Last week’s report that the economy lost 467,000 jobs in June and the unemployment rate climbed to 9.5 percent, the highest rate since August 1983, was not just bad news for Wall Street. It was also terrible news for the war against foreclosures.
Talk of a new “foreclosure wave” caused by incalcitrant banks slow to process REOs, the expiration of state foreclosure moratoria or the resetting of thousands more ARM loans misses the point. The real monster driving families from their homes today is not complicated nor mysterious.
With apologies for James Carville, it’s the economy, stupid.
Every quarter since the last fall, Jay Brinkman, the chief economist at the Mortgage Bankers Association, has connected the dots as the MBA’s delinquency survey-the best and most current analysis of delinquency by loan types-found that the picture was shifting as the percentage of delinquencies among subprimes declined and the percentage of delinquencies among prime loans increased.
“While much of the mortgage problem in some states continues to be overbuilding, poor underwriting and incorrect credit pricing, fundamental economic factors are becoming more important. The 30-day delinquency rate is still lower than it was in the 2001 recession, but job losses are mounting. We have not gone into past recessions with the housing market as weak as it is now so it is likely that a much higher percentage of delinquencies caused by job losses will go to foreclosure than we have seen in the past,” Brinkman said on December 5, commenting on the findings of MBA’s third quarter 2008 delinquency survey.
Three months later, things were clearer. “We will continue to see, however, a shift away from delinquencies tied to the structure and underwriting quality of loans to mortgage delinquencies caused by job and income losses,” he said in
And most recently, discussing the first quarter ’09 survey: “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. More than anything else, this points to the impact of the recession and drops in employment on mortgage defaults.”
People with a prime loan, whether fixed or ARM, met higher underwriting standards to qualify and are significantly lower risk than subprime or opt A borrowers. Yet they are clearly now the new focus for the foreclosure problem.
It’s a different picture altogether. These are people with good credit histories, often long histories of homeownership, sufficient income when they bought their homes and their loan aspplications were well-documented.
However, the real estate markets have driven borroers underwater on their loans and the economy has cost them their jobs. They are the next wave of foreclosures and the only way to save them will be economic recovery.
Take a look at how the rising percentage of prime defaults tracks monthly unemployment claims