More Prime Foreclosures in Our Future

The Mortgage Bankers Association noted that a record 12%, or 1 in 8 homeowners, in the US are now behind on their payments or in foreclosure; 10.6% of the mortgages in Florida are now somewhere in the process of actual foreclosure. (My seatmate here on the flight says the prices on the condos where he lives are now back to 1998 levels. It would be scary, he said, if you had to sell. There are new developments that only have 10% actual occupancy, as the bulk of the condos were bought for speculation. Now those 10% of buyers are having to shoulder all the fees for upkeep. Nobody will buy, because the upkeep costs can be more than the mortgage. It’s a vicious cycle.)

Foreclosures are 7.8% in Nevada, 5.6% in Arizona, and 5.2% in California; 25% of subprime loans are now in foreclosure; 14% of FHA government, taxpayer-guaranteed loans and a growing 6% of all prime loans are now in foreclosure. (Note: the seasonal adjustments may overstate the actual numbers, as we’re in new territory in terms of actual foreclosures.) The MBA press release says:

"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."

How could so many prime loans be in foreclosure? These were people with good credit and jobs. The answer is the very deep and lengthy recession coupled with high and rising unemployment. The number of foreclosures won’t abate until unemployment starts to fall. And even optimistic forecasts assume unemployment will keep rising into 2010. As I’ve written for a long time, I think it’s quite likely that we’ll see unemployment rise to over 10%. When I first wrote that a few years ago, many called me just another doom-and-gloom guy. Now, many think I’m Pollyanna. Such is the life of those who believe in Muddle Through.

For those who think the end of the recession will be like all past recessions, the problems in the housing market should make for serious concern. The average homeowner with a mortgage has very little, if any, equity. There’s little room for home-equity withdrawals - if banks were lending. And recent data shows a very serious and un-American drop in credit-card borrowing. US consumers are retrenching, and global trade figures echo that.

We’re in for a slow, Muddle Through recovery, with the real potential to slip back into recession when the tax increases hit. Stay tuned.