Great minds think alike. On the heels of my initial morning commentary regarding my belief that housing will remain under pressure, my friends at 12th Street Capital shared a recently released report from Moody’s on the residential mortgage market.
What does Moody’s see? A foreclosure bubble. Ouch!!
HAMP, Moratoriums, and Court Delays Expand Foreclosure Bubble: >>>>>
The backlog of seriously delinquent mortgage loan inventories continues to grow as foreclosure referrals and foreclosure sales are stalled by mediation efforts, growing foreclosure court delays, title and assignment difficulties and missing documents necessary to initiate foreclosure. As the accumulating delinquent and modified but re-defaulted loans progress through the default process, foreclosure and liquidation timelines will be exacerbated, resulting in higher holding costs and elevated loss severities.
The 2009 third quarter OCC Mortgage Metrics Report indicates an 80% increase in the number of foreclosures in process and a 125% increase in the number of loans 90 or more days delinquent compared to a year earlier (Figure 1). Over the same period, the number of completed foreclosures decreased by over 7%.
Servicers recently surveyed by us indicate that they are holding off on both foreclosure referrals and foreclosure sales in order to provide delinquent borrowers ample opportunity to be evaluated for a HAMP modification. Since the announcement of the program in March 2009, the foreclosure process has been stalled on over one million delinquent loans, resulting in a significant slowing in the pace of liquidations.
In addition, loans that do wind up in foreclosure are taking much longer to resolve due to court delays. Servicers have indicated that state courts are overwhelmed with foreclosure cases, lengthening foreclosure sale timelines by up to two years or more. Judicial foreclosure states such as Florida, New Jersey and New York have experienced some of the most notable delays.
The slowdown in foreclosure sales has applied brakes to the rapid decline in home prices as the market has not been flooded with distressed sales. However, the foreclosure overhang continues to pose a major risk. A long and slow resolution of stalled foreclosures will significantly increase loss severities.
Treasury’s rollout of the Home Affordable Foreclosure Alternative (HAFA) program should help resolve this to a degree. HAFA requires that servicers consider borrowers for short sales or deed-in-lieu prior to pursuing foreclosure sale.
This commentary is more technical in nature than my earlier post this morning. That said, there is one specific line grabs me:
A long and slow resolution of stalled foreclosures will significantly increase loss severities.
That, my friends, is not good business. As much as government officials may believe their programs and efforts are helping, they are not.
Disclosure: no positions