Professor Cole's Finance Blog

Today, the Mortgage Bankers Association released its quarterly National Delinquency Survey for the second quarter of 2009, which shows that the delinquency rate for one-to-four residential properties rose to a new seasonally adjusted high of 9.24 percent of all loans outstanding and that the percentage of loans in the foreclosure process rose to a new high of 4.30 percent. In other words, the housing situation continues to deteriorate in spite of the administration's $50 billion foreclosure mitigation plan, which, thus far has been an abysmal failure. Almost one in seven mortgages is now delinquent or in default, and this doesn't include the additional millions of mortgages that are estimated to be "underwater," where the property is worth less than the mortgage.

Also of note in this report is the finding that the seasonally adjusted delinquency rate on FHA loans (insured by the Federal Housing Administration) rose to 14.42 percent. The FHA loan is the "new subprime loan." The FHA requires a down payment of only 3.5%, most closing costs can be included in the loan, and the FHA is "more forgiving" than other lenders when it comes to your credit history. I'm not making this up!

One aspect of this problem that has been neglected is the feedback effect that the housing market has on employment. According to the U.S. SBA, small businesses account for more than half of all employment growth in the U.S. Home equity is the seed capital for most small businesses. As home equity has dwindled during the financial crisis, so has the equity position of most small businesses. When a firm's equity base is declining, it is likely to cut back on employment. Hence, the financial crisis has brought about a decline in small business equity as home equity has declined, which leads firms to lay off workers, who then cannot pay their mortgages, leading to more foreclosures and completing the feedback loop.