Seriously Delinquent Mortgages in the Fourth District
Much of the recent commentary on the economy has been focused on the recovery, while seriously delinquent mortgages have quietly crept upwards. (McDash/LPS defines seriously delinquent mortgages as those that are 90 or more days delinquent plus those that are in foreclosure.) As of December 2009, 7.9 percent of mortgages in the nation and 7.6 percent of mortgages in the Fourth District were considered seriously delinquent. Since December 2008, seriously delinquent mortgages have increased 75 percent (3.42 percentage points) nationally, whereas in the Fourth District they have increased 48 percent (2.45 percentage points).
While it might be natural to suspect that subprime mortgages are responsible for the increase in seriously delinquent loans, this would be misleading. Currently, prime loans account for 83 percent of seriously delinquent mortgages in the Fourth District and 84 percent of mortgages in the nation.
Delinquencies in prime loans are rising mainly for two reasons: “underwater” mortgages and unemployment. Declines in home prices have left many homeowners with underwater mortgages. A homeowner with an underwater mortgage may choose to stop making mortgage payments because the value of the mortgage is worth more than the actual house. Eventually, the decision to walk away from an underwater mortgage leads to delinquencies and then on to foreclosure. The decision to walk away from an underwater mortgage is a personal decision involving many different variables (mortgage terms, the amount of the drop in home price, credit history, and so on), which makes estimating the potential number of underwater mortgages challenging. The usefulness of such estimates are thus limited.
A more informative indicator of seriously delinquent mortgages would be local unemployment rates. Conceptually this relationship is straightforward. If unemployment increases in an area, wages decrease. Falling wages inhibit homeowners’ ability to pay their mortgages and delinquencies increase. In the Fourth District, county unemployment rates have a strong correlation (0.47) with seriously delinquent mortgages.
Seriously Delinquent Mortgages, September 2007–December 2009
Like the nation, many counties in the Fourth District began to see their rates of seriously delinquent mortgages increase at the end of 2008 and accelerate throughout 2009. Many of the same geographic patterns that characterize unemployment rates across the Fourth District also characterize seriously delinquent mortgage rates. In recent reports on Fourth District employment conditions, for example, we have noted a pattern that applies equally well to unemployment rates as to seriously delinquent mortgage rates: “Distress from the auto industry restructuring can be seen along the Ohio-Michigan border. Outside of Pennsylvania, lower levels of unemployment are limited to the interior of Ohio or the Cleveland-Columbus-Cincinnati corridor.” Surprisingly, there are pockets of lower rates of serious delinquency in Fourth District Kentucky despite the state’s high unemployment rate (10.7 percent). Overall, a majority (56 percent) of Fourth District counties reported 7.5 percent of all mortgages as seriously delinquent.