Mortgage Delinquencies on the Rise; Indicators of Future Foreclosures

Here is a quick graphic from the WSJ depicting the rise in mortgage delinquencies over the course of 1980 to the present; while an increase of 4% to 6% may seem marginal on its face, it’s still a net 50% increase in the number of mortgage delinquencies compared to the usual low.

The number doesn’t include foreclosures (running at 2% of all mortgages), people who can’t pay their ARM resets or people who are on the verge of being in trouble, so the real number with respect to home owners in trouble is undoubtedly higher. In fact, the percentage of mortgages in some sort of trouble be it delinquency, foreclosure, ARM danger or a struggling homeowner could easily top 10%.

Graphic Courtesy of the Wall St. Journal

Something that the chart doesn’t convey is the impact of each of those delinquencies on the financial sector, simply put: lenders originate loans with funds they themselves borrowed and have very high leverage ratios. As a result, the impact on the lenders from each delinquency is several times greater then what is shown on the chart, it’s not as simple as, “well this still means 94% of their loans are being paid, so things shouldn’t be that bad”.

The chart also depicts home equity with respect to total value of the home, i.e. % home equity, much has been made of this number declining as a sign of a deteriorating housing market and/or homeowner finances but I think the value of this metric has been exaggerated. % equity is a function of a multitude of variables including housing prices in general, the % of new homeowners in the market, home equity withdrawals, average down payment size, etc. % equity has been declining for decades and is more a function of the changing financial status of home owners and the types of homes they buy more than anything else. It’s a worthwhile data point to track, but I don’t think it has the relevance that many place on it due to the wide variety of factors involved.

I would argue that the key equity metric is % of homeowners under water, as it’s a much stronger indicator of whether nor not someone can refinance or may decide to walk away from their home.

When it comes to metrics that may predict future downturns in the market or are the most important on a daily basis to the average person, I think it would be more useful to track the following:

1. % of homeowners that can afford their monthly housing payments
2. % of homeowners that are under water
3. % of homeowners that face ARM resets they can’t afford
4. % of homeowners whose credit scores are either too low to qualify for a mortgage in today’s market, or in retrospect never should’ve qualified in the first place.

While monitoring equity % has value, the real issues are whether or not an individual can afford their monthly payment, truly had the financial resources to buy, have enough equity to refinance their way out of trouble and if they’re facing an unavoidable ARM reset. Declining % equity is not that big of a problem for financially stable people who can afford their homes in the first place. By focusing on the affordability issue, it’s easier to identify homeowners who are in danger of falling behind on their mortgages.

You can read the larger article the graphic comes from by clicking here.

Comments

[ponchovilla]

"The real issues are whether or not an individual can afford their monthly payment" That's where the nail meets the head. By any common sense meaning of housing affordability too many of these loans were virtually upside down at the start. Is there any data that shows how much of the closing cost above the appraised value (inflated or not) was rolled into the loan. Add moving expenses and new home start up expenses etc plus increased utility expenses and the mortgagee was likely stretched from the get go. Then add in the nasty surprise between year one to year two those incremental tax and insurance expenses...and we can anticipate the rest of the story that does not show up in the charts.