest only or partial interest.

Khater said alt-A defaults in the Atlanta area rose to 15.8 percent from 9.1 percent —- a 74 percent increase. The recession is triggering defaults across all loan types, said Frank Alexander, a real estate law expert who teaches at Emory University.

“It makes no difference if you’re alt-A or prime if you’ve lost all your income because you’ve been laid off,” Alexander said. “I suspect that the majority of residential loans being foreclosed in 2009 will not be subprime loans.”

Prime and alt-A loans make up about 89 percent of metro Atlanta’s outstanding loans, Khater said.

Atlanta saw 20 months of increasing unemployment before the jobless rate fell slightly in March to 9.1 percent from 9.2 percent. Over the same period, metro home values have fallen on average 5.5 percent year to year, Khater said.

Many people with good credit who bought at the top of the market are now “upside down,” meaning they can’t refinance into cheaper loans because their homes are worth less than the amount owed on them. Those homeowners are more vulnerable to financial blows such as job loss, divorce and sickness.

“This divorce got very nasty, and that was what led to me losing my job,” recalls homeowner Michael Brown, who nearly lost his house to foreclosure. “Your life depends on your income and you making your payments and paying all your bills, and once that’s taken from you, the job market out here’s pretty hard.”

Brown spoke on a video put out by the Atlanta Federal Reserve called “Foreclosure Prevention: Hope for Georgia’s Homeowners.” He escaped foreclosure after contacting a free counseling service that helped him negotiate better terms.

The Consumer Credit Counseling Service of Greater Atlanta, which assists people across the country, is getting more calls from homeowners with interest-only loans. Callers are struggling with loan payments that adjusted higher, loss of income or unexpected expenses.

In January 2008, CCCS received fewer than 100 calls about interest-only loans. This year, the number jumped to more than 800 a month in January, February and March.

“It’s pretty striking when you see how the problem has sort of matured,” from subprime to better loans, CCCS President Suzanne Boas said.

“Unfortunately, a lot of folks used interest-only mortgages to buy more house than they could afford.”