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Foreclosure Crisis Update

posted by Alan White

Screen shot 2010-09-03 at 4.03.35 PM New numbers are out for the second quarter from the Mortgage Bankers Association’s National Delinquency Survey and HOPE NOW.  After three years, the ramp-up phase of the foreclosure crisis seems to be ending, as the rate of mortgages in default or foreclosure has leveled off, albeit at historically unprecedented and appalling levels.  The bad news is that new (30- and 60-day) delinquencies are still high, although down just a bit from their early 2009 peak, so that the foreclosure pipeline will remain primed for many months to come.   Equally problematic are the huge numbers of very-overdue loans not yet in foreclosure, still at five times their normal level, and portending continued high foreclosure inventory and sale rates for the foreseeable future.

The NDS confirms the catastrophic failure of subprime adjustable-rate mortgages.  There are still 4.5 million subprime ARMs out there in the NDS sample, which extrapolates to 5.3 million in the U.S., or about 10% of all outstanding mortgages.  Fully half of the loans in this category have defaulted:  28% are behind in payments and another 23% are in foreclosure.   There are an additional 5% of U.S. home  mortgages that are fixed-rate subprime loans, one-third of which are in default or foreclosure.

Pennsylvania seems to be having some success in foreclosure prevention, perhaps because of its emergency mortgage assistance program and/or its aggressive court diversion and mediation programs.  Pennsylvania’s foreclosure inventory rate is considerably below those of neighbors New Jersey and New York, which have similar short-term delinquencies, and Pennsylvania is also well below the national foreclosure average.

Florida and Nevada, on the other hand, stand out as having foreclosure inventory rates of triple and double the national average, respectively.   Inventory can be affected by lengthy foreclosure processes, as well as by weak resale markets that discourage servicers from adding more completed foreclosures to their unsold property inventories.   Don't look for home prices to rebound in the sand states any time soon.

In the foreclosure mitigation department, HOPE NOW has been reporting monthly permanent mortgage modification numbers at all-time highs since December 2009.   While this seems encouraging, as do some preliminary signs that modified loans are performing better, the investor reports on subprime and alt-A mortgages I follow tell a different story, showing total permanent mods down considerably since HAMP was introduced in early 2009.  According to HOPE NOW's numbers, the recent decline in mortgage workouts subsidized by the HAMP program is more than offset by continuing increases in "proprietary modifications", i.e. mortgage servicer initiatives not funded by TARP money.   In any event, while the crisis would certainly be worse without modification programs, they have failed thus far to even begin bringing foreclosures back down to non-crisis levels.


banks are deliberately procrastinating on foreclosures; they dont want the worthless houses either, in some areas of the country people have been living in their homes for over 500 days without paying on their mortgages...

Nearly Two-Thirds of Delinquent Mortgages Untouched: Study - According to a new report from state attorneys general and bank supervisors from across the country, more than 60 percent of homeowners with seriously delinquent loans are still not involved in any form of loss mitigation with their servicer. The ratio is disconcerting considering the group also found that one of servicers’ primary loss mitigation options today, loan modifications, are resulting in significant payment reductions with fewer redefaults. The State Foreclosure Prevention Working Group says loans modified in 2009 are 40 to 50 percent less likely to be seriously delinquent six months after modification than loans modified at the same time in 2008. “This improvement in loan modification performance suggests that dire predictions of high redefault rates may not come true,” the group said in a paper released Tuesday. “This positive trend suggests that increased use of modifications resulting in significant payment reduction has succeeded in creating more sustainable loan modifications


Procrastination on Foreclosures, Now 'Blatant,' May Backfire - By postponing the date at which they lock in losses, banks and other investors positioned themselves to benefit from the slow mending of the real estate market. But now industry executives are questioning whether delaying foreclosures — a strategy contrary to the industry adage that "the first loss is the best loss" — is about to backfire. With home prices expected to fall as much as 10% further, the refusal to foreclose quickly on and sell distressed homes at inventory-clearing prices may be contributing to the stall of the overall market seen in July sales data. It also may increase the likelihood of more strategic defaults. It is becoming harder to blame legal or logistical bottlenecks, foreclosure analysts said. "All the excuses have been used up. This is blatant," Banks have filed fewer notices of default so far this year in California, the nation's biggest real estate market, than they did 2009 or 2008, according to data gathered by the company. Foreclosure default notices are now at their lowest level since the second quarter of 2007, when the percentage of seriously delinquent loans in the state was one-sixth what it is now.


I concur that banks are taking their sweet time to try to do any loan modification. They believe that they can just foreclosed on the properties and take possession of the properties. Banks still believe that they can get a better price by repossessing the homes in their portfolio.

We need a way to make them understand that it is in everyone's best interest if the bank and the homeowners can come to an agreement to keep the loan agreement as it was intended originally.

If "the banks" are recouping the face value, outstanding principle or the 30 year stream of income through insurance policies covering any given RMBS vehicle, what do they care about "everyone's best interest"? They've already got their money by the time a property is FC'd.

In many cases, "the banks" foreclose the physical asset in order to begin the process of laundering it - and, more importantly, the associated mortgage, note and loan history with all of it's potential "discrepancies", "flaws", "mistakes" and outright, blatant fraud off of their books. The problem, now, is that if they take legal possession and title of those physical assets they can't move them b/c of the market. So the "asset" stays on their books, in their own name once FC'd, sucking up allll kinds of capital for maintenance and repair, insurance, etc.

And since fraud potentially trumps a whooooole host of actions, legally speaking, every day that the "asset" is on their books in their own name is another day they risk having a borrower come after them legally, thereby tying up the laundering process indefinitely.

From what I have seen, the banks have avoided foreclosing because: 1) they were hoping for a miracle that would turn the market enough that they could foreclose later and turn properties for prices not so grossly out of line with their leverage level, and 2) by holding loans in endless "modification" programs, they could avoid honestly booking the collateral and the loan while maintaining some modicum of revenue stream (Anything's acceptable at the margin.). The former has been an epic failure, and the latter is out of steam; no one's buying it anymore.

Now the banks find themselves bracing for the next bulge, the next round of ARMs that will reset over the next year-and-a-half or so. Except these have never been classified as sub-primes. No, these are all supposedly prime borrowers. So when these start defaulting at the same rate as the sub-primes, not only will the banks be facing a potential REO tsunami since they will have to deal with the new defaults alongside the pending ones (not being in a position to string the new ones out, having already exhausted all book-cooking options), but also the exposure of the "sub-prime" myth. As the option ARMs default in droves, it will become evident that the principal cause of the collapse of the 2003-2007 mortgage market was not bad borrowers but bad lenders.

ya...... good stuff. Forcing Mods either through tweaking states foreclosure laws (something I am pushing for in Texas because the FED can't pass anything useful)or Reforming Bankruptcy Reform is our best avenue. Bankruptcy option would rather could totally fry the Servicers Books but by bringing payments down to affordable levels consumers could have that extra disposable income. Coupled with making 7 a bit easier, we could infuse our economy with debt free consumers "ready at the wheel" to consume...thereby forcing employers to hire to keep up with increased consumer demand. Cost to John Q? Maybe a little of their 401K still invested in derivatives but we could eliminate government payments to Servicers to modify Mortgages. Servicers are just not set up or motivated to make new mortgages.

I do not believe Congress or the Courts were ready to truly understand the mortgage business and securitization factors from the start. Adding fuel to the fire, most so called mortgage lenders did not understand who really owned the mortgage. Thus three strikes and your out even before consumers could not repay the mortgage, or servicer, or an investor. Loosing any home is tragic to any consumer. The problem is who can be saved, who can be modified, and who really can approve the modification. The question is whether the government should get out of the mortgage business and let the chips fall where they fall. A nightmare for certain and certainly not a popular option. To one commentator, the bank doesn't want the property, the consumer cannot afford to remain in the property and the housing market is headed into the tank regardless of how much more money Congress tosses into the pot. Anyone up for some type of miracle?

Are foreclosures bad or are they a part of the normal process of market failure? The author seems to imply that foreclosures are "bad news", I disagree it may simply be reality on the failure of a hyped real estate bubble and many homeowners are strategic defaulting. While foreclosures are bad and so are layoffs and people getting push out of their homes, nobody is in favor of bailing out irresponsible buyers and banks as well as the homeowner himself who got him or herself into a mess.

Now of course , foreclosure prevention programs that help the not so irresponsible consumer who may range from maybe having a home loss a little value, or a lender who had done security backed loans and may have not understand the terms or who had refinanced and had previously paid off a mortgage are helpful, sometimes foreclosures are not in the interest in the lender but are done anyway or not done at all if the house is worth close to nothing which hurts certain folks and it happens. Foreclosures take time by states but it may not be completely "bad" although nobody wishes for someone to lose their home.

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