Mortgage Delinquency

If you look at the mortgage delinquency rate, I think it is very difficult to expect an economic recovery in 2010. This is from an AP article posted in the Houston Chronicle this morning.

More than 14 percent of American homeowners with a mortgage were either behind on their payments or in foreclosure at the end of September, a record-high for the ninth straight quarter and a problem that could threaten the economic recovery.

So picture a room of 50 mortgagors. 7 people in the room are either in payment default or are so far behind that the bank holding the loan has exercised the remedy of foreclosure.

The record-high foreclosure numbers are being driven by borrowers with traditional fixed-rate mortgages, rather than the shady subprime loans with adjustable rates that kicked off the mortgage crisis.

Prime traditional fixed-rate mortgages are now a larger problem than the subprime loans. The subprime loans could potentially be worked out into a long term fixed rate loan giving room to reduce the monthly payment. But in the case of a fixed-rate loan, there isn’t much that can be done. These mortgagors simply cannot afford their houses.

Loans backed by the Federal Housing Administration also show increasing signs of trouble. More than 18 percent of FHA borrowers are at least one payment behind or in foreclosure.

I wrote about the FHA last week. If you take a room of 50 people with FHA loans, 9 people in the room would be in payment default on their loans. Trader Mark at Fund My Mutual Fund also has some good posts about the problem with incentives that provide homeowners upside benefits without downside risk.

People know about the housing crisis. But I don’t think they realize how bad it actually is. How is there going to be an economic recovery when 14-18% of all mortgagors are in default. If you can’t afford your home, it means you have no discretionary income. You’re concentrating on putting food on your table.

Now picture that same group of 50 people. We know that 7-9 of them have absolutely no money to spend. How many others are barely making ends meet? I think we can easily say that at least 20% of mortgagors are not in a position to participate in the economy. I suspect the number is substantially higher but 20% is staggering enough.

Of course, I’m just talking about homeowners with mortgages. Historically, renters are generally in a worse position financially than homeowners with mortgages. So if homeowners are having trouble participating in the economy, the situation for renters is likely worse.

My opinion is that we’ll be working through this housing crisis for years. The expectation of being able to unwind this in a matter of months or even within a year is simply not a reasonable expectation.

I have not posted this long term double top chart in a long time. I have not forgotten about it.

Finally, for those that believe we’re still in the early innings of the housing crisis, DMM is worth a look. It has been in an uptrend since September. It is very thinly traded so it really needs to be a long term holding and limit orders must be used to enter.