Housing: The Well-To-Do Start To Default

No one was particularly surprised that the Mortgage Bankers Association’s National Delinquency Survey showed defaults reaching record levels. The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 9.24% of all loans outstanding as of the end of the second quarter of 2009, up 12 basis points from the first quarter of 2009, and up 283 basis points from one year ago.

The delinquency rate for last quarter was the highest since the association began keeping records in 1972.

What is a shock is the extent at which prime mortgages are starting to spoil. Jay Brinkmann, MBA’s Chief Economist said, “While the rate of new foreclosures started was essentially unchanged from last quarter’s record high, there was a major drop in foreclosures on subprime ARM loans.  The drop, however, was offset by increases in the foreclosure rates on the other types of loans, with prime fixed-rate loans having the biggest increase.”

The well-to-do are having trouble making their house payments which should send a shiver through the spines of executives at banks and mortgage loan firms. These companies are just beginning to recover from the subprime mortgage fiasco and are suddenly faced with a new wave of trouble.

There are probably several reasons for prime mortgages hitting a troubled patch. Unemployment has not spared the middle and upper classes. It is probably harder for someone who has lost a $100,000 job to find one quickly than it is for someone making $25,000. The universe of jobs gets smaller as people move up the compensation ladder. Added to that is the fact that prime borrowers had fairly valuable homes, at least at one point. That may have allowed them to borrow relatively significant amounts of money though home equity loans. Many of those loans are underwater, further pressuring owners.

The holders of prime mortgages have probably  joined the exodus of people who believe that their homes will never be worth as much as the banks loans that financed their purchases. That causes a certain amount of economic hopelessness which is likely to give an perverse incentive for more people to simple hand in their keys and walk away.

The rumors that the housing market is recovering are just rumors. The hard data shows that the mortgage problem is getting worse and as long as that is happening home inventories will go up and home prices will come down.

Douglas A. McIntyre