One in Seven American Mortgages in Trouble

Here in DC, the housing market seems to be seriously heating up again.  If houses sat on shelves, they'd be flying off of them--in the "transitional" neighborhoods that I keep my eye on, an easy majority of the new listings for homes under $500,000 last fewer than ten days.

It's hard to square this with the new report from the Mortgage Bankers Association, which indicates that fully one in seven mortgages in the United States is now delinquent.  That's almost 15% of all mortgages, for those who flunked fraction.

It's now conventional wisdom that the causes of foreclosure have shifted dramatically over the last twelve months.  The early foreclosures were usually due to some form of bad faith on the part of the borrower (or their lying, thieving mortgage broker):  either they lied on their documents, and simply didn't have the kind of income they'd need to support their house; or they were investors who were speculating on the house, not planning to live in it, and they stopped paying the mortgage as soon as it became clear that they were simply throwing good money after bad.  In other words, it was fundamentally a problem of excessive home values which have now fallen.  Mortgage modifications were aimed at easing that problem.

Now, that wisdom says, "it's an income problem".  One in ten workers does not have a job, and which for many means that their household cannot support any sort of mortgage payments.

This is true, so far as it goes.  But the kicker is that income problems are price problems.  In ordinary times, in most markets, you might see delinquencies . . . but someone who actually simply could not make their mortgage payments would have been able to sell the house rather than go into foreclosure, shred their FICO score, and possibly end up with a deficiency judgement.

A strengthening market should be preventing further foreclosures.  But that's not even true in DC, where you see new short sales and bank-owneds coming on the market every day.  Whatever the first-time homeowner's tax credit did, it didn't save the American homeowner from pretty deep devastation.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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