According to the Mortgage Bankers Association, 3.1 million households are 90 days or more late on their payment or in the foreclosure process and collectively called seriously delinquent. While still excessive by all comparisons to history, the number has dropped 28% from a high of 4.3 million at the end of 2009. The decline has been gaining speed and is now running at 10% reduction per year.
The primary driver behind delinquent mortgages is unemployment. Home owners who have a loss of income and are unable to make their mortgage payments usually have the option of selling their home and moving to a less expensive alternative. However, as house prices have fallen, that ability is truncated and a foreclosure, short sale or other bank assisted disposition is the likely resolution. To demonstrate the correlation between mortgage distress and unemployment, the graph shows each state’s level of both along with a linear approximation of the relationship. In simple terms, roughly a one percentage point decline in the unemployment rate will reduce the seriously delinquent rate by 0.8 percentage points.
As house prices continue to increase, more households who become unable to meet mortgage payments can sell their homes rather than default. And, as unemployment falls, fewer households will be unable to pay their mortgage. But, the number of home owners behind on their mortgage payments one month or more or in foreclosure (about 5 million) is still way below estimates of the number of home owners with a mortgage balance above current value (11 million). While an improvement in house prices or employment will reduce the rate, the unemployment effect appears to dominate one.
The relationship is shown in the graph where the extreme states are also noted.