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Mortgage Defaults Still Rising

11.30.2009 · Posted in Mortgage Articles

This morning Trans Union, the big credit bureau, released its quarterly report on mortgage defaults, and it was not appealing. Nationwide, 6.25% of all residential mortgages were at least 60 days past due in the third quarter, up from 5.81% in the second quarter and 3.96% a year ago. This was the 11th uninterrupted quarter that mortgage defaults increased.rnrnMortgage defaults are the first step in a house eventually going into foreclosure, so look for those to start heading up again. Foreclosures have been held down by trial modifications under the **** program, but very few of those have gotten to the stage of being final modifications. And even when mortgages are modified, there is a strong tendency for those people to again find themselves in financial dilemma. Clearly people not paying on their mortgages is not good news for the big banks like Bank of America (BAC – Analyst Report) and Wells Fargo (WFC – Analyst Report) that lent them the money.rnrnIf there is a silver lining in the data, it is that the rate of increase seems to be slowing. The third quarter increase was “only” 7.6%, which is down from an 11.3% increase in the second quarter and a 14.0% increase in the first quarter. Of course, as the base increases, each additional percentage of increase means a bigger absolute number of mortgage defaults.rnrnThere are huge regional disparities in the rate of mortgage defaults. The former bubble states continue to suffer unbelievalble high rates of mortgage defaults — 14.5% of all mortgages in Nevada and 13.3% of all homeowners in Florida are at least two months behind on their mortgages. That is almost one in seven in Nevada and about two in every fifteen in Florida.rnrnIn contrast, states where very few people live are experiencing very low rates of mortgage defaults. North Dakota is holding up best, as it is on a number of economic indicators with a rate of only 1.7%. South Dakota is not faring all that much worse at 2.3% and in Vermont the rate is only 2.6%.rnrnHowever, the gap is starting to close, and not in a good way. The fastest growth in mortgage defaults is now coming from areas where there was no real housing bubble. The biggest jump came in Wyoming where mortgage defaults jumped by 17.9% in the quarter, followed by Kansas at 17.4% and North Dakota at 16.0%. Still, it would take a long time for North Dakota to catch up to Nevada.rnrnThere are two key forces that are leading to people defaulting on their mortgages. One goes to a lack of desire to do so, and the other goes to lack of ability to do so. If your house is substantially underwater, i.e. your mortgage is for a lot more than the house is worth, it is not economically rational to continue to pay your mortgage. After all, most mortgages are non-recourse, which means that the worst thing that happens is that the house gets foreclosed on and you go rent.rnrnAt one point, there was a huge social stigma to being foreclosed upon, but as it becomes more common, the stigma diminishes. There are, of course, some non-economic costs associated with not paying and just living rent- or mortgage-payment-free for awhile, and in many areas of the country that can now be well over a year. Your kids might be upset with you since they would have to change schools and leave all their friends if you can

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