More Homeowners Defaulting on Mortgages

New data shows that a rising number of homeowners nationwide are defaulting on their mortgages. Alex Chadwick talks to Marketplace's John Dimsdale about the future of new homebuilding.

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ALEX CHADWICK, host:

Back now with DAY TO DAY, and evidence today that more homeowners are not able to keep up with their mortgage payments. At the end of last month, 2.3 percent of the nation's home mortgages were delinquent. That is the highest level in three years. Joining us is John Dimsdale from MARKETPLACE. John, why are we seeing so many Americans falling behind in these mortgage payments?

JOHN DIMSDALE: Well, several things are happening here. Some homebuyers were caught short by the slowing housing market. They were thinking the value of their home would continue to rise by some of the spectacular levels that we've seen, so they overextended themselves. They took on more debt than they could afford on the assumption that they could always sell the property at a profit, pay off the loan, maybe even earn a little in the process. But that's not possible in the current environment.

But lenders are also at fault. Under the same theory that these values would keep going up, banks have been making loans with easier and easier repayment terms. There are interest-only mortgages, where you don't even start bringing down the principal for years, or adjustable-rate mortgages that start out with very favorable rates and then begin to bite with higher interest later on. There's even one loan called a negative-amortization loan, where the borrower's payments don't even cover the interest, and the unpaid interest gets folded back into the principal, so the borrower falls farther and farther behind each month.

Now, some of this new information on delinquencies comes from the Moody's research arm, Economy.com. Mark Zandi, the chief economist there, says we're seeing the fallout from the bursting of the housing-price bubble.

Mr. MARK ZANDI (Chief Economist, Economy.com): Many households, homeowners, got in thinking that the housing market would remain very strong at that these mortgages were temporary, that they'd be able to get into something more traditional and easier to manage. But now with the market turning against them and prices flat to down, it's much harder for them to do that.

CHADWICK: John, these rising mortgage delinquencies, what are the numbers historically? Are they are historically high levels here?

DIMSDALE: Not yet. The numbers are just getting back to average. They've been low for several years. But banking regulators are beginning to warn lenders to tighten up their standards, to stop making loans to buyers who are taking on more debt that they can handle. The bank examiners worry that the result could be a wave of foreclosures that will create a real drag on the economy.

CHADWICK: So this is going to mean more problems for homeowners struggling to make their payments, these higher interest rates on mortgage loans?

DIMSDALE: Absolutely. And the federal reserve could be making things worse by gradually hiking short-term interest rates over the last two years. They're in a pause right now, but they may not be done, given the inflation that they see in the economy.

Coming up later today on MARKETPLACE, we'll take a look at the economics of ethanol and whether the numbers add up.

CHADWICK: Thank you, John Dimsdale of public radio's daily business show MARKETPLACE, produced by American Public Media.

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