What happens when the housing crisis collides with rising unemployment?

The answer, according to close watchers of home foreclosure activity, is a “second wave” of default notices, this time targeting homeowners who’ve fallen behind on mortgage payments because their paychecks have vanished.

The first wave of foreclosures, which didn’t hit Oregon nearly as hard as it did boom states like California, Florida, Arizona and Nevada, was triggered by the sub-prime loan debacle. It rolled across the United States unevenly, both in terms of timing and in terms of geography.

But one of the nation’s highest unemployment rates marks Oregon as prime territory for a second wave, this one triggered by income loss.

Tom Heinicke, a broker with Portland-based Meadows Group Inc., discussed the phenomenon in the latest issue of Real Estate Quarterly, published Thursday by the School of Urban Studies and Planning at Portland State University.

Even as the housing bubble was popping around the country, Oregon appeared “largely unscathed” until late 2007, he said.
But citing data from the Mortgage Bankers Association, Heinicke said Oregon’s share of delinquent loans nationwide topped 5 percent in the fourth quarter of 2008, an increase of 70 percent from the fourth quarter of 2007. And for calendar 2008, he said, Oregon accounted for 7 percent of the nation’s total.

Delinquency began to climb in Oregon in 2006, according to Heinicke’s data. But the dramatic spike didn’t come until late 2007 — a year in which the state’s unemployment rate never crept above 5.6 percent, generally remaining closer to 5 percent.
“The bulk of short sales and foreclosures that surfaced in the early stages of the downturn,” Heinicke said, “were the result of sub-prime lending practices, particularly among low-income, high-risk borrowers.”

The same phenomenon — a spike in foreclosure activity, coming against the backdrop of a relatively stable job market — played out in Yamhill County in early 2008.

The county logged only 53 trustee deed transfers, typically pegged to properties sold at auction as part of the foreclosure process, in 2007.

Foreclosure activity began to pick up in 2008. Almost 120 default notices, which mark the state of the foreclosure process, were recorded by the Yamhill County Clerk in the first four months of that year.

The county started hemorrhaging jobs in the fall of 2008 — several months later. As a result, local unemployment running about 5.1 percent at the end of 2007 is now pushing 14 percent.

While rising unemployment clearly couldn’t have caused the first wave of local mortgage defaults, it certainly could trigger a second wave. There is typically a lag of several months, however, as the foreclosure process is a lengthy one, particularly when it is initiated in response to loss of a job.

A month or more can pass between a pink slip and that first missed payment. Several more months may pass before the bank issues a notice of default. And it may be months later before the foreclosure process runs its course, if it comes to that.
So the prospect of what the loss of 500 local jobs February might mean for home foreclosures this summer and fall is alarming.

“I would agree, the second wave is largely a result of growing unemployment and shrinking salaries,” Heinicke told the News-Register. “We certainly haven’t seen the full extent of this development, and it may drag on for a while.”

“It certainly makes sense that when people are unemployed that they have an increased risk of foreclosure,” said Patrick O’Conner, the regional economist responsible for assessing Yamhill County unemployment. “That is the case in even a normal housing market or a normal recession.”

Another factor plays into all this: Some have speculated that the pace of foreclosures the last couple of months may have been slowed artificially by government-mandated and bank-specific moratoriums that have since expired.

“A lot of the banks, I think, pulled back to sort of get a handle on the situation,” says Megan Ramos, a home ownership specialist with the Housing Authority of Yamhill County.

A spokeswoman for the California-based industry group RealtyTrac on Friday concurred in that. “We believe the various moratoria, as well as lenders holding back on initiating foreclosure on many properties until they heard the specifics of the Obama foreclosure prevention plan in early March, kept the numbers artificially low for most of the quarter,” said Tammy Chan.
Now that those moratoria have expired, Ramos said she’s starting to see banks moving ahead again with foreclosures. And others are seeing the same phenomenon occurring elsewhere.

Kelly Edmiston, a senior economist for the Federal Reserve Bank of Kansas City, said he doesn’t expect the foreclosure problem ease appreciably in the next couple of years. If that seems a frightening prospect in itself, he also warned, “In fact, it may well get worse.”

Nationally, the number of homes facing foreclosure grew 24 percent in the first three months of this year, compared to the same period in 2008, based on the filings that initiate the process.

And 2008 was hardly a down year. In all, 2.3 million households were served with foreclosure filings, more than twice the number logged in the pre-recession year of 2006.

In a public appearance early this year, Federal Reserve Gov. Elizabeth Duke said the percentage of mortgages entering foreclosure is likely to increase. Even if the number of filings begins to decline, the lag time built into the process means “we are still likely to see higher levels of property taken as foreclosures initiated earlier are completed and the share of those foreclosures resulting in the loss of a home increases.”

Meanwhile, there’s another cloud bank on the horizon: Some analysts fear the commercial real estate market, saying it faces problems mirroring the bust of the early 1990s.

Delinquency rates on loans for hotels, factories, office complexes and shopping centers have risen sharply in recent months. And that is likely to continue through the end of 2010, as companies lay off workers, downsize or close.

— The Associated Press
contributed to this report.