Unlike the Canadian housing market, where mortgage delinquencies are mere 0.5% of the total outstanding mortgages, the picture in the US is bleak where estimates suggests that 14% of the outstanding mortgages are in arrears.
From David Rosenberg of Gluskin Scheff:
This is no time for complacency with regard to the outlook for house prices and mortgage defaults in the U.S.
First, here are some numbers:
Two-thirds of American homeowners have a mortgage — 56 million in total.
Around 50% are guaranteed by the GSEs, 35% are held directly on the balance sheets of the banks, and 15% are private label.
Estimates I’ve seen suggest that 14% of these 56 million mortgages are already in arrears or in the foreclosure process. This means that about eight million Americans have stopped paying their mortgage. Staggering.
Other estimates suggest that over 90% of these late-paying/non-paying debtors will never get back to being current. So what we are looking at is something like 7.2 million mortgages that will inevitably go into foreclosure in the near future.
Meanwhile, the pace of foreclosures has been slowed via loan modifications brought on by government pressure and the simple fact that banks do not want to take deflated property onto their books. What does not get reported often enough is that the rate of non-foreclosure on delinquent borrowers is surging — 24% of the people who have not made a single mortgage payment in the last two years have still not been foreclosed on. The banks don’t want to take the hit and in the meantime the foreclosure pipeline is completely clogged up. (It has to be said that the banks are content in kicking the can down the road since homeowners are making good on their second lien — $842 billion outstanding, most held at the big four banks, and they are holding these at par even as the first lien has already gone bad!)
When this foreclosure pipeline gets unleashed, I fear that the wave of supply is going to precipitate another leg down in home prices.
Also, keep in mind that the loan modifications are not even working — half of them are re-defaulting within 12 months (and this is happening even after monthly payments have been cut 50%). The principal reason is the negative net equity position most of the homeowners in arrears find themselves in (the amount by which mortgage balances exceed the true value of real estate for those in default or near-default could be as much as $2 trillion).
Currently, over 17% of homeowners are “upside down” on their mortgage and another 10% decline in home prices would take that share up to 27%. This, in turn, would dramatically lift mortgage default rates. If the banks ever do a “short sale”, which the Administration clearly wants them to do, then the entire second lien is wiped out — cutting deeply into bank capital (if not wiping it out entirely).
I only bring this up because I heard Dick Bove (and other bank analysts) talk about how the banks are a huge buy now that the financial regulation bill is behind us and the uncertainty gone. Maybe that’s true for non-consumer, non-mortgage lenders, but we have to be aware that the problems with housing finance are very likely to remain a huge overhang for many U.S. banks in coming months and quarters.
If Congress is no longer extending jobless benefits and State governments are now attacking public pensions, then it stands to reason that additional support for the housing market out of Washington is not forthcoming. This public backlash against more deficit finance is going to pose a big roadblock for any company linked to the housing sector, especially since whatever revival we experienced in the second half of 2009 and the opening months of 2010 was due to government intervention.