Have Mortgage Delinquencies Peaked?
Posted by Larry Doyle on December 8, 2009 9:43 AM |
This past May, I designated mortgage delinquencies as “The Most Critical Economic Statistic.” I wrote then and continue to believe now:
Which economic statistic is the most important? Unemployment? Housing starts? Trade deficit? Inflation? Retail sales?
Well, they are all important . . . but as I review the many statistics, the economic data that I believe most significant are loan delinquencies.
While assorted analysts and economists have called the bottom in housing numerous times, rest assured a true bottom will not be established until we see a meaningful decline in mortgage delinquencies. Why? There is a strong correlation between delinquencies, defaults, and foreclosures. Until delinquencies decline, the supply of homes coming onto the market through the foreclosure process will not abate.
While analysts and economists have been wrong in their calls to this point, I keep my eyes and ears open when another entity calls a peak in the rate of delinquencies. I witnessed another one again this morning. The Financial Times reports, U.S. Mortgage Delinquencies to Fall in 2010:
The proportion of US borrowers who have slipped behind on mortgage payments will fall in 2010 for the first time since the financial turmoil began in a sign that the nation’s housing crisis is abating, the credit bureau TransUnion forecasts on Tuesday.
The expected dip in mortgage delinquencies from current peaks will be welcomed by banks, which have lost billions of dollars on soured loans, and Barack Obama’s administration, which has spent funds and political capital trying to stabilise the housing market.
After studying 27m consumer records, TransUnion predicts that the rate of mortgage delinquencies – the ratio of borrowers who are 60 or more days behind on payments – will peak in early 2010 before falling towards the end of the year.
In the third quarter of 2009, delinquencies hit 6.25 per cent of mortgages – about three times the historical norm. They are estimated to reach 6.56 per cent at the end of this year, and then settle at 6.39 per cent in 2010, the Chicago-based group forecasts, as unemployment falls, house prices rise and subprime loans are renegotiated or expire.
While I would welcome the news of delinquencies declining, I question the premises on which TransUnion makes this prediction. Will unemployment fall? This is not a given. Will home prices rise? This is also not a given. Subprime loans may be renegotiated or expire, but I would encourage TransUnion to review the negative dynamics at work in the prime and Jumbo mortgage space.
Additionally, TransUnion seems to believe that delinquencies are a result of changes in house prices. I would maintain that delinquencies are more the cause of changes in house prices and less the effect.
TransUnion does hedge its prediction somewhat. How so? As the FT reports:
TransUnion expects five states, including Florida, California and New York, to buck the national trend and experience a rise in delinquencies next year.
In addition to the actual level of delinquencies, I also want to highlight that Uncle Sam is attempting to ‘game’ the foreclosure statistics by promoting short sales. I highlighted this point in writing, “Uncle Sam’s New Mousetrap to Stem Foreclosures.”
I do hope delinquencies peak and housing stabilizes. However, I remain in the “show me” camp. Housing prices ran up over a ten year time frame. I am not ready to call a bottom just yet.