Delinquency risk rising
Outlook for surging mortgage delinquencies worsens.
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.
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.