The U.S. economy is in the middle of a mortgage default crisis and to know what it means to you, you have to follow the money and a long trail of statistics. Both lead to a housing market built on a weak foundation of rapidly rising home prices, risky mortgage loans and complicated investments where value came not from buying or selling property, but from the performance of the real estate market as an entity.
That’s where it started, but the result – the highest mortgage delinquency rate since the Great Depression – comes down today to one issue: jobs, or the lack of them.
Nationally, mortgage defaults are up 16 percent over the same time period as last year, with the worst 10 states accounting for nearly 75 percent of those defaults.
In the Twin Cities, the figures tell a more optimistic story. While the percentage of lender-mediated homes on the market is high, in most Twin Cities towns and neighborhoods, the outlook is improving.
In the 13-county metro area, during the first quarter of 2010, foreclosure and bank-owned properties were down almost a third, from 4,472 in 2009 to 3,093 in 2010 and short sales – where a lender allows a homeowner to sell for less than is owed – were down 15 percent from 4,934 homes in 2009 to 4,192 in 2010. (Traditional homes sales were up from 4,623 to 6,342.)
In fact, Builder, a website for the home building industry, rated Minneapolis and St. Paul the 13th healthiest market in the country for new home construction, a key indicator for recovery due, they claimed, to an unemployment rate lower than the national average.
While these statistics are encouraging, that doesn’t mean that the Twin Cities is in the clear. In fact, the Minnesota Housing Partnership reports that in the fourth quarter of 2009, mortgage delinquency rates reached 8.1 percent in Minnesota, the highest rate since these figures began to be recorded in the late 1970s. According to the MHP report:
Lenders wishing to avoid owning and taking losses on properties have opted instead to give owners longer timelines to remedy defaults or renegotiate mortgage terms, especially as federal assistance programs evolve. Yet high unemployment and rising mortgage delinquency rates predict continued high foreclosure rates.
Scott Anderson, senior economist at Wells Fargo & Company who has monitored the housing default crisis as it moved through the economy, thinks that we are currently in the second phase of a multi-phased financial dilemma.
The first wave of foreclosures on subprime loans given to high-risk borrowers is ending, he said. The second and current wave of defaults are adjustable rate mortgages (ARMs) where the interest rates are periodically adjusted, often raising mortgage payments too high for many borrowers to afford.
A third phase may be coming, says Anderson, affecting fixed-rate mortgage loans, as higher-income homeowners who were considered good credit risks lose their jobs. Right now, houses costing up to $200,000 are selling quickly while homes in the $200,000 to $750,000 are not finding buyers. Many of these homes are in wealthier suburbs and will be a major factor in the next surge of defaults, Anderson said.
“The primary reason in all of the economic models is the unemployment rate,” he said. “We’ve lost 8.4 million jobs. The official unemployment rate is 9.7 percent, but if you include the underemployed, it’s probably closer to 17 percent. Even those who have held on to their jobs see slower wage growth.”
Chip Halbach, Executive Director at the Minnesota Housing Partnership, an organization whose mission is to create and preserve affordable housing, believes that third wave will begin as early as next year.
“People are running out of money and their savings,” he said, “They’re underemployed and unemployed and that’s what’s driving most defaults. Health care is also a significant reason. Although there hasn’t been a major default spike due to health care, when your income is down, you can’t pay for a mortgage if you’re paying for health care.”
How bad the crisis is can depend a great deal on location. David Arbit, a market analyst for 10K, a Minnesota-based real estate research company, said that lender-mediated sales as a share of homes on the market stayed the same or fell in 51 out of 77 areas surveyed. In some areas – Mendota Heights for example – the percentage of lender-mediated homes on the market is only 6.6 percent.
In other areas, such as North Minneapolis and south Minneapolis’s Powderhorn Park, the St. Paul districts of Dayton’s Bluff, Hillcrest and Phalen, and suburbs such as Brooklyn Center and Brooklyn Park, the proportion of bank mediated sales is hovering around 50 percent.
Other places have only just begun to see the consequences of the recession on the housing market. Until recently, Northfield had a stable real estate market largely untouched by foreclosures. But figures from March of this year indicated that 26.5 percent of Northfield homes for sale were bank-mediated homes, reflecting a more than 148 percent increase from the same time period in 2009.
Kevin Knudsen, Franchise Vice President of the Coldwell Banker Burnet Highland Park Office and former president of Minneapolis Area Association of Realtors expects that the next wave of defaults will not end with foreclosures but with short sales.
Knutson is also keeping his eye on the job market. “It’s the best indicator on whether people are going to make their mortgage payments. If there’s a healthy economy, people will be able to stay in their houses.”
There’s also evidence that changes are coming to the banking industry. New regulations encourage and sometimes force lenders to work with customers in good faith. Some banks, like Wells Fargo and Bank of America, have stated their intent to step up their loan modification programs as a way to help homeowners, especially the unemployed and underemployed, keep their homes.
Arbit, who before beginning his job at 10K research, worked with the non-profit Greater Metropolitan Housing Corporation, said that although the current market is an opportunity for buyers, “The flip side is a sad side.”
“There are city blocks that have only one occupied house,” he said. “For the stability of the neighborhood, for the tax base, you want to keep people in their houses. But, if you’ve got months of non-payments, they’re going to take your home. For some, there’s no recourse. It’s hugely disappointing and it’s all too common.”
Statistics don’t matter so much when it’s your house the bank is taking.