– Will loss reserves decrease again in Q2?
– Long-term default trends broken
– Prime, Jumbo Prime, and Option ARMs leading the way
– FL and NV – 1 in 5 homeowners in default or foreclosure
– 637k NEW mortgage delinquencies in May
– Q1 new loan production down slightly from Q1 2008
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Our mission is to provide our clients a significant edge. This is done by turning the daily, market-moving real estate and mortgage news flow and events into old news by the time it makes headlines. – Mark Hanson
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**We chose one of many weekly research reports and notes for this blog. For more information on our variety of absolutely unique research offerings please see the website.
First published in The Mortgage Pages research – July 5th 2009
With earnings on tap, one of the major pro-financials arguments I have been hearing lately is the continued reduction of loss reserves. I just assumed that everyone was in the ‘reserve building’ camp this quarter. Non-performing assets and core earnings will be key this quarter. And the fact is, defaults are rising across the board. With respect to residential real estate, defaults and foreclosures were up over 20% in Q1 relative to Q1 our data show.
A couple of weeks ago Lender Processing Services put out its monthly mortgage performance observation report that I skimmed through. The charts and results looked a lot like our data, so I filed it away in the mental hard drive and moved on. But upon closer examination over the past few days, the report was very enlightening. They also show that conditions continue to worsen, but only in the past couple of months long standing seasonality trends were broken and mortgage performance turned markedly worse.
Defaults, Foreclosures and Seasonality Trends Broken
May month-over-month default increase over 300% above the average for past four years.
Foreclosure inventories across Pay Option, Subprime and Alt-A continue to surge — up 88.3% y-o-y. This shows how lagging foreclosures actually are. The foreclosure resales for sale today are from 30-day loan defaults that first happened from 1 to 1.5 years ago — the heart of the Subprime Implosion. This highlights how much housing supply is in the foreclosure pipeline at any given time.
As explained in the previous chart, the massive default surge in higher grade paper over the past 6 months shown below will not produce foreclosure-related housing supply for months down the road…even longer with mortgage modifications in full force that extent out the default and foreclosure crisis. This will keep supply/demand fundamentals strained indefinitely, especially with lending outside of $417k still extremely tight relative to 2002-2007.
ONE in FIVE properties in FL and NV are in some stage of foreclosure. Now that is what you call supply.
This number even shocked me -- this equates to 1.3% of ALL mortgage loans in the country becoming delinquent in May alone. This is out of control. We track from Notice-of-Default, which is at 90-days typically. At 90-days most borrowers don’t cure. But as values come down, jobs continue to be lost and financing remains tight, more and more 30-day delinquencies are making all the way to foreclosure. Therefore, this 637k number is now very important and comes into play.
What happened in April and May? A complete break of trend can be seen here. This is significant.
The same significant trend break can be seen here.
The perfect mortgage credit crisis — the perfect borrowers, many that don’t need the help and that will not spend their $100 month refi savings, are the only ones able to borrow.
The epidemic mortgage mod re-default rate averaging 60%-70% will keep foreclosure-related housing supply on the market for years.
This is another great example of why mortgage mods are ineffective – they are addressing the problem far too late in the process. As a mortgage mod bear, this data is a positive to me. But if they wanted to make mods more effective, they would hit the borrower with force at the 30-day late mark.
Best Regards,
Mark Hanson
This document is for your private information only. In publishing research, Mark Hanson and M Hanson Advisors are not soliciting any action based upon it. Mark Hanson and M Hanson Advisors publications contain material based upon publicly available information, obtained from sources that we consider reliable. However, Mark Hanson and M Hanson Advisors does not represent that it is accurate and it should not be relied on as such. Opinions expressed are current opinions as of the date appearing on Mark Hanson and M Hanson Advisors publications only. Mark Hanson and M Hanson Advisors are not liable for any loss or damage resulting from the use of its product. Mark Hanson and M Hanson Advisors are Limited Liability Corp registered in CA.
July 19th, 2009 at 1:05 pm
As always, thanks for piercing through the clouds of obfuscarity that usually passes for information. ”…1.3% of ALL mortgage loans in the country becoming delinquent in May alone.” That’s something to chew on.
July 19th, 2009 at 1:12 pm
I always look forward to your reports – hard statistics, not speculation. Added to this are anecdotal reports from friends and aquaintances. . .my sense is that a lot of people who have been “hanging in there” waiting for the market to improve, are finally being washed out. I heard of two instances this week where people are in the “walk away” process. . .these are properties with loans in the 700K plus range, with similar properties selling by developers in the 580K range.
July 19th, 2009 at 1:14 pm
Mark
This is the mother of all car crashes about to happen. We are only extending out the problem with the revised 105% to now 125% LTV home affordable programs. Tact on 6% for realtors and 3% for seller concessions for closings costs and prepaids. Maybe a subordinating 2nd. They would be 134% LTV when they opted to sell a few years down the road. We have trapped our previous clients, friends, co workers and fellow americans as full time renters. I urge all to soak in Mark’s data and make a sound decision before committing to one of those programs. My 2 cents..
JB Beyer
July 19th, 2009 at 6:02 pm
I suspect the Fed is okay with extending the problem out, as it allows the banks to earn there way out of the problem. If they had to take the losses all at once, we’d be looking at a completely insolvent banking system. I believe in the stress test, the Fed estimated the 19 largest banks would earn roughly 600Bill. over the next couple of years. That fills a fairly deep hole! This is another argument against the inflation camp, and another reason why deflation is the issue at least for the next couple/few years.
July 19th, 2009 at 6:11 pm
good point housingrealist,
They will review the 105% numbers to see how many people they helped then evaluate it.
I have a gut feeling they will try the 125% LTV program for 8 -16 months and box as many people as they can before slowly immplementing major principal reductions. a kind of quantative easing…
July 19th, 2009 at 6:38 pm
Guys,
You are missing much.
The loan mods are being done, after the calculation of Net Present Value, regarding what brings more money for the investors, as dictated by the Pooling and Servicing Agreements. Whatever is most profitable for the investor, is what is done.
The PSA covers the guidelines for mods and reductions. Most do not even give reductions any consideration. If there is no mention in the PSA of reductions, then reductions are not an option.
Most people do not even realize the purpose for TARP money. The majority of the TARP money is going to the Master Servicers of these bad loans. The reason is that for every missed payment by a borrower, the Master Servicer must “advance” the missed payments to the investor to keep up the income stream. The advances can only stop when it becomes a point of realization that the borrower will never be able to make up the payments, and foreclosure is the only option. Then the NOD is filed, the Master Servicer stops making advances, and once the home is foreclosed upon, the Master Servicer can sell the home and recoup the advances, leaving the Junior Tranche holders holding worthless bonds.
Patrick Pulatie
loanfraudinvestigations.com
July 19th, 2009 at 8:56 pm
Mark, great piece of work. But is it seriously 20% of all PROPERTIES in Florida and Nevada are at some point of default? Not just 20% of all mortgages, but rather 1 in every 5 HOMES?!? That is unbelievable. And California is standing at just over 1 in every 7 homes in default/nts/foreclosure?
I can’t believe anyone would be stupid enough to think the worst is over, TARP and Obama have saved the day etc, and the general denial and stupidity of the regular Joe Citizens, as they seem to be moving back towards spending like no tomorrow.
The subprime meltdown of last year is going to be nothing compared to this nightmare…
July 19th, 2009 at 10:20 pm
With no growth, we’re doomed.
Mark’s chart postings point towards further deflation in housing prices (over supply and no buyers).
Counter parties on derivative bets which are not even reported/tracked will be backstopped by the printing of more debt to prevent a worldwide calamity which will further erode confidence in the US dollar.
Price deflation with a loss of consumer confidence will unleash currency inflation to stop gap and bridge to a recovery that is decades away.
That’s the best case scenario as I see it.
July 19th, 2009 at 10:40 pm
Los Angeles still needs to drop more….any predictions for areas like Glendale/Burbank/Pasadena/Northridge/Porter Ranch/etc????
July 20th, 2009 at 4:52 am
Mark,Is there any way to separate primary residences from from second/vacation/investment homes? I looked at Realtytrak and didn’t see anything. Thanks so much for sharing info with us.
July 20th, 2009 at 6:48 am
All the US help for defaulting mortgages has been aimed at primary residences, no? Nothing has really helped, not -5% underwater, not -25% underwater and now we have a proposal for the US to buy and rent foreclosures. One big problem however, according to NAR between 33% and 40% of home sales in 2004-2007 were second homes not eligible for help. The proportion of second home sales must be considerably higher in the bubble states and these homes were bought at or near the top. Depending on the leverage these owners no longer have ANY skin in the game and the US programs aren’t designed to save the banks from risky loans on second homes. Foreclosure sales of second homes should be enough to crater home values on their own. Maybe the banks are dumping their bad second homes and holding the primary homes hoping for a huge US bailout?
July 20th, 2009 at 6:59 am
Why do people think that the government has any TRUE desire to help people?
July 20th, 2009 at 7:12 am
Patrick, you are referring only to the securitized products correct? I was aware that this problem existed, which appears to be the true elephant in the room when it comes to why the servicers don’t want to/can’t offer principle write downs. It’s my understanding that the equity tranche continues to put pressure on the servicer to not complete principle write downs, but are also positioning themselves to sue the servicer if foreclosure takes place to quickly. The equity tranche wants to lengthen out the time of the foreclosure process, because as you specified the servicer must continue making the payments to them until the home is sold. To me this appears to be a stealth way of transferring value from the senior tranches to the equity tranche holders. In a sense the equity tranche has the entire loan and servicer by the short hairs. Patrick, are you able to go into more detail regarding this issue? It appears you have some knowledge in this area.
July 20th, 2009 at 8:00 am
There is so much involved in the Securitization Process, and after a year of researching it, I only know probably have about 70% of it understood.
You nailed it on the Junior Tranches. Carrington has filed suit against AHL for just that reason. I am actually in the process of talking with Carrrington about supporting their lawsuit. The reason is that what I can show, would open up Carrrington to save the Junior Tranche investors, yet allow mods to take place.
When the loans were securitized, different tranches were awarded different income streams from the loans. The problem is that the Senior Tranches are paid first, whether it is the income streams, or it is payoff of the loan. If there is not enough money from the payoff or the income stream, then the Junior Tranche holder is “holding the bag”.
When the loans were securitized, there were “protections” in placed for such eventualities. However, these protections were based upon certain probabilities of events. What has actually occurred was far beyond the estimated probabilities.
The Servicers do have the ability to conduct loan modifications to a certain degree. However, it must meet a Net Present Value Test. The problem is that there is no true set standard for the test. The Fannie Mae/Freddie Mac test has tried to standardize the test, but the Servicers can make certain assumptions about the loans, and can work around the standards in that manner.
For the Private Securitizations, there is no standard for this determination.
Another thing that affects the Tranche holdership is the Credit Enhancements. These are the methods and processes of attemtping to ensure that if defaults did occur, there would be funds available to pay the income streams. Some of the enhancements were
Credit Default Swaps
Substitution of bad Loans with new “good” loans.
Income Reserves from monthly payments. The Tranche owner might receive a portion of the monthly payment, with the rest going into a “slush fund” in the event of too many defaults, and missed payments would be made from this fund.
Now, imagine this. Many of the investors who bought tranches would then take those tranches and break them up into new, smaller tranches and sell those slices off. And some of the new buyers would do the same thing again. Just imagine the headaches on all of that.
It would take hours to explain this whole mechanism. I am having the devil of a time explaining it to attorneys and writing it up in a simple format for the courts to understand.
July 20th, 2009 at 9:43 am
Patrick, I think what you described at the end is what they refer to as CDO sqaured and CDO cubed. It is amazing how complex, and nearyly impossible it will be to deal with this problem. I think it may just have to play out.
Mr. M – How do you see your princ. write down happening with the issues we’ve been discussing?
July 20th, 2009 at 11:29 am
The only way to get true principal reductions would be to litigate them, for the most part. This would mean making each case so expense for the servicer and lender that they would accept the easiest route.
Part of this tactic would involve attacking the legality of MERS and also Securitization, which involves “breaking” holder in due course, which I am working on now.
July 20th, 2009 at 12:03 pm
Excellent posts, Housingrealist and Patrick. I too cant understand Mr M’s advancement of the PR strategy without him addressing the hurtles securitization presents.
But this…1.3% of ALL mortgage loans in the country becoming delinquent in May alone.
I would love to be a fly on the wall at Obama’s economics meetings. Some savage realities must be entertained by Obama and his staff. The prospects of boxing a few million borrowers back in to good standing through 2012 with a “throw ‘em a bone” modification sounds like a solid strategy to spread the pain.
The admin truly believes housing will rebound in time for modified mortgages be converted by a sale or refi. From the Home Affordable plan recasting in year 5, I assume the admin sees the bubble as a symmetrical one.
July 20th, 2009 at 1:19 pm
Record high sales volumes and prices in the bubble years with over 35% vacation/investment homes so there are 10-12 million bad RE investments out there, a lot of them highly levereged with the investors way under water in non-recourse states. Non of the federal programs address bad RE investments and the volumes of these going bad will suck down the entire market.
July 20th, 2009 at 1:33 pm
“Part of this tactic would involve attacking the legality of MERS and also Securitization, which involves “breaking” holder in due course, which I am working on now.”
Patrick, could you explain this is more details?
July 20th, 2009 at 3:11 pm
Change the engine while the car is running?
Didn’t junior get more interest? Now you want senior to split with juniors? Hmm… I don’t see that hapening.. my .02 cents, but hey, if the bankers allow it between them..fine with me!
I would imagine to see then, this kind of change hapening through out the whole stock market.. un-intended consequences.. Nobody would want to loose, no matter what tranch they’re on!
July 20th, 2009 at 3:34 pm
The only way to get true principal reductions is FC! rebuild, and buy later! Prices must (and will) get to a price that’s afordable…
btw, isn’t Carrrington the old suprime lender? (New Century..bought for 139 million?)
July 20th, 2009 at 4:19 pm
“The only way to get true principal reductions is FC! rebuild, and buy later! Prices must (and will) get to a price that’s afordable…”
I agree with you 100% ex_owner. Any other excuse for a PR is BS.
July 20th, 2009 at 4:38 pm
Patrick
Is there a way you could email sample of standard PSA to see how it reads…very interesting..
also lots of outsourcing loss mitigation going on also
Saxon is outsourcing to Hill Bridge Capital Group
Taylor Bean to Sparta Servicing
CIT outsourcing to Loan Resolution corp.
we closed a short sale in May where American Home Mortgage originated it and sold ti Citi Financial. American Home mortgage maintained servicing when payments were good. When it went south they transferred to Real Time Resolutions.
We played who has the damn note for awhile finally we found
Strategic recovery group had it on someone’s desk for 3 months.
who are all of these companies?
July 21st, 2009 at 7:00 am
still NO principal reductions yet ???…what is Timmy Tax Cheat doing about this disaster that gets worse every month ?
July 21st, 2009 at 8:16 am
Javagold, go ask your banker for one
July 21st, 2009 at 11:01 am
even if i were to get one from my banker ex owner it will not help me when the value of everyones homes goes down another 40%….they can kick the can down the road all they want the longer they wait the more people will lose their homes, which helps NO ONE, PR are the only solution to flush the ponzi scheme housing bubble and wash eveyone to start fresh again
answer is so simple evwen a renter should be able to figure it out
July 21st, 2009 at 12:28 pm
I have been receiving quite a few mailings and a voice mail from Chase asking me to call about refinancing into fixed (I have a 5/1 ARM set to recast in 2010). And I’m talking a letter a week for the past month. I am not sure if Chase is doing some mass promotion being “new” in CA or targeting ex-WaMu bubble borrowers specifically.
I am trying to fix a threshold for doing business with them.
I estimate my rate indexed to the 1 year CMT to drop from 5.x to 3.x on recast day. My home is still above water by 5-7 %. And, in all of WaMu’s wisdom it made more sense for them to lend to myself with stated income than to both my wife and I, i.e my wife is NOT on the loan.
So, stick with 5.x% for through mid 2010, the 3.x % through mid 2011 and see how this economy plays out, or refinance to current jumbo rates (6.5+) and expose my wife’s credit to this home?
The answer seems clear to me, but my situation illustrates the leverage many prime borrowers have over the lender.
July 21st, 2009 at 1:55 pm
Well Javagold, you should spend less time attacking Timmy Tax Cheat, and more time focusing on paying your mortgage.
“PR are the only solution to flush the ponzi scheme housing bubble and wash eveyone to start fresh again answer is so simple evwen a renter should be able to figure it out”
BS!!!
July 21st, 2009 at 6:47 pm
Javagold and others talking about PR. Please go back up and read the posts by myself and Patrick. With securization and the fight going on between servicers, senior tranches and subordinated tranches, PRs are not going to take effect on a large scale. They can’t unless you do away with the contracts those securities have. Not happening!!!
July 22nd, 2009 at 8:05 am
Mr. M – I know you have detailed info and thoughts on Danville, any thoughts on Lafayette, just down the road? What are you seeing there?
July 24th, 2009 at 10:00 am
I’ve been reading this blog for the past 6 months or so and I just don’t see prices falling in West LA area. Houses out here are still 800k+. MB and SM has very little under $1mil. Unless you are willing to rebuild on a lot, prices out here is still way out of whack. And as much as I wish they would fall, so I can buy one they simply aren’t falling much. I don’t see foreclosures either… There are a few here and there but nothing that is depressing the market. Prices have rolled back to about 2004-2005 prices, which by most accounts, is pretty inflated from the run up from 2000 already.
If this shadow inventory is out there, why are the banks holding on to them? It doesn’t add up for me…very weird.
July 24th, 2009 at 3:20 pm
WestLA… desirable areas..are the last to drop.. they all do in the end!
July 25th, 2009 at 3:10 pm
MM,
Are you planing to write an article on the shadow inventory volume? Any plan for it if you know? When/will it be released to MLS?
I think that would add a lot of traffic to your site!
thanks,
Ex_owner
July 25th, 2009 at 3:21 pm
or do banks plan on selling the shadow inventory through some other avenue? bulk to investors? or not planing on selling them yet.. ?? or slowing down the whole re-sale time…
I would imagine at the rate is going.. it’s only getting bigger..
July 26th, 2009 at 3:38 pm
I read another article that stated more directly that the US would buy the foreclosed homes from the banks. After all how can the US rent them out if they don’t own them? It will take a colossal amount of money to buy all these foreclosed homes. 19 million unoccupied/marginally occupied homes of all types – thats enough for 60 million people!
July 26th, 2009 at 6:01 pm
I am absolutely shocked by the chart showing the amount of loans in relation to FICO scores.
We are at least two years into this and to me it looks like lending standards only really tightened significantly in the last 4 months or so.
This makes me a little worried that as soon as real estate “appears” to stabelize, they will bring out the mirrors for the fog test soon.
July 27th, 2009 at 5:51 pm
loans in relation to FICO.. are those gov, non-gov or combination?
Can we get a ratio between gov and non-gov?
July 27th, 2009 at 5:53 pm
MM,
I know you’re bussy… but you’re now runing at 2 articles per month.. are you super bussy with investors groups that pay you? ( I don’t blame you then ).. or just nothing more going out there?
July 28th, 2009 at 7:19 am
West LA says: “If this shadow inventory is out there, why are the banks holding on to them? It doesn’t add up for me…very weird”
Part of what I recently discovered, is why the banks do not push the foreclosure process is that is not on their books as bad debt yet. The longer they can stall a foreclosure the cleaner their books look. Shortsale / Preforeclosure are still in the borrower’s hands. Not the bank/lenders.
So why should the banks push the foreclosures? On the preforeclosure process, even if the homeowner has left the property, the bank is not responsible for the property, including taxes and insurance. Amazing games out there, but it is what it is. They are releasing REO homes in small drodes, hoping to not loose as much on the value. I call this major constipation on the banks part. The longer they drag this out, the longer the pain will be.
July 28th, 2009 at 3:57 pm
Spot on, LovinLife. We are looking at the Japanese gameplan from 89-2006 (or even to present)…just one long, drawn out downtrend and super recession.
But hey, it’s better than a depression, right? Better than getting through this as quickly as possible, getting the pain all at once and working through it fast and rising from the ashes. Nah, we’ll just delay, stall, and draw out the inevitable.
Anyway, WestLA, can you give us a couple of zip codes you are looking at? You should check them out in realtytrac. Even if you don’t sign up, you can still see by zipcode how many properties are in preforeclosure, get an idea of the shadow inventory. Something tells me there is plenty hiding under the surface, even in the most high end areas.