Amid record levels of home foreclosures nationwide, there are worrying signs that the foreclosure crisis could be spreading to parts of the country that had previously been relatively unscathed.
Last month, for example, RealtyTrac, a private firm that tracks foreclosure data, recorded sharp spikes in foreclosures in states like Idaho, Oregon, Utah, and Illinois, where the prolonged recession is cited as the culprit.
"These foreclosures appear to be driven by local unemployment," says Rick Sharga, a senior vice president at RealtyTrac. "For the next year, at least until unemployment settles down, you probably will see some places pop in that have not been high foreclosure rate areas."
Until recently, the bulk of foreclosures were driven by a combination of risky lending practices, including the now infamous subprime loans, and sharply plunging home values. The damage has been heavily concentrated in just four states. The so-called sand states — California, Florida, Nevada and Arizona — accounted for well over half of all foreclosures last month, according to data from RealtyTrac.
From Sidelines To Center Of Crisis
The new foreclosure hot spots are unlikely to change the raw numbers of foreclosures nationwide dramatically, in part because the scale of the problem in California and the other sand states is so massive. But the trends do mean that many states that had been on the sidelines of the foreclosure problem will suddenly be center stage.
Oregon, for example, did not have as much of a real estate boom in recent years as neighboring California, and lenders there did not offer as many of the subprime loans that have since been labeled "toxic." But Oregon did see its unemployment rate shoot up to 11.9 percent in July from 6.3 percent a year ago. And foreclosures are up a whopping 84 percent from a year ago.
"It surprised us when we went from a state with a low level of subprime lending to a state with a high level of foreclosures," says Gerry Mildner, the director of the Center for Real Estate at Portland State University. "Most of our problems have to do with unemployment rather than with toxic loans. People being caught out are first-time homebuyers without a lot of home equity, mostly in lower-income areas in north Portland and southeast Portland, and also increasingly in middle-income new suburbs."
RealtyTrac's Sharga points to several other states that have seen alarming jumps in unemployment, including Kentucky, Alabama and North and South Carolina.
Good Borrowers With Good Loans Getting Caught
In Kentucky, the jobless rate nearly doubled, from 6.5 percent in June 2008 to 11.1 percent in June 2009.
Abdon Ibarra is watching how the state's surging unemployment is leading people straight toward foreclosure. He runs the Kentucky Homeownership Protection Center, a state government initiative to counsel troubled borrowers. The average homeowner who has called him for help has an income of $33,165, but he has also counseled borrowers making more than $1 million.
"Many are good loans, 30 years with good rates," Ibarra says. "But when this thing hit, everything fell out of balance. I really feel that we haven't seen this bottom out."
Nationwide, the number of prime mortgages entering foreclosure doubled in the first three months of this year compared with the same period in 2008, overtaking subprime loans to become the largest share of new foreclosures, according to the Mortgage Bankers Association.
The effects won't be uniform statewide, of course. In North Carolina, the Charlotte area could be hit hard in the coming months.
"What's happened in the banking industry will significantly affect Charlotte, which had been lagging the rest of the country in foreclosures," says Stephen Cumbie, the executive director of the Center for Real Estate Development at the University of North Carolina's Kenan-Flagler Business School. "But the rest of the state is not as obvious a candidate."
He points to the Raleigh-Durham area, where employment has remained steadier because of its more stable health care and education sectors.
States like Kentucky and North Carolina might also still escape the worst of the foreclosure mess, in part because they never experienced the kind of runaway housing markets that fueled massive price increases in places like California and Florida. This means that home prices in Kentucky, for example, have not fallen as steeply as elsewhere, and many troubled borrowers might be able to sell their home for a high enough price to escape foreclosure.
But the effects are delayed, with foreclosures often taking more than 18 months between the first missed payment and the final repossession. "We won't know what the impact of these rises in unemployment will be until a year from now," says Sam Khater, a senior economist with First American CoreLogic, a private real estate data firm.
Hidden Backlog of Foreclosures
What worries Khater more are states where sharply rising unemployment is coupled with many homeowners who already owe more than their houses are worth. He points to states like Ohio, Georgia and Illinois. Home prices in Illinois, for example, fell 14.8 percent in June compared with a year earlier. "Their price decline has been accelerating," he says.
The actual foreclosure rates are hard to predict in part because a number of state governments, along with federal government-sponsored Fannie Mae and Freddie Mac, have instituted a range of delays and moratoriums on foreclosures.
"The government has a pretty big chokehold on the foreclosure process," says Madeline Schnapp, the director of macroeconomic research at TrimTabs Investment Research. But that also means that there is a hidden backlog of home loans in default that could end up in foreclosure.
Signs Of More Trouble Ahead
One warning sign of emerging trouble spots: when large numbers of borrowers enter foreclosure less than six months after missing their first payment — an unusually fast period that suggests a rapid economic deterioration, says Steve Berg, a managing director at Lender Processing Services, a private real estate and mortgage services firm.
His company data show that unexpected towns like St. George, Utah; Hilo, Hawaii; and Bend, Ore., had alarming levels of speedy foreclosures. "You're looking at those areas that have the fastest pace of first missed payment into foreclosure anywhere in the country," he says.
More broadly, Moody's Economy.com estimates that lenders will foreclose on 1.89 million homes in 2009, up from 1.43 million last year. Beyond that, a leading indicator of foreclosures is the delinquency rate, which tracks the percentage of borrowers who are at least 60 days behind on their mortgage payments. Some, but not all, of these homeowners could end up in foreclosure eventually. Mortgage delinquency is up 65 percent from a year ago, according to figures released Monday by TransUnion, a credit rating agency, although the rate of increase slowed slightly in recent months.
"Delinquency is growing, but we feel an increased level of confidence that things will begin to improve shortly," says F.J. Guarrera, vice president of TransUnion's financial services group. He cautions that any improvement will be gradual. "It will take some time for recovery," he says.
RealtyTrac's Sharga agrees, adding, "We don't see much improvement until 2011."