Foreclosure News Dampens Improving Economic Data
Even though stocks have rallied lately on improved economic news, mortgage foreclosures continue to hang like a cloud over the scene.
- An easing in unemployment gains and solid May reports from major retailers were the latest items that suggested the economy was continuing to avoid recession
- On the flipside, a mortgage report for the first quarter of 2008 showed that foreclosures and delinquencies continued to rise
- The foreclosure crisis was given its latest human face when it was reported that celebrity Ed McMahon was struggling to keep his mansion out of foreclosure
- Meanwhile, without fanfare, ten-year Treasuries ended May with a yield above 4.0% for the first time this year — a possible portend of higher mortgage rates to come
Mortgage Foreclosures: The Saga Continues
Mortgage foreclosures reached record numbers in the first quarter of 2008, with 0.99% of mortgages falling into foreclosure, up from 0.83% the previous quarter. Ominously, the mortgage delinquency rate also rose in the first quarter, from 5.82% to 6.35%. Delinquencies are defined as mortgages which are more than 30 days behind on payments, but which have not yet slipped into foreclosure.
The rising delinquency rate suggests that the foreclosure rate may yet climb higher. While not all mortgage delinquencies end up as foreclosures, since delinquency precedes foreclosure, it is natural to view trends in delinquencies as an indicator of coming trends in foreclosures.
The story of Ed McMahon’s brush with foreclosure will sound familiar to many Americans with mortgage woes — a combination of a financial setback and a property which has declined in value and can’t be sold has left McMahon seriously behind on his mortgage payments. Besides finding a familiar pattern in that tale, mortgage holders should also note that McMahon is reportedly working with his lender on a revised payment plan, an advisable step toward avoiding foreclosure.
In any case, both the broad data and the individual story are reminders that the foreclosure crisis has not gone away, despite generally improving economic news.
Will More Mortgage Holders Face Higher Rates?
While many delinquencies have been caused by adjustable rate mortgages for subprime borrowers or with gimmicky features which caused payments to reset to unnaturally high levels, the rise in ten-year Treasury yields is a warning that a broader population of mortgage holders could face higher mortgage rates.
In some ways, ten-year Treasuries are like the proverbial canary in the coal mine, being the first to sense a hazard. The rise in these yields is not surprising given the generally improving nature of economic news, but it could be an indication that further rises in mortgage rates are not far behind.
Refinancing Still an Option
For now, thirty-year mortgage rates remain at reasonable levels. However, anyone with an adjustable rate mortgage should look at the economic trend and consider refinancing to a fixed rate mortgage. A fixed rate mortgage can reduce financial risk by stabilizing mortgage payments. The continuing, sad stories of foreclosure are a warning of what has happened to some who didn’t heed this risk.
Tags: 2008, adjustable rate mortgage, economy, foreclosure, mortgage rates, refinancing
June 5th, 2008 at 1:49 pm
Given the general market indicators, it seems that the rates may be rising fairly quickly in the upcoming few months. Can you provide any suggestions on how to “time the market”? Also, what other options should one consider besides just getting a fixed rate mortgage?
June 12th, 2008 at 10:10 am
Market timing is a risky, and I think fundamentally unsound, investment strategy, and it makes even less sense with regard to purchasing a home. I think you hit the nail on the head when you said that rates may be rising fairly quickly in the months ahead, but even if you and I are wrong, the general volatility of rates proves one thing — be it housing prices or mortgage rates, conditions don’t stay in one place for a while. If a family can get a house they can afford under today’s conditions, it would be a shame if they missed out on that opportunity based on a guess that prices or rates might move lower still!
As for options in a rising rate environment other than just getting a fixed rate mortgage, another thing to consider is getting as long a mortgage as possible. Normally, I’d advocate getting a 15-year vs. a 30-year mortgage if you can comfortably swing the higher payments, but if you believe rates are setting off on a long-term trend higher, lower rates would have more economic value if you could lock them in for a longer time. For example, if interest rates generally moved significantly higher, you could find yourself able to invest the differential between a 30-year and a 15-year payment at rates higher than your mortgage.