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ONCE AGAIN, Foreclosures, Past-Due House Payments Increase! Will They Impact Housing Prices?


According to the latest survey from the Mortgage Bankers Association, as of the end of June, 2008, nearly one in ten homeowners were either behind in their mortgage payments, or at some stage of the foreclosure process.  The current 9.16% delinquency figure is up over 40% from June of last year, and is the highest percentage since the MBA began its mortgage delinquency research in 1969.

Some experts see the rate of foreclosures as the worst since the 1930's and the Great Depression.  The spike started two years ago, as those with sub-prime loans, issued to those with marginal credit credentials, began to default on their loans, as their adjustable interest rates increased.  Falling real estate prices in many areas of the U.S. have left many homeowners owing more on their homes than their current value on the market.

Jay Brinkman, the Chief Economist for the Mortgage Bankers Association, blames some of today's woes on the proliferation of "Option ARM Loans" a couple of years ago.  These loans, given to those with good credit and down payments, allowed home borrowers the option of paying interest only at the onset, or a portion of the principal if they can. 

Subsequent interest rate resets and the requirement of partial repayments of principal after the first or second year of the loan has caused the monthly house payments for many to jump - beyond affordability, for many.

The MBA Survey shows 5.35% of prime loans were past due or in foreclosure at the end of the Second Quarter, 2008.  The delinquency percentage for sub-prime loans was exponentially higher - roughly 30%!   At the end of last quarter, 2.75% of all loans were at some stage of foreclosure, up from 1.40% one year earlier.

Homeowners in Florida and California accounted for a staggering 39% of all loans in foreclosure - despite the fact these two states account for only 20% of all written mortgages nationally.  In both of these states, real estate speculators and home builders overestimated housing demand several years ago, and flooded the market with new homes, at high prices.  Today, the glut of homes has caused prices to tumble, and equity to slide quickly.

Lower home values make refinancing more difficult, if not impossible, for many in-distress homeowners.  For some, their reduced market value removes the incentive for them to keep up with their mortgage payments at all.

Here in Illinois, the rate of foreclosures stood just above the national average of 2.75%.   Other states above the national average foreclosure rate included Michigan, Arizona, Nevada, Ohio, Indiana, and Rhode Island.

For FHA Insured Loans, 14.87% were in foreclosure at the end of the Second Quarter, up from 14.73% one year earlier.  This percentage is expected to grow, as the percentage of borrowers using Federal Housing Authority loans is expected to skyrocket to 30% by the end of 2008.  During the housing boom, in 2006, only 1.8% of home borrowers financed using FHA loans.

The FHA has picked of the slack in home loans as many big mortgage investors have begun to stay away from loans not backed by U.S. Loan Guarantors and Investors, Fannie Mae and Freddie Mac.  These two agencies have drastically tightened their borrowing standards since the beginning of this year, and many borrowers have little option other than going the FHA route.

Housing Economist Thomas Lawler, from Leesburg VA, expects the rate of foreclosures to continue to escalate into 2009, as adjustable rates continue to reset, and home values continue to fall.  He added, however, that lenders now owning foreclosed homes are being more aggressive at dropping their asking prices for these bank-owned properties, and this may impact pricing of other, conventionally-sold property.

However, those planning for a massive drop in average home prices due to the increase in foreclosures nationally many not see that happening.  according to conclusions drawn in a National Bureau of Economics Research opinion.  (See Brian Blackstone' Real Time Economics Blog Post in Friday, September 5th's Wall Street Journal for more info, and a link to the opinion).

“Even in the face of an extreme foreclosure wave such as that experienced in 2007, our evidence indicates that foreclosure shocks have relatively small effects on U.S. house prices,” the authors, Charles Calomiris of Columbia University and Stanley Longhofer and William Miles of Wichita State University wrote.

Under their "extreme" scenario, where home foreclosures would increase 75% over current levels, the authors predict home prices would only drop about 5.5% from their current levels between the Second Quarter, 2007 and the end of next year.

See James R. Hagerty's article in Friday's Wall Street Journal for more info.  Here is a link to the Mortgage Banker's Association 2nd Quarter, 2008 findings summary.  The whole MBA Study is available for purchase via their website.


Posted: Sunday, September 07, 2008 9:51 AM by Dean's Team

Comments said:

Good Morning! Foreclosures, and homeowners past due in at least one mortgage payment, continue to increase.

# September 7, 2008 5:36 PM
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