by Calculated Risk on 12/04/2008 02:43:00 PM

From Fed Chairman Ben Bernanke: Housing, Mortgage Markets, and Foreclosures

Home sales and single-family housing starts held unusually steady through the 2001 recession and then rose dramatically over the subsequent four years. National indexes of home prices accelerated significantly over that period, with prices in some metropolitan areas more than doubling over the first half of the decade. One unfortunate consequence of the rapid increases in house prices was that providers of mortgage credit came to view their loans as well-secured by the rising values of their collateral and thus paid less attention to borrowers' ability to repay.

However, no real or financial asset can provide an above-normal market return indefinitely, and houses are no exception. When home-price appreciation began to slow in many areas, the consequences of weak underwriting, such as little or no documentation and low required down payments, became apparent. Delinquency rates for subprime mortgages--especially those with adjustable interest rates--began to climb steeply around the middle of 2006. When house prices were rising, higher-risk borrowers who were struggling to make their payments could refinance into more-affordable mortgages. But refinancing became increasingly difficult as many of these households found that they had accumulated little, if any, housing equity. Moreover, lenders tightened standards on higher-risk mortgages as secondary markets for those loans ceased to function.
...
As house prices have declined, many borrowers now find themselves "under water" on their mortgages--perhaps as many as 15 to 20 percent by some estimates. In addition, as the economy has slowed and unemployment has risen, more households are finding it difficult to make their mortgage payments. About 4-1/2 percent of all first-lien mortgages are now more than 90 days past due or in foreclosure, and one in ten near-prime mortgages in alt-A pools and more than one in five subprime mortgages are seriously delinquent. Lenders appear to be on track to initiate 2-1/4 million foreclosures in 2008, up from an average annual pace of less than 1 million during the pre-crisis period.

Predictably, home sales and construction have plummeted. Sales of new homes and starts of single-family houses are now running at about one-third of their peak levels in the middle part of this decade. Sales of existing homes, including foreclosure sales, are now about two-thirds of their earlier peak. Notwithstanding the sharp adjustment in construction, inventories of unsold new homes, though down in absolute terms, are close to their record high when measured relative to monthly sales, suggesting that residential construction is likely to remain soft in the near term.

"Predictably"? ROFLOL. Hey, hoocoodanode?

Most of the speech focuses on foreclosure prevention, and I'll get to that later.