Housing Crisis Deepens - Prime Borrowers' Roll Is Over

All I can say about the most recent housing data is YUCK.

The Mortgage Bankers Association announced Thursday that 13% of all home loans are now delinquent or in foreclosure:

WASHINGTON — More than 13% of U.S. homeowners with a mortgage are either behind on their payments or in foreclosure as the recession throws more people out of work, the Mortgage Bankers Association said Thursday.

The record numbers in the report are being driven by borrowers with traditional fixed-rate mortgages, rather than the shady subprime loans with adjustable rates that kicked off the mortgage crisis. As of June, more than 4% of borrowers were in foreclosure and about 9% had missed at least one payment.

One in three new foreclosures between April and June was from a prime, fixed-rate loan, up from one in five a year earlier. Last year, subprime adjustable-rate loans caused the largest share of foreclosures.

My Take:

There are no "green shoots" in this report. The numbers here are staggering. What's most concerning to me is the fact that prime borrowers are now starting to drop like flies. 33% of new foreclosures are prime borrowers versus only 20% a year earlier.

Folks, prime borrowers are not supposed to fail. The default rate on prime borrowers historically has always been under 1%. This is an extremely disturbing trend and it's one that bears watching.

What's most concerning here is the fact that these foreclosures were fixed rate loans. This means there was no adjustment that raised the monthly payment. What this tells you is these prime borrowers flat out COULDN'T AFFORD THE HOUSE.

It's becoming clearly evident that pretty much all of America bought homes that they couldn't afford during the housing bubble.

Most of these loans that are delinquent will eventually get foreclosed on. This will dump even more inventory into the already bloated housing market which will then put even further pressure on prices.

Housing clearly isn't anywhere near the bottom. If the prime borrowers continue to fold like tents it will have a catastrophic effect on the housing market and our economy.

Another Consumer Beatdown

The noose around the consumers' neck just got a little tighter as the banks continue to slash credit availability:

Credit card issuers slashed credit for an estimated 24 million borrowers who paid their bills on time, and a third of those consumers saw some drop in their credit scores during a six-month period, a new study says.

The study, to be released Thursday by Fair Isaac— the creator of the widely used FICO credit score — shows that 8.5 million consumers' scores fell from the end of October 2008 through April 2009 after they had their available credit reduced by an average of $5,100. These consumers had no risk triggers such as a late payment. The typical score drop was "well under 20 points," according to Fair Isaac, with about 500,000 consumers experiencing drops of 40 or more points.

The problem with this analysis, according to John Ulzheimer, president of consumer education for Credit.com, an information site, is that it "minimizes" the impact of lenders' actions on consumers. When lenders lower credit lines or close accounts, it could affect consumers' utilization ratio — which measures borrowers' debt to available credit — potentially lowering the score.

If a consumer has a credit score of 800, a drop of 20 points would still likely qualify the person for the best rate, experts say. But this same drop for consumers in lower score bands could have a significant impact on what interest rates they get, if they can even qualify for a loan.

"The fact that 8.5 million consumers have seen their scores reduced because of no fault of their own over the past six months is problematic," says Ulzheimer, "especially when you take into account that these people could have seen their limits reduced prior to the study and might see" limits cut further.

The effect of lenders' overall actions, he adds, "is going to be much more than 20 points."

My Take:

How are we supposed to spend ourselves back into prosperity without any credit?

Folks, the fact that banks are hurting your credit score even if you pay your bills on time is a big problem. Maybe we should all say the hell with it and just stop paying our bills if our credit score is going to drop regardless (sarcasm off).

You gotta wonder:

Are the banks going to have any FICO score qualified borrowers by the time they are done penalizing us for their greedy mistake of lending out too much money?

The Bottom Line

Folks, this whole thing is insane. The Fed's answer to our economic crisis was to provide the banks with liquidity so that they could lend out money and jump start the consumer.

Great idea guys. How's that working so far? Let me answer that Alex: IT'S NOT.

Because the banks are so deep in debt, all they have done is hoard the bailout money in an attempt to dig themselves out of insolvency. Meanwhile, as the pigmen sit and count their money, Rome continues to burn as the the American people increasingly suffer.

As long as the money flows into the banks instead of to the people, this economy is going to continue and tank. The numbers speak for themselves: 13% delinquency rates on mortgages, 9.4% unemployment, and 576,000 new jobless claims as of today(which was above expectations).

This country is going to see a revolution if things continue down this path.

I am amazed at how the market continues to climb the wall of worry and move higher. Pretty soon they are going to realize that this wall is as tall as the Hoover Dam. Look out below when the market comes to this conclusion.

I bought a few PUTS on SPY at the close Thursday after seeing Thursday's data. Thursday's move higher looks tired and the news just keeps getting worse.

Disclosure: Short the S&P via SPY PUTS.

Comments

[perceptions...:]

Yes, you gotta wonder, what was the plan?

And, what is plan B?

Aug 21 10:05 AM

[OptimizedPrime:]

Besides "flat out couldn't afford the house" I would also point to "strategics" being a BIG part of the next wave of foreclosures.

It makes logical sense: you have (had) good credit, bought a house on leverage, and now it's hopelessly underwater for the next decade. Why not walk away and rent the same home for half the monthly payment for the next 4-6 years while your credit recovers?


OP

Aug 21 10:45 AM

[JPSmith:]

"What this tells you is these prime borrowers flat out COULDN'T AFFORD THE HOUSE."

I would guess that many of these prime borrowers lost their jobs and haven't found new ones. If by "can afford the house" you mean "can continue to service their mortgage even if unemployed for a year or more" very few people would have homes.

Aug 21 11:51 AM

[Gregman2:]

"What this tells you is these prime borrowers flat out COULDN'T AFFORD THE HOUSE." I think this is an unnecessary conclusion. What it tells you is that contingencies can happen. It also tells you there's a serious need to reform the debt/equity structure of mortgages to allow both sides to adjust to market conditions. The notion of fixed rate debt in a fluctuation price environment is just plain dumb.

Aug 21 12:12 PM

[JM Kraus:]

What happened to the social stigma of "walking away"? As the foreclosure crisis continues to permeate every credit level, will it now be socially acceptable and financially prudent to walk away from a home (and debt obligation) just because the home will never recover the value that it once had? Four years does not seem to be a long enough credit penalty.....

Aug 21 12:24 PM

[JPDX:]

The issue seems to be that they COULD afford the house when they were working. I think it is totally reasonable to expect higher defaults across the board during a recession like this. Job losses have affected all levels of society. Naturally prime borrowers will hold out longer than subprime because they have more to lose, mainly being credit scores that have afforded them nice things over the years. The default rate is still very low and not even an issue in many regional markets.

Aug 21 12:56 PM

[The Housing...:]

JM

Many financial advisors will tell you to "walk away" if the house is way underwater.

Take your 7 year credit hit and move on. Paying back $600k over 30 years on an asset that's woirth only 200k makes zero fiscal sense.

I can see why morally one might have an issue with doing that.

Aug 21 04:12 PM

[Griz:]

I am beginning to regard home-ownership as just a business transaction. I am a smart businessman. The big company corporate executives have shown me that it is ok to default on debt, i.e. it's just business. I will soon default on my debt, it's just business.

Aug 21 04:25 PM

[cadoggy:]

How much would you pay to avoid a 'social stigma'? If it were a few hundred bucks maybe people would pay it. But paying $100,000 or more to avoid social stigma is the worst idea I've ever heard. Talk about buying something you can't afford.

People should walk away if they're so far under water. You can get an FHA loan only 3 years later with a good interest rate. Renting is the way to go for the next 3 years anyway!

Aug 21 05:35 PM

[The Housing...:]

Caddy

Great point on the FHA loan.

Thats the next bubble. Its Fannie/Freddie all over again! I believe the deliquency rate on FHA paper is 13%.

Reflating bubbles never works. When will the government learn.

Aug 21 05:40 PM