Is The Mortgage Market Starting to Heal?

By Les Christie, staff writerFebruary 19, 2010: 11:51 AM ET

 

NEW YORK (CNNMoney.com) — The mortgage market may have begun to turn: Fewer borrowers fell behind on their payments during the last three months of 2009.

A seasonally adjusted 9.47% of all mortgage loans were late during the fourth quarter, down from 9.64% at the end of September, according to the National Delinquency Survey, which is produced by the Mortgage Bankers Association and is considered the bible of the industry.

This figure is significant because it shows a reduction — even if just slight — in the volume of loans heading toward the foreclosure process. This has not happened since 2006.

“We are likely seeing the beginning of the end of the unprecedented wave of mortgage delinquencies and foreclosures that started with the subprime defaults in early 2007, continued with the meltdown of the California and Florida housing markets due to overbuilding and the weak loan underwriting that supported that overbuilding, and culminated with a recession that saw 8.5 million people lose their jobs,” said Jay Brinkmann, the MBA’s chief economist.

Of course, delinquency rates were still 1.59% higher than they were in the last quarter of 2008.

Foreclosures: Where does your state rank?

Brinkmann’s main reason for optimism was a drop in the percentage of borrowers who had missed one mortgage payment. That rate fell quarter-over-quarter to 3.63% from 3.79%.

“The continued and sizable drop in the 30-day delinquency rate is a concrete sign that the end may be in sight,” he said. “We normally see a large spike in short-term mortgage delinquencies at the end of the year due to heating bills, Christmas expenditures and other seasonal factors.”

Another positive sign is a drop in the percentage of borrowers whose lenders had initiated foreclosures, the first step in the process of taking homes away from borrowers. That may be only temporary, though: Lenders have been holding back and the number of seriously delinquent loans not in foreclosure has ballooned.

As a result, loans 90-days late or more now account for half of all delinquencies calculated by the MBA, a record high and twice the category’s share of delinquencies two years ago.

Landlord foreclosed. Do you have to go?

“The build-up in the 90-day bucket of loans that could end up in foreclosure should keep foreclosure rates elevated,” said Brinkmann.

But the high number of borrowers in that category is also somewhat of a statistical glitch. Loans are remaining there much longer than they did in past years because of government and lender attempts at mortgage modifications.

Of all the delinquency hot spots, Florida is the worst hit with 26% of all mortgages in some kind of trouble.

The worst performing category of loans was subprime adjustable rate mortgages, with more than 42% being 90 days late or in foreclosure. That is nearly four times the rate of default during early 2007, when the mortgage meltdown was heating up.

The MBA report, according to Mike Larson, a real estate analyst for Weiss Research, is a further sign that the housing market is truly stabilizing.

“We’re now seeing the next piece of the puzzle fall into place,” he said. “Specifically, early stage delinquencies are stabilizing. This is a key sign that housing market conditions are slowly, grudgingly, getting slightly better.”

One key trend is that home price declines, a key influence on delinquency rates and, especially, on foreclosures, halted their free-fall in 2009. The average home price in 20 major markets dropped only about 5% during the 12 months ended Nov. 30, according to the S&P/Case-Shiller home price index.

As prices stabilize, fewer mortgage borrowers will plunge underwater, owing more on their mortgage balances than their homes are worth. Homeowners with positive equity in their homes have an asset they can tap during temporary financial strains and are much less likely to fall behind on their mortgages.  

Housing’s Crystal Ball

By BOB TEDESCHI  Published: February 17, 2010

HOME buyers heading into real estate’s busy spring season face a tricky question: should they buy soon, before mortgage rates increase, or wait a few months, when housing prices are finally expected to hit rock bottom?

Of course, the assumptions at the core of that question could easily fall through. But rarely in recent years have economists from the mortgage and housing industries been so closely aligned in their short-term nationwide forecasts as they seem to be now.

Economists are generally predicting that mortgage rates will begin to edge up in late March, settling at about 5.5 percent, possibly as high as 6 percent, for a 30-year fixed-rate loan. The rate today is around 5 percent. They also expect that the inventory of foreclosed homes will grow through the summer, saturating the market with cheap properties and keeping overall prices low.

“I wouldn’t rush,” said Mark Zandi, the chief economist at Moody’s Economy.com, “but if I found a house I was excited about, I wouldn’t wait. You might not be buying at the very bottom, but you’ll still get a great rate, and if you stay for more than a few years, you’ll be rewarded.”

By that time, he added, home values will have appreciated.

Two factors could push rates higher, economists say. First, the Federal Reserve is set to stop subsidizing the mortgage market sometime next month, when it exhausts the roughly $1.25 trillion earmarked for mortgage-backed securities sold by Fannie Mae and Freddie Mac. The government stepped in as a buyer during the mortgage market crisis, when most investors had rejected these securities. Economists expect investors to re-enter the market, but only if rates on the securities become more attractive.

Mortgage rates also typically move in lockstep with the long-term economic outlook. Economists generally believe that the nation is in the early stages of a slow recovery, and that as the recovery proceeds, interest rates will go up.

Mr. Zandi and Jay Brinkmann, the chief economist for the Mortgage Bankers Association in Washington, are both predicting that rates will not exceed 5.5 percent this year. If they rose beyond that level, Mr. Brinkann said, the federal government would very likely resume its subsidies rather than risk damaging the real estate market.

But Cameron Findlay, the chief economist for LendingTree.com, predicted that rates could go as high as 6 percent without any government intervention.

Mr. Findlay also studied the mortgage burden of households across the nation, as a guide to how quickly particular states could recover from the recession.

In New York state, for instance, the average mortgage payment is $1,326, or about 34 percent of the average household’s income ($47,349), Mr. Findlay said. The state’s unemployment rate is 9 percent, which is slightly lower than the national average of 9.7 percent. Mr. Findlay’s data did not separate New York City from the rest of the state.

Connecticut’s ratio of mortgage debt to income is lower, at 24 percent, and the unemployment rate is also lower, at 8.9 percent, which he says means people are generally better positioned to buy homes than in New York.

New Jersey’s mortgage debt-to-income ratio is also lower than New York’s, Mr. Findlay said, at 26 percent. But the state’s unemployment rate is 10.1 percent, he added, and that means its housing recovery will probably trail New York’s.

Mr. Zandi of Economy.com said he expected the nation’s housing prices to fall another 8 percent during 2010 and bottom out by the end of the year, 34 percent lower than they were at the market’s peak in the spring of 2006.

Housing prices will increase once foreclosures start to fall. “It will be a number of years before prices really start to rise in a normal way,” Mr. Zandi said.