Delinquent Mortgages Are Soaring; Foreclosures Aren't

Due in part to various foreclosure moratoriums and also just a plain logistical backlog, a curious thing is taking place. While the number of mortgages that are seriously delinquent has been soaring, the rate of actual foreclosure repossessions is only creeping up.

Nationally, according to First American Core Logic, a big title insurance firm, the repossession rate was 0.7% in May -- up from 0.6% a year ago. At the same time the number of mortgages that are more than 90 days past due has increased to 6.5% of all mortgages -- up from 4.0% in May of 2008.

It is said that California leads the country, so this article from the L.A. Times may show where the rest of the country is headed. There, the repossession rate is actually down to 1.0% from 1.1% a year ago. At the same time, the serious delinquency rate (90+ days) has soared to 9.5% from 5.0% a year ago.

In other words, the consequences for not paying your mortgage have gone down. For many people it is possible to live rent- and mortgage-free for over a year.

A big part of the problem could be just the logistical bottlenecks of handling so many foreclosures. As a bit of anecdotal evidence, a commentor on a blog I read regularly (Calculated Risk) who is a real estate lawyer in Florida, reports that a single judge in Miami has a docket of over 40,000 foreclosures. While that is not exactly an ironclad source, I have found her to be a reasonable person in the past, and have no real reason to doubt her.

The other part of the problem is that if the bank actually forecloses, there is no way that it can avoid recognizing the loss. By letting things slide, they can extend and pretend that eventually everything will get caught up. They also avoid the upkeep costs on the foreclosed property.

So in the short term, this non-foreclosure strategy can be beneficial to the banks like (but not limited to) Wells Fargo (WFC) and Bank of America (BAC), at least from an accounting perspective. Also, the house is less likely to be vandalized if the "owner" is still in it than if it is vacant.

It is also obviously beneficial to the non-paying homeowner, who now has significantly more available cash each month. Those that chose to take simple steps like demanding proof that the mortgage servicer has actual legal claim to the house (the paper work is often messed up) can delay the actual repossession even more.

The danger is that more and more people will end up going down that route. The cash flow to the banks and the holders of the mortgage backed securities is obviously hurt a great deal. This is creating a huge foreclosure backlog. Either all those 90+ day delinquent mortgages will be cured, or the number of actual repossessions will soon skyrocket. The final alternative is that a large portion of the population will be living rent-free indefinitely.

Of the three scenarios, the most likely one is that the rate of actual repossessions will start to pick up. Given the rising unemployment rate and the exceeding long length of unemployment in this recession, having large numbers of these delinquencies cured seems exceedingly unlikely. If the current situation keeps up with no consequences for not paying your mortgage, we could end up with an economy that looks sort of like a third-world country, where large numbers of people are effectively squatters with unclear titles to property (Hernando de Soto has written extensively on this in the case of Peru), which will eventually choke off the economy.

However, for the short term, if you are living in an underwater house and are having a hard time paying your mortgage, the last thing you want to do is mail in the keys and move out. That will hurt your credit almost as much as an actual foreclosure. Better to put the money aside and wait for the sheriff to show up at the door. He might be awhile in coming, and in the meantime, you live rent- and mortgage-free.

Not great advice for the economy as a whole, but for the individual it is probably the best course of action, provided you are likely to lose your house anyway. Eventually, that sheriff will show up, but in the meantime you will have improved your cash flow by thousands of dollars a month.

Comments

[Neil459:]

Even better, pay 25% of your mortgage and there is a good chance that all of the non-payers will be scheduled for foreclosure before you are. You might be able to stretch the low rent out for several years.

Jul 09 09:17 AM

[Lies and Da...:]

Interesting observation but I would suggest that the actual backlog is
[Properties that are delinquent]-[Properties sold in a short-sale situation]=[Foreclosure backlog]

Foreclosure, without a doubt, is an expensive and lengthy process. By allowing a delinquent owner squat on the property banks are allowed to time-shift the loss into the future (spreading the pain instead of sinking the ship).

Benefits for the bank:
*Home "owner" maintains the property. Saving the banks money.
*Avoidance of expensive legal fees.
*Able to time-shift losses into the future.
*Hires an agent and lists the property are a short-sale. Short-sales, in general, sell for more than a foreclosure.

Benefits for the owner:
*Lots of extra cash each month.
*Credit is not impacted as much.

Benefits for the potential buyer:
*A discount in comparison to normal sales.
*Property tends to be in much better shape than a foreclosure.

So what exactly is the incentive for a bank to seize a property? They would lose more money regardless of what happens.
They'd have to pay for the maintenance of the property, the court fees, be forced to recognize losses NOW and still will have no income from the property.

Jul 09 09:24 AM

[greedcanbgood:]

There's just no way that banks and mortgage companies have the resources to foreclose on so many properties. In addition, the "big, bad bank" mentality still exists out there. I'm not suggesting that there isn't monetary benefit in trying to work things out with the debtor but you can't tell me that there isn't a teensey weensey bit of a PR, face-saving angle out there as well.

Jul 09 09:53 AM

[User 443884:]

While I understand the options you've presented, I think you overlooked the best option for many who are behind on their mortgages. Lenders are more willing to do a loan modification and thus help both the lender and the homeowner avoid what you have described as an unavoidable foreclosure down the road. It's better for both. Checkout my website for a free report to learn more about loan modification as well as other options for struggling homeowners.

Jul 09 10:00 AM

[FDNY RET:]

Don't forget the other Wolf at the door.

The City/Town/County etc is not happy with their loss of real estate taxes which is their lifeblood. The Bank also does not look favorably to taking possession and becoming liable for the payment of this lien on the property which continues to build in many cases, and makes the property even more "unsaleable" beyond it's loss of value plus Bank mortgage liens.

Jul 09 10:11 AM

[ewing:]

The banks should also consider that someone who is not making mortgage payments also has no incentive to maintain the the structure. A leaking roof or pipe is now a considerable expense to the squatter as he knows he will eventually have to leave and in the mean time the value still goes down. The banks and homeowners are both acting irresponsibly. Another example of why socialism does not work.

Jul 09 11:23 AM

[Gampa98:]

California and Florida were at the top of the real estate boom, and therefore probably leading the delinquent brigade. I doubt if the delinquency rate will translate to the rest of the country where the boom was not so evident.
Case in point. My son refinanced his home north of Raleigh just this past April at a low 4.75% fixed rate. The bank appraisal on his home was up 12% in four years.
My daughter-in-law works for Wells Fargo in Charlotte. She's been flooded with ref-fis for the past year. Not all of the news is bad.

Jul 09 11:36 AM

[Troyhector:]

With the rise in unemployment rates and inability of the helpless borrowers to repay the loans, mortgage deliquencies are on the rise.
The unemployment rate in the nation, which stands at 9.4% currently, may even increase to alarming double digit number making the financial situation even worse for the borrowers to repay. The layoffs of many workers have been permanent and hence, their hopelessness in recovery of the jobs or helplessness to repay mortgage over time looks bleak and they resort to foreclosure than choosing to invest or borrow more money on something that they are not sure whether they would be able to afford in the long run.

Read more www.housingnewslive.co...

Check out www.housingnewslive.co...

Jul 09 01:53 PM

[Fitz919:]

The Author missed the answer bigtime! The reason foreclosures are slowing down has to do with Home Equity Lines Of Credit attached to those mortgages. When a foreclosure happens, any HELOC instantly has a value of ZERO. That means any lender will be reluctant to foreclose, because he has to report the full amount of that loss. Citigroup for example has so many properties with HELOCs, that the total amount when reported guarantees Citigroup's insolvency.

Jul 09 11:02 PM

[greedcanbgood:]

Fitz919 - The HELOC/1st mortgage relationship can be a little more complex than that. If a first mortgage goes through foreclosure, the HELOC is PROBABLY worth pennies on the dollar, sometimes more, sometimes less. If the HELOC is already non-accrual then the lender is as good as reporting it as a loss anyway.

Jul 10 09:46 AM

[User 444841:]

This is NOT socialism. In fact capitalism was the system that got us to this mess to begin with.
Sometime we have to find out as a nation what is real and stop putting tugs everywhere like WallMart does...

S


On Jul 09 11:23 AM ewing wrote:

> The banks should also consider that someone who is not making mortgage
> payments also has no incentive to maintain the the structure. A leaking
> roof or pipe is now a considerable expense to the squatter as he
> knows he will eventually have to leave and in the mean time the value
> still goes down. The banks and homeowners are both acting irresponsibly.
> Another example of why socialism does not work.

Jul 10 10:58 AM

[Rhett:]

Free rent? You people are a bunch of theives.

Jul 10 02:58 PM

[TinyTim:]

sounds more like a rational consumer to me.
Great comments.

There's also been a lot of buzz about how banks are not doing loan mods because of self-cures and repeats.

So the banks are frozen like a deer in the headlights.
Now we see why the TARP money isn't going anyplace.

Jul 10 07:33 PM

[RayD:]

Your statement seems to ignore the potential cash flow banks will receive from foreclosures.


On Jul 09 09:24 AM Lies and Damned Lies wrote:

> Interesting observation but I would suggest that the actual backlog
> is
> [Properties that are delinquent]-[Properties sold in a short-sale
> situation]=[Foreclosure backlog]
>
> Foreclosure, without a doubt, is an expensive and lengthy process.
> By allowing a delinquent owner squat on the property banks are allowed
> to time-shift the loss into the future (spreading the pain instead
> of sinking the ship).
>
> Benefits for the bank:
> *Home "owner" maintains the property. Saving the banks money.
> *Avoidance of expensive legal fees.
> *Able to time-shift losses into the future.
> *Hires an agent and lists the property are a short-sale. Short-sales,
> in general, sell for more than a foreclosure.
>
> Benefits for the owner:
> *Lots of extra cash each month.
> *Credit is not impacted as much.
>
> Benefits for the potential buyer:
> *A discount in comparison to normal sales.
> *Property tends to be in much better shape than a foreclosure.<br/>
>
> So what exactly is the incentive for a bank to seize a property?
> They would lose more money regardless of what happens.
> They'd have to pay for the maintenance of the property, the court
> fees, be forced to recognize losses NOW and still will have no income
> from the property.

Jul 13 01:49 AM