Thursday, May 28, 2009

The Irrelevant Aspects of US Mortgage Woes

In its quarterly status report,  released today, the Mortgage Bankers Association presented data that, as expected, points to a continued deterioration in the quality of US mortgages. According to the Association, this report set all time records (to the beginning of record keeping for this sort of data) in the following categories:
  • The percentage of first mortgages to have foreclosure proceedings initiated
  • Quarter to quarter increase, in basis points, of percentage of first mortgages to have foreclosure proceedings initiated.
  • The non-seasonally adjusted delinquency rate for mortgage loans on one to four unit residential properties.
  • The combined percentage of loans in foreclosure and at least one payment past due.
  • The percentage of loans in the foreclosure process.
Clearly, mortgages in the United States are performing poorly in virtually every aspect that it is possible for the instrument to fail. This information is all relevant insofar as assessments of future economic activity are concerned. What is quite irrelevant, in our opinion, is the fact that 46% of foreclosure starts are concentrated in a handful of states including Florida and California. Our reasoning is as follows: The nation does not exist in a vaccuum. We get the distinct impression that, when the MBA continually asserts the regional specificity of mortgage delinquincies/foreclosures/late payments, they are considering this aspect to be a mitigating factor within the carnage. This attitude belies certain realities.

First, California and Florida are major population centers within the United States-the two states together represent nearly 25% of the United States population. Hundreds of thousands of people migrate to and from these areas each year-under normal economic conditions. Housing markets across the country are adversely affected by the diminished pool of potential buyers that is the result of CA and FL residents being unable to sell their own home, or no longer credit worthy enough to receive financing.

Second, and obviously, woes within one region of the country can damage the ability of a financial institution, that is national in scope, to provide credit. Whether or not these bad loans are all located in one state, or evenly spread across the country, the majority of all loans are concentrated within a handful of financial institutions, rendering the actual loan location irrelevant. 

Perhaps the location of the mortgage meltdown epicenters is continually contained in these reports as a mere bit of trivia. Unfortunately, we feel that it is often cited as a means of assuring those lesser-affected states that everything will be allright.

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