The Wall Street Journal

18 November 2011

The share of households delinquent on their mortgage payments has fallen to the lowest level since the end of 2008, offering signs that modest job gains are stemming further damage for now in the battered U.S. housing sector.

A report released Thursday by the Mortgage Bankers Association showed that 8% of mortgage borrowers were at least one month past due on their payments during the third quarter, down from 8.4% in the second quarter and 9.1% one year ago.

An additional 4.4% of all borrowers were in some stage of foreclosure, representing more than two million loans, unchanged from the second quarter and the year-earlier period. The figures remain near their highest levels of the crisis.

The decline in delinquencies means the housing market’s woes aren’t getting worse, but many markets must still digest an enormous backlog of bank-owned foreclosures over the coming years. That is likely to keep pressure on prices for at least another year, and the market remains vulnerable if the economic recovery doesn’t accelerate.

In recent quarters, delinquencies have moved largely in lock-step with employment. As job growth firms up, delinquencies should continue to fall, but if borrowers lose their jobs or see their hours cut back, they are more likely to fall behind on payments.

Meanwhile, in a modest sign of improvement, the Commerce Department said Thursday that construction of single-family homes increased 3.9% in October from a month earlier, running at a seasonally adjusted annual rate of 430,000. That was down 0.9% from a year ago.

Construction remains at historically depressed levels because builders must compete with the glut of bank-owned foreclosures.

While “we’re on the downhill side of the mountain now…we still have a long way to go,” said Michael Fratantoni, vice president of research for the MBA. It could take at least three to four years for foreclosure levels to return to more normal levels, he said.

The housing market still faces other big challenges, such as the nearly one in four homeowners with a mortgage who owe more than their homes are worth.

William Dudley, president of the New York Federal Reserve Bank, said in a speech Thursday that current debt-restructuring mechanisms for mortgages aren’t adequate, and he warned that the “flawed structure” would “destroy much more value in housing than is necessary.”

Mr. Dudley became the latest policy maker to urge wider consideration of loan write-downs, signaling his support for a program that would allow underwater borrowers who make timely mortgage payments to “earn accelerated principal reduction” over time.

Government-controlled mortgage giants Fannie Mae and Freddie Mac have resisted writing down loan balances, and banks have used such write-downs sparingly, saying other loan modifications are just as successful but much less costly.

The Mortgage Bankers Association data also shine light on why some states have larger backlogs of bad mortgages. Nine of 10 states with foreclosure rates that exceed the national average are judicial states, where banks must process foreclosures by going to court. That is designed to provide greater legal protections to homeowners, but it has led to larger foreclosure backlogs than states where foreclosures are completed through an administrative process.

In Florida, a judicial-foreclosure state, more than 14% of all mortgages were in some stage of foreclosure at the end of September, the highest rate in the country. Florida suffered one of the most severe housing busts.

New Jersey, another judicial-foreclosure state, didn’t experience nearly as dramatic a housing boom and bust as the hardest-hit markets. However, New Jersey surpassed Nevada as the state with the second-highest foreclosure inventory, with more than 8% of mortgages in foreclosure.

About 2.7 million mortgages nationwide that were made between 2004 and 2008 ended in foreclosure through February, representing around 6.4% of all mortgages issued over that period. An additional 3.6 million homes, or 8.3% of loans, are at immediate risk of foreclosure, according to a separate report released Thursday by the Center for Responsible Lending, a nonprofit research and consumer-advocacy group.