14% of homeowners in danger of foreclosure

Yesterday, the Washington Post reported an “unexpected” decline in new-housing starts, a drop of 10% from September to October, when analysts — and the White House — expected the number to rise.  Today, the Post again reports on bad news in housing, which will likely depress new housing starts even further.   The number of homeowners in trouble on their mortgage rose to 14% in the third quarter, the highest level since Mortgage Bankers Association began conducting the survey in 1972 — and they expect it to get worse:

More than 14 percent of borrowers were in trouble on their mortgage during the third quarter, a new record, according to an industry survey released Thursday, which also suggests that the foreclosure rate is likely not to peak until next year as unemployment rates continue to rise.

Unemployment remains a big driver of the problem, according to the Mortgage Bankers Association, which conducts the survey. Those with delinquent loans now include a growing portion of people traditionally considered creditworthy and people whose mortgages are insured by the Federal Housing Administration. …

About 9.6 percent of borrowers were delinquent on their mortgage during the third quarter, according to the survey, and another 4.5 percent more were somewhere in the foreclosure process. Overall, about 14 percent of mortgage loans or 7.4 million households were delinquent or in the foreclosure process during the quarter, according to the group.

And unemployment has not yet peaked.  Joe Biden’s chief economic adviser told CBS earlier this month that he doesn’t expect to see positive job creation numbers until the third quarter of 2010, which means unemployment will rise until at least mid-summer.  As more people get thrown out of work, more mortgages will go into risk of default.

Furthermore, the programs that the White House has in place don’t address this situation.  The Obama administration has a program that renegotiates loans to lower the payments, but that assumes that the homeowner can make those payments at all.  The unemployed will not qualify for refinancing, as it won’t help them with their basic problem of insufficient income.  The program was designed for people who got in a little over their heads, not for those who can’t make any reasonable payments at all.

As foreclosures rise — and they will, based on this data — it will suppress new-home sales.  Foreclosures lower home values and keep people from moving into new homes when they cannot get their investment back on their current homes.  Also, the inventory in the foreclosure market will make new homes less attractive, and therefore will keep new starts lower.

Even a drop in the unemployment rate won’t stop foreclosures from hitting peaks now.  The unemployment rate has gone too high and the number of mortgages in danger too many to keep them from snowballing.  The main failure won’t be the mortgage-renegotiation program but Porkulus, which was supposed to prevent this outcome by keeping unemployment from hitting 8%.  How many mortgages could have been rescued for the $787 billion Obama spent on his failed stimulus package?  Assuming an average principal of $300,000, it comes to 2.623 million mortgages paid in full, or ten times that number to pay 10% of the principal in exchange for keeping homes out of foreclosure for a significant period of time.  That still would have been bad policy for a number of reasons, but it would have had more positive impact on the American economy than Porkulus did.