The U.S. Housing Market's Very Sobering News

by: Todd Sullivan

The Mortgage Bankers Association came out with their Q1 report Friday and then updated their forecast. [I was going to piece this in, but it really needs to be read in its entirety. Any bold highlights are mine]:

WASHINGTON, D.C. (May 28, 2009) — Foreclosure actions were initiated on 1.37 percent of first mortgages during the first quarter of 2009, according to the Mortgage Bankers Association. This was a 29 basis point increase over the fourth quarter of 2008 and a 36 basis point increase from one year ago. Both the level of foreclosures started and the size of the quarter over quarter increase are record highs.

According the MBA’s National Delinquency Survey, the delinquency rate for mortgage loans on one-to-four-unit residential properties was 8.22 percent on a non-seasonally adjusted basis, down 41 basis points from 8.63 percent in the fourth quarter of 2008. Delinquency rates always decline in the first quarter of the year due to a variety of seasonal factors. After accounting for these factors, the seasonally adjusted delinquency rate was 9.12 percent of all loans outstanding as of the end of the first quarter of 2009, up 124 basis points from the fourth quarter of 2008, and up 277 basis points from one year ago.

The seasonally adjusted rate is the highest in the MBA’s records going back to 1972 and the unadjusted rate is the highest recorded in the first quarter of any year back to 1972.

This means now that on every quantifiable level, this housing bust is far worse than the most recent one in the early 1990s. Read more on that and its effect here.

The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the first quarter was 3.85 percent, an increase of 55 basis points from the fourth quarter of 2008 and up 138 basis points from one year ago. Both the foreclosure inventory percentage and the quarter to quarter increase are record highs.

The combined percentage of loans in foreclosure and at least one payment past due, meaning the percentage of mortgage holders not current on their mortgages, was 12.07 percent on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey.

“The increase in the foreclosure number is sobering but not unexpected. The rate of foreclosure starts remained essentially flat for the last three quarters of 2008 and we suspected that the numbers were artificially low due to various state and local moratoria, the Fannie Mae and Freddie Mac halt on foreclosures, and various company-level moratoria,” said Jay Brinkmann, MBA’s chief economist. “Now that the guidelines of the administration’s loan modification programs are known, combined with the large number of vacant homes with past due mortgages, the pace of foreclosures has stepped up considerably.”

“In looking at these numbers, it is important to focus on what has changed as well what continue to be the key drivers of foreclosures. What has changed is the shifting of the problem somewhat away from the subprime and option ARM/Alt-A loans to the prime fixed-rate loans. The foreclosure rate on prime fixed-rate loans has doubled in the last year, and, for the first time since the rapid growth of subprime lending, prime fixed-rate loans now represent the largest share of new foreclosures. In addition, almost half of the overall increase in foreclosure starts we saw in the first quarter was due to the increase in prime fixed-rate loans. More than anything else, this points to the impact of the recession and drops in employment on mortgage defaults.

This means that the housing bust has cycled from a sub-prime to Alt-A to now an employment issue. Since we were already in the midst of the drop when the layoff began, those losing jobs had no way to sell their homes. Now even good borrowers with conforming loans are defaulting at a record rate.

“What has not changed, however, is the oversized impact of California, Florida, Arizona and Nevada in driving up the national numbers. Those states continue to account for about 46 percent of the foreclosure starts in the country, and represented 56 percent of the increase in foreclosure starts, including half of the increase in prime fixed-rate foreclosure starts.

“It is difficult to overstate the severe impact home price declines have had on mortgage performance in those four states. 10.6 percent of the mortgages in Florida are now somewhere in the process of foreclosure. In Nevada it is 7.8 percent, Arizona 5.6 percent and California 5.2 percent.

“In the first three months of this year, foreclosure actions were started on 3.4 percent of the mortgages in Nevada, 2.8 percent of the mortgages in Florida, 2.5 percent of the mortgages in Arizona and 2.2 percent of the loans in California. In comparison, the states with the highest foreclosure rates in the hard hit Midwest were Michigan and Illinois at 1.5 percent and Indiana and Ohio at 1.3 percent.

“While the national foreclosure start rate was 1.37 percent in the first quarter, in California, Florida, Nevada and Arizona it was 2.45 percent. Absent those four states, the national rate would have been 1.01 percent.

“Looking forward, it does not appear the level of mortgage defaults will begin to fall until after the employment situation begins to improve. MBA’s forecast, a view now shared by the Federal Reserve and others, is that the unemployment rate will not hit its peak until mid-2010. Since changes in mortgage performance lag changes in the level of employment, it is unlikely we will see much of an improvement until after that,” said Brinkmann.

Want more bad news? What could be worse? Well, we are actually in a trough for Alt-A and Option Arm resets as the following chart shows:

Simply put? It gets worse from here and here is already really bad...
So aside from the damage already done, rapidly rising mortgage rates and more folks losing their jobs, we have a wave of resets coming that dwarfs the first one that pushed housing off the cliff. Now, there is no way to know what percentage of those in 2010-11 set to reset have either a) already lost their job and will default before then, b) have already defaulted or c) have already converted into conforming loans.

But, we do know this, no matter how large the percentage of those set to reset that fit into a, b or c above, there is another serious body blow to the housing market waiting around the corner.

We also know that government programs designed to help have been abject failures as HOPE for Homeowners, designed to save 400k homes, has saved, ummm, 1 (that is 1...not a misprint). A Fannie Mae program, HomeSaver Advance [HSA] has seen 70% of the people it actually did help re-default. This isn't an issue we can govern our way out of, and to be honest, government meddling is making it worse. How many people held on to homes, wiping out savings in the HOPE a government program was going to bail them out? Only after it was too late did they find the program would not work for them and now not only were they losing their home, their saving was gone also.

It is the unintended consequence of government trying to artificially prop up a market.

The sad truth is this just has to play out and it will be a long and difficult process. Do not let anyone tell you any different...