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1 in 6 Home Mortgages Now in Arrears


According to the U.S. Census Bureau, about 67% (pdf) of owner-occupied American homes have mortgages against them. According the the Mortgage Bankers Association, 15.02% of those mortgages are at least one payment late. That works out to be 10%, a record high.

Since 3.63% of mortgages are only one payment behind, that leaves about 11.4% of mortgage holders (7.6% of all homes) who can’t just be dismissed as having lost a payment slip.

In the third quarter of 2009, 1.2% of mortgages began foreclosure. That’s “only” .8% of all homes, and “just” in one quarter. Multiplying by four quarters puts 3.2% of all owner-occupieds in foreclosure. How many on your block?

It is upon statistics like these that we are being told “the worst is over” and our economy has been stabilized.

Whoever holds such a view has to explain this:

Chart showing coming resets to Option ARMs

The big light green section in 2007–08 was the subprime bomb. That played a huge part in putting the economy in the position we’re in now. Notice that we stopped making so many subprime loans, and there’s really no light green in the future.

But what about the light gold? Those are Option ARMs:

Option ARMs are often offered with a very low teaser rate (often as low as 1%) which translates into very low minimum payments for the first year of the ARM. During boom times, lenders often underwrite borrowers based on mortgage payments that are below the fully amortizing payment level. This enables borrowers to qualify for a much larger loan (i.e., take on more debt) than would otherwise be possible.

Any loan that is allowed to generate negative amortization means that the borrower is reducing his equity in his home, which increases the chance that he won't be able to sell it for enough to repay the loan. Declining property values would exacerbate this risk.

We’re in the trough between those who defaulted on sub-prime loans and those who will default on Option ARMs.

And the darker gold, the Alt-A category? They’re not single-family loans, so from a heartstring standpoint, not as bad:

One problem associated with Alt-A loans is the lack of necessary proof or documentation needed to be approved for a loan. Thus, lenders may be inclined to suggest borrowers skew their incomes or assets in order to qualify for a larger loan; in the long run, the borrowers may turn out to be unable to afford their payments but the lenders still collect a hefty profit. Because Alt-A loans are also the financing of choice for most non-owner occupied, investment properties, as a class they represent a far greater likelihood of borrower default than conventional, conforming mortgages, since people are more likely to abandon a property in which they do not live than they are to risk losing their primary homes. As of 2008, there was strong evidence of weakness among securities backed by Alt-A mortgages for reasons similar to the crisis in those backed by subprime.

From an economic standpoint, the Alt-As represent more worthless paper your bank is holding. And for quality-of-life, imagine what happens when most of the small apartment buildings in a neighborhood are abandoned by their owner. Zero maintenance, no tenant screening, no taxes paid to local governments.

Which leads to further downward pressure on property values, squeezing harder on the Option-ARMs and the regular joes slipping further under water on conventional mortgages.

One in ten home owners are behind on their payments, and these are probably the good times.

H/Ts: Vox Popoli and Market Ticker