Graphic from the Wall Street Journal
Most news outlets (see Washington Post, LA Times, Chicago Tribune) correctly reported that the number of mortgages in forclosure or delinquent declined over the last year. None of the sources I saw mentioned that homes in foreclosure have tied their all-time high, though Calculated Risk led its headline with that item.
Is this important? Sort of. On its face, it is good that there are fewer delinquent mortgages. However, there are two points that most news accounts omitted:
First, and most important, this is entirely expected. It would be difficult or impossible for it to be otherwise. Mortgages issued in the last two years have had stricter underwriting standards. That is to say, if you got a mortgage between late 2008 and now, you probably could afford it and likely won’t default without a job loss, etc. The large waves of delinquencies in 2009 and 2008 and 2007 were from mortgages originated during the loose credit years of 2005-2007. (Thomas Lawler was quoted as pointing this out in the Wall Street Journal’s account of the data.)
Second, this data was reported by the Mortgage Bankers Association. It deals with mortgages, not houses. Therefore, it only tracks mortgage loans that are delinquent or “in foreclosure.” By in foreclosure, they mean, the debt is still oustanding and the bank has attempted to exercise its right to the mortgage–to reposess the property. It is not a survey of houses–it is a survey of mortgages. This is a key difference because charts like the one attached here appear to show fewer houses in distress. However, they leave out the number of houses owned by banks–the so-called “shadow inventory.” Those are not considered “in foreclosure” because the foreclosure has happened already.
Therefore, any optimism you might have based on the chart has to be tempered by the fact that the chart does not show bank-owned homes.
Though the LA Times article does not expressly make this point, it is the subtext of Mark Zandi’s quote in the Times account:
“We are going to see a lot of distressed sales,” said Mark Zandi, chief economist for Moody’s Economy.com. “This isn’t over yet, and in my view this is probably the most significant threat to the economy right now.”
A large number of foreclosures puts pressure on U.S. home prices, he said.
“When house prices are falling, it is hard to get completely enthusiastic about the economy,” he said. “The home is still the most important asset people own. Small businesses use homes as collateral and local governments have to cut, because their property tax revenues are under pressure, it is the economy’s biggest problem.”
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