Foreclosure Waters Rising Fast

There is more data showing that we are far from out of the woods on the housing/mortgage front.

The graph below (From a Freddie Mac (FRE - Analyst Report) presentation, by way of http://www.calculatedriskblog.com/) shows the changing composition of FRE backed mortgages by Loan-to-Value (LTV) over time. What is striking is the rapid growth of the top yellow group in the graph from near zero in 2006, to 17% of the portfolio at the end of the first quarter. These are the people who are underwater on their houses, and represent the greatest risk for default or foreclosure. In addition 11% of homes have less than 10% equity.

If we extrapolate out the 17% to the 51.6 million houses with mortgages, then there are currently 8.8 million houses underwater. However, the Freddie portfolio is much better than average, so this has to be considered the absolute low estimate of underwater houses. The numbers at Fannie Mae (FNM - Snapshot Report) should be similar to those at FRE. The real problems were the loans that went into the private label mortgage backed securities.

One good measure of how much better the FRE portfolio is than average is the 90+ day delinquency rate. At the end of the first quarter it was running 229 basis points for all FRE single family houses. By comparison the Mortgage Bankers Association (MBA) puts the nationwide prime conventional delinquency rate at 479 basis points.

The worst problems FRE has is with mortgages which were initiated in 2007, 34% of which are now underwater, followed closely by those initiated in 2006, where 32% are underwater. However, it takes time for serious delinquencies to show up, and the rate at which they did so was much faster for the 2007 vintage loans than for the 2006 vintage loans. The scary thing is that the 2008 loans so far look even worse (given their seasoning) than the 2007 loans.

Foreclosures are going to be a serious drag on the results of the banks with big exposure to mortgages, like Bank of America (BAC - Analyst Report) and Wells Fargo (WFC - Analyst Report) for the foreseeable future. The recovery in housing will be very slow, and since residential investment is usually the key locomotive in pulling the economy out of the ditch at the end of recessions, progress on the economy will be very slow this time around.