(originally published on December 8, 2007)
The Mortgage Bankers Association estimated this week that a record 0.79% of mortgages entered foreclosure proceedings in the three months ended September 30, up from a previous record of 0.65% in 2Q'07 and more than double the 0.32% rate a year earlier. 5.59% of all borrowers were at least 30 days late in making their mortgage payments, just shy of the 5.68% record set in 1986. Further, a record 1.26% of borrowers were 90-plus days late, putting them at significant risk of slipping into foreclosure. Sub-prime adjustable rate mortgages had particularly ugly delinquency and foreclosure rates with the survey estimating a record high 15.6% borrowers, or nearly one in six, being seriously delinquent.
Foreclosures now have become the focal point of US politics. We had remarked in our prior WMRs that the rising foreclosure rates were likely to crystallize a major change in policy making. The reason is simple. Foreclosures – those on the brink or past the line – are a subset of a much larger cohort of trouble. A foreclosure in a street affects not only the household concerned, but depresses property values all across the street, affecting the entire neighborhood. Moreover, half the foreclosures are in the states of Florida, Texas and California. It is nearly impossible to become the President of the United States without winning at least two of these three states. With the ARM resets set to peak in May 2008, it should not come as a surprise that this topic has become the rallying point in the Presidential race.
In this context, the bail-out package announced by the Bush administration was also not completely unexpected. Under the deal, loans that originated between Jan 1 '05 and July 31 '07 (and those that reset between Jan 1 '08 and July 31 '10) qualify for the bailout, potentially bringing a much-needed respite to as many as 1.2 million sub-prime homeowners. In some cases, loan-servicing companies will agree to freeze mortgages at their low introductory 'teaser' rate for a fixed period, while in other cases, credit counselors will walk mortgage holders through refinancing processes. The deal, however, will not provide any relief to those homeowners who are behind by more than 30 days in their payment, those that have already refinanced or have been more than 60 days delinquent on more than one payment during the past year.
At its most basic level, the proposal aims to stop and reverse the domino effect of falling home prices and rising foreclosures. While the intention is laudable for sure, cherry-picking winners and losers from the rubble of the sub-prime mortgage meltdown is probably not the best way to go about it. It still remains to be seen if these attempts can indeed prevent a full-blown housing recession - an event that many believe is already underway.
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