|Volume 8, Issue 2, 2008||Federal Reserve Bank of Dallas|
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Residential Foreclosures in Texas Depart from National Trends
Since 2005, mortgage delinquencies and foreclosures across the U.S. have escalated from historically low levels. They may continue to rise if the mortgage industry turmoil continues and economic growth slows.
In Texas, the number of foreclosures has been among the highest in the nation. However, Texas has the second-largest population among the 50 states and a large number of home mortgages. Its foreclosure rate as a percentage of total mortgages has not ranked high. It did surpass the national level in 2003 but then fell below it in 2007 (Figure 1).
Despite foreclosure problems in Texas, the housing downturn has not been as severe as in other parts of the country. Texas' housing market has been more resilient because of stable real estate prices (Figure 2) and the state's strong economy. Broad-based job growth, a relatively low cost of living and affordable housing have attracted a large population of migrants to Texas. Texas tops all states since 2000 in the addition of number of residents. This trend has driven Texas' housing demand, which contributes to stable housing prices even during market slowdowns.
Housing costs in Texas are lower than the national average. According to 2006 American Community Survey, the median home value was approximately $114,000 (in 2006 dollars) in Texas versus $185,200 in the U.S., ranking 42nd among the 50 states. However, housing costs other than mortgages, such as property taxes and utilities, can be as substantial in Texas as elsewhere in the country. The median monthly owner cost with a mortgage was $1,309 in Texas, ranking 24th among the 50 states.
A Closer Look at Subprime Mortgages in Texas
A major contributing factor to the increase in foreclosures has been the expansion of the originations of subprime mortgages—the nontraditional mortgages that extend credit at higher prices to borrowers whose mortgage applications may have been denied in the past because of poor credit or lack of a down payment. These mortgages have financially overburdened some high-risk borrowers, leading to delinquency and foreclosure. Figure 3 compares the percentages of "seriously delinquent mortgages" by loan type in Texas. Similar to the national trend, the performance of subprime loans—and particularly those with adjustable rates—has deteriorated much more than that of prime loans.
Figure 4 shows the dramatic increase in subprime loans as a percentage of total outstanding mortgages in Texas and the U.S. beginning in 2003. Texas has been trending with the U.S. and was recently only slightly higher.
Based on the LoanPerformance aggregate reports compiled by the Federal Reserve Board, Texas had 202,562 securitized, owner-occupied subprime mortgages in April 2008, ranking third highest among the 50 states, behind California and Florida (Table 1). Among these loans, 14,364 (7.1 percent) were in foreclosure process or were real estate-owned (REO) properties, which put Texas seventh in number but 48th in percentage among the 50 states.
Texas' share of securitized, owner-occupied subprime mortgages per thousand housing units ranked 16th among the states. Texas' non-owner-occupied subprime mortgages (borrowers are investors or second-home owners) as a share of total securitized subprime mortgages was about 8.6 percent, which ranked 25th among the states.
The LoanPerformance reports for the first four months of 2008 show change in the inventory of securitized subprime loans (Figure 5). On average, loans in the April report were originated 36 months ago. The inventory has been shrinking because there are no new securitized subprime loans in 2008. Approximately 10 percent of the loans were originated in 2007, 31 percent in 2006 and 58 percent in 2005 or before.
Among all securitized, owner-occupied subprime mortgages in Texas in the April 2008 LoanPerformance report, the average FICO score of borrowers was 606, which ranked 38th among the states. The average loan balance was $98,461, which ranked 41st highest. The percentage of owner-occupied subprime loans with full documentation was 70 percent and ranked 35th.
According to the April report, 41 percent of the owner-occupied subprime mortgages were cash-out refinances, 46 percent were home purchases (slightly declined from 47 percent in February and March) and 12 percent were for other purposes.
Seventy-one percent of these loans were current, 10 percent were 30 to 59 days past due, 4 percent were 60 to 89 days past due, 7 percent were over 90 days past due, 4 percent were in foreclosure, and 3 percent were REO properties. The percentage of seriously delinquent loans, which includes those over 90 days past due, foreclosures and REOs, was 14 percent, which ranked 41st highest among the states. The distribution of loan performance has not changed much since the beginning of 2008. Figure 6 displays the numbers of delinquent loans from January to April.
Among Texas' securitized, owner-occupied subprime mortgages in the April LoanPerformance report, 46 percent were variable rate loans and only 2 percent were interest-only or negative-amortized loans. Both rates were the lowest among the states. Of the variable rate loans in April, 57 percent were already reset, 18 percent were scheduled to be reset by October 2008, 16 percent by April 2009, 7 percent by April 2010 and 3 percent after April 2010. The reset schedule for the LoanPerformance inventories from January to April of 2008 is displayed in Figure 7.
The average initial interest rate of variable rate loans was 8.6 percent, average margin was 6.2 percent, and average current rate was 9.7 percent, 0.7 percentage point higher than the average initial interest rate of all securitized, owner-occupied subprime mortgages. The high initial interest rate of these loans and the small difference between the average current rate and initial rate suggest that resets may not be the main reason for the increase of foreclosures in recent months.
The LoanPerformance database contains both subprime loans and higher-balance loans made to borrowers who might have past credit problems—but not severe enough to drop them into subprime territory—or who, for some reason (such as a desire not to document income), chose not to obtain a prime mortgage. The latter category is marketed as Alt-A securities.
In the April 2008 LoanPerformance report, Texas had 46,239 securitized, owner-occupied Alt-A mortgages and ranked eighth highest among the 50 states. Texas' non-owner-occupied Alt-A mortgages as a share of total securitized Alt-A mortgages was about 41 percent, ranking fourth highest among the states, much higher than the share of non-owner-occupied subprime loans in total subprime loans (8.6 percent).
Among all the securitized, owner-occupied Alt-A loans, 19 percent are variable rate loans, and 17 percent are interest-only or negativeamortized loans, both ranked 47th among the states. The average FICO score of borrowers was 705, which ranked 16th among the states. Only 3 percent of the Alt-A loans were over 90 days past due or in foreclosure or REOs; Texas has been one of the best-performing states in terms of the share of these problematic Alt-A loans.
About the Author
Wenhua Di is a community affairs economist at the Federal Reserve Bank of Dallas.
e-Perspectives, Volume 8, Issue 2, 2008