The meltdown in the subprime mortgage market has caused a shift toward more traditional mortgage instruments this year, according to a report released Wednesday.
However, the fallout from exotic and subprime loans — typically given to people with little or less-than-stellar credit history — has caused mortgage payments for many to skyrocket, according to the U.S. Mortgage Payment Index, compiled by Wharton School professor Susan Wachter. This had led to an increase in the number of foreclosures in areas where these instruments were popular, including the District and parts of Northern Virginia.
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“It’s a good sign that many Americans have heard the warning bells and flocked to more secure kinds of home financing,” Wachter said. “While it’s not all doom and gloom, there are still a number of people with bad credit stuck in expensive subprime or risky exotic and piggyback mortgages, which could result in dramatically rising payments at best and foreclosure at worst.”
“The bottom line is that the mortgage market is self-correcting — consumers are turning away from exotic loans and toward more secure options,” she said. “But for those who remain stuck with rising payments, the time to getout is now.”
Wachter found that 89 percent of borrowers with one-year adjustable-rate mortgages refinanced into more secure instruments in the first three months of the year. In addition, the number of people taking out private mortgage insurance has risen more than 55 percent, giving these borrowers protection against steep market fluctuations.
Despite the shift, fallout from the subprime market has already been seen in the region. The number of foreclosures in Washington jumped 42 percent from March to April, according to real estate surveys, with foreclosure rates rising nearly 20 percent in Maryland and Virginia.
“Things are looking even worse,” said Sharon Reuss, a spokeswoman for the Center for Responsible Lending. “They way [subprime and other exotic] loans are designed, people can’t afford to make their monthly mortgage payments.”
