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Mortgage Delinquencies - The Coming Storm

A few words are not going to begin to describe the value of this important and timely post.

Jeff has outlined, with graphic example, the pernicious effect of negative equity, which I believe is causing our entire economy to tank. Sadly, few in a position to know, with minor exceptions, neither the fed, the treasury, the WH, HUD, Congress, etc., have noticed or have forgotten that the wealth of the United States Economy comes from the bottom up, consumers buy and industry benifits. If consumers do not or cannot buy goods and services, the economy will fail..

We need to keep beating the drum and sooner or later. . . . HA! Who am I kidding. Helping individual home owners isn't even on the Radar. There's no PAC money. Besides, all of the money is gone.

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Via Jeff Geoghan MBA - Lancaster PA Real Estate Expert (The Jeff Geoghan Realty Group, Coldwell Banker Lancaster PA):

This is one of those posts where I wish I didn't have to write it, but felt it was so important to my readers that I would be remiss not to at least talk about it.

Everyone out there probably knows somebody who is behind on their mortgage payments, looking for alternatives and likely also just finding out that their home's value has dipped below what their loan amount is. I know some within my own personal circles. It's a tough situation for me to advise them as a professional because it's such a personal challenge to their pride and self-worth, not to mention their plans an dreams for the family. The question we're asking is "when is this going to stop and where are we heading?"

I'm going to put up a few graphs that show the trends nationally with regards to mortgage delinquincies:

This chart is by quarter - Single-family mortgages set a new record delinquency rate in the second quarter of 2009, according to a quarterly survey by the Mortgage Bankers Association. Those of us in the real estate business see the foreclosure process (just visit the local Sheriff Sale docket to see the current numbers) but the looming delinqency-to-foreclosure issue is far, far larger.

The Wall Street Journal on 8/3/09 reported the following quote: “While subprime mortgages sparked the first round of housing problems two years ago, now "troubles are lurking further up the food chain," says Joshua Shapiro, chief U.S. economist at MFR Inc. White-collar job losses have accelerated while more adjustable-rate loans to prime borrowers are resetting to higher payments. ‘You put all that together, it leads me to believe that the next leg down on home prices is going to come from the top,’ he says.”

The first objection someone may have would be to say "yes, but historically those who are delinqent usually get their act together and come current on the mortgage after a while". That WAS true, but not anymore! We call that the "Cure Rate", that is the rate of delinquencies that go back to current. The Wall Street Journal reported on 8/24/09 about a Fitch analysis that found that the Cure Rate from 2000-2006 was 45% (which means about half of people fix their delinquency). However, as of July 2009 the rate had dropped to just 6.6%! That means that over 90% of delinquent customers are going to foreclosure. Take a look again at the above chart...

The next thing someone will say is "well, that's the 'sand states' and not my area". Here's the chart for all 50 states showing the same breakdown of delinquencies and foreclosures. Guess what - most states have a significant problem, especially compared to historical figures.

Now the next thing someone may say is "aren't those loans going to get 'fixed' by a loan modification?" I know several people right now who are applying for a Lancaster County loan modification but are waiting and waiting. I hope it works out for them...

In reality, loan modifications are hardly making a dent. To me, that's a burning question. Why arent banks being more aggressive in giving customers the option to extend their loan and/or reset to a lower rate? Why are they being SO difficult? The people I know don't want to be foreclosed. They CAN make payments. They just need the terms redrawn to allow them to catch & keep up. Loan modifications are not helping us get this crisis under control.

What are the causes of all these delinquencies? Here's a chart that is enlightening:

We hear a lot about adjustable rate mortgages being the culprit, but the reality is that it's the loss of jobs and the tanking real estate market that's the perfect storm. See my previous post on unemployment in the nation, the state and Lancaster County.

Keep in mind, this post is not intended to give us "good news". You may be experiencing good things in your market and that's great. My intent is to get us thinking about the challenges that aren't going away and how we're going to address them as homeowners, agents and professionals. I'd love to hear your ideas!

Posted by Lenn Harley, Real Estate Broker, Maryland & Virginia on 09/30/2009 05:13 PM

Comments (24)

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24 Comments on Mortgage Delinquencies - The Coming Storm

SEP

Lenn - This is a bank of information and it's not over yet!

Robert. Sadly, I believe you're quite right.

Hi Lenn, I wrote the first comment on Jeff's post this morning. It was so well constructed and I applaud you for re-posting it. I think you see this market in the context of what is actually going on. Allow me this thought to reverberate. I listened quite intently to Volker last night in an interview and he ( being the head of the advisory group advising the administration) feels that the fed should not step in and help out further with the housing mess. His logic as he explained was not because it might not help but to do so would prevent the longer recovery as the Fed's help would be good only for a year or two. I scratched my head and wondered what he was alluding to. I get the idea he feels the longer term of the recovery is needed to space out the foreclosures and the dispensation of the bad assets. He coupled that with stating that defaulting commercial assets are next. Sadly with the unemployment numbers still climbing, notice of defaults still behind, most of the loan modifications that were promised didn't materialize because the banks simply do not want them, while the banks were made whole. In some respects I see this like a bit of a tether to keep the citizenry in line and feeling dependent on the government. If anyone thinks this mess is improving because sales started to increase, I think they are sadly mistaken. The incentives helped a little, the interest rates remain low because it serves the purposes for the banks right now, not because it benefits mortgages. That is just a marginal side benefit. The government key interest in my opinion is still the banks and not homeowners. When they decide that the foreign investors will come back, you will see those rate changes. Things are being paced because there will likely be some more surprises in the coming months ( and they are probably not Christmas presents that anyone would want).

William. Volker has no credibility. He's an Obama advisor.

Obama announced $30Billion today to help home owners.

Too little. . . Too late.

They will rue the day they kicked the American home owner under the bus. Our economy will not recover from this mess for a decade.

Volker is an elitist who believes that harm to ordinary citizens is to be taken in stride because each citizen is merely one individual and of little importance when compared to what an individual mega bank could absorb.

Fact is, those individual "small numbers" of American home owners in financial distress due to the mortgage mess, in aggregate, represent about 15-20% of the American consuming economy. How is the economy going to get the 4% growth factored into the Obama economic projections for the next year or two??? Where was Mr. Volker when the administration's economists formulated recovery based on a 4% hypothetical???

They've been wrong all along. Why trust them now????

Lenn,

Very telling data. Makes you scratch your head. And that's what I am doing right now (LOL)

Len you are raising a topic no one in real estate wants to acknolwedge. I agree 100% with your assessment and the facts. There is no avoiding this perfect storm. Surviving the storm however is key and that is my focus.

As I am sitting in the trenches of ground zero I will not speculate as to what the future holds.

I do know many people (in that delinquent column) who are either trying to short sell or in a trial period of their loan modification phase. I do know short sales are being approved at an amazing rate currently. I do know that many people who received a loan mod LAST year are speculating about defaulting again to see if they can get something better.

I do know I am being contacted very often and people are being SHOCKED as to what list and sold prices are in their subdivision (mostly absentee owners).

I do know people are BITTER because of negative equity. Until something is done about that, this boat is going to continue to sink.

Thanks for the reblog, Lenn - much appreciated!

I thought I would copy a comment I added a few minutes ago on my own article - might be food for thought:

I was just reading the new issue of "Realtor" Magazine and lo & behold, here's Lawrence Yun's quote:

"...we forecast higher home sales and stabilizing prices in the year ahead. But there are concerns. First, although inventories are improving, it's possible that many owners want to put their house on the market but are waiting for conditions to improve. Banks may be doing the same with their foreclosed properties..."

Mr. Yun goes on to cite other "economic factor" that may "hold back recovery". "...and heavy job losses make it likely foreclosures will keep rising through the remainder of the year".

Mr. Yun gets the essentials right, but I believe it may be much worse than he is letting on. Also, EVERYBODY knows that banks are holding on to foreclosures en masse, probably to keep the assets on their books at the higher value to avoid scrutiny of their books by the feds.

Lenn- These figures are frightning......I wrote an article on why Banks don't want to do loan modifications, and just looking at these charts further reinforces the thought that Banks are not here to help us, they are here to make and keep their dollar.

Anyone in Florida can attest to the validity of this information. Everyone should re-blog Jeff's article to fully inform people in the industry of the bare-bones facts.

Bravo to you Jeff and Brava Lenn for re-posting.

I'm getting more depressed every day, as I read the negative reports about real estate, foreclosures, and the economy in general. I honestly don't know how to keep from letting my own attitude from going down the drain, with the horrible results we're seeing everywhere =/

OCT

Jeff. I view everything Dr. Yun writes with a skeptical eye. I haven't read his job description. Is he bound by his professional ethics to arrive at truths? Or, is he bound by a job description that is devoted to the growth of the NAR membership rolls??

He has been so far behind the downward curve on the housing industry decline, he either doesn't understand what negative equity has done to the economy or he doesn't want to or cannot write about it.

Locally, we see this, more real estate offices closing, listings coming off the market for those who are marginal, and didn't realize the WOULD have to bring money to the table. But there will another cycle, something different,

I still feel shocked that banks will not work closer with people who just can't make it with current payments and interest but want to stay in homes. I am tired of the "they should never have bought in the first place" comments, of course many of them shouldn't have but now we are here and we need to help them. The loan modifications are VERY SLOW to be approved even for the trial period and many individuals have already given up hope before they hear if they can modify. The economy will not improve unless we start really helping the individuals in trouble in a bigger way. Banks have used our money for their own gains not to help the people. It has to stop!

Paddy. You are, IMO, spot on.

Fact is, consumers didn't invent the loans that got in trouble. The mortgage industry did. But, they get a pass and Billions of tax payer money when that home owner defaults. It makes no sense.

Sadly, the banks are not paying the price, the American home owners and tax payers are.

A sad and scary reality that has to be faced. It's time to stop sticking our head in the sand. Thanks for reblogging this post and bringing attention to the subject.

The more I read about what is going on in the mortgage industry, the angrier I become. And recently I have even begun to scoff at the talking heads who mention that the housing industry is beginning to show signs of recovery - bah. Cynical much? Uh huh. The One West Bank sweetheart deal is one that I just discovered, and one which turned huge light bulbs on in my little pea brain.

I just wrote an email to one of my upside down clients, older couple, health issues, home value declined, need to sell, and we are about to embark on a short sale strategy, trying to encourage them to keep their chins up. I haven't had the heart to tell them that Bank of America is part of that sweetheart deal and our chances are slimmer now than they were six months ago, but that chat is coming today. Anyhow, I was lamenting the fact that the bankers and lenders are no longer our neighbors and friends, and by extension human. And they will expect her to spend her last dime on her loan payments.

The foreclosure tsunami is coming, and I fear there is no high ground to run to.

I missed Jeff's article, Lenn, so thanks for re-blogging. Very sobering, indeed, and of course we would like to not have to think about it, or hope that the evidence is somehow wrong. But to do so means avoiding what needs to be done to deal with what the near future is bringing. And I fear it will be far worse than what is being projected since the real truths behind the scenes are not being shared and perhaps not even truly known.

And if the massive inventory does makes its appearance, how can the banks possibly deal with the volume they need to process on the sales side. And with even more difficulty in getting loans, unless there are a ton of investors paying cash...

Scares the puddin out of me. Thanks for the repost, Lenn. I've forwarded it to cohorts in my office.

Irene. I have been pooh-poohed all over ActiveRain for 2 years now because I don't follow the mantra, "If you think good thoughts good things will happen". I'm a realist. I saw it coming and prepared accordingly. Folks don't want to hear the truth.

I keep telling them, "You can't handle the truth", but it's a fact. Negative equity is pernicious and is catching up with the economy big time. The pols don't listen and actually don't really care.

Debra. Indeed it is and it ain't gonne be fun.

Jeff. With the exception of pockets of close in buyer and some foreclosure first time buyers, it's already pretty bad out there.

Joan. At least you're prepared. I like to be prepared too.

OCT

Hello Lenn, Robert Reich said it many years ago, we are in a Consumer Driven Economy and will now live and die by that fact. When consumer confidence is in the tank, consumers reduce spending and we get Deflation fears; and now the reality of Deflation. Our collective psyche cannot handle deflation well. Instead of accepting pay-cuts, employers layoff current employees and any new employees come in at lower pay. Instead of making a good-deal purchase at 20% off this week, we as consumers wait and see if it will be 30% off next week, etc. From 1991 to 2001 Japan went through a horrible economic deflationary period where real estate lost 60% of its value very quickly, and their monetary and fiscal policy inefficiently tried to resuscitate the Consumer. Guess what? - our leaders (government and corporate) seem to be repeating the same mistakes Japan made. The Economic History Lesson is already there, and there are no easy pain-free answers; better ones? - Yes! Are we too proud or dim to execute a better recovery plan based upon the Lesson Japan gave us? John

Alexander - HA! Forget consumer confidence.

A person can be confident and out of a job at the same time. They're still out of the market.

OCT

Why would anyone continue to pay monthly payments on a house that is not worth anywhere near what they owe on it and the values are still dropping? Its like paying the minimum on a credit card when that interest is so high that the balance goes up every month.

Everyone who can qualify needs to short sell now unless a miracle happens and the lenders start giving debt foregiveness with their modifications. It makes perfect sense to short sell, rent until your credit score recovers, which might not be that long, and then buy the same type house you sold for 1/2 the price. Modifying just isn't that much of an advantage when you weigh the options.

OCT

Nancy. I agree. Many who have negative equity will just continue to make the payments on a seriously undervalued asset. So be it.

However, if the owner MUST sell, they are left with short sale or foreclosure. They have no choice.

The banks won't reduce principle balances. They have no incentive to do so. The government could have financed that plan but they decided to just give the money to the banks and kick the home owners under the bus.

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