Foreclosures Getting Out of Control

There has been enough talk about an impending next wave of foreclosures to suggest that indeed it’s going to happen. An article in the LA Times throws a little more information into the mix.

Just as the nation’s housing market has begun showing signs of stabilizing, another wave of foreclosures is poised to strike, possibly as early as this summer, inflicting new punishment on families, communities and the still-troubled national economy.

Amid rising unemployment and falling home prices, mortgage defaults have surged to record levels this year. Until recently, many banks have put off launching foreclosure action on the troubled properties, in part because they had signed up for the Obama administration’s home-stability plan, which required them to consider the alternative of modifying loans to make it easier for borrowers to make payments.

Just how big the foreclosure wave will be is unclear. But loan defaults are up sharply. And with many government and banks’ self-imposed foreclosure moratoriums expiring, the biggest lenders indicate that they are likely to move more aggressively to clear up a backlog of troubled mortgages.

I think the important information here is that the banks are reaching the point at which they are ready to start cleaning out the pipeline. Between state moratoriums and federal programs requiring them to consider modifications prior to foreclosure, the pace of resolution slowed. Having gone through the compliance phase, they’re now looking at an overwhelming amount of new inventory.

The Times article contains some useful data:

In the first quarter, some 1.8 million homeowners nationwide fell behind on their loans by 60 to 90 days, a 15% increase from the prior quarter, according to Moody’s Economy.com. The research firm said that loan defaults rose sharply as well, to 844,000 in the first three months of this year.

California accounts for an outsized share of mortgage loan defaults. A stunning 135,431 homeowners in the state were hit with notices of default in the first quarter, an increase of 11% from the earlier peak in the second quarter of 2008, according to real estate information service MDA DataQuick. Foreclosure sales in the state have been moderating after averaging a high of 26,500 a month last summer.

As I read those numbers, I don’t see any second derivatives at all. It appears as if the pace is accelerating. When you toss in the continuing decline in the employment picture — both increased joblessness and declining income for those still employed — it’s not at all unreasonable to assume that we aren’t near the bottom.

The earlier foreclosures, or the first wave if you will, most probably resulted from bad purchase or financing decisions. Homeowners who bought at the top of the market, or who bought too much house, or who got taken down by exotic financing or were done by a combination of all three. It was the natural result of a bubble unwinding and taking down the most aggressive players. In this second wave we’re probably seeing the harsh whip of the recession. Those being taken down now are being done in as much by economic distress as they are by housing bubble payback.

It’s a vicious downward spiral. As the economy deteriorates more are thrown into foreclosure and the more that are thrown into foreclosure, the more negative is the feedback loop to the general economy. Throw in those able to make payments but so far under water that they opt to strategically default and it becomes difficult to see the way out.

In the past I was an opponent of mortgage modifications. I’m not too sure that at this juncture something fairly radical might not be in order. We might be approaching a moment at which the only choice is to simply write-off big chunks of mortgages and restructure outstanding loans based on much lower principal balances. It will be a difficult and probably vastly unfair undertaking but the alternative of letting the market work through this seems to increasingly involve the risk of things spinning totally out of control.

Comments

[Mr. Cynical:]

Part of a solution has to involve expedited short sales. B of A is taking 60-90 days for a short sale even after they have a preliminary HUD on the table. Ridiculous. Speeding this process will allow saleable homes to move forward before the foreclosure sale.

Jul 05 01:55 PM

[valuepredictor:]

As author of “The Missing Keys to Thriving in Any Real Estate Market” it is not mere loan modification, tossing money at the problem, or simple write-offs. The problem started from a lack of need of current local info (due diligence) and a reliance of poor risk systems such as FICO, rating agencies, and a reliance on appraisers and present values, all of which have nothing to do with local information at the Block level. Until loans and underwriting take into account current local information and true risk, then only winners will be those who make commissions, and those who do not hold (flip), or those that buy at deep discount, and truly know that their local market has bottomed. HomeValuePredictor.com

Jul 05 02:56 PM

[Robert Gosney:]

So we had a housing bubble. Why has the correction been 40% so far rather than 15-20%? Voluntary defaults. Why would it spin out of control? Voluntary defaults. The voluntary default feedback loop is a self fulfilling prophecy. Keep your cash ready and look for any sign that the psychology is changing. There could be a stampede back into the market. I have read on Bloomberg that the last year that house prices reflected fundamentals was 2004. In my area home prices are below 1986 levels (about $0.25 on the dollar from peak [75% price decline]).

Jul 05 09:39 PM

[conceptwizard:]

1.2 trillion of Alt A's resetting over the next 3 years, we are about 35% of the way through them. Along with this Prime mortgage, Second Lien and HELOC delinquentcies are up drastically. We are no whee through this mortgage mess. Yes the subprime is about over. The Administration's Re-Fi plans flunk the grade. Yes that was an "F". Mortgage applications are down, Unemployment is up. People who want to sell cant and people who want to buy cant get money from the banks, because they wont lend, dont tell the media that though because they all have "Green Shoot" housing projects on the go.

Jul 05 11:56 PM

[Rolandownth...:]

As a person who is facing foreclosure himself, I can tell you it is going to get so much worse then you can imagine. First the banks are not modifying loans. I know of folks trying to negotiate modifications and the banks just aren't doing it. You have the problem of house way under water and the Obama plan doesn't cover them. Next, you have banks that aren't helping period, but throwing anchors instead of life rafts.
Next, the commercial bubble is coming fast. Sub-prime may be bottoming, but alt A's are just now going threw the system. Even those that are working have had reduction in hours and or pay. The banking investors are just plain unrealistic! Greed kills and absolute greed absolutely kills!
I don't see real estate bottoming out for many years to come, let alone getting ones value back could take 5 to ten years. This is a crises that is a depression. What is happening is just part of the overall meltdown. You need to see the larger picture. The dollar is ready to collapse. Martial law may become the norm, as everything from multiple states and government programs are about to be broke. Watch out for your pensions, 401k's, currency. America is broke and the world knows it. Wonder when our own country will figure it out?

Jul 06 12:38 AM

[derryl:]

PIMCO's Paul McCulley cites Hyman Minsky's 3 stages of finance, what he calls a "Minsky Journey"

www.pimco.com/LeftNav/...

Minsky's thesis is that stability is destabilizing, because we get lulled into thinking that the present state or trend is sustainable so risk taking rises and leverages up asset prices and a Journey begins.

First there is "hedge" finance where cash flows from operations cover both principal and interest payments. This is what we used to know as normal banking, a time of stability.

Next on the bubble train comes speculative finance, where cashflows can pay the interest but the principal must be rolled over when it comes due. This is the interest only loan stage where everyone, from the borrower to the loan originator to agency insurer to the Wall St MBS packager to the government regulator believes the loans are secure because asset prices keep going up. This belief is self-fulfilling.

Third and last is Ponzi finance where there are no cash flows and loans are made sheerly on expectation that the asset can be resold at a higher price. Loans are made purely on asset value with no concern about the borrower's present ability to service the loan.

Then comes what McCulley calls a Minsky Moment where the blinders fall off and affordability reenters the picture; i.e. when a buyer balks at the $600k price tag on a Las Vegas bungalow, and the whole process rockets into reverse.

So the first level of defaulters are the Ponzi buyers with no skin in the game who bought 1 or more houses with no intention of ever living in them or renting them out, pure price speculation. As soon as prices reversed they are toast. Or they are NINJA borrowers who were used, quite willingly, as fodder for mortgage originators who were supplying product for Wall St packagers. They never could make the principal or interest payments but nobody in the Ponzi finance phase cared.

The next level of defaulters are the speculators who maybe can rent out their properties and make the interest payments and even keep a few bucks for themselves. But when they start having to make principal payments or when interest rates adjust on their grossly underwater mortgages they bail. There's another wave of MBS fodder at this level too, homebuyers who could never afford a real mortgage on the house they bought but felt it was a good no money down investment in a rising market.

The third level of defaulters are people who qualified for realistic mortgages but who have suffered income loss from unemployment or investment deterioration and can no longer make the payments. I would say this is the only level of mortgagors who maybe deserve help.

Bank asset portfolios ride all the way down the reverse Minsky Journey. The prudent bankers who didn't lever up to enjoy the forward Journey are not now suffering insolvency during the downward Journey. But the money center banks who made megabillions in the Ponzi and speculative phases of the ride are now grossly insolvent but are being bailed out by US taxpayers, while the prudent lenders and borrowers are picking up the tab. But that's another story.

In the new normal assets like homes have to be affordable at our new long term reduced income levels. So prices have a long way to come down still before this thing can begin to clear. Coupled with the fact that the housing industry, fueled on speculative fervor, has built forward inventories of houses that the buyers never intended to live in, prices will have to sink way below affordable to clear this glut. Look out below, because no bottom is in sight yet.

Jul 06 01:06 AM

[Loan Survivor:]

There is no easy solution. It will get uglier before it gets better.

I also believe the government is trying to force banks into hiding the true extent of the problem. How many of us see vacant houses around us that aren't for sale? Why is that? What will happen to the number of homes in this category when banks increase their actual foreclosures?

Some type of incredible intervention will be needed to break the negative feedback loop on the housing crisis.

BTW - America may be broke, but so is most of the civilized world.

Jul 06 09:35 AM

[Joe Adamaitis:]

I sense a dose of reality here this morning. For those green shooters who latch onto any mirage of positive data, the truth must feel like daggers to the heart. (Sorry Larry)

If only we could focus on facts in this financial crisis and not spin the data, (as in, jobs fell 627k but it was less than analysts expected or shares of XYZ stock were up as they lost less than analysts expected: KEY Word ANALYSTS) perhaps then and only then can we truly assess the reality of what we're going through.

The most valid and important point I heard this morning (thanks Derryl) was that prices need to come down to align themselves with income levels. Accurately stated! Sellers and lenders continue to look for suckers to take them out of their misery and as long as this continues we will not hit the bottom. Further to this point is principal reduction by those who gained the most. And before everyone get's their shorts all bunched up over this comment, you need to truly get on board with where this entire mess originated from. The Top!

Billions made and now it's time to pay the piper. This isn't about bailing out foolish or greedy homebuyers. This isn't about giving people a free ride on the backs of taxpayers. This is punishing those who had the tools, the brains (we thought) and the sophistication to analyze the products, run the models in good times and bad, but went ahead and created and distributed this junk across the country. Now it's time to give back in order to stabilize not just the housing industry, but the worldwide economy!

I don’t care if you call it principal reduction or housing recovery action, keep the people in their homes and level the playing field against dropping prices. Get it over with and stop drip, drip, dripping the morphine! Until hard choices such as principal reduction and seller price reductions are made there is no way for us to get to this coveted issue of the bottom!

Jul 06 10:28 AM

[Jordan Lindsey:]

<As I read those numbers, I don’t see any second derivatives at all. It appears as if the pace is accelerating. When you toss in the continuing decline in the employment picture — both increased joblessness and declining income for those still employed — it’s not at all unreasonable to assume that we aren’t near the bottom.>

You cannot put it any simpler for folks out there!

Jul 06 03:23 PM

[Troyhector:]

Foreclosures are rising." In June, 281,560 were in process, slightly above the 277,847 in May. The stock market tumbled on news that housing foreclosures and delinquencies rose again in the first quarter. The Office of the Comptroller of the Currency said that among the 34 million loans it tracks, foreclosures in progress rose 22 percent, to 844,389. That figure was 73 percent higher than in the same period last year.
I think the situation would deteriorate even further since

* Massive Job losses
* There Is No Demand
* Since May, Mortgage Rates Have Gone Up
* Too Much Supply
* Option ARM – The Next Wave of Default
* Market Psychology

Check out this blog www.housingnewslive.co...

Jul 06 06:34 PM

[Northstar10000:]

You don't have to forgive directly. You can do the club house turn thing by simply mailing everyone a check. those who wish to make their mortgages whole will do so, those who don't won't have any belly aching to do. Those who rent can buy, others get to live in an apartment. The gov is printing billions anyway might as well pass a few billion bucks directly to the folks.

Jul 06 09:12 PM