Category Archives: Foreclosure

Mortgage Bankers: Delinquencies and Foreclosures Continue to Fall, but a Few Problems Persist

by Brian Lego — Eye on Housing

The Mortgage Bankers Association’s National Delinquency Survey showed the delinquency rate on first-lien residential mortgages dropped 41 basis points to 7.58% during the fourth quarter of 2011 (down from 7.99%). While the foreclosure inventory remained elevated from a historical perspective to close out the calendar year, it still registered a modest decline between the third and fourth quarters of 2011, falling 5 basis points to 4.38%. The share of loans entering the foreclosure process during the final three months of the year slipped to 0.99%–marking only the second time in the past four years the foreclosure starts rate fell below 1%.

Jay Brinkmann, MBA’s Chief Economist, discussed some of the observed improvements in mortgage loan performance:

“Mortgage performance continued to improve in the fourth quarter, reflecting the improvement we saw in the job market and broader economy. The total delinquency rate and foreclosure starts rate decreased and are back down to levels from three years ago. A major reason is that the loans that are seriously delinquent are predominantly made up of loans originated prior to 2008 and this pool is steadily growing smaller as a percent of total loans outstanding. In addition, employment is the key driver of mortgage performance and the mortgage delinquency rate is actually falling faster than the unemployment rate is declining,”

A promising piece of data in last quarter’s results was the broad-based geographic improvement in mortgage loan performance. The share of seriously delinquent loans remained unchanged or fell in 25 states, including the hardest-hit areas of California, Florida, Nevada and Arizona. While this represents an improvement, the foreclosure crisis still very much remains concentrated geographically as five states—Florida, California, Illinois, New York and New Jersey—account for more than half of all foreclosures yet only represent less than a third of all serviced loans. By itself, Florida accounts for nearly 25% of the nation’s total foreclosure inventory.

The legal process has had a palpable effect on the level and trajectory of foreclosure activity across states. Indeed, of the top 15 states in terms of the current share of first lien mortgages in foreclosure, 14 use the judicial process to handle foreclosure cases. Furthermore, foreclosure inventory rates in judicial states are roughly four percentage points higher and have seen rates trend appreciably higher while non-judicial process states have experienced modest declines in foreclosure rates during the past two years.

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Shadow inventory Armageddon

Shadow inventory Armageddon – Foreclosure timeline up to an average of 599 days with 798,000 mortgages having no payment made in over 1 year and no foreclosure process initiated. Shadow inventory grows to over 6,540,000 properties.

The biggest problem facing the housing market is still the large amount of stubborn shadow inventory.  The fact that this figure remains elevated is a sign that the banking system after all these years and trillions of dollars in bailouts has yet to figure out a streamlined way to unload properties. The Federal Reserve is trying to grease the wheels with historically low mortgage rates but that has done very little since this does not address the weak economy.  At the latest count there are 6.54 million loans that are either delinquent or in the foreclosure process.  This figure hasn’t really moved much for the entire year.  Properties have been sold from the REO (bank owned) pile but this is the tiny chunk of properties that is covered by the mainstream news and also that appear in public listing services.  As we will show in charts later in this article, only examining this piece of the real estate pool is like seeing the tip of an iceberg and thinking there is nothing underneath it submerged in the water.

The stagnant shadow inventory

The latest data shows that the shadow inventory has increased a bit in the last few months:

total shadow inventory loans distressed aug 2011

To break down the figures even further you have 2.48 million loans that are less than 90 days delinquent (3 missed payments), 1.9 million loans that are 90+ days delinquent (more than 3 missed payments), and 2.16 million loans already in the foreclosure process.  In total, this adds up to over 6.54 million loans in the distressed pipeline and this is what I would categorize as the shadow inventory.  As the chart above highlights, only about 500,000 properties are actually real estate owned and show up for sale in local MLS data (and not all REO show up but a lot do).  The cure rates are abysmal on many of the loans and many are underwater to levels that will never cure on these properties.  In fact, the latest data shows that the typical foreclosure process timeline is now up to a stunning 599 days!

“(LPS) The July Mortgage Monitor report released by Lender Processing Services, Inc. shows that foreclosure timelines continue their steady upward trend, as a payment has not been made on the average loan in foreclosure in a record 599 days. Of the nearly 1.9 million loans that are 90 or more days delinquent but not yet in foreclosure, 42 percent have not made a payment in more than a year with an average delinquency of 397 days, also a new record. At the same time, first-time foreclosure starts in June were near three-year lows, and first-time delinquencies accounted for only 25 percent of new delinquent inventory.”

Even more disturbing you have 42 percent of the 1.9 million loans that are 90 or more days delinquent not making a payment in more than a year (approximately 798,000 mortgages are going with no mortgage payment for more than a year yet no foreclosure process has been initiated).  The data doesn’t break this down further but how many of these non-payment properties are here in overpriced markets in California like Beverly HillsBel-AirManhattan BeachCulver City, or Pasadena?  The numbers are stunning from the pieces we have gathered.

Part of the interesting market dynamics is that you see areas like Florida, Nevada, Arizona, and even theInland Empire here in California selling well given to the crash in home prices.  In other words, the market will clear properties out nicely if the price is right.  Of course banks are pretending the most expensive areas are the healthiest when that is not necessarily true.  Take for example the overpriced Orange County:

MLS non-distressed listings:                      16,307

Notice of default filed:                                 4,721

Auction scheduled:                                        6,951

REO:                                                                      1,798

Even in a county where prices are still inflated you have nearly as many homes in the distressed shadow inventory pipeline as you do on the MLS.  And keep in mind, 4.38 million properties have missed at least 3 mortgage payments and no foreclosure process has been initiated.  The NOD is the first step in the foreclosure process.  Also, you have 798,000 people living in homes that have not made a payment for at least one full year.  How many folks in Orange County fall in these categories and are part of the shadow data?

Now the issue about the shadow inventory is the pipeline shows no signs of sizeable clearing.  Why?  Even though properties are being cleared out via REO sales, this is a small fraction of the pool and it also doesn’t include the fact that tens of thousands of people each month are thrown into the distressed pool because of the economy.  This is why you have a tough battle ahead.  What is a more “normal figure?” for shadow inventory?  Hard to have an exact figure but a healthy range is within the 1 to 2 million range.  6.54 million is very far from that baseline figure.

The hidden cost of living

There is a good measurement tool over at MIT that is called the Billion Prices Project (BPP).  This measure seeks to get a better idea of the real nature of inflation in the economy:

annual inflation

Source:   MIT

Contrary to what we are being told the cost of living is going up.  You have a variety of things happening from producers chopping down ounces or repacking goods giving you less for the same price to energy costs still being high (a gallon of gas here in L.A. County is stilling running over $3.8).  You also have health premiums going up all the while people have no growth in household incomes.  Yet the MIT data shows year-over-year inflation is now up over 4 percent.  This figure is incredibly high when there is no added wage growth (even a 1 percent spike with no wage growth is crushing).  You don’t need to be an expert here but just look at your monthly purchases to see this revealed.

The big ticket items like housing have been falling but for most other daily goods the cost has gone up.  This is why the bigger issues that will push housing lower are outside of the housing arena (i.e., jobs, healthcare, education, food etc).

REO not reflective of overall market

As we have mentioned, the coverage in any mainstream press is heavily focused on REO inventory:


Source:  Calculated Risk

The above snapshot is incredibly limited since it covers about 500,000 properties whereas the trueshadow inventory figure is up to 6.54 million.  Of course the banks are happy pretending the housing issue is only 500,000 homes but the reality is much more disastrous and given the immobility of the figure, we realize banks still have no handle on how to move the properties.  Why?  Because they are only focused on keeping their personal interests going at the expense of taxpayers.  Most of the loans are government backed (aka taxpayers) so it is ironic that we give the same banks that caused this financial mess the obligation and power to clear out the inventory.  Is it any wonder it has been a boondoggle?  How many million dollar bonuses have been paid to banking executives all the while the housing market has continued to implode?  It would have been better to create a RTC like entity, let too big to fail actually fail, and simply clear out the market.  As we have seen, price will get sales going and also free up disposable income instead of paying the bank to live in a stucco home.  Four years into the crisis and we are still at worse than square one.  What do you expect when people trust the same financial and banking sectorthat led us into this mess to solve it with no actual change?

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