Last week, the Mortgage Bankers Association (MBA) released its quarterly statistics for delinquency and foreclosure. Depending on one’s interpretation, the stats show both a stabilizing in the housing market and the possibility for a further drop in prices. Overall, an estimated 13.5% of mortgages are either delinquent (at least 30 days late) or are in foreclosure. While the fact that nearly one out of every seven borrowers are in trouble would seem to be cause for concern, this rate has actually fallen steadily over the last two years. Meanwhile, “Loans one payment past due were at 8.22%, down considerably from the 9.13% mark at the end of the third quarter and the lowest rate since the end of 2007.” Finally, 6.4% of loans are more than 60 days late, and only 3.6% exceed 90 days past due. The drop in borrowers that were 30 days past due can probably be attributed to a strengthening of the labor market. As employment rises (albeit gradually), fewer borrowers are likely to miss a payment. In addition, the steep drop-off in delinquency rates between one missed payment and two or three or more lends credence to the oft-held belief that the majority of late borrowers will ultimately resolve their financial difficulties and resume making payments. (This is due at least in part to the 2 million loan modifications that have been granted over the last few years). Even if you put a positive spin on these declines, the stats nonetheless indicated several negative developments. First, a nationwide drop in delinquency rates concealed the fact that the number of borrowers past due actually increased in 33 states, and remains above 10% in a handful of cases. This reinforces the notion that the nationwide housing crisis remains a series of interconnected regional crises. Second, “The percentage of loans in foreclosure inventory hit an all-time high.” Moreover, the majority of 90-days past due mortgages will ultimately result in foreclosure, but it can often take 1-2 years to complete. This slowdown in the foreclosure process, combined with banks’ inability/unwillingness to write down losses on foreclosed properties, suggests that the shadow inventory (currently estimated at 4.5 million properties) will expand further. Whether this facet of the housing picture improves or worsens depends largely on housing prices. Unfortunately, whether housing prices improve or decline depends on no small part on solving the twin problems of mortgage delinquency and the shadow inventory. Basically, these trends tend to reinforce each other, such that foreclosure causes home prices to drop, while an exogenous rise in home prices would certainly promote timely repayment of mortgage obligations. As I wrote in my latest update on the housing market, however, I think that a handful of factors continue to conspire against prices. If I’m right, lower prices will only spur more default/foreclosure, which will in turn drive prices even lower. Only when the market hits bottom – which may not be until 2012 in some markets and even later for others – will both delinquency rates and prices improve in tandem.
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