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Monday, May 05, 2008

Bernanke on Mortgage Delinquencies and Foreclosures

by Calculated Risk on 5/05/2008 09:13:00 PM

From Fed Chairman Ben Bernanke: Mortgage Delinquencies and Foreclosures

[C]onditions in mortgage markets remain quite difficult, and mortgage delinquencies have climbed steeply. The sharpest increases have been among subprime mortgages, particularly those with adjustable interest rates: About one quarter of subprime adjustable-rate mortgages are currently 90 days or more delinquent or in foreclosure. Delinquency rates also have increased in the prime and near-prime segments of the mortgage market, although not nearly so much as in the subprime sector. As a consequence of rising delinquencies, foreclosure proceedings were initiated on some 1.5 million U.S. homes during 2007, up 53 percent from 2006, and the rate of foreclosure starts looks likely to be yet higher in 2008.
The rate of foreclosures looks to be higher in 2008? That is an understatement!

Bernanke presented these graphs (note that the price graph is based on OFHEO and not Case-Shiller):

Change on mortgage delinquency by county

Change in House Price Index by County

Non-occupied home purchaes by County

Percent home loans with piggybacks by County

Bernanke presented a couple of other graphs, but it appears that the delinquency rate is related to declines in house prices (other research supports this). From Bernanke:
What are the implications of these relationships, particularly the linkage of mortgage payment problems and falling house prices? ... [W]hen the source of the problem is a decline of the value of the home well below the mortgage's principal balance, the best solution may be a write-down of principal or other permanent modification of the loan by the servicer, perhaps combined with a refinancing by the Federal Housing Administration or another lender. To be effective, such programs must be tightly targeted to borrowers at the highest risk of foreclosure, as measured, for example, by debt-to-income ratio or by the extent to which the mortgage is "underwater."
Once again Bernanke is calling for mortgage servicers to reduce the principal amount of underwater loans.