"Reluctant Banks" Let Defaulted Borrowers Stay in Homes
Yesterday, we discussed Lender-Abandoned, Non-REO Foreclosures.
That started a robust discussion, leading to a follow up piece by Bob Ivry of Bloomberg: Lenders Buried By Foreclosures Let Late Borrowers Stay in Homes.
According to Ivry:
"Banks are so overwhelmed by the U.S. housing crisis they've started to look the other way when homeowners stop paying their mortgages.
The number of borrowers at least 90 days late on their home loans rose to 3.6 percent at the end of December, the highest in at least five years, according to the Mortgage Bankers Association in Washington. That figure, for the first time, is almost double the 2 percent who have been foreclosed on.
Lenders who allow owners to stay in their homes are distorting the record foreclosure rate and delaying the worst of the housing decline, said Mark Zandi, chief economist at Moody's Economy.com, a unit of New York-based Moody's Corp. These borrowers will eventually push the number of delinquencies even higher and send more homes onto an already glutted market. "We don't have a sense of the magnitude of what's really going on because the whole process is being delayed,'' Zandi said in an interview. "Looking at the data, we see the problems, but they are probably measurably greater than we think.''
That's quite astonishing: Conditions are actually worse, not better, than the already miserable numbers we hear being reported each month. And, the trend is accelerating downwards
Some specific data from the Bloomie piece:
- Lenders took an average of 61 days to foreclose on a property last year, up from 37 days in the year (RealtyTrac)
- Sales of foreclosed homes rose 4.4% in 2007 (LoanPerformance First American CoreLogic)
- Inventory of foreclosed homes more than doubled last year (LoanPerformance First American CoreLogic)
Given those numbers, its no surprise that the number of "Reluctant Banks" are also increasing.
What are "reluctant banks?"
Some banks are letting people stay in their houses until someone through foreclosure and beyond. One distressed mortgage buyer said people have been staying in their home "Until someone comes to kick them out . . . Sometimes no one comes to kick them out.''
Also of interest: The surge in Foreclosures is completely overwhelming much of the legal system. Court houses cannot keep up with the new foreclosure applications. And, Mortgage servicers are weeks if not months behind in starting the foreclosure process.
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There's a lot more detail and interviews in the full piece . . .
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Source:
Lenders Buried By Foreclosures Let Late Borrowers Stay in Homes
Bob Ivry
Bloomberg, April 4 2008
http://www.bloomberg.com/apps/news?pid=20601109&sid=aefAJU_88vfs&
Friday, April 04, 2008 | 11:23 AM | Permalink
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Comments
What I find amazing is that the vast majority of people do not seem to understand the magnitude of the issues.
When it does get worse and people do start to understand, the amount of bleeting that will occur by people saying that they didn't realize how bad it could get is going to be sickening to those who do have clue.
Posted by: wedwards | Apr 4, 2008 11:33:51 AM
Yep, things are pretty bad. But if you've been short since early March on all this bad news, you've gotten crushed. The markets anticipated all this bad news by going down 20% in a couple of months. Stocks are going up now and there are a ton of long trades that are working again.
Posted by: Roger | Apr 4, 2008 11:36:27 AM
Someone on this board once mentioned lenders did this in 30's.
Posted by: wunsacon | Apr 4, 2008 11:44:39 AM
"That's quite astonishing: Conditions are actually worse, not better, than the already miserable numbers we hear being reported each month. And, the trend is accelerating downwards."
Why would you have not expected this to occur?
I would have been astonished if this wasn't happening. Disappointed, too.
Posted by: Movie Guy | Apr 4, 2008 11:49:53 AM
FUNNY
http://www.theonion.com/content/amvo/bernanke_says_recession_possible
Best regards,
Econolicious
Posted by: ECONOMISTA NON GRATA | Apr 4, 2008 11:50:01 AM
"What are "reluctant banks?"
As in to lend? We know they're flush with our money.
Posted by: Pat G. | Apr 4, 2008 12:07:36 PM
My take on the markets is that the Fed chairman, Treasury secretary, etc are usually so far behind the curve in recognizing that a recession is occurring, that the economy is in the early stages of recovery before they publicly admit concern.
My belief here is the markets are looking at Bernacke's recent comments as a sign of hope that the end is near! Sigh.
I wish I was more ignorant and could view the world with rose-colored glasses like the rest of the market participants do!!
Posted by: wedwards | Apr 4, 2008 12:08:13 PM
As Roger says, this is why bank stocks are down 50%+ and giving double-digit dividend yields.. This is already baked into the cake.
Things are bad, but it's not the end of the world as we know it. Let's throw some crazy numbers and see how bad things can be.
Let's say that 20% of all mortgages will end in foreclosure. And the bank will lose 50% of the mortgage value after reselling it at a loss and whatever other fees are involved. Even with these EXAGGERATED numbers, we're still talking about only a 10% haircut on their existing mortgages. Is that the end of the world for these banks?
If anybody knows the real numbers, it'd be fun to play with.
Posted by: Eddie | Apr 4, 2008 12:09:57 PM
dang . . . where is cinefoz when you need him?
Posted by: Shane | Apr 4, 2008 12:14:42 PM
Roger: yes a lot of shorts huting in the near term and some long trades working again...totally agreed. however, how long does that dynamic last? given:
-Weakening consumer spend could continue 2-8 qtrs
-Corporate profit margins at all time highs and very likely to compress which will take S&P EPS down
-Financial sector was large portion of S&P EPS (30-40%-ish) and will contribute materially less to the EPS go fwd for some time because some of the highest profit margin biz is now way less (CDO type products)
-MEW and construction spend way down and could stay down for 2-8 qtrs will be a material drag on GDP
-PE on S&P 500 is still pretty high relative to historic average
-Inflation in food and energy still higher than past few yrs and bites into already squeezed consumer budgets
given all that it might be very tough for the S&P 500 Index to get a higher PE on lower EPS outlook in order to get the index to rise materially from here.
not saying it won't happen, markets can defy fundamentals for years, but given the headwinds it may very likely trade sideways and gains like the past few weeks are given back over the next 6-12 months.
just my 2 cents worth. and i'm net long and would prefer mkts to rise over time. but...over the long term fundamentals need to support the valuation and there are so many neg headwinds/conditions right now.
Posted by: craig | Apr 4, 2008 12:15:10 PM
Eddie: agree it's not end of world but where the banks get in trouble is similar to why consumers get in trouble when they put 5% down and borrow 95% to buy a house (assume $100,000 house). So i have $5,000 of capital in the house (banks are levered also...not usre if it's 19:1 though). Lets say the house goes down 5% in value (similiar to banks losing 5% on total loans out). My capital is reduced to zero. Fine, I can walk away and do a jingle mail, but I think banks are required by law to have a certain amount of capital per loans out. so a small 5-10% hit means a lot to a bank's solvency and/or it's ability to lend new capital.
i'm not a banker but i think that's why a small hit means a lot to banks. any bankers out there can confirm or refute?
Posted by: craig | Apr 4, 2008 12:25:03 PM
Eddie: agree it's not end of world but where the banks get in trouble is similar to why consumers get in trouble when they put 5% down and borrow 95% to buy a house (assume $100,000 house). So i have $5,000 of capital in the house (banks are levered also...not usre if it's 19:1 though). Lets say the house goes down 5% in value (similiar to banks losing 5% on total loans out). My capital is reduced to zero. Fine, I can walk away and do a jingle mail, but I think banks are required by law to have a certain amount of capital per loans out. so a small 5-10% hit means a lot to a bank's solvency and/or it's ability to lend new capital.
i'm not a banker but i think that's why a small hit means a lot to banks. any bankers out there can confirm or refute?
Posted by: craig | Apr 4, 2008 12:26:13 PM
Eddie, do you understand the concept of leverage? Look it up and get back to us.
Posted by: Mac & Bumble | Apr 4, 2008 12:28:17 PM
The refi business rather then new home purchase is the real culprit behind the large number of foreclosures and the vast reach into all aspects of the homeowners market. Basically people have presold their homes to themselves and taken the money and spent it, now they either can't afford to live in the home given the new loan amounts or would rather walk away rather then paying a upside down mortgage.
The value of SFR as collateral for future expansion of the economy is lost.
Posted by: ron | Apr 4, 2008 12:29:32 PM
"What I find amazing is that the vast majority of people do not seem to understand the magnitude of the issues...."
Well...the property tax office here (Bedroom community of Portland, OR) fully understands the ramifications.
20% (per year) penality for deliquent property taxes.
Posted by: SR | Apr 4, 2008 12:29:33 PM
I am sorry but this is not such a big deal and it makes good sense.
The value of the house and the neighborhood are less likely to deteriorate if the foreclosed houses are not empty or abandoned.
Further, if the banks ever get around to it, there is the opportunity to collect rent from the occupiers (if they were evicted they would have to pay rent somewhere in order to live).
Presumably if an offer were to be made on a property, the bank could then evict the owner unless they can match within a certain time period.
Posted by: robster | Apr 4, 2008 12:33:51 PM
When taking into consideration that hedge funds and mortgage lenders do not have access to the Fed discount window and three layers of « victims » do not receive the same treatment.It is more and more unsure that banks are the lightest casualties for now and in the very next future.
Please see hereunder
rhttp://bankimplode.com/
Imploded*" Banks:
Bear Stearns
Northern Rock PLC
Coast Bank
http://hf-implode.com/
Since mid-2007, at least 74 funds at 41 outfits have "imploded*"
http://ml-implode.com/
Since late 2006
247 major U.S. lending operations have "imploded
Posted by: Philippe | Apr 4, 2008 12:42:37 PM
We'd be in difficult times without a housing bubble and bust. With the bubble thrown in (and all of the attendant toxicity and contagion), Looks like this is shaping up to be a doozy of a downturn.
Posted by: Marcus Aurelius | Apr 4, 2008 12:49:16 PM
Love this quote:
The most experienced people you can bring in are origination people,'' Stern said. ``But for a bank it's a moral hazard to have the same people who originated the loans now modifying those loans. That wouldn't be desirable. Once around is enough
Fudge mortgage applications like we saw in that chase letter, then turn around and get paid to process the forclosures. I bet there is a decent amount of this going on, because the banks have shown how much they care about moral hazards.
Posted by: Peter_BK | Apr 4, 2008 12:52:30 PM
The only thing astonishing is that you're astonished.
And yes, this is what happened during the depression - it's win-win, since they'll keep up the home, and be less likely to trash it when finally asked to move, since they've been shown something resembling compassion.
As for how bad it can get: 20% foreclosure rate assumes that things don't get too bad in the economy - given that we're going to lose about $5-$8 trillion in capital, figure the odds on that one. (We're already at 5% or more on some packages from 2005, and it's just getting started.) And only 50% off? Guess again - in many markets (CA, FL, AZ, NV), that's going to be the writedown on the list price, so the mortgage recoup values could go even lower. And of course all seconds and helocs in that scenario go to zero. But that's only for originations from 2003 onward. If we knew what percentage of loans were made in the last 5 years, we'd have a better picture of where things were going.
Unfortunately, I live in SFO, and I know ZERO people who have a loan structure older than 5 years... I'm sure it's not that bad elsewhere, but I don't have any other datapoints.
I can get very, very bad. This is dead cat bounce, people.
Posted by: Jim D | Apr 4, 2008 1:02:53 PM
"I can get very bad" is actually, "This can get very bad". Freudian slip?
Posted by: Jim D | Apr 4, 2008 1:04:50 PM
Bearish Blind Squirrels was right when he called the bottom at 1285, but you told us to go “crazy short” on the same day.
I wish I had listened to Bearish Blind Squirrels.
Posted by: Eric | Apr 4, 2008 1:14:45 PM
Today's New Finance Concept: jingle return-to-sender.
Posted by: Roger Bigod | Apr 4, 2008 1:15:01 PM
Let's just make sure the homebuilders get their tax break. They need to stay solvent to further add to the inventory.
8^)
Posted by: Mephisto | Apr 4, 2008 1:16:33 PM
Big Pic, it's sensible to understand foreclosures by looking at the incentives of banks involved. The banks' decisions matter in short sales as well: even with a willing buyer, many short sale deals languish for months. From the banks' perspective, they continue to get mortgage payments, and then go to foreclosure anyway. In markets where the inventory of foreclosures aren't through the roof, they can sell out of foreclosure for the same price and collect some payments along the way.
Posted by: Ellie at Redfin | Apr 4, 2008 1:25:17 PM
