Increase in First Time Mortgage Delinquencies Could Lead to More Foreclosures

Homeownership for animals is probably not a viable way to deal with excess housing supply.

According to a report on CNN.com, the number of first time mortgage delinquencies is increasing.  3.51 percent of borrowers were 30 days delinquent in the Q210, up from 3.31 percent in Q110.  This could be the first signal that there is another wave of foreclosures on the way.

The first wave of foreclosures appears to be receding.  The delinquency rate dropped to 9.85 percent in the second quarter, down from 10.06 percent in the first quarter.  Seriously delinquent mortgages (90+ days late) fell to 9.11 percent in Q210 from 9.54 percent in Q110.  While REO property is accumulating at lenders, fewer homeowners are entering into the foreclosure process- for now.  It remains to be seen whether or not this trend will continue.

Fairly obviously, the main cause of foreclosure (and delinquency) is loss of income.  Unemployment remains high (currently U-3 unemployment is at 9.6 percent and the broader U-6 measure is at 16.7 percent).  Nothing in the current models suggests that the labor market will see significant improvements in the near future.  This month’s non-farms payroll report was not particularly encouraging.

One of the other major causes of foreclosure is when homeowners owe more on their mortgage than their home is worth (this condition is known as being underwater).  There is reason to believe that many more homeowners may be on the verge of becoming underwater.  Demand for homes has dissipated since the expiration of the first time homebuyer tax credit at the end of April.  At the same time, the supply of homes has steadily increased, to the point where we have a 12.5 month supply of excess homes (a normal market has about 6 months), a number that is increasing due to mounting REO property.  There are also estimates that a “shadow inventory” (distressed homes that are in severe danger of foreclosure) of 3 to 4 million homes may exist.  This confluence of low demand and high supply against a backdrop of unemployment means that significant downward pressure on housing prices will persist in many parts of the country.

Decreasing home values means that many homeowners will lose equity in their homes.  Those that lose enough equity to go underwater are far more likely to default on their mortgage, either intentionally or unintentionally.  If we see a large decrease in home values, we are likely to see an increasing number of foreclosures and delinquencies.  Many analysts are predicting a decline in home values of 5 to 20 percent over the next couple of years, assuming other conditions stay the same.

How would a decline in home values effect you?  Let me know in the comments section below.