Richmond Fed: GSEs Encourage Mortgage Defaults 11 comments
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The Richmond Fed produced a report that provides some useful information on the issue of non-recourse mortgage loans and their default rates. The report includes a State-by-State breakdown of the rules for defaulting.
This report was over my head. For example, the following calculation describes the probability of a short sale in a Recourse State:
The conclusions are easier to read. I found this interesting:
For homes appraised at $300,000 to $500,000, borrowers in non-recourse states are 59% more likely to default than borrowers in recourse states. For homes appraised at $500,000 to $750,000, borrowers in non-recourse states are almost twice as likely (100%) to default as borrowers in recourse states while for homes appraised at $750,000 to $1 million, borrowers in non- recourse states are 66% more likely to default.
California is the largest State that is also a non recourse State. It is also a place where a significant amount of properties are worth >$300k. Given that the anticipated default rate is 70+% greater then in another State it tells you what is happening and what will continue to happen for Cali-jumbo mortgages. It is a black hole. Given this, why would anyone be willing to lend in California?
Also from the conclusion is the following. It took me a bit to understand the double negatives. When I see words like this I just assume that it is an effort to obfuscate something.
We cannot reject the hypothesis that recourse does not have an effect on Loans held by the Government Sponsored Enterprises.
In the body of the paper is a better explanation:
Recourse does not have a significant impact on the probability of default for mortgages held by a GSE.
I found that to be a startling observation. What this means is that people will more likely default on a GSE loan than a private lender regardless if they are in recourse or a non-recourse State. This can only be attributable to the following mindset:
I owe this mortgage to the Feds. Even though they have the right to go after my bank account to pay this off I know they will not. So screw them, I‘m not paying. There is no downside.
The confirmation for this comes from the Richmond Fed:
The probability of default by foreclosure increases by 7% for mortgages held by a GSE as compared to the mortgages held by private lenders.
This report was sent to Congress. I doubt they will read it. Barney Frank, one of the chief ‘deciders’ on all of this should read it. The conclusion is obvious. When the government makes mortgage loans they are encouraging defaults. As lenders they appear to have no teeth. This is a hell of a predicament given that the D.C. lenders are currently 95% of the new mortgage market. The total value of mortgages held by Uncle Sam is $7.5 Trillion.
The most significant contribution from this piece is a well-organized discussion of who can do what to whom and when can they do it on a State-by-State basis. That information can be downloaded at this site. The information on the individual State Laws starts on page 43 and ends on 54.
The following is a summary of that information. If you are thinking of defaulting on your mortgage you might take a look at these sources. Who says the government doesn’t provide useful information?
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Also, you should not confuse past history with future performance. Yes, the GSE are doing a large part of the market now, but the loans that they are booking today do not look like the loans that they booked in 2006-2008, and to suggest that you will see similar performance from the 2009 vintage is unfounded.
The real issue isn't with availability of mortgage funds for california vs another recourse state, say the state where I live, Illinois. The issue is why is a california borrower able to get as low a rate, given all other details being the same, with the rate that I can get in Illinois?
The intervention in the market place that causes the mis-pricing of these risks is what a large portion of the problem is.
Regards
> Also, you should not confuse past history with future performance. Yes, the GSE are doing a large part of the market now, but the loans that they are booking today do not look like the loans that they booked in 2006-2008, and to suggest that you will see similar performance from the 2009 vintage is unfounded. >
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How are they different? Some had posted some stats on here not too long ago that they were still making low interest loans to people with marginal credit scores with very low down payments ie.3% to 5%(?) and that many were apparently using the $8,000 government credits albeit in a somewhat circuitous fashion, through relatives etc. so that many were putting virtually nothing down.
That sounds to me like the recipe for the disaster we've been experiencing. People getting loans with little to no skin in the game. If the paper is saying there is also little or no recourse, it sounds like quite a risky gamble of yet more trillions of taxpayer dollars in an attempt to keep at least some of the air in the housing bubble.
On Nov 06 02:38 PM woollyB wrote:
> I've been waiting for more coverage/recognition of this issue. The
> crisis will be at fever pitch when millions of people decide they
> are so far underwater that they don't care about the moral obligation
> to repay and don't care if their credit scores are ruined. The deed/rent
> plan Fannie just announced (as well as Wells Fargo's new "plans")
> indicates that the reckoning is drawing ever nearer.
You might be correct in a limited sense as certain things such as option arms are no longer available. But you need go no further than the FHA data to see government support of a subprime model is alive and well. Additionally, there is substantial evidence, witness for example the agriculture department's guarantee of mortgage loans in supposedly rural areas and the plethora of buyers who would not qualify for loans absent the tax credit to know more pain is still being built into the system. The next check point may well be when the FHA finally releases the audit of it's capital adequacy that was due last Wednesday.
On Nov 02 09:05 AM drb116 wrote:
> I think this analysis misses several correlations. Since the GSE
> are limited to small loans, I don't think it is fair to compare GSE
> foreclosures to the overall market. You would need to compare the
> GSE foreclosures to foreclosures with similar loan sizes. I am pretty
> sure that if you looked at dollars foreclosed, you would see the
> GSEs have a much smaller share.
>
> Also, you should not confuse past history with future performance.
> Yes, the GSE are doing a large part of the market now, but the loans
> that they are booking today do not look like the loans that they
> booked in 2006-2008, and to suggest that you will see similar performance
> from the 2009 vintage is unfounded.
First: It's FEDSPEAK. Go figure.
Second: The algorithm is incomprehensible to anyone but the quants who developed it.
Third: Don't expect Barney to read the legislation he has proposed except that which is highlighted by his staff.
Fourth: Conclusion. Defaults will continue. The taxpayer/debt/equity players hold the "bag".
Fifth: It doesn't take two economists studying data for many months at great expense to develop this theory and provide reasonable evidence of GSE default problems.
Sixth: The report is intended to be over your head. It pays better to be a GURU or guru assistant.