July 17, 2009

Mortgage Markets in North Carolina Under Pressure, But Perform Better than Fifth District and National Average

Richmond, Va.

A report by the Federal Reserve Bank of Richmond found that mortgage performance in North Carolina weakened in the first quarter of 2009, but not to the same degree as in other parts of the Fifth District and the nation as a whole. However, if unemployment rates continue to rise and house price depreciation becomes more widespread, further deterioration in mortgage performance could occur, particularly in parts of the state with high shares of non-owner-occupied, interest-only, or adjustable-rate mortgages.

Research has shown that declines in house prices are generally the most important factor in mortgage delinquencies and foreclosures. In North Carolina, on average, house prices didn’t appreciate as much as they did nationwide, nor have they fallen as steeply. As a result, while the percentage of the state’s prime mortgages in foreclosure — 0.96 percent — is higher than it has been during the last 10 years, it is still below the national average and remains the lowest in the Fifth District. In addition, the subprime foreclosure rate in North Carolina of 5.81 percent is the lowest in the Fifth District and ranks 49th in the nation.

It is likely that the worsening employment picture in North Carolina has contributed to higher delinquency and foreclosure rates. The state’s unemployment rate climbed from 5.3 percent in March 2008 to 11 percent in March 2009. "The unemployment rate is often used as a proxy for negative income shocks that borrowers face," said Sonya Ravindranath Waddell, associate regional economist and one of several report authors. "These shocks can make it more difficult for borrowers to pay their mortgages."

Additionally, certain parts of the state have higher shares of non-occupant owners, especially coastal areas such as the Kill Devil Hills micropolitan statistical area and the Wilmington metropolitan statistical area. Non-owner/investor properties often have been found to have higher rates of foreclosure and delinquency than owner-occupied properties, "in part," said Waddell, "because owner-investors might not face some of the noninvestment losses associated with foreclosure that owner occupants face."

The full report provides information on the composition and performance of prime and subprime mortgage loans at the MSA level and for selected counties in North Carolina. (Subprime mortgage loans are those made to people with credit scores of 620 or below.) Visit the Richmond Fed's web site and online Foreclosure Resource Center for more information.

The Richmond Fed serves the Fifth Federal Reserve District, which includes the District of Columbia, Maryland, North Carolina, South Carolina, Virginia and most of West Virginia. As part of the nation's central bank, we're one of 12 regional Reserve Banks that work together with the Federal Reserve's Board of Governors to strengthen the economy and our communities. We manage the nation's money supply to keep inflation low and help the economy grow. We also supervise and regulate financial institutions to help safeguard our nation's financial system and protect the integrity and efficiency of our payments system.


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