[Editor's Note: This analysis of the U.S. mortgage market is part of a two-story package that appears in today's issue of Money Morning. To read a related story on the outlook for adjustable-rate mortgages (ARMs), please click here.]
It doesn't have four letters, but "mortgage" has definitely been a dirty word in the financial world the past few years. That's especially true when the word "mortgage" is paired up with such other terms as "subprime," "delinquent," and "foreclosures."
Little wonder that mortgages – along with the derivative securities backed by them and the often-unseemly practices of the people pushing them – have gotten much of the blame for precipitating the economic meltdown from which the American economy is now struggling to recover.
There's still plenty of woe in the mortgage world. But in recent months there have also been some signs that the real-estate-financing markets are at least regaining some semblance of stability, with foundations being poured for a rebuilding phase that might not be too far down the road.
So far, the most promising sign of this hoped-for mortgage-market rebound has been a late-February report from the Mortgage Bankers Association (MBA), the mortgage-lending industry's leading trade group. The recently released report shows that delinquencies on existing first mortgages for residential properties with one to four living units – we're talking about roughly 44.4 million loans – declined in the 2009 fourth quarter.
The MBA's National Delinquency Survey found that late payments on these loans fell to a seasonally adjusted rate of 9.47% of all mortgage loans during the final three months of last year. That's down from 9.64% at the end of the third quarter. But it was still well above the 7.88% level from the fourth quarter in 2008, the MBA reported.
Although the decline from the third to the fourth quarter of last year was small, it still represented the first quarter-over-quarter decrease in the number of loans potentially headed for foreclosure since mid-2006. Mid-2006 was when the rate of late payments began to rise. The rate began to increase steadily until early 2007, when a massive spike in subprime-mortgage defaults caused the late-payment rates to escalate to unprecedented levels.
The ensuing collapse of housing prices – particularly in overbuilt areas like California, Nevada and Florida – and the country's subsequent plunge into recession, which pushed unemployment rates into double-digit territory, left an even-larger number of U.S. homeowners unable to meet their monthly obligations.
Peeling Back the Layers
MBA Chief Economist Jay Brinkmann said the positive nature of the figures was bolstered by a similar drop – from 3.79% to 3.63% – in the number of borrowers who had missed only one monthly payment. Brinkmann said that was significant for two reasons:
- First, this latest development counters the historical trend for the fourth quarter, when short-term mortgage delinquencies normally rise due to holiday spending, higher heating costs and other seasonal factors.
- Second, it means the rise in short-term delinquencies stopped short of the record levels set in 1985.
The drop in 30-day delinquencies is doubly important, Brinkmann added, because those late payments have historically been a leading indicator of foreclosure actions.
"With fewer new loans going bad, the pool of seriously delinquent loans and foreclosures will eventually begin to shrink," Brinkman said. "It also gives us growing confidence that the size of the problem now is about as bad as it will get."
Of course, the size of the foreclosure problem remains at record levels nationwide – and is far worse in some of the hardest-hit areas.
Across the United States, the percentage of mortgages in some stage of the foreclosure process rose to 4.58% at the end of 2009, up from 4.47% in September and 3.30% at the end of 2009. In Florida, however, 20.4% of all mortgages are either 90 days or more past due – or are already in foreclosure. Nevada is a close second: A total of 19% of its loans are either three months or more in arrears, or are now in full-blown foreclosure. Even worse, the number of subprime mortgages in foreclosure nationwide stands at 15.58%, up from 15.35% in September.
However, even in the foreclosure category, the MBA found some positive signs in the fourth quarter.
The number of loans on which new foreclosure actions were started fell to 1.20%, down from 1.42% in September and up just 12 basis points from year-end 2008. Foreclosure starts on subprime loans also decreased slightly, dropping from 3.76% in the third quarter to 3.66% in the fourth quarter.
Not everyone agreed with the MBA's somewhat upbeat view of the foreclosure numbers. A MarketWatch commentary on the delinquency report noted that a moratorium on foreclosures had been imposed by lenders and loan regulators in many areas of the country – a restriction that could be merely delaying new foreclosure actions rather than eliminating the need for them.
In his commentary, MarketWatch Assistant Managing Editor Steve Kerch noted that many mortgage lenders are already holding large inventories of foreclosed properties and might not want to add to the list until real-estate sales actually pick up from current levels.
Ineffective Assistance Programs?
Another factor at play was the Obama administration's increased emphasis late last year on its Home Affordable Modification Program (HAMP), designed to help 3 million to 4 million borrowers restructure their mortgages to avoid foreclosure. That could have helped stall new fourth-quarter-foreclosure actions and undoubtedly contributed to the improved MBA numbers, although the actual impact of the HAMP program still isn't clear.
The public-interest news organization, ProPublica, reports that only about 1.0 million homeowners have been put into the program since it started in April 2009. And only about 116,300 have received permanent loan modifications, while roughly 62,000 have already been dropped from the program for various reasons, such as failing to make their payments even after those payments were reduced.
The remainder of the 1 million participants are still in the so-called "trial period," which was supposed to last a maximum of three months. However, ProPublica says 475,000 have been in trial periods for longer than three months, and 97,000 have been stuck in loan-modification limbo for more than six months, with almost 60,000 of those having mortgages handled by Chase Home Finance, a subsidiary of JPMorgan Chase & Co. (NYSE: JPM).
The lengthy trial periods could have a negative long-term impact on troubled homeowners, since the reduced payments result in an increased balance on their mortgages, hurting the credit scores of the affected borrowers and leaving them with fewer alternatives if the modification ultimately falls through.
The low success rate and slow progress of the loan-modification programs also means that actual foreclosure rates could still spike higher, especially given the fact that very few of the people in trouble with their mortgages because of unemployment have been able to find new jobs – and more are still losing them, as evidenced by the rise in new weekly claims for jobless benefits in eight of the first 10 reporting periods in 2010.
The jobs situation also helps explain why about 275,000 homeowners in loan-modification trial periods are already delinquent on their payments, according to the U.S. Treasury Department, which monitors HAMP.
The housing market itself has been adding to the confusion with respect to mortgages. After rising nicely during the final quarter of 2009 – thanks in large part to a pair of government homebuyer tax-credit programs – sales of existing U.S. homes unexpectedly dropped in January.
The National Association of Realtors (NAR) reported that sales in the first month of 2010 fell 7.2% to an annual rate of 5.05 million units, down sharply from the predicted rate of 5.50 million homes – though that still represented an increase of 11.5% from January 2009. December sales were also revised downward slightly – from an annualized pace of 5.45 million to a projected 5.44 million units.
The impact of the waning federal tax credits on January sales was reflected in another NAR report. Purchases by first-time homebuyers using the credit – which was subjected to income limits in November – fell by 3.0% in January. The tax credits are scheduled to expire at the end of April.
By contrast, the report said January purchases by investors who were looking to take advantage of foreclosure bargains rose by 2.0% from December to January.
That surge in investor buying was particularly evident in some of the nation's harder-hit regions, such as the Las Vegas area, where the research firm MDA DataQuick reported that 43% of all January home purchases were made by investors or second-home buyers, who paid a median price of $101,000 for their homes, down from $109,836 in December and $125,000 in January 2009.
However, the impact of that buying on the Vegas mortgage market was less pronounced since MDA also told the Las Vegas Sun that a full 50% of January home purchases were all-cash deals, up from 39% in January 2009.
That situation prompted first-time homebuyer Chris Iuso – who's pre-qualified for a loan and looking to purchase a Las Vegas foreclosure property for as much as $120,000 – to complain to a Wall Street Journal reporter that, in spite of Nevada's No. 2 national ranking in mortgages in foreclosure, "there really isn't much inventory (of foreclosed houses) to chase."
Even worse, the bit of housing that is out there and available typically sells for cash on the barrel – putting it out of reach of the typical prospective homeowner. Iuso's agent, Bryan Mitchell of Re/Max Associates, told The Journal that some bank-owned homes have attracted more than 20 offers within just a few days.
Of course, one reason cash is suddenly king in severely depressed markets is that lenders remain reluctant to make new real estate loans – for a variety of reasons. Those reasons include:
- Jobless rates, which remain stubbornly high, and which are actually still climbing in such geographic areas as Las Vegas.
- Low rates on fixed-rate loans – too low, in fact, for lenders to willingly take on the uncertainty of long-term loans.
- High exposure to increasingly delinquent commercial-property/commercial-real-estate (CRE) loans, which could be the focus of the next banking crisis.
- And still-declining property values, which could put even more homeowners "under water," meaning they owe more on their loans than their houses are worth.
Still-falling average home prices were confirmed by the S&P/Case-Shiller U.S. National Home Price Index, which recorded a 2.5% decline in the fourth quarter of 2009 versus the fourth quarter of 2008. There is a bright spot, however: That's a major improvement over the annualized rates reported in the first three quarters of 2009, when there were reported price drops of 19.0%, 14.7% and 8.7%, respectively speaking.
In the nation's 20 leading metropolitan areas, which are surveyed monthly, the drop in average prices for December was 3.1%.
The One Place to Profit From the Mortgage Malaise
The continued decline in home prices was the major underlying reason the late-February report by real estate researcher FirstAmerican CoreLogic concluded that 11.3 million U.S. homeowners – nearly 25% of all residential-mortgage holders – owe more on their loans than their houses are worth. The report said that 620,000 new homeowners went under water in the fourth quarter, while another 2.3 million are living on the razor's edge – with less than 5% equity in their homes.
What does this all add up to for investors? The mortgage markets may be stabilizing, but uncertainty remains far too high to generate many outstanding profit opportunities in this harried market sector.
But there may be one exception: The mortgage insurance market.
The mortgage market remains a turbulent one. Property values remain questionable in many markets. And because of a "jobless recovery" and shaky employment outlook, even a borrower with a pristine credit score may end up in a financial jackpot with the loss of paycheck that's necessary to keep making mortgage payments. With such a dour outlook, you can bet that every lender will insist on mortgage insurance before making any new loan. That, coupled with even a modest decline in new delinquencies and foreclosures, could help out the insurers – and their stock prices.
Proof of that came late last month when Radian Group Inc. (NYSE: RDN) reported a smaller-than-expected quarterly loss – $1.12 versus a predicted $1.69 – based on a slowing in the rate of fresh delinquencies and increased liquidity to cover claims, a condition it expects to maintain through 2012.
Radian's shares rose $1.25 each, or 14.59%, to $9.83 on the news, and eclipsed the $10 level this week. Other firms in the sector – most of which will be reporting earnings in the next couple of weeks – also rose in price on Radian's coattails. Among the ones that could be worth a look, with closing prices from yesterday, are:
- The PMI Group Inc. (NYSE: PMI) – $2.80.
- MGIC Investment Corp. (NYSE: MTG) – $8.00.
- MBIA Inc. (NYSE: MBI) – $5.05.
But given all the uncertainty in the mortgage market right now, make sure to investigate these companies carefully before purchasing their shares.
News and Related Story Links:
- Money Morning News Analysis:
Epitaph For the ARM: Is the Adjustable-Rate Mortgage Finally Dead?
- Mortgage Bankers Association:
National Delinquency Survey.
- Mortgage Bankers Association:
Bio for Chief Economist Jay Brinkmann
Chase and Other Servicers Leave Many in Loan Mod Limbo; Treasury Threatens Penalties.
- U.S. Department of Housing and Urban Development:
Official Web Site.
- U.S. Census Bureau Web Site:
American Housing Survey (AHS).
Foreclosure troubles only hibernating.
- Thomson Reuters:
January existing home sales unexpectedly plunge.
- The Las Vegas Sun:
Cash deals make up half of Las Vegas home sales.
- The Wall Street Journal:
Vegas Housing Bargains Dry Up.
- Standard & Poor's:
S&P/Case-Shiller Home Price Indices.
Home sellers finally get real.
10 tips on mortgages for 2010.
- U.S. Treasury Department:
Official Web Site.
- FirstAmerican CoreLogic:
Official Web Site.
- Money Morning Special Report:
How Banks Are "Crowding Out" the U.S. Rebound.
- Money Morning Real Estate Series (Part I of II):
Will the Dark Cloud of Commercial Real Estate Blot Out the U.S. Recovery?
- Money Morning News Archive:
Jobless Recovery Stories.