Home loan foreclosures

The Financial Times reports that "US home loan foreclosures reach record high." The percentage of home loans that are delinquent or in the process of foreclosure is frightening. This graph, from Calculated Risk, tells the tale:

The graph shows that 14% of home loans are either delinquent or in the process of foreclosure, up from just over 5% in 2005. (The source is the Mortgage Bankers' Association. The MBA report says the number is 15%; I don't know the source of the discrepancy.) There are powerful forces driving economic recovery, as I've mentioned in numerous posts on this blog. At the same time dangerous imbalances are accumulating in the economy that are pushing back against the forces for recovery - among them home foreclosures, a developing commercial real estate crisis, Europe's debt problems, the possibility of a financial crisis in China as it tries to prick its bubbles, a flight from Treasuries led by China, ... These forces could derail recovery. On the other hand, economic growth and increased employment act against these recessionary forces: more jobs means more household income and fewer foreclosures, and so on. Time may also be on the side of recovery: the wave of foreclosures hits those homeowners who are deepest underwater; as the most troubled loans are foreclosed, the remaining outstanding loans are healthier and less likely to fall into delinquency. Expansionary and contractionary economic forces are engaged in a dramatic tug of war.

So the detail of the graph above is somewhat heartening. While foreclosures are at a record high, the 30-day and 90-day "buckets" are falling, meaning fewer homes are entering the delinquency-foreclosure death spiral. According to the MBA report:

“We are likely seeing the beginning of the end of the unprecedented wave of mortgage delinquencies and foreclosures that started with the subprime defaults in early 2007, continued with the meltdown of the California and Florida housing markets due to overbuilding and the weak loan underwriting that supported that overbuilding, and culminated with a recession that saw 8.5 million people lose their jobs,” said Jay Brinkmann, MBA’s chief economist.

“The continued and sizable drop in the 30-day delinquency rate is a concrete sign that the end may be in sight. We normally see a large spike in short-term mortgage delinquencies at the end of the year due to heating bills, Christmas expenditures and other seasonal factors. Not only did we not see that spike but the 30-day delinquencies actually fell by 16 basis points from 3.79 percent to 3.63 percent. Only three times before in the history of the MBA survey has the non-seasonally adjusted 30-day delinquency rate dropped between the third and fourth quarter and never by this magnitude. If the normal seasonal patterns hold for the first quarter, we should see an even steeper drop in the end of March data.

Good news for the forces of expansion.