RAY SUAREZ: The foreclosure problem is showing no signs of easing. New figures out today show they were up 30 percent last month compared to a year ago. Roughly 290,000 households received at least one foreclosure notice in February.
Andrew Jakabovics studies these matters as the associate director for housing and economics at the Center for American Progress, and he joins me now.
Andrew, why are foreclosures continuing to climb?
ANDREW JAKABOVICS, Center for American Progress: Well, I think the loans that we’re seeing going bad now are really tied to the fact that unemployment has gone up considerably. We’re now at 8.1 percent unemployment in the country as a whole.
But to the extent that foreclosures are really a lagging indicator, the numbers that we see in February really sort of show the weakness that existed in a lot of places already at the end of last year.
RAY SUAREZ: So you’re saying that this is something different? This isn’t interest rates being adjusted up or subprime mortgages blowing up in their third or fourth or fifth year, but this is just people without enough money to keep servicing their loans?
ANDREW JAKABOVICS: It’s a combination of the two. There’s certainly still subprime loans that are going bad, although we’re sort of at the tail end of some of that. And some of the option ARMs and other exotic mortgage products that are out there are starting to reset, and so some people are seeing some adjustments upwards in their monthly payments that they’re unable to make.
But a lot of people that are having trouble now are really having trouble either because they’ve lost a job. If you’re talking about a two-earner family, one of those wages may now have been gone or hours have been cut back and, again, so the take-home at the end of the day is smaller, and so people are having just a harder time making their monthly obligations.
RAY SUAREZ: But now aren’t we several months into a period where major institutions — big banks, loan servicers, lenders — were saying, no, let’s put a moratorium on, let’s help people work out their loans? Why are we still seeing these big increases?
ANDREW JAKABOVICS: So we’re looking at sort of two different sets of numbers to some degree. The 290,000 that we saw in February combines not only people who have lost their homes to foreclosure, that the banks have actually taken those properties, but also people who’ve received notice from their servicer saying that they missed last month’s payment. They’re now 30 or 60 or 90 days delinquent.
And so, even though servicers may not be proceeding with foreclosure, they’re still sending out those notices letting people know that they’re behind on their payments.
Banks vs. loan servicers
RAY SUAREZ: Aren't banks pretty reluctant to foreclose right about now? Don't they already have a lot of properties on their books that they didn't expect to?
ANDREW JAKABOVICS: So part of the problem is that it's far easier for the servicers that handle the mortgages for the large banks -- these are often subsidiaries of the big banks -- to foreclose, because the investors have a demand for their money back, basically. Try and get whatever you can out of these borrowers as long as possible, but in many cases it's far easier to simply foreclose on a property than to try and negotiate with the borrower, which is one of the things that the Obama administration's plan is attempting to rectify.
RAY SUAREZ: But to get back to that again, doesn't a bank lose a lot more money if a house goes all the way through the process to foreclosure?
ANDREW JAKABOVICS: It does. It does, particularly because of the fact that, given the glut of homes on the market today, it's hard for the bank to then sell the property to recoup its losses.
And so, while it's still easier to, in theory, make modifications which would improve the value for the investors and also keep borrowers in their homes, because of the way servicers effectively get paid, they don't see their returns if they make a modification, but they do get paid first out if they foreclose on the property.
So when the property goes into foreclosure and they sell the property, the servicers basically take their cut off the top. And so one of the things that the Obama administration's plan attempts to do is to incentivize servicers to make modifications by offering them an incentive payment to do it.
RAY SUAREZ: The list of places that are being heavily affected, the familiar names were there, the Floridas, the Arizonas, the Nevadas, the Californias, but new places like Idaho and Illinois were on the list. What do you see in that?
ANDREW JAKABOVICS: So, again, I think that really speaks to the fact that the economy is weakening nationally, that it's not simply a series of small, regional recessions, but really we're looking at 8.1 percent unemployment across the country.
There -- in November, which I think is reflective of some of the foreclosure numbers we're seeing now, there were five states plus the District of Columbia that had unemployment rates above 8 percent. As of the end of January, there were 15 states that had unemployment rates in excess of 8 percent.
And I think that's really what we're starting to see now, is that the numbers in places like Idaho and the like are really not as much reflective of bad loans that were issued in those communities but really the underlying weakness in the economy.
Minorities harder hit
RAY SUAREZ: And how is that tied in with the fact that apparently, from the numbers, minorities, black and brown homeowners are being hit harder than ever?
ANDREW JAKABOVICS: Well, I think there are two pieces to that. One is the fact that the unemployment rate in the black and Latino communities are higher than among whites. At the end of 2008, African-Americans had an unemployment rate of 11.5 percent; Hispanics had an unemployment rate of about 9 percent compared to about 6.3 percent for whites.
If you couple that with the fact that they were more likely to get high-cost loans -- a third of all African-American homeowners had high-cost loans, about 30 percent of Hispanic homeowners had high-cost loans -- couple the fact with greater risk of job loss and higher monthly payments on average anyway for the same price house, the combination can really lead to foreclosures very fast.
RAY SUAREZ: Are the ingredients there for these bad numbers to continue on later into 2009?
ANDREW JAKABOVICS: I think so, just because of the fact that unemployment is where it is now and it will take several months before they're reflected in the foreclosure numbers.
And I think that that's really why the recovery plan that's been implemented, as the money starts flowing into states, creating jobs or at least protecting jobs from future losses, that that will help people sustain their monthly payments where possible.
RAY SUAREZ: Andrew Jakabovics, thanks for joining us.
ANDREW JAKABOVICS: Thank you very much for having me.