Mortgage Picture Brightens, for Now



Original Post Date: August 27, 2010

By: Nick Timiraos

The number of U.S. households that missed consecutive mortgage payments or were in foreclosure fell more in the second quarter than anytime since the mortgage crisis began four years ago, a survey found.  But the data, released Thursday by the Mortgage Bankers Association, showed the crisis is far from ending. One worrisome sign: The number of newly distressed borrowers increased, raising the prospect that foreclosures and delinquencies could resume their rise.

Overall, some 14.4% of borrowers had missed at least one payment or were in foreclosure at the end of June. That was down from 14.7% at the end of March, but up from 13.5% a year ago. The improvement came because fewer borrowers fell 60 days or more delinquent on their mortgages. The number of households that had missed just one payment increased.  “We’re past some of the worst problems,” said Jay Brinkmann, chief economist of the Mortgage Bankers Association. But with more than seven million homeowners behind on payments or in foreclosure, he said, “The bar for good news is being set very low.”

The improvement was seen in almost every state, with the biggest declines coming in those that have been hardest hit by foreclosures: Arizona, Nevada and Florida.  The news that the share of borrowers that have missed one payment rose—after falling for two straight quarters—reflected the difficulty some borrowers are having making payments on modified mortgages. It also came during a period when unemployment-insurance claims increased.

The rise in newly delinquent mortgages was the sharpest among borrowers with loans backed by the Federal Housing Administration.  While the mortgage crisis was driven at first by adjustable-rate mortgages that reset to higher payments, the majority of deteriorating loans are now being driven by unemployment. Ultimately, the economy will need to create more jobs to pull the housing sector out of its yearslong slump.  “It takes a paycheck to make a mortgage payment, and that is key at this point,” said Mr. Brinkmann.

Over the past year, policy makers have taken aggressive steps to stabilize housing markets by offering tax credits to spur sales and by backstopping loans with low down payments through the FHA. At the same time, mortgage rates have fallen to historic lows. The average rate on a 30-year, fixed-rate loan fell to 4.36% for the week ending Thursday, according to a survey from Freddie Mac.

But the housing market is facing a new round of pain. Sales plunged in July after tax credits expired and as new concerns mounted about the strength of the economy.  That could lead to lower prices, which would exacerbate one of the biggest problems facing the market: the elevated level of homeowners who are “underwater,” or owe more than their homes are worth.

A separate report Thursday showed that nearly 11 million homeowners were underwater in the second quarter, down slightly from 11.2 million in the prior quarter, according to CoreLogic, a mortgage-analytics firm. The decline came largely as more underwater homeowners went through foreclosure.

Even if the economy improves and the pool of delinquent loans begins to shrink for good, housing markets will have to absorb some share of the 4.5 million loans that are seriously delinquent or in foreclosure.  “The problem is going to move to a resolution phase where you’ve got to work through the foreclosures, and eventually it impacts the real-estate market,” said Herb Blecher, senior vice president of LPS Applied Analytics, a research firm.

Already, there are signs foreclosures could soon be on the rise. Newly initiated foreclosures increased 25% in July to a six-month high, according to a coming report from LPS. The uptick comes as more homeowners who have been in a “trial” loan modification have failed to receive permanent modifications under the government’s Home Affordable Modification Program, or HAMP.

Foreclosure time lines have grown longer as banks pursue modifications and other workouts on a glut of loans. At the end of July, the average borrower in foreclosure hadn’t made any payments for more than 15 months, according to the LPS report.  Meanwhile, the Obama administration, faced with disappointing results from HAMP, is focusing its latest efforts on unemployed homeowners who are at risk of foreclosure.