Prime Mortgages Going Sour

At the end of the second quarter, 4.3% of all residential mortgages were in some part of the foreclosure process, up from 3.85% at the end of the first quarter and 2.75% a year ago. In addition, on a seasonally adjusted basis, 9.24% of all mortgages were delinquent (behind by at least one payment), up from 9.12% at the end of March, and just 6.41% at the end of June 2008.

Both were records since the Mortgage Bankers Association (MBA) started keeping track back in 1972. On a non-seasonally-adjusted basis, the delinquency rate was not quite as bad at 8.86%, but still a record.

That means that 13.16% of all residential mortgages (NSA basis) are in trouble. With about 51 million houses with mortgages in the country, that means 6.71 million bad mortgages out there. With the number of people out of work still rising, the problem is likely to continue to get worse for quite a while.

The chief economist for the MBA expects that foreclosures will not peak until the end of 2010. I suspect he might be a little bit on the optimistic side, but that projection is reasonable. If someone is also in a house where the value of the house is less than the amount of the mortgage, the probability that they will continue to pay the mortgage falls rapidly.

If they are also out of work while they are underwater, then continuing to pay their mortgage is simply not an economically rational thing to do. Far better to simply live rent- and mortgage-free until the sheriff shows up at the door. Given the overwhelming case-load, that can often be well over a year (though it varies greatly by location).

Once upon a time, people liked to think that the mortgage problems were contained to the subprime market. It was just a problem of irresponsible people on the wrong side of the tracks. That is clearly no longer the case.

While as a percentage, subprime mortgages are still much more likely to be delinquent or in foreclosure than are prime mortgages, there are far fewer subprime mortgages than prime mortgages. In absolute numbers, there are far more bad prime mortgages than bad subprime mortgages.

The graph below (from http://www.calculatedriskblog.com/) shows just how bad the loans are going sour on the people who had good credit when they took out the mortgages.

The percentage of prime loans in foreclosure jumped to 3.00% at the end of the second quarter vs. 2.49% at the end of March. The percentage delinquent rose to 6.41% from 6.06% at the end of March.

On a percentage basis, subprime loans continue to be an absolute horror show. At the end of the quarter more than one in four (25.35%) subprime loans were delinquent (up from 24.95% at the end of the first quarter) and 15.05% were somewhere in the foreclosure process, up from 14.34% the quarter before.

Thus, the combined troubled mortgage rate is now over 40% on subprime loans.