Realty Check

Inside Today's MBA Foreclosure Report

The headline in today's big Q2 Delinquency Survey from the Mortgage Bankers Association is that the face of foreclosure is changing from subprime to prime.  Deep in the many many many charts that the MBA included in the "press packet" was the Q109 to Q209 Change in Foreclosure Starts Rate for prime fixed.  In the top twenty ten states that showed the biggest increases, only one of the "usual suspects" (CA, FL, AZ, NV) reared it's ugly head:  Nevada.

The state with the biggest jump was actually Washington (state, not DC).  Maryland, North Carolina, New York, Idaho, and Hawaii were all in the top ten.  Job losses are clearly to blame for the foreclosures in these states, but price declines have served to exacerbate the problem.

"Prices are so low now that if you’re hit with an unemployment event, you have no choice but the foreclosure," says Susan Wachter of the Wharton Business School.  Whereas in previous recessions, borrowers hit with job losses could simply chose to sell, today so many borrowers are underwater on their loans that selling is not feasible.

A new report from First American Core Logic shows nearly one third of all mortgages or 32.3 percent are now underwater...that's 15.2 million loans.  Believe it or not, that's actually slightly better than the 32.5 percent we saw at the end of March, and that's thanks to home prices falling less steeply.  The good news is that negative equity is heavily skewed to three states, which account for half of all the negative equity in the U.S.:  Florida, Arizona and Nevada.  More than half of all borrowers in each state are underwater.

So where do today's numbers lead us?  Some skeptics out there think that the Mortgage Bankers are focusing on job losses in this report, so as to shift the blame from the faulty loan products that so many of their constituents invented.  Knowing the number crunchers at the MBA for a few years now, I don't really buy that argument, especially since it's pretty much already out there that bad mortgages and bad mortgage lending brought down the world's largest economy.

That said, while prime fixed rate loans did show the biggest increase in delinquencies, they are still comparatively small compared to subprime.  Prime fixed rates make up 65.5 percent of all US loans outstanding, but only 32.4% of all new foreclosures.  Subprime fixed make up 6.3 percent of all loans, but 13 percent of new foreclosures.

The numbers today clearly show that we are not finished working our way through the faulty loan products, and on top of that, job losses are pushing the numbers beyond the subprime fallout.  However you slice it, it's not getting any better, and anyone who thinks all those foreclosures aren't going to continue to put pressure on supposedly recovering home prices, is living in la la land, not in the U.S. housing market.