Mortgage defaults are rising again after nearly a year of trending downward, raising concerns about homeowners falling behind on their payments and undermining whatever nascent housing recovery may be under way.
First mortgage default rates rose to almost 2 percent in September and second mortgage default rates rose to about 1.3 percent over the same period, according to recent data from S&P Indices and Experia. The uptick in defaults is the first increase since November 2010. A mortgage is considered in default after 180 days of nonpayment.
But perhaps even more troubling are the increasing instances of mortgage delinquencies reported among the nation's largest consumer lenders. Wells Fargo said delinquencies of more than 90 days in its consumer loan portfolio rose 4 percent, according to a report in the Financial Times, prompting the bank to increase its provision for consumer-banking losses for the first time in two years.
A slew of other major banks, including Citi, JPMorgan, and Capital One, also reported rising delinquencies, the Times reported, more evidence that rock-bottom mortgage rates and government efforts are doing little to help struggling American homeowners.
"It is clear that the downward trend we saw through most of 2010 has stopped," said Jay Brinkmann, Mortgage Bankers Association's chief economist, in the group's latest delinquency survey release. "Mortgage delinquencies are no longer improving and are now showing some signs of worsening." Given the stagnant economic climate and deterioration in the labor market, experts fear the rise in delinquencies could translate into more defaults, and while not cause for alarm at this point, the turnaround in consumer credit could be an inflection point. "The latest month had a blip in the upward direction and we need to watch out because it's the first time that we've seen all of the credit types—we're talking 1st, 2nd mortgages, bank loans—move up," says Maureen Maitland, vice president of Standard & Poor's Indices. "We're not entering a very comfortable period with everything that's going on in the economy and housing market in general."
That makes recent rumors of a new government-sponsored mortgage assistance program seem all the more urgent. Details remain sketchy, but state and federal officials are in talks with major banks to allow creditworthy homeowners current on their payments to refinance underwater mortgages, according to The Wall Street Journal. The negotiations are part of a larger effort to settle allegations of bad foreclosure practices.
Homeowners with negative equity typically aren't eligible to refinance their mortgages, but the proposal will allow homeowners who are current on their mortgage payments to do so, potentially easing the financial burden and giving consumers' budgets a break.
While this particular proposal would only affect the 20 percent of homeowners with mortgages owned by commercial banks the Journal reports—the vast majority of mortgages today are backed by government-sponsored enterprises Fannie Mae and Freddie Mac—economists project that a larger scale refinancing initiative could free up more than $70 billion for consumers to spend elsewhere. Low consumer demand and spending have been hallmarks of the weak recovery.
Even inklings of help for the housing market seem encouraging when contrasted with the government's past policy on housing, which has been, essentially, to stand on the sidelines. Banks and big corporations have received government bailouts, but struggling homeowners still haven't seen much aid from Washington. While limited in scope, a potential deal to help homeowners avoid foreclosure could ultimately help the housing market regain ground.
Yet experts don't hold much hope for the new plan. "While this proposal is better targeted than most, it is likely to be announced as a general solution rather than the limited program that it is," Heritage Foundation analyst David C. John wrote in a blog post Wednesday. "That means the hopes of many will again be raised, only to be dashed when the details are uncovered."