Mortgage market branches out as foreclosures rise

2/14/2014 2:46:47 PM

According to a recent report from RealtyTrac, foreclosure activity increased in some regions in the U.S. during the first month of 2014. The U.S. Foreclosure Market Report revealed that there were 124,419 foreclosure filings, including repossessed homes, default notices and scheduled auctions.

The number of foreclosure filings declined for the 40th consecutive month in January, but was 8 percent higher than December's figure. From a year ago, foreclosure filings were down 18 percent, the smallest annual decline since September 2012.

The new RealtyTrac report that there is still work to be done in the housing market recovery, though conditions have significantly improved since the housing bubble burst.

"The monthly increase in January foreclosure activity was somewhat expected after a holiday lull, but the sharp annual increases in some states shows that many states are not completely out of the woods when it comes to cleaning up the wreckage of the housing bust," said RealtyTrac Vice President Daren Blomquist.

Mortgage requirements loosen
As more homes headed to foreclosure in January, CNBC reported that subprime mortgages - which were largely the cause of the housing crisis - have reemerged in the mortgage market. Since the recession, lenders have tightened their credit requirement in order to make only the safest home loans, but looser standards may soon be reintroduced.

Lower credit standards could temporarily boost housing demand from those who were most affected by the housing bust or have previously gone through a foreclosure or short sale. However, subprime mortgages carry much more risk for both borrowers and lenders. To offset the risk of borrowers with low credit scores, lenders are requiring larger down payments.

Since the enactment of the Dodd-Frank legislation, if a borrower defaults on their home loan after being approved for a subprime mortgage, they can sue the lender and make the claim that the loan should have never been given in the first place. As a result, banks and lenders have stated they will begin to crack down on their loan requirements. However, it appears that certain lenders have begun targeting less qualified borrowers. According to CNBC, Wells Fargo now has a credit requirement of 600, while the previous limit was 640.

The introduction of lower standards may come as a result of rising mortgage rates. Although interest is currently hovering around levels last seen November, mortgage rates are expected to rise above 5 percent later in 2014 as a result of the Federal Reserve's fiscal policy. The rise in rates could deter some potential homebuyers from applying for a mortgage, so lenders are branching out.

While some lenders continue to offer subprime mortgages, there are still far fewer than were approved before the recession. Mark Fleming, chief economist at CoreLogic, told CNBC that the number of subprime mortgages completed in October accounted for just 0.3 percent of all new mortgages. By comparison, in February 2004, the annual average of subprime mortgages reached 29 percent.

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