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We're No. 1! Unfortunately, it's for past-due mortgages

Mississippi is at the top of a list that is troubling news for the state economy. The Magnolia State currently ranks number one in the country in the rate of mortgage payments that are past due.

In the fourth quarter of 2007, Mississippi had 11.07% of loans with installments past due, nearly double the national average of 6.31%. The next highest was Michigan with a delinquency rate of 8.97. Wyoming, North Dakota and Oregon had the lowest rates at about 3%.

Marianne Hill, senior economist for the Mississippi Institutions of Higher Learning, says delinquency rates in Mississippi are high largely for the same reason they are rising in most of the country: Borrowers in the subprime mortgage market are not able to meet the higher payments as their adjustable rates rise.

“Some lenders were greedy, and engaged in high-risk lending practices,” Hill says. “They also failed to properly inform borrowers of the costs they could expect to face down the road. More than 15% of mortgages outstanding in Mississippi are subprime, according to the Mortgage Bankers Association, and 11% of mortgage-holders in the state have at least one installment payment past due.”

Sign of a recession?

Is this more evidence of a recession in the economy? A recession refers to a decrease in economic output and employment. Hill says the housing sector is an important part of the economy, and nationally, according to many economists, the downturn in the construction and purchase of homes has led to a recession.

“This can only be confirmed after the data comes in, but there is general agreement that the data will show at least a brief recession in the first half of 2008,” Hill says. “Due to the high levels of construction activity related to Katrina, the slowdown in construction employment here still leaves us with more construction activity than before 2005. Though activity in Mississippi is slowing down, it does not yet appear that overall output has dropped, which is required to meet the definition of a recession. Employment in January was above that of January a year ago, although state tax revenues were lower and the number of building permits issued has been dropping.”

Although Mississippi had the highest delinquency rates, it didn’t have the highest foreclosure rates. The highest foreclosure rates were seen in Nevada, Florida and California. There are other states with higher rates of seriously delinquent mortgages and with a higher start rates of new foreclosures. However, Mississippi is among the top 11 in both categories.

The Mortgage Bankers Association says foreclosures are the worst in recent history with the proportion of all mortgages nationwide that fell into foreclosure increasing to a record high of 0.83% in the October-to-December quarter. That surpassed the previous high of 0.78% set in the prior quarter. And many experts are predicting the foreclosure problem will get worse before it gets better.

Considering Katrina

A two-year moratorium on home foreclosures that went into effect in the southern part of the state after Hurricane Katrina expired in October. Hill says since the fourth quarter data for 2007 appears to be based on data available at the start of the quarter, which means that the full effect of the end of the moratorium has not yet been felt.

After considering why Louisiana, which also experienced widespread damage from Hurricane Katrina, has lower delinquency rates that Mississippi, Hill has determined part of the answer is insurance. Most of those with flood damage in Louisiana were in the flood plain and most had insurance. In Mississippi, most homes flooded were outside the 100-year flood plain and most did not have flood insurance. In Louisiana, 35% of those homeowners with flood damage due to Hurricanes Katrina and Rita did not have flood insurance, but in Mississippi the figure is 70%.

“There were more than 12,000 homes in Mississippi with major or severe flood damage outside the flood plain with no flood insurance,” Hill says. “In Louisiana, the number was under 12,000, and the percent of the total with damage was of course much smaller than here.”

Mississippi Banking Commissioner John Allison says it will take a while after the lifting of the Katrina moratorium before foreclosures make it through the legal process.

“I had one commercial banker tell me because there are a lot of foreclosures out there, the attorneys who handle it are backlogged,” Allison says. “So, getting a foreclosure through the process is taking a while longer.”

Also, the Mortgage Bankers Association and RealtyTrac, the two main pollsters on foreclosure rates, rely on electronic data submitted from courthouses. Some courthouses in Mississippi aren’t yet submitting data electronically, so that could make it difficult to have the most up-to-date figures for the state.

Falling dominoes?

Allison says it is not a good sign being first in past due loans, especially if it leads to a domino effect. If more homes are foreclosed, more property goes on the market and a glut could lead to declining property values.

“It will hurt everyone when it is all said and done, whether we are number one or number 10, because devaluing of the housing market would be the determining factor there,” Allison says.

There is concern the insurance issue could be causing people to lose their homes on the Mississippi Gulf Coast. Allison says many people can’t afford the insurance to rebuild, and can’t get a mortgage financing without insurance. Insurance on a $135,000 house might cost in the range of $400 to $500 per month.

“Some of the cost of these insurance premiums close to the water on the Coast are just astronomical,” Allison says. “Even rates in Iuka have probably been affected by Katrina. It is a statewide thing. To spread out their risk, the insurance companies have had to increase the whole policy base. So, people in the central and north part of the state may also be seeing some increase in premium costs.”

Many issues in play

Another issue he thinks is at play is that with real estate values going up, some people took equity out of their house to pay off bills. Now the credit cards are maxed out again, and the homeowner can’t afford to make payments.

“It isn’t just one thing we can hang our hats on,” Allison says. “Part of it is financial literacy, managing money. There are the disaster areas. And there were people taking out subprime loans not understanding what they were getting into. There are all kinds of exotic products in the market.”

Theoretically, a decline in the value of homes might be helpful for purchasers. But while that might be a ray of hope for people who couldn’t afford a home before, there are now much stronger underwriting standards for getting a loan. And Allison points out that declining home values certainly aren’t good for the people who own the homes, and especially those who may have purchased homes at the height of the boom.

Allison is optimistic the situation will be resolved.

“Real estate is resilient,” he says. “It does bounce back. Hopefully people are in it for the long run. They will get their values back and everything should be okay.”

Contact MBJ contributing writer Becky Gillette at 4becky@cox.net.

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