Underwater Mortgages And Higher Delinquency Rates

In case you needed to hear more bad news about the Chicago real estate market two reports came out yesterday that continue to paint a rather grim picture of area homeowners.

46.2% Of Chicago Area Homes Are Underwater

Zillow issued their 3rd quarter home value report and it showed that nationally 28.6% of homes are worth less than their mortgages. However, for Chicago the number is 46.2%. Now you have to take this with a very large salt pellet because, as I’ve demonstrated recently, Zillow’s Zestimates are horribly inaccurate. Nevertheless, let’s assume they are directionally correct and that Chicago is worse than the nation as a whole and it’s worse than it was in previous quarters.
Zillow believes that the negative equity percentage is rising as a result of a continuing decline in home values, coupled with a slowing foreclosure rate – i.e. homeowners in negative equity are not being put out of their misery. Zillow goes on to forecast “a housing bottom in 2012, at the earliest, and third quarter data further confirms this forecast.”

National Mortgage Delinquencies Continue To Rise

Transunion reported that the rate of mortgage delinquencies (people who are more than 60 days behind in their mortgage payments) increased in the third quarter to 5.88% from 5.82% in the second quarter. Now that’s a small increase but it’s the first increase in the delinquency rate in two years. The fact that so many homeowners are underwater doesn’t help matters. There is little incentive to stay current on your mortgage when you are building no equity.
However, Tim Martin, group VP of U.S. housing in TransUnion’s financial services business unit, believes that this increase may persist in the short term but in the long term delinquencies should decline. He attributes this to tighter lending requirements, an assumed improvement in the labor market, and some evidence of home price stabilization.

0 thoughts on “Underwater Mortgages And Higher Delinquency Rates

  1. Gary, this is why I think the only way out of this mess is wholesale refinancing of existing mortgages into 10 or 15 year loans at like 1 or 1.5% interest rates or the current Fed Funds rate. By doing that, underwater homeowners would have some hope of recovering their lost equity and actually owning their homes.
    Low rates with 30 year amortizations doesn’t solve the problem of underwater homes. All it does it kick the can down the road.
    The Govt is figuring this out and supposedly the new HARP 2.0 program is going to be designed to encourage people to go to 15 year terms by making those loans more attractive by loosening up price adjustments and other ovelays. It is better to make less interest and get borrowers equity position back than to have the over hang of a potential strategic default.

  2. As someone who owns mortgage REITS, and there are many of us, this would be a disaster. The value of my investments has already declined by 10% or more as a result of this prospect. It’s a wealth transfer from investors to homeowners. It will cost investors billions.

  3. How is it any different from early payoffs from lower rates? Instead of printing money to buy more MBS, Feds should just payoff the existing loans and lend to the homeowner at X rate with 10 or 15 amortization and be done with it.

  4. Because the market has already factored in the belief that these loans won’t be paid off early and can’t be refinanced. So they have been trading accordingly and their value gets knocked down when the assumptions change. The other thing is that the inability to refinance keeps the interest rate appropriated higher on these loans because they are damn risky. In order to refinance some lender is going to have to agree to take a low rate for a 125% LTV mortgage. In reality the government will end up guaranteeing these at below market costs.
    There is never a free lunch. The basic principle is that any interference in the markets ALWAYS has unintended consequences. If you look long enough you will find them.

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