Mortgage Delinquencies Continue to Climb, Watch Out for Other Loans

It's beginning to get really ugly out there... unfortunately 13 months ago when we were told "this is just a subprime issue" we repeatedly said subprime is a symptom of the problem, not the problem - it is the tip of the iceberg - we have alt A mortgages, option ARMs, prime mortgages, credit card loans, auto loans, student loans, credit card debt. It's all coming down the pike. It appears the pike is coming right at us. This is why I cringe each time 1 data point "improves" slightly and all the Kool Aid drinking bulls clutch to it and say "ignore the rest of the data". At some point we have to move from denial to acceptance. Specific to foreclosures we are probably 70%+ of the way through the subprime - by mid 2009 they should be "done" as they were the first to falter - now we move onto the red meat. Read on for the latest round of statistics via the Wall Street Journal

• The mortgage problems behind the havoc in financial markets climbed back last month, as delinquencies jumped at the fastest pace since last year for many loan categories. Overall, 6.6% of mortgages were at least 30 days past due at the end of August, up from 5.8% at the end of June and 4.51% a year earlier
• "The disturbing thing is that mortgage quality is bad and getting worse," said Mark Zandi, chief economist of Moody's Economy.com, which has data showing a similar trend. Mr. Zandi said the latest data "argues that foreclosures will remain very, very high well into 2009 and 2010." (agree) The rise in bad loans is being driven by higher delinquencies for mortgages originated in 2006 and 2007, when lending standards were loosest.
• All loan categories were affected in the latest data, though the largest percentage-point increase came on subprime loans, where the delinquency rate jumped more than 2.2 percentage points from June and July levels to 24.48% in August.
• But other types of loans deteriorated rapidly, too. Delinquencies on option adjustable-rate mortgages, which let borrowers make minimum payments that may not even cover the interest due, jumped 1.17 percentage points, to 14.38% in August. Delinquencies on Alt-A mortgages, a category between prime and subprime, also rose 1.17 percentage points, to 10.73%. In previous months, increases were smaller.
• Nearly 2.4% of jumbo loans made to borrowers with good credit were at least 30 days past due at the end of August, a fourfold increase from two years ago.
• Loans originated before 2004 are less likely to be delinquent, largely because lending standards were tighter and borrowers are more likely to have equity in their homes. (interesting "out of box" concepts, eh?)
• Job losses also are taking a toll on borrowers, said Thomas Lawler, an independent housing economist. Until recently, "so much of the horrendous credit performance has had nothing to do with the economy," Mr. Lawler said. "Now, we clearly see the employment picture deteriorating." (and that's the next shoe - usually the economy leads housing down. This is the first case that housing leads the economy down - now we'll pile the economic malaise on TOP of the housing issues)
• Delinquencies are highest in Florida, Nevada, California and Arizona. Unemployment rose in all four of those states between July and August. The unemployment rate for California rose to 7.7% in August, up from 5.5% a year earlier, according to the Bureau of Labor Statistics. In Florida, the unemployment rate climbed to 6.5% from 4.2% during the same period.
• Home sales also were weak in August.. completed sales of homes in August were down 17.5% from a year earlier. That was worse than the 14% decline in July from a year before (we have "official" figures later this week)
• The new analysis suggests foreclosures are increasing at a slower pace or leveling off for subprime mortgages and Alt-A loans. That, said analysts, may partly reflect the widening use of foreclosure moratoriums and efforts by lenders to modify troubled mortgages.
• Both delinquencies and foreclosures continued to climb for option ARMs. The share of option ARMs in foreclosure jumped to 7.8% from 7.3% over the two-month period. Nearly 30% of option ARMs originated in 2006 were at least 30 days past due or in foreclosure 2½ years after origination. (that's pathetic) [Aug 13: Option ARMs - Who Thought Up These Time Bombs?]

Comments

[venividivici:]

Well you can see why the boys need another $700 billion to throw at the problem. Ben has just said that things will get worse if America slips into a recession. I'd describe the current situation in the housing market as a depression.

2008 Sep 23 01:33 PM

[markg:]

Ven, you are correct. This makes how long that Bernanke has been using threat of recession to get what he is asking for? It's a tired threat, because it's already happened.

This is the same guy, by the way, who insisted we were not in a housing bubble. And he wants how much more??

2008 Sep 23 02:26 PM

[MFI-Miami:]

Option-ARMs are going to be a nightmare when they start going off in massive numbers. The reason being, they were sold to consumers who did not understand them by Loan Officers who did not understand them coupled with lenders who allowed people to be qualified by the start rate not the fully indexed rate. Then followed it up with sloppy underwriting.

2008 Sep 23 02:48 PM

[williemo:]

MFI-Miami has summed it up well. However, it is my belief that most loan officers did understand the risk via the indexed rate. As all the rest of the commission-driven loan officers during that time, they were no different than an aggressive car or appliance salesman, blinded by the commissions, and sales reports, and how they'd look to their peers, to be really concerned about the customer. To them, isn't it the customers' responsibility to plan for themselves and know what they can afford? If the underwriters approve it, then it must be ok. To me, there was no real way to stop what was happening, other than the fallout this year. No one could yell loud enough to stop the speeding lending train before it crashed into the station. Everyone had their head down, in their own world, and didn't care.

2008 Sep 23 06:02 PM

[H. Michael ...:]

I agree with Miami on the POAs, I'm gonna have to disagrere with Willi. As a former supervisor of mortgage originators, I would frequently test job candidates and existing LOs to see how well they understood POAs (I was not a fan of POAs and they were not necessary in my market like they were in FL and CA).

Only 1in7 were able to understand the concept of a negative amortization loan tied to a variable rate structure and the financial explosion that would occur in a rising rate/depreciating market. To be fair, I got the impression many didnt give a damn beyond the commission and simply didnt want to learn. Still, having World Savings reps running around with their claims that their u/w models had been backtested thru the Great Depression did not help.

2008 Sep 23 08:24 PM

[rm:]

[they were sold to consumers who did not understand them by Loan Officers who did not understand them coupled with lenders who allowed people to be qualified by the start rate not the fully indexed rate.]

While it may be true that borrowers did not understand them, they really didn't take the time to do so, nor did they ask many questions beyond, "What's my monthly payment going to be?"

Even without understanding the terms, nearly all borrowers knew that they were going to have to refinance before these things exploded.

Many were also told that they would have to do some clean-up on their credit in the meantime... but how many did?

2008 Sep 24 09:12 AM

[ArnoldCountry:]

"While it may be true that borrowers did not understand them, they really didn't take the time to do so"

I worked in a major bank who provided those and have a law degree and MBA. I was brought a TIL to examine when I was first hired on an Option ARM that was the payment was to be fixed for a 5 year term but the TIL showed the payment changing at 33 months. It took me about 4 hours and excel spreadsheets to figure out that the loan was resetting at 110% due to the high margin. No one, not even funders or the Account Execs were able to figure that out. It was such a major revelation, I put on an emergency training "clarification" for all staff that handled those products, funders, account execs, loan officers, etc. (it took a couple of weeks) to explain what was going on. Reaction? I did not know that was one... other was... gee, if I tell my customers the truth, they would never take this loan.

I will never accept that consumers, of average education, can ever understand the complexities of an option arms just by reading the documents... it took some doing on my part.

2008 Sep 24 10:07 AM

[TinyTim:]

cut the crap.
you guys are forgetting (conveniently) that it is ultimately the responsibility of the customer to figure out whether a purchase is viable. Why? they suffer the consequences. if you don't understand it, why the hell would you buy it. mainly because all your friends and relatives are jumping on the bandwagon and to keep up with the Jones' based on the unrealistic expectation of continued exorbitant appreciation. (aka greed) These customers are not sheep and they knew they were taking a big risk and most made other housing arrangements for when the bottom dropped out.

Regarding the salesmen and sales managers, how many can explain complex products? It's not what they do. Buy a new loaded car and ask someone at the dealership to explain the electonics package. (good luck). these mtg companies were smart enough to unload these debt bombs.

Regarding the companies that bought the debt bombs, it is ultimately the responsibility of the customer to figure out whether a purchase is viable. Why? they suffer the consequences. if you don't understand it, why the hell would you buy it.

2008 Sep 24 05:30 PM