Mortgage deleveraging to continue in 2012
The amend-pretend-extend policy of lenders is designed to avoid recognizing losses. They hope to replace their old bad loans with good new ones. So far they have been successful at keeping this bogus debt on their books. The result is millions of delinquent borrowers in shadow inventory.
Households shed mortgage debt each month for more than one year now, but the deleveraging has yet to end, according to Fannie Mae Chief Economist Doug Duncan.
Either through payoffs or foreclosure, total U.S. mortgage debt dropped or remained flat for 15-straight months, according to Federal Reserve data. The peak came in the first quarter of 2010, when American households unloaded roughly $125 billion in mortgage debt those three months alone.
Duncan pointed out recent housing indicators have improved. Existing home sales rose in January and gained roughly 27% at an annualized rate over the past six months. Actual sales came in at the highest level in four years at the start of 2012, though National Association of Realtor data can be less than dependable.
Even as these metrics show consumers are looking to take on more debt, lending remains tight and appraisals are still coming in low.
Purchase mortgage applications remain on the downslide since the crash. Duncan expects total mortgage originations to total $1.14 trillion in 2012, down from $1.36 trillion the year before.
“Another worrisome aspect of the housing market is the lack of sustained improvement in purchase mortgage demand,” according to the Fannie Mae outlook report released Monday. “While mortgage rates have hovered near their record lows, purchase mortgage applications have remained at depressed levels. Investors and other all-cash buyers continue to play a sizable role in supporting sales in battered housing markets.”
Last week, purchase applications did climb 4.4% from one year ago to the highest level since January, a sign the housing market might be on the verge a spring turnaround at last.
Still, household formation has been “anemic,” according to Duncan, remaining below the long-held average of 1.1. million to 1.2 million households per year. Younger buyers burdened with the student loan debt are delaying homeownership and instead are choosing to rent the very homes first-time buyers bought in the past, according to Duncan. The share of the single-family housing stock as rentals grew to 33.5% from 30.8% over the back half of the last decade.
There are still 1.4 million homes in the foreclosure process, according to CoreLogic. Another 2 million are 90 days or more delinquent, according to Lender Processing Services. More than 11 million homeowers are underwater and unable to move to where the small of job growth is occuring. All of this, according to Duncan, is keeping housing as a headwind until banks and government agencies begin deleveraging their mortgage problems at the same pace as consumers.
But until the foreclosure settlement is finalized, new standards put in place and processing begins moving again, the long road to recovery will remain delayed, Duncan said.
His forecast remains little changed from one month ago. Home sales, he said, may only increase 7% from last year.
“In any case, while the clearing of the foreclosure pipeline may hurt home prices in the short run, it will likely help the markets recover over time as the shadow supply will come to weigh less on home prices,” Duncan said.