Thursday, November 19, 2009

If Juveniles Were As Delinquent as FHA Borrowers, We'd Have a Teen Crime Wave On Our Hands

(This Chart gives new meaning to California as a "Blue State". Darker shading indicates a higher level of mortgages that are 90+ days delinquent. Source: NY Fed Q2 2009.)

The weak job market has sapped homeowners of their ability to pay their mortgage. The situation is bad. Several years into the housing crisis, the US is still being roiled by record homeowner delinquencies and foreclosures. Consider these statistics:

1. "One out of every six FHA mortgages was late by at least one payment and 3.32 percent were in foreclosure, the highest for both since at least 1979"

Implication: FHA loans are backed by the US government and are subject to rigorous underwriting requirements. More than 30% of new loans being underwritten in California are FHA loans. But the bottom line is -- no job means no salary and no ability to pay a mortgage. And with many borrowers putting down as little as 3.5% (with a possible 6% seller credit), these delinquent borrowers become prime walk-away candidates. No downpayment = no equity = no downside of going into foreclosure except the collapse of one's credit score.

2. "The delinquency rate for prime fixed-rate mortgages, considered home loans with the least risk, rose to 5.8 percent and the foreclosure inventory rose to 1.95 percent, the highest since at least 1972."

Implication: Again, no job means no salary. And with many prime borrowers' nest eggs decimated by the collapse in the financial markets, no reserves means no ability to pay a mortgage once the paycheck stops. Now that prime borrowers are going into default, the whole housing spectrum, from low end to high, is under stress.

3. "The share of all types of mortgages with one or more payments overdue climbed to a record seasonally adjusted 9.64 percent in the third quarter. The foreclosure inventory increased to 4.47 percent from 4.3 percent. Both were the highest in 37 years of data."

Implication: 10% of mortgages are delinquent -- and we're in a housing 'recovery'!?! Yikes! It's impossible for recovery to take place without a wave of government-backed loan workout and forbearance programs. The "Making Home Affordable" program initiated in 2009 is a travesty and banks are doing everything in their power to avoid helping homeowners. And although the high level of foreclosed inventory presents buying opportunities, it also puts downward pricing pressure on existing homes for sale. See you at the bottom.

4. "Builders broke ground on 529,000 homes at an annual pace in October, down 11 percent from the previous month and the fewest since April’s all-time low, the Commerce Department said yesterday."

Implication: Horrendous news on the job front. In California, job losses in the construction industry have already been staggering. No building means no jobs means no recovery. Long-term, the lack of housing units in the pipeline (particularly in the multifamily - rental sector) will lead to a housing crunch after the housing crash. Look for high rental increases in major metropolitan areas (Los Angeles, especially) by the middle of the decade.

5. "The FHA’s insurance reserve ratio fell to 0.53 percent, the lowest level in history, and more steps are needed to shore up the agency that guarantees one of every five single family loans, Housing and Urban Development Secretary Shaun Donovan said Nov. 12."

Implication: The FHA will be the next federal bailout. Although Fannie Mae and Freddie Mac are close contenders.

6. The U.S. economy returned to growth in the third quarter after a yearlong contraction, the Commerce Department said in an Oct. 29 report. The world’s largest economy expanded at a 3.5 percent pace from July through September. Household purchases climbed 3.4 percent, the most in two years.

Implication: Hope. There are many, many signs that the nation is on the mend. However, during this recovery period the housing sector nationwide will be under pricing pressure as foreclosures, short sales and homeowner walk-aways shape the market.