As the U.S. housing market continues to slog through a hangover from its post-millennium boom, mortgage foreclosure data released Thursday provide fresh evidence that the slow-motion unwinding of the easy-money mania is still under way.
The number of residential mortgages going into foreclosure hit a record in the first quarter of the year, with the biggest increases coming in the so-called "subprime" market of borrowers with weaker credit histories. Foreclosure rates were highest in a handful of states where home prices and sales surged during the boom, including California, Florida, Nevada and Arizona.
The rate of delinquencies, defined as borrowers who are at least 30 days behind on their payments, also rose among subprime borrowers to 15.75 percent. For all mortgages, the delinquency rate dipped a bit compared with last year's fourth quarter, but remained higher than the comparable year-ago period.
The housing industry watches these numbers closely because the delinquency rate is a bellwether for more serious problems down the road, including a default by borrowers who have gotten in over their heads. Unless those borrowers can renegotiate a new loan with more favorable terms, those defaults will likely become foreclosures. While the dip in delinquencies is a positive sign, it's too soon to say the rate has peaked, said Doug Duncan, chief economist of the Mortgage Bankers Association.
"We’re not ready to say one data point is a trend," he said. "We will probably see modest increases in delinquencies and foreclosures for the next couple of quarters."
A separate report this week by RealtyTrac reported that foreclosures for May were up 19 percent from April and up nearly 90 percent from May 2006. In Nevada, there was one foreclosure filing for every 166 households last month, nearly four times the national average and the highest rate in the country for the fifth month in a row, according to RealtyTrac.
Some lenders are working to help borrowers who got into trouble. By making concessions, like offering a new loan with a lower interest rate or shifting from an adjustable to a fixed rate, those lenders may lose a little in the short term. But they’re hoping to head off bigger losses if the loan goes to default and the borrower's home is sold in a foreclosure.
"There's no question that within the industry it's kind of all hands on deck — let's work with borrowers," said Duncan. "They are aggressively restructuring loans for people who, largely due to circumstances beyond their control, are in some difficulty."
Those circumstances include a drop in housing prices in many parts of the country, which has left some recent homebuyers holding loans that are bigger than the value of their houses. So far, the biggest problems are cropping up in the relatively small subprime market, where the riskiest lending took place.
No one can say for sure when the housing market will hit bottom. The outlook for an overall recovery depends on a variety of factors, including the overall strength of the economy and job market, the direction of future interest moves, and how well borrowers now facing delinquency can get back on their feet.
In any case, it will be some time before the dust settles on the mortgage market and any housing turnaround can be confirmed. That’s because the process of working out a delinquent loan — whether through refinancing or foreclosure — can take months to play out. For lenders and investors who bought bad loans, the process will likely extend well into next year.
“It can take 12 to 14 months for the loans to go through the foreclosure process and then be sold before a loss might be incurred (by the lender),” said Susan Barnes, head of mortgage-backed securities ratings at Standard & Poor’s.
In the meantime, hopes for a buoyant spring season have come and gone for the real estate market with little sign of recovery, especially in regions where the level of unsold new and existing homes remains at historically high levels.
"There are large inventories that will have to be worked off in certain sections of the country before we see a recovery take place," said Duncan.
Meanwhile, lenders have tightened standards for new loans, which has shut some potential buyers out of the market. Rising interest rates have also slowed demand.
“Certainly the evidence suggests that the housing recession is getting worse, not better,” said Nouriel Roubini, a former White House economist who is now an economics professor at New York University.
While the number of foreclosures hit a record, the national average masks strength and weakness in different regions of the country. Markets in California, Florida, Nevada and Arizona, which saw the biggest boom, are now feeling the most pain — and will likely take the longest to recover. Ohio, Indiana and Michigan also saw high rates of foreclosures, according to the latest figures. But nearly half the states outside those trouble spots saw a drop in new foreclosures.
So far, it doesn’t appear that the housing recession has spread to the wider U.S. economy. Though interest rates have bumped higher, they still remain fairly tame by historical standards. Inflation, as measured the by the Producer Price Index, appears to be holding steady, according to figures released Thursday. And despite the pinch of higher gasoline prices, consumer spending has shown little sign of slowing, based on retail sales figures released on Wednesday.
All of which leads some economists to believe that despite the financial hit to the millions of individual borrowers who got in over their heads, the impact on the wider U.S. economy will be limited.
“The U.S. is a massive economy with incredible productivity, and the non-housing (gross domestic product) has been growing over 3 percent in the last year,” said Brian Wesbury, chief economist at First Trust Advisors.
“We can absorb these losses. It's going to be painful, and there's still some losses to come. But it's not the kind of thing that will drag the entire economy down.”