High-risk mortgages are growing concern
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By BRUCE EDWARDS Staff Writer - Published: March 11, 2007
Mortgage delinquencies and foreclosures in Vermont remain below the national average. But when it comes to homeowners with sub-prime mortgages, the state has a higher percentage of homes in foreclosure, according to the Mortgage Bankers Association.
At the end of the third quarter, 4.33 percent of the 5,100 sub-prime mortgages in Vermont were in foreclosure, higher than the national average of 3.86 percent and higher than the New England average of 3.95 percent, the Washington-based industry group said in its December report.
Sub-prime mortgages, which have gained in popularity in recent years during the housing boom, are loans made available to higher-risk borrowers and come with a higher interest rate.
Concerned about a jump in defaults on sub-prime mortgages, the Federal Reserve Board this month issued an advisory to lending institutions to exercise caution in making risky loans.
The state Banking Division picked up on the problem last year, issuing its own guidance to lenders.
"The Vermont Department of Banking, Insurance, Securities and Health Care Administration expects providers to effectively assess and manage the risks associated with nontraditional mortgage loan products," the department stated in its November release.
According to the Banking Division, there are approximately 600 non-bank mortgage lenders in the state and a number of them specialize in sub-prime loans.
"We were concerned all along that they were lending to people who were on the edge to begin with and any change in the economy, jobs, at a time when interest rates might go up slightly (would have) an impact on the borrowers," Deputy Commissioner Thomas Candon said.
Candon added that given the state's overall lower delinquency rate, the spike in sub-prime foreclosures during the third quarter may be an anomaly.
The head of the Vermont Mortgage Bankers Association said that Vermont banks refrain from sub-prime mortgage lending.
"Those kinds of products are probably distributed through alternate (lending) channels rather than your traditional banks," said Diane Smith, executive director of the Vermont Mortgage Bankers Association.
Chittenden Bank, the largest bank headquartered in the state, does not make sub-prime loans.
"We don't engage in that type of lending," said Chittenden Bank President John Kelly.
Kelly said the bank's "credit quality is one of our great strengths." He added the bank has very few problem loans.
At the Vermont Housing Finance Agency, an organization that issues low-interest loans to many first-time homebuyers, the foreclosure rate is less than 1 percent, VHFA spokesman John Fairbanks said in an e-mail.
Candon said three sub-prime mortgage lenders ran into financial trouble and no longer do business in Vermont. Mortgage Lenders Network and ResMae Mortgage filed Chapter 11 bankruptcy while Ownit Mortgage Solutions simply went out of business.
The Mortgage Bankers Association reported in December that foreclosures and delinquencies were up nationwide over the third quarter of 2005.
Including prime and sub-prime mortgages, Vermont's overall mortgage foreclosure rate was 0.73 percent at the end of the third quarter, up over the second quarter, but well below the national average of 1.05 percent and below the New England average of 0.81 percent. Total number of mortgages serviced in the state at the end of the third quarter was 56,382.
Delinquencies in Vermont were also below the national and regional averages.
A the end of the third quarter, total delinquencies in the state stood at 2.89 percent, an increase over the second quarter, but again below the national average of 4.84 percent and the regional average of 3.97 percent.
A payment is considered delinquent if its 30 days or more overdue.
While Vermont's sub-prime foreclosure rate was above the national average, the state's delinquency rate for sub-prime loans at the end of the third quarter was 10.08 percent, below the national average of 12.95 percent and the New England average of 12.86 percent.
Despite a spike in sub-prime foreclosures in the state, Candon was please with the state's overall foreclosure and delinquency rates.
"Vermont borrowers have a reputation of making their mortgage payments," he said.
What's required, he said, is tighter lending practices by sub-prime lenders "to make sure the borrowers … have the ability to repay the loans."
If the Fed's mortgage lending guidelines are adopted and followed by lenders, the mortgage industry believes the result would likely be fewer borrowers qualifying for sub-prime loans.
John Robbins, chairman of the Mortgage Bankers Association, said the group was concerned that the guidelines "may restrict credit to many consumers in high-cost areas and deny credit to many deserving low-income, minority and first-time home buyers."
Fed Chairman Ben Bernanke has said the central bank is concerned about the rise in delinquencies. Several financial firms that specialize in sub-prime mortgages have seen shares plummet in recent weeks, roiling the industry sector. The problems in the sub-prime market were seen as a factor in the recent stock market downturn.
The Associated Press contributed to this story.
Contact Bruce Edwards at bruce.edwards@rutlandherald.com.
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