Unpacking the post

Yesterday, Panet Money posted about new forclosure data. It's a bit too concise, but iportant and I wanted to take a moment to go over what is being said. Ready? Lets go:

Foreclosures spiked by 30 percent last month. All told, 290,631 homeowners got either the news or the boot, depending on how far along in the process they were. The Mortgage Bankers Association calculates that 11.18 percent of all loans was either in foreclosure or at least one payment behind.

One thing to note is that, historically, 3% of all mortgages will end in a foreclose. This is a reality, and mortgage lenders expect this. The 3% figure is based on the number of mortgages and does not have anything to do with dollar amounts being lent out.

This financial crisis all began because people had expected that that 3% default rate would be consistent regardless of whether or not the people who were getting the loans today met the same qualification standards as those people from yesterday (from which the 3% figure was derrived). The crisis, therefore, is that the default rate is higher (at 11.8%, it is almost four times higher) than anyone had planed it to be. This led to all sorts of other problems, which I won't get into here. Anyhow:

The fear now is that the new foreclosures are driven by rising unemployment, and not fallout from the subprime mortgage crisis. New weekly claims rose by 9,000, to 654,000.

Keep in mind that the first wave of foreclosures came because interest rates were resetting, or home prices fell so that they were upside-down on their loans, or they could contractually no longer pay only interest on the loan. The above section tells us that the first wave of foreclosures hurt the economy, but that now the hurt economy is leading to more foreclosures.

The other day at church coffee hour, of all places, I met a guy who does risk management for a major bank. He says they're solid through 10 or 11 percent unemployment. That's in the neighborhood of the Federal Reserve's "adverse scenario" for stress testing banks, at 10.3 percent unemployment next year.

This is the really scary part. The risk manager is saying that as long as unemployment rates stay below 10 or 11%, their bank (or the banking system generally, I'm not sure about which) is safe. This aligns with what the Treasury Department says. According to Planet Money, unemployment reached 8.1%.