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Economists have been warning about it and now we see it starting to form - the next wave of U.S. foreclosures is maturing, even as you read this.
The last wave, made up of sub-prime borrowers and others with risky adjustable rate loans, is washing out, according to data from the Mortgage Bankers Association, and a new crest is building. This time it consists of mostly prime (good-credit) homeowners who have simply lost jobs in this poor economic climate.
"You can't expect a recovery in the housing market in the absence of a recovery in the jobs market," said Jay Brinkmann, the association's chief economist as quoted on CNNMoney.com. "It takes a paycheck to make a mortgage payment."
The MBA statistics show that the number of borrowers who are seriously delinquent - at least 90 days late - fell in the second quarter compared with the first quarter of 2010 and there were only 4.57 percent of all homes in foreclosure in the second quarter compared with 4.63 percent the previous quarter.
That's the good news. Here's the bad news: One in ten U.S. mortgages is late by at least one payment. One in ten! And seriously delinquent payments, while down for the quarter, are still up compared with last year. And perhaps most important of all, there was a significant rise in the number of newly delinquent loans in the second quarter. Those late by just one payment, or 30 days delinquent, made up 3.51 percent of all borrowers in this latest quarter, up from 3.31 percent at the end of 2009. This category of delinquencies had been consistently declining during the whole of last year.
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From here, whether or not this next foreclosure wave turns tsunami definitely depends on the employment market. Certainly mortgage modifications can help. Although the government efforts at loan modifications have been disappointing (a 50 percent dropout rate as of July), some private bank programs have seen greater success at preventing foreclosure, especially recently.
But modifying loans in this new wave is a secondary concern. It comes down to whether or not these delinquent borrowers can get jobs again in the near future. And there is little talk of jobs coming back anytime soon. In fact, a Wall Street Journal blog post this week cited the research of economists Vincent and Carmen Reinhart who have studied post-World War II economic crises and their aftereffects.
They have found that "income growth tends to slow and unemployment remains elevated for a very long time after a severe shock."
The Journal article added that "in ten of the 15 cases they looked at, unemployment never returned to its pre-crisis low in the 10-year window after the crisis occurred. In many cases, unemployment has never gotten back to where it was. One example: The unemployment rate in Japan hit a low of 2.1% before its stock market and housing sector busted in 1992. It has not gotten lower than 3.8% since then."
So if the recession technically ended last year, we are looking at higher than desired unemployment until 2019. There are plenty of homes that can be lost in that time frame. Let's just hope the Reinharts are wrong, but we may want to prepare for high water just in case.
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