11/20/2009
By David Urani, Research Analyst

The Mortgage Bankers Association reported that mortgage delinquencies and foreclosures hit another quarterly record in the third quarter (after setting another record during the second quarter). The percentage of all mortgages that are at some stage of delinquency is 14.4%, up from 13.2% the previous quarter. I don't think these numbers are particularly surprising to anyone; we all knew foreclosures and the likes are still worsening, especially with unemployment still on the rise. However, this is just the proof that housing is indeed still a major problem for the economy, and probably our single biggest risk for going into that dreaded double-dip recession.

The percentage of mortgages in delinquency is at 9.6% while foreclosures are being reported on 4.5% of mortgages. Although subprime and other deceptive lending practices were the root cause of housing to begin with, the problem has spread well beyond that, with prime fixed-rate mortgages representing the biggest proportion of foreclosures. The percentage of FHA loans is also on the rise, with 1.76% in foreclosure. Although the government is doing its best to help out the housing situation, and to allow homeowners to borrow cheaply with low rate FHA loans, even those loans can go sour. The big question at hand now is just how effective the government's foreclosure prevention plan will work. Currently, over 500,000 people are enrolled in a three month trial period for the program, which will lower payments for struggling borrowers, however we have yet to see what percentage will ultimately be enrolled in the full program, or what percentage who do get enrolled eventually go back into default.

So, seeing news like this I am a little bit relieved that the tax credit is being extended. Although there are major problems with the tax credit, including its cost (roughly $15.0 billion), the fact is that market prices can just adjust higher to compensate for it, and the fact that many buyers who wouldn't have used it anyway are still being paid with our tax money. However, there is no doubt that it has a widespread psychological affect; consumers and the extra sales will be needed to counteract the waves of foreclosed homes that are still hitting the market at record high rates.

Anyone thinking of investing in the housing sector needs to know that the risk is still extremely high. Chances are efforts like the stimulus bill, foreclosure preventions, lowering mortgage rates, the tax credit and other actions will keep the housing market from diving into another abyss. However, I would stay on the lookout for more price pressure in the housing market, especially as more previously delayed foreclosures begin to cycle through into vacant inventory. Its going to be a bumpy road on the way up, and we are going to need to keep housing on at least some sort of government lifeline, probably all the way through 2010.

David Urani
Wall Street Strategies