US Foreclosure Levels On The Rise

Even though home sales data for both new and existing appeared a bit more optimistic - up 0.3% and 2.9% on a seasonally adjusted basis - those figures do not hold the whole truth. The level of homes on the market increased to a 10.2 months supply, which reflects the rising tide of distressed sales of foreclosures.

According the Mortgage Bankers Association’s most recent figures released Thursday May 28, 2009, approximately 5.4 million out of approximately 45.0 million home loans were delinquent or in some stage of the foreclosure process for 1Q09. This equates to 12.1% of all mortgages being delinquent or in the foreclosure process, compared to 11.93% at the end of FY08.

It is expected that the number of foreclosures should continue to expand as more individuals become unemployed or underemployed over the next year. Since the recession began over a year and a half ago, nearly 6 million have lost their jobs, with current estimates expecting the unemployment rate to broaden to 10.0% from the currently 8.9 % level.

Clearly the temporary moratorium on foreclosures imposed by lenders and mortgage underwriters, which have all but ended, did little to spur the mortgage note-holders to expedite the reworking of homeowners’ obligations. Unfortunately, as lending institutions are moving quickly against delinquent homeowners once again, more homeowners than ever before are falling behind on their mortgage payments and sliding into the foreclosure abyss as the U.S. housing crisis cancer continues to spread into what was previously known as the “stable borrower” ranks.

The addition of more real estate available for sale in an already saturated market should be expected to moderate housing prices even further. Based on the recently released data, prime based fixed-rate loan foreclosures have begun to overtake those of the risky subprime loans and rising adjustable-rate mortgages.

The foreclosure rate on these “plain-vanilla” mortgages has doubled in the last year, according to the Mortgage Bankers Association, and for the first time those loans make up the largest share of new foreclosures. During 1Q09, on a seasonally adjusted basis, 6.06% of all prime loans were delinquent, up from 5.06% in 4Q08.

The hardest-hit states with respect to delinquency rates remains the “fab four” states (California, Florida, Arizona and Nevada) which account for 46% of all new foreclosures nation.

This would leave us a bit concerned for those financial institutions that recently completed the “stress test” - including but not limited to Citigroup (C: 3.67 0.00 0.00%), Bank of America (BAC: 11.30 0.00 0.00%), Wells Fargo (WFC: 24.77 0.00 0.00%), US Bancorp (USB: 18.92 0.00 0.00%) and JPMorgan Chase (JPM: 36.65 0.00 0.00%). We are worried the government’s worst case scenario may not have been “worst” enough.