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| 2Q '09 | 1Q '09 | |
| # of CUs | 7,982 | 7,998 |
| Members (millions) | 91.9 | 91.7 |
| Total Assets ($ billions) | 871.8 | 867.4 |
| Total Savings ($ billions) | 741.8 | 737.2 |
| Net Cap. /Assets | 9.6% | 9.6% |
| Loans to Savings | 78.5% | 78.8% |
| Loan Delinq. | 1.60% | 1.54% |
Persistent Foreclosures Moving Upscale
Job losses and falling home prices now afflict prime market
Housing is one key to the U.S. economic recovery, but housing can't rebound while the market is flooded with homes falling into foreclosure. Far from going away, the problem is broadening, reports BusinessWeek. And it's not just about subprime anymore. Now, people with excellent credit who never dreamed of getting in financial trouble are being dragged down by a cycle of rising unemployment and falling home prices.
"For the first time since the rapid growth of subprime lending, prime fixed-rate loans now represent the largest share of new foreclosures," according to a July report from the Mortgage Bankers Association. Trouble in prime was responsible for the worst performance on record for the U.S. mortgage sector in the first quarter, and that trouble persists: Prime fixed-rate loans now account for one in three foreclosure starts, whereas a year ago they accounted for one in five.
The worst problems continue in the bubble states of California, Florida, Arizona, and Nevada, with distressed homeowners unable to sell to pay off their debts. That contributes to an oversupply of housing, particularly at the top end. There are enough $750,000-plus homes on the market to cover more than 40 months' worth of demand at the current rate of sales, according to the National Association of Realtors. That's four times the rate of oversupply in the housing market as a whole.
"As for the outlook, it's unlikely we'll see meaningful reductions in the foreclosure and delinquency rates until the employment situation improves, said Jay Brinkmann, MBA's chief economist. Earlier in 2009, the jobless rate for adults with bachelor's degrees or more stood at 4.4%—more than double the rate of 2% a year earlier. And many families in that segment of the population built their finances on the assumption of continuous full employment, so they can't cover the mortgage when even one spouse is out of work.
The economics at the top of the market aren't as advantageous as they are at the bottom, where first-time home buyers are flocking to lower-priced homes, spurred by low interest rates, temporary tax credits, and a drop in prices. At the high end, homes are too expensive for most first-time buyers, and move-up buyers can't purchase a home without selling property they already own. What's more, financing is far costlier, if it's available at all, because private investors have lost their appetite for big mortgages.
Any rise in mortgage interest rates is also a blow to homeowners who are trying to sell to avoid foreclosure, pushing potential buyers out of the market. And the market is unlikely to get much help from the government's foreclosure-prevention program, which is voluntary for lenders and is off to a slow start since its March inception.
This second wave of foreclosures isn't expected to crest until 2011, says David Crowe, chief economist of the National Association of Home Builders. Foreclosures typically top out after unemployment does, and Crowe doesn't expect that to occur until late this year. After that, he says, more people will lose their homes because of upward resets on adjustable-rate mortgages.
While most of the subprime loans issued during the boom years have been washed out by now, there are still about half a trillion dollars' worth of option ARMs, which allow borrowers to add unpaid interest to the principal they owe. There's also an alarming $2.5 trillion in "alt-A" loans, which are between prime and subprime and include mortgages that required little or no proof of income or assets. Most of these loans were issued to people with relatively good credit who were buying more expensive homes.
Experts also expect a steady increase in defaults over the next decade as interest-only and so-called ‘pay option" loans mature, pushing more homeowners into foreclosure.
A key unknown is how many middle- and upper-income homeowners will simply walk away from homes that are worth less than their mortgages. So far few have. Experts are divided over this but admit that more walk-aways will exacerbate foreclosures.
The foreclosure rate is already so high that it's likely to put considerable pressure on the national housing market for at least two more years. While forecasts differ in detail, it's apparent that foreclosure is going upscale, which means the housing bust won't end anytime soon.
An earlier version of this article appeared in CU360 on July 1 of this year. For more on this topic from CU360, see Some Homeowners Opting for ‘Strategic Defaults' and Foreclosures Continue at Record Pace.
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