Much of the recent commentary on the economy has been focused on the recovery, while seriously delinquent mortgages have quietly crept upwards. (McDash/LPS defines seriously delinquent mortgages as those that are 90 or more days delinquent plus those that are in foreclosure.) As of December 2009, 7.9 percent of mortgages in the nation and 7.6 percent of mortgages in the Fourth District were considered seriously delinquent. Since December 2008, seriously delinquent mortgages have increased 75 percent (3.42 percentage points) nationally, whereas in the Fourth District they have increased 48 percent (2.45 percentage points).
While it might be natural to suspect that subprime mortgages are responsible for the increase in seriously delinquent loans, this would be misleading. Currently, prime loans account for 83 percent of seriously delinquent mortgages in the Fourth District and 84 percent of mortgages in the nation.
Delinquencies in prime loans are rising mainly for two reasons: "underwater" mortgages and unemployment. Declines in home prices have left many homeowners with underwater mortgages. A homeowner with an underwater mortgage may choose to stop making mortgage payments because the value of the mortgage is worth more than the actual house. Eventually, the decision to walk away from an underwater mortgage leads to delinquencies and then on to foreclosure. The decision to walk away from an underwater mortgage is a personal decision involving many different variables (mortgage terms, the amount of the drop in home price, credit history, and so on), which makes estimating the potential number of underwater mortgages challenging. …