essays & effluvia: Mortgage Default Crisis

Thursday, July 09, 2009

Mortgage Default Crisis - Brutal Past 2-Months

M Hanson Advisors – Real Estate & Finance

The Mortgage Pages - July 9^th 2009

- Mortgage Default & Foreclosure Crisis - Brutal Past Two-Months

- 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

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

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. 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.

The report is 3mb so instead of attaching, below are the charts that are the most important. If you want the full report, please shoot me a note and I will send. Mark

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.