The Bad News in the Latest Re-default Numbers

Written by: Steve Cook Sat, April 4, 2009

The headlines from the first joint Mortgage Metrics Report for Fourth Quarter 2008 by two of the Federal agencies that regulate banks and thrifts are a shocker.

Defaults continued to worsen in the fourth quarter, according to the survey of about two-thirds of the nation’s banks and thrifts by the Office of the Comptroller of the Currency and the Office of Thrift Supervision. Fewer than 90 percent of all the mortgages in the nation were performing on January 1, compared with 93 percent at the end of September 2008, just three months earlier.

The percentage of modified loans that are re-defaulting seems to be out of control. Re-default rates were both high and rising during the first three quarters of 2008, with loans modified in the third quarter showing the highest re-default rates—precisely when the industry’s Hope Now campaign and the government’s FHA Secure and Hope for Homeowners programs were supposed to be making a dent. Forty percent or more of modified loans are defaulting again within eight months. It’s hard to find any evidence in the statistics that we are close to figuring out a successful loan modification strategy.

Bad as those numbers are, the most frightening news is a change in the mix of loan types in default. During the fourth quarter, the biggest percentage jump was in prime mortgages, the lowest loan risk category and one that accounts for nearly two-thirds of all mortgages serviced by the reporting institutions. At the end of the fourth quarter, 2.4 percent of prime mortgages were seriously delinquent, more than double the 1.1 percent recorded at the end of March 2008.

A larger percentage of subprime and alt—A loans are in default, but the rise in prime defaults may signal a change in the prevailing causes—and solutions—to foreclosures. Sinking housing values in 2007 and 2008 spelled doom for those who hoped to finance their home with rising values. Where borrowers have jobs, ARM loans can be refinanced into conventional loans through the FHA Secure program. The Administration’s new modification program, based on FDIC’s experience with IndyMac borrowers last year, also works only if borrowers have regular employment.

Why would someone who has had a prime, conventional, fixed-rate loan for years suddenly default? Clearly, we are seeing the impact of unemployment taking its toll on housing. Unemployment has significantly worsened since the period of this study in fourth quarter. The unemployment rate is 8.5 percent today, and 13.2 million workers are out of a job. Since the recession began in December 2007, 5.1 million jobs have been lost, with almost two-thirds (3.3 million) of the decrease occurring in the last 5 months. It’s inevitable that unemployment of this magnitude will create widespread foreclosures, heavier in markets with the highest unemployment like Michigan and Ohio.

These defaults caused by unemployment are linked to job creation in the economy and will continue to worsen as the economy worsens—one more indication that the housing economy and the overall economy are closely tied, and that housing wont heal until the economy as a whole heals.

There really is nothing we can do about “good old fashioned” foreclosures short of finding employment for the borrower. In launching his loan modification program, President Obama was careful to say that it would not save every family from foreclosure. Now we know what he meant.

It’s not hard to calculate scheduled resets of mortgage loan types and forecast likely defaults. Forecasting unemployment is much more difficult. The OCC-OTS report raised the ante on uncertainty when it comes to anticipating the future flow of foreclosed properties on the market.

Share/Save

RealEstateEconomyWatch.com

The Bad News in the Latest Re-default Numbers

26 Comments For This Post

Leave a Reply

Recent Indicators

Highlights

Latest Videos