Rise in prime mortgage foreclosures seen in US

Homeowners with the best credit are the next big risk for the US housing market.

An increase in mortgage defaults among prime borrowers in 2009 is likely to accelerate this year, slowing the real estate recovery even as Americans become more optimistic about the economy, said Robert Shiller and Karl Case, the economists who created the S&P/Case-Shiller Home Price Index.

‘There will be continuing foreclosures, and not just sub-prime, it will be prime mortgages,’ Robert Shiller, a professor at Yale University, said in an interview. ‘This is creating a huge shadow inventory of homes that are still owned, but they’re going to be on the market in the next year or so.’

The number of prime mortgages overdue by at least 60 days more than doubled in the third quarter from a year earlier to 838,000, according to a Dec 21 report from the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

Unemployed homeowners struggling to pay their bills will default on their home loans and increase foreclosures, Professor Shiller and Professor Case said.

Employers have cut more than 7.2 million jobs in the last two years, the biggest employment loss since the Great Depression. ‘Unemployment is not respecting income boundaries,’ said Prof Case in an interview. ‘It’s affecting rich people, poor people and middle-income people and they all have mortgages.’

The US may begin to see some signs of a housing recovery this year, he said.

The foreclosure inventory of prime adjustable-rate loans rose to 10 per cent in the third quarter, more than doubling from a year earlier, while prime fixed-rate loans more than doubled to 1.95 per cent, said Jay Brinkmann, chief economist of the Mortgage Bankers Association in Washington. The surge in prime ARM foreclosures is coming at a time when rates are resetting lower, reducing monthly payments, he said.

‘If you have a prime adjustable-rate mortgage resetting in 2010, you probably are going to see your rate go down,’ Mr Brinkmann said. ‘Still, prime ARMs are defaulting at a higher rate because these borrowers were the risk-takers who chose the initially lower payments so they could stretch to get into a house.’

While an increase in prime foreclosures will slow the housing recovery that began last September, it won’t be enough to knock it entirely off-track, Prof Case said. Home resales last November rose to the highest level in almost three years, the third consecutive monthly gain, and the supply of new homes for sale is at the lowest level in almost four decades.

‘That’s taking some of the pressure off,’ Prof Case said. ‘Hopefully in 2010 we’ll see some recovery.’

Source: Business Times, 5 Jan 2010