Real Estate

Delinquency risk rising

Outlook for surging mortgage delinquencies worsens.

By Les Christie, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- As housing markets deteriorated over the summer, and a liquidity squeeze buffeted credit markets, delinquencies and defaults jumped. And now one forecast predicts that these numbers will climb even higher over the next six months.

The Core Mortgage Risk Monitor (CMRM), an index of foreclosure risk compiled by First American CoreLogic, increased by 1.6 percent compared with the three months ended June 30.

10 Riskiest markets
The major metro areas most likely to record high rates of delinquencies and foreclosures over the next six months.
Rank City State Anualized home price appreciation rate
1 Detroit MI -0.73%
2 Warren MI -0.13%
3 Youngstown Oh 2.05%
4 Dayton OH 2.38%
5 Toledo OH 2.15%
6 Cleveland OH 2.41%
7 Grand Rapids MI 1.88%
8 Memphis TN 4.87%
9 Akron OH 4.49%
10 McAllen TX 6.64%
Source: First American CoreLogic

The index predicts the chances that future mortgage loan delinquencies will occur and is based on such factors as fraud propensity and collateral risk (the accuracy and sustainability of home prices paid), house price dynamics and the health of local market economies.

Nationally, the index has settled into a level similar to what existed at the end of the last recession in 2001. And because the risk of default continued to rise for two years after that event, CoreLogic predicts the current risk index will keep going up for another 18 months or more.

While the national risk average has risen, scores among metro areas vary widely. "It's not necessarily a national problem," said CoreLogic's chief economist, Mark Fleming. "It's focused on local markets."

High risk markets have foreclosure rates and fraud and collateral risk indices three times the national averages. High risk markets also have job issues such as high unemployment of low wages and wage growth, all indications of economic stress.

By contrast, the lowest risk markets have low unemployment, high-paying jobs and solid job growth, moderate house price appreciation, low foreclosure rates, and minimal fraud and collateral risk. Overall, the rankings strongly support the assertion that mortgage risk is concentrated in specific regional or local markets.

The areas most affected by delinquencies are represented by Rust Belt localities such as Detroit, where the troubled auto industry has devastated the local economy. CoreLogic ranks it as the number one city for delinquency risk.

In more economically healthy areas, overheated housing prices in mostly coastal state communities can drive up the delinquency risk.

High home prices mean that a large percentage of buyers have overextended themselves to get into a home. They may have taken out mortgages with low initial interest rates that later reset much higher, counting on rising prices to allow refincing at lower rates.

But when home prices fell, those escapes shut down, and the risk of delinquency jumped. That's what's happening in many once overheated coastal-states.

Less at risk are cities where the economy remains healthy but prices never ran up at breakneck pace. If home prices are still rising, it further reduces risk. That insulates places Salt Lake City, where median home prices appreciated in double digits over the past 12 months, from wholesale delinquencies.

The fourth market category is made up mostly of what has been dubbed "Superstar Cities," places so attractive that even though homes are very expensive, people still line up to buy them. New York, San Francisco and Los Angeles are good examples.

Sky-high prices in these cities introduce an element of risk but steady demand and high barriers to development (limited open land, stringent regulatory atmosphere) keep prices from falling and risks low.

"The rise in home prices were supported by the fundamentals of the local economy," said Fleming.

Among the 100 largest cities, the major market with the highest risk for delinquencies, after Detroit, is Warren, Michigan, another auto-industry dependent metro area. The only non-Rust Belt cities in the top 10 are Memphis, Tennessee and McAllen, Texas.

The lowest risk metro area is Honolulu, followed by Salt Lake City and Richmond, Virginia. Top of page



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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.