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Ohio’s improving economy lowers mortgage problems

Better economic conditions and tighter underwriting standards in Ohio are leading to fewer problem loans, another signal of the state’s housing market recovery, Federal Reserve researchers said.

Fewer homeowners are becoming delinquent on their home loans, or 60 days or more behind on payments. And more homeowners who have already fallen behind are catching up on their on their own.

The housing market collapsed in 2007-08 after millions of homeowners found their mortgages unaffordable and their home loans defaulted and were foreclosed.

For most of 2012, more Ohio loans exited delinquency — because the borrower caught up on payments due to a successful loan modification or their finances improving, the loan was paid off, or the bank completed a repossession — than there were new loans that became delinquent, according to Federal Reserve Bank of Cleveland research.

At the end of last year, the delinquency rate was about 8 percent of active Ohio mortgages, compared to nearly 10 percent in 2009, said Lisa Nelson, senior policy analyst in community development at the Cleveland Fed.

The loan trends coincide with rising home sales and home prices throughout the area and Ohio as a whole. In February, for example, sales of existing Ohio homes rose by 10 percent and sales prices rose 8 percent on average year-over-year.

Put together with the fact that fewer homeowners are falling behind on their home loans, it shows that Ohio’s housing market is healing.

“We were seeing that more people were able to refinance and we believe that are able to pay off their loans even though they’re underwater,” Nelson said.

The housing recovery has been slow, said Francisca G.-C. Richter, community development research economist at the Cleveland Fed and Nelson’s partner on the report, which analyzed trends in Ohio’s inventory of distressed loans.

“This could be signaling that turnaround,” Richter said. “In general a better economy is going to make for a better housing market, which then in turn will make for a better economy.”

Following the housing crisis, underwriting standards have become “common sense,” said Marianne Collins, executive director of Ohio Mortgage Bankers Association.

“If you look at the things that have originated in the past three or four years, it’s really a quality book of business,” Collins said.

“If you look at those years there, say 2006, 2007, you had loans where you didn’t have to document income, assets or employment. Very low credit scores were acceptable with those types of loans. It was a recipe for disaster,” she said. “We don’t have all those exotic programs anymore.”

Over the past three years, a growing number of Ohio homeowners became current on loan payments on their own. One-third of loans that entered delinquency in the first four months of 2011 were current six months later with no modification or other change of loan terms, Nelson and Richter said.

A small percentage of distressed homeowners have successful loan modifications. Of all loans entering delinquency in the first four months of 2011 that received a modification, 7 percent were still current on payments six months later. The share of all Ohio loans modified successfully sits at 2 percent.

A modification changes terms of an existing loan including the interest rate, monthly payment, principal balance or length of the loan.

The biggest lingering concerns in the housing market are the high level of underwater homeowners and how long properties spend in distress without being resolved.

Underwater homeowners owe more on their home than it’s worth. They’re more likely for foreclosure due to a sudden job loss, illness or divorce. They also have a harder time qualifying for a loan modification or refinance to better terms.

Loans have to already be delinquent to qualify for a modification.

Federal programs have been expanded so underwater borrowers can qualify to refinance, even with negative equity. Previously, requirements were for the homeowner to have positive equity. A higher pace of refinance activity is believed to be helping lower delinquency rates, according to Nelson’s and Richter’s findings.

A refinance pays off an existing loan and issues a new loan usually at better interest rate terms.

On average more than 20 percent of Ohio homeowners were underwater in 2011 and 2012, although the levels of negative equity vary widely across the state ranging from 5 to 44 percent.

Home prices are not rising in Ohio as fast as states with stronger recoveries, which would help restore equity, Richter said.

“If they don’t have any equity in their home and they have a shock…by not making a house payment they’re not going to lose equity,” Richter said.

The other trouble spot is what happens to a property once it falls more than 60 days delinquent. The longer a loan is delinquent, the less likely that it will recover.

Of all the loans statewide that became distressed in the first six months of 2011, half of them were still delinquent a year later, the researchers said. The turnaround to complete a foreclosure is “sluggish.”

During the time it takes to process a foreclosure, properties can become vacant, attract vandalism and crime, and lose property value.

“It adds uncertainty to the housing market,” Richter said.

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