In a recent ad for a leading antacid, the uniformed cashier at a fast food outlet drolly asks the customer, “Would you like that to hurt now or later?”
The same question can be asked of the U.S. housing market.
During the last month of 2009, a record 1.81 million U.S. home loans were non-performing, fueling concern that the housing market will continue to sour the economy well into 2010.
Based on the latest figures released last week, soured mortgages ballooned towards the end of 2009. This happened despite efforts by the Obama administration to push loan modifications to ease the rising foreclosure rate.
Even as new defaults have started to slow, the number of mortgages beyond revision may undermine continued price stabilization as the housing market struggles to recover from the worst slump since the 1930s. According to late December bond disclosures, mortgages at least 60 days delinquent in so-called non-agency securities equaled 32 percent of the total, up from 25 percent a year earlier.
The Pain Will Continue
Compared to the same period last year, the rate of home loans lapsing into foreclosure appears tame. But if the trend from the end of last year continues unabated, the housing market is facing substantially more pain as 2010 progresses. This will be especially true for non-agency subprime and jumbo loans.
Non-agency loans are those mortgages not backed by government-supported underwriters like Fannie Mae, Ginnie Mae or Freddie Mac. Declines in the values of these homes began hurting markets in 2007, helping create more than $1.7 trillion of write-downs and credit losses at the world's largest financial companies.
The latest government figures show that about 600,000 mortgages underwritten by non-agency securities are “re-performing.” That means borrowers have caught up after falling behind on original payments or are current on modified terms. These loans, however, still represent a threat to home prices because even after modification, 10.9 percent of such mortgages fell back into default last month.
Housing analysts are gravely concerned that in the coming year as many as 10 million of all U.S. home loans, including those underwritten by Fannie Mae and Freddie Mac, may turn into sales of distressed properties. For example, at the end of October, 90-day delinquencies for single-family loans owned or guaranteed by Fannie Mae, the largest mortgage-finance company, rose to 5 percent from 1.9 percent a year earlier.
Attractive Areas Scarcely Better Off
Although prices have been marginally stabilizing, California and the Sun Belt areas adjacent to cities like Atlanta, Phoenix, Miami and Las Vegas, will continue to face tough conditions. These are areas where the oversupply of relatively high-priced homes and at-risk mortgages remains the greatest.
Adding to this problem will be the massive number of five-year option-ARM (adjustable rate mortgages) due to re-set in 2010 and 2011. Based on loans written from 2005 through 2006, there still are hundreds of thousands of prime and Alt-A (subprime) borrowers making interest-only payments on their mortgages.
Over the next year, these borrowers are going to face a payment shock as they are forced to start servicing both the interest and principal on their loans. If the job market and income remain unchanged, as currently projected, these pending re-sets could lead to an additional spike in foreclosures that the government loan modification efforts may be unable to adequately address.
As some analysts have put it, the Obama administration is facing a Humpty-Dumpty scenario. No matter what it does, it's going to be nearly impossible to quickly reassemble the scattered pieces of the fractured housing market.
John Cohn is a senior partner in the Globe West Financial Group based in West Los Angeles. He may be contacted at www.globewestfinancial.com
