More Bad News Coming

While a macroeconomic recovery has set in and will continue in 2010, Freddie Mac's chief economist Frank Nothaft said at the SourceMedia Loan Modification Conference in Dallas more bad news is coming in the mortgage market.

"We haven't seen the peak of the mortgage delinquency rates!"

Currently, he said, the serious delinquency rate, or number of loans 90 days plus late, which includes Freddie Mac loans, is the highest it has been since the 1930s.

Data from the National Bureau of Economic Research and Mortgage Bankers Association show that by yearend 2008 (if 1962 is considered 0.0%) 5.5% of prime conventional loans, including alt-A loans, were 90 days or more delinquent or in foreclosure. Compared to 0.5% in 2006, it spiked 5.4% in 2009 showing how the mortgage crisis has moved from the subprime to the conventional arena. MBA data also show that between the first quarter of 1998 and the second quarter of 2009, the total number of loans delinquent 90 days or more or in foreclosure increased by 8%, the number of prime and alt-A 5.4% and the number of subprime loans 26.5%.

In 2005 the share of subprime loans serviced in the U.S. that defaulted represented 46% or almost half of all defaults and foreclosures.

If the share of subprime loans serviced in the U.S. peaked in 2007 to 14% of the total number of loans, by the end of the first half of 2009 it dropped to 11% of the total.

At the same time if up to 55% of the number of foreclosures started were subprime in 2007, they represented only 37% of the number of foreclosures started by H12009.

Meanwhile prime and alt-A loans reached to 54% of the total number of foreclosures started in the first half of 2009 tilting the foreclosure balance towards the conventional market.

Even more disheartening, Mr. Nothaft said, is the recent unemployment rate, which he expects will continue to rise next year at least during the first quarter. It adds to the effect of losses in housing prices that have seen a cumulative decline of 17% since June 2006, as well as hopeful upward improvements starting in March to June 2009 (based on calculations using the internal Freddie Mac Index, a value-weighted index of Freddie's single-family portfolio). He stressed on the other hand that the ups and downs of aggregate numbers do not tell much about the whereabouts of the marketplace. "Every single neighborhood is a housing market." Frank Nothaft Unemployment will remain the main trigger of delinquency.

According to Mr. Nothaft serious delinquency rates are likely to rise further by the end of 2009 with subprime, alt-A and option adjustable-rate mortgages as the main contributors to foreclosures.

Freddie Mac data of prime conventional conforming loans extracted from a sample of borrowers who made successful contact with their servicer reinforce traditional beliefs showing the effect of the overall economic crisis on the mortgage market.

For example, it indicates that job loss is the main hardship reason among delinquent prime borrowers. Between January and June 2009, unemployment or underemployment/curtailment of income was the No. 1 hardship reason for 56.8% of these borrowers, with another 19.3% citing excessive obligations, or debt as their No. 1 hardship. Illness and death in the family came third with 11.4%. By the first week of November the government reported that the unemployment rate spiked to 10.2%, up from 9.8% in September, marking the highest level in 26 years.

What is different between the crisis of 2009 and the crisis that peaked during November to December 1982 when unemployment reached 10.8%, Mr. Nothaft said, is that back then unemployment was not accompanied by the drastic decreases in home prices seen during the current crisis mostly due to the high subprime loan default rates.

Nonetheless, there will be a recovery, however modest, he said.

The recovery will be sustained because of the very aggressive monetary policy, the fiscal policy and the stimulus package benefits in times when interest rates are at their lowest in 50 years.

Ultimately, he said, the Making Home Affordable Program is very important for the future wellbeing of the marketplace and for keeping families in homes for the long-term through streamlined refinancing and loan modifications.