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Texas Housing and Mortgage Update

Texas and other areas in the Eleventh District did not experience a drastic home appreciation or expansion of exotic mortgages in the lead-up to the recent recession; therefore, the region did not get into a mortgage crisis as severe as in some other parts of the nation (Figure 1). However, the region has not been immune to the consequences of the financial system turmoil and the economic slowdown.

Although Texas' foreclosure rate as a percentage of total mortgages serviced has stayed lower than the national level since 2007, it increased throughout the recession (Figure 2). The foreclosure inventory exceeded 2 percent for Texas and 4.6 percent for the nation in first quarter 2010 and then dropped afterward, partially attributed to the demand surge with the homebuyer tax credit. The foreclosure inventory bounced back in fourth quarter 2010. The increase may be related to a seasonal drop in sales but suggests that foreclosure activities may not have peaked. The inventory has resumed growing since third quarter 2010.[1]

Geographic Variations

Mortgage loan performance varies across Texas. Table 1 shows the volume of mortgages and delinquency rate for the 30 Texas counties with the largest numbers of prime loans being serviced in the Lender Processing Service database. These counties share a similar story: Subprime accounts for only a small percentage of total loans serviced, and the foreclosure rate for subprime is much higher than for prime loans. In the four large counties in North Texas—Dallas, Tarrant, Collin and Denton—over 24,400 prime and 6,100 subprime mortgages are seriously delinquent.

Table 1 Mortgage Delinquencies in 30 Texas Counties (December 2010)
Prime loans							Subprime loans
County	Number serviced		Total past due (percent)		Seriously delinquent (percent)		Number serviced		Total past due (percent)		Seriously delinquent (percent)
Harris	385,637		8.92		3.85		21,507		41.21		27.34
Dallas	232,185		10.19		4.5		10,345		42.21		28.82
Tarrant	205,748		8.96		3.94		6,577		41.37		28.3
Bexar	174,901		9.26		3.62		6,218		40.4		24.96
Travis	124,482		5.33		2.3		2,495		35.63		22.57
Collin	114,093		5.9		2.65		2,354		41.08		29.14
Denton	100,050		6.53		2.83		2,268		40.92		27.07
Fort Bend	75,193		7.48		3.34		3,428		42.68		28.82
Williamson	70,820		6.55		2.68		1,403		40.27		26.66
El Paso	55,617		9.09		3.15		2,771		37.57		22.09
Montgomery	55,175		6.48		2.66		1,677		38.64		23.91
Bell	38,376		7.08		2.95		647		36.01		23.8
Galveston	37,470		7.21		2.99		1,476		39.97		25.68
Hidalgo	33,078		11.4		4.25		2,840		40.49		24.33
Brazoria	32,194		7.94		3.51		1,268		45.58		29.18
Nueces	27,560		9.07		3.39		1,146		40.23		23.65
Lubbock	25,559		7.39		2.43		515		33.4		16.89
Cameron	21,604		11.32		3.81		1,486		38.56		23.22
Hays	20,798		7.37		2.94		487		41.68		26.28
Ellis	17,365		11.45		4.95		737		41.93		26.73
McLennan	17,310		7.4		2.69		491		38.9		20.57
Comal	16,684		6.16		2.5		350		39.71		22.57
Johnson	16,523		10.23		4.3		542		38.01		23.62
Brazos	15,946		4.21		1.2		271		33.95		17.71
Smith	15,209		7.05		2.68		435		45.75		28.97
Guadalupe	14,843		6.27		2.31		266		39.47		22.93
Webb	14,004		15.24		4.96		954		45.81		28.3
Jefferson	13,336		10.21		3.76		620		40		24.84
Rockwall	12,867		8.03		3.56		299		41.14		27.09
Kaufman	12,685		11.79		5.17		474		44.73		30.59
Source: Lender Processing Services Applied Analytics.

Figure 3 shows Texas home price appreciation from fourth quarter 2009 to fourth quarter 2010. Texas had a smaller decline in home prices than the nation did. Home appreciation in all major Texas metros is likely to turn positive later in 2011 or in early 2012 if the state has a strong economic recovery.

The composition of loans in earlier stages of default indicates how many are in the pipeline for foreclosure (Figure 4). The foreclosure rate has been trending up over the past four years for the whole nation. However, there were fewer loans delinquent for 90 days and above in December 2010 than in December 2009, which suggests that foreclosure activities are about to peak.

The same is true for Texas. In December 2009, serious delinquencies in the state reached almost 4 percent, but in December 2010 there were fewer loans about to foreclose. It is worth noting that in Texas foreclosures and serious delinquencies are less common than in the U.S., but the rates of 30-day and 60-day delinquencies have always been higher than in the nation. Texas borrowers seem to be more likely to miss one or two mortgage payments but are usually able to catch up in the third month. Although less detrimental than foreclosures, these delinquencies still impair borrowers' credit. A lower credit score will limit the borrower's future credit access and increase the cost of credit.

A major contributing factor to the increase in foreclosures during the earlier stage of the recession was the originations of risky mortgages—the nontraditional mortgages that extended credit at higher prices to borrowers whose mortgage applications may have been denied in the past because of poor credit or lack of down payment. These mortgages have financially overburdened some borrowers, leading to delinquencies and foreclosures. Subprime loans have the highest delinquencies among all mortgages. Figure 5 shows that at the late stage of the recession, serious delinquencies gradually increased among other types of mortgages as well.

The overall mortgage market performance mainly depends on the performance of loan types with large volumes. Figure 6 suggests that subprime loans did not have a large penetration in Texas, and the share has shrunk since the recession's beginning. A majority of loans being serviced are still conventional prime loans, but the share dropped from approximately two-thirds in 2007 to about 62 percent in fourth quarter 2010. The Federal Housing Administration (FHA) has expanded its share, although not substantially. According to the Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions, FHA has been the most common financing method among all home sale transactions in Texas in the past two years. Texas real estate agents' participation in the national survey varies month to month, but the dominance of FHA financing has been persistent in the survey results.

The delinquency rate for prime loans is the lowest among different loan types; however, it was closely trending with the subprime loans through the recession and went above 4 percent in early 2010 (Figure 7).[2] The deterioration of prime mortgage performance in Texas was likely caused by the broad impact of the economic recession, and in particular, the increase in unemployment.

Texas Gathers Momentum for a Recovery

Texas has a relatively healthy economy compared with the nation. Texas' energy, high-tech and trade sectors have enabled the economy to outperform the nation in the recovery from the recession. Even with the population surge in Texas during the past decade, the state's unemployment rate has been lower than the nation's by an average of 1 percentage point since January 2007 (Figure 8).[3] Rising oil prices also benefit the state generally. Still, the recent jump in unemployment in Texas was the largest since the Great Depression. It will take significant time to bring the high unemployment rate down to the level before the recession.

The performance of the housing sector directly affects employment in the construction sector and the demand for housing-related commodities. Particularly in Texas, construction is sensitive to housing demand. The number of building permits in the state at the end of 2010 was half the number at the end of 2007.

Approximately 30 percent of home sales in Texas were distressed in January 2011. The share was significantly lower than in the nation as a whole, which approached 50 percent according to the Campbell/Inside Mortgage Finance Survey. The increasing foreclosure inventory, lack of demand and large share of distressed sales have pushed housing prices lower (Figure 9). Texas home values didn't experience an abrupt boom and bust—as occurred in the nation—but appreciated at a slower pace during the recession and started depreciating in 2009.

According to the CoreLogic Report on U.S. Housing and Mortgage Trends, the share of homes with negative equity is approximately 23 percent for the whole nation, and Las Vegas–Paradise in Nevada topped all core-based statistical area (CBSAs) with a share of more than 73 percent.[4] In Texas, far fewer homes have negative equity. The state overall had approximately 11 percent, and Dallas–Plano–Irving and Houston–Sugar Land–Baytown CBSAs had about 14 percent and 12 percent homes with negative equity, respectively. The decline in housing assets and housing liquidity affects consumers' ability to tap housing equity for consumption. Overall, the housing sector remains a drag on a full recovery despite several positive signs in Texas.

—Wenhua Di

Notes

1. In the fall of 2010, several large loan servicers suspended foreclosures across the U.S. because of allegations of potential fraudulent practice in signing foreclosures. It is referred to as the "robo-signing debacle" because foreclosure proceedings were signed without careful verification of paperwork.
2. Among the loans serviced in December 2010 in the Lender Processing Services (LPS) database, only about 3.5 percent are subprime loans. The share of subprime loans in LPS is much lower than that in the Mortgage Bankers Association (MBA). MBA divides the conventional sample between prime and subprime based on whether the servicer handles primarily prime or subprime loans. Hence, there are some prime loans in the subprime sample and some subprime loans in the prime sample.
3. For more information, see "Texas Twist: Why Did State's Unemployment Fall Below Nation's?," by Anil Kumar, Federal Reserve Bank of Dallas Southwest Economy, Third Quarter, 2010.
4. The Office of Management and Budget defines a core-based statistical area (CBSA) as an area based around an urban center of at least 10,000 people and adjacent areas that are socioeconomically tied to the urban center by commuting.

e-Perspectives, Volume 11, Issue 2, 2011

Federal Reserve Bank of Dallas  Community Development Office  P.O. Box 655906, Dallas, Texas 75265-5906 214-922-5377
Alfreda B. Norman  Assistant Vice President and Community Development Officer		Julie Gunter  Senior Community Development Advisor
Jackie Hoyer  Houston Branch Senior Community Development Advisor		Wenhua Di  Senior Economist
Elizabeth Sobel Blum   Community Development Research Associate		Roy Lopez  Community Development Specialist
The views expressed are the authors' and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System. Articles may be reprinted on the condition that the source is credited and a copy is provided to the Community Development Office.