California Sending out Approximately 475,000 Notice of Defaults for 2009 yet Overall Foreclosures Declining. Shadow Inventory, Q3 Defaults, Toxic Loans. The State of the National Housing Market.
California is on path for a record 2009. By the end of the year over 475,000 notice of defaults will be sent to California homeowners. This of course is simply from lenders that actually even bother to send a notice of default. The shadow inventory is growing and we have some concrete data showing the mismanagement in the housing market. Banks for the most part are playing hot potato with bad mortgages like Alt-A and option ARMs. It is interesting to note that today, we have data showing a record number of notice of defaults for 2009 yet actual foreclosures are less than 2008. What gives? Well for Q3 we found out that the median months behind before a lender filed a NOD is 5 months. That is right, 5 months with no payment before the lender even notices.
First let us look at this trend on a chart:
Source: Data Quick
The first key point is that 2009 saw more notice of defaults sent out than in 2008. In terms of housing distress, 2009 was a tougher market than in 2008. Sales have boomed but this is mostly due to the lower end of the market enticing investors and first time buyers. Throw in every incentive you can imagine and you can understand why it “feels” better. The data as you can see above shows otherwise. The Q4 data is an estimate but I lowered the number even below the current average. Given that many lenders are not even moving on some properties, we can expect NODs to probably fall again in Q4. Some lenders like Bank of America have stated that they will start moving and foreclosing on loans that don’t qualify for HAMP soon but we’ll see. I take what the banks say with a grain of salt.
You would expect that with a high NOD and weak cure rate, that actual foreclosures would be higher this year for California. Not the case:
This is a fascinating trend. A loan that enters the NOD phase in all likelihood is going to be foreclosed. But banks aren’t moving through the process in full form. In many cases this is where the shadow inventory is being built. At this point, it isn’t the REOs on the books that are a problem but loans that are sitting in a sort of mortgage purgatory. Not paying but also no NOD. Given low cure rates and the abundance of toxic mortgages in California it is a major red flag that NODs are at a record but foreclosures are falling. We now know the average foreclosure timeline is 18 months to 2 years so some of these will become foreclosures in 2010.
If we look at quarterly data, you can actually see this. NODs will spike followed by a jump in actual foreclosures:
You’ll see NODs spike in 2006 and 2007 followed by actual foreclosures. We see a dip in 2008 because of moratoriums but the trend emerges with one caveat. Foreclosures don’t seem to have a trend but move sideways. So what is the reason for this? Banks are largely operating with no system in place and many institutions are selectively ignoring certain non-payers. So in terms of actual data, they look fine in some areas. After all, if the bank isn’t pursuing the property why would the public care? The public should care because taxpayers now subsidize the entire banking and mortgage industry (hello FHA insured loans).
Many of our favorite toxic mortgage all-stars appear in Q3 of 2009. In fact, the largest defaulter in Q3 is now defunct Countrywide:
In fact, out of the top 5 culprits only two stand in 2009 and that is Bank of America and Wells Fargo. Bank of America swallowed up Countrywide Financial and Washington Mutual is now part of Chase (as if I need to tell anyone in California with Chase’s massive marketing blitz partly subsidized by the American taxpayer). The lenders are gone but the loans are still here wrecking havoc.
Yet that is only half of the story. If we look at some of the subprime outfits we get default rates for the period of:
ResMAE Mortgage: 73.9
Ownit Mortgage: 69.5
BNC Mortgage: 61.4
Argent Mortgage: 59.9
First Franklin: 59.4
These suckers are long gone but here are their mortgages clogging up the California housing market. Is anyone going after these people criminally? Look at those rates! You have fraud factory written all over them.
Nationwide Housing Market
The nationwide housing market is still in deep trouble. The amount of single family homes in delinquency is an all time high:
Source: Congressional Oversight Panel
Now here is where the above California data doesn’t coincide. California has 5.3 million homes with a mortgage. Keep in mind California is in much worse shape than the overall trend. So using this data, you would expect some 530,000 homes in a form of distress. That nearly matches up with the 475,000 figure for NODs. But then, if we look at actual cure rates, we are left asking what is really going on here?
Most of the Alt-A loans and a ton of subprime is here in California. Meaning, of the 475,000 NODs we would expect only 23,750 to cure (assuming better nationwide stats). Yet actual foreclosures are trending more in the figure of 230,000 for 2009. In other words even by this data some 200,000 homes are sitting in the California pipeline. The number is much higher because we are not looking at many homes with non-payers or strategic defaulters that have yet to even receive an NOD. Can’t track something you don’t report but we know it is happening.
We have never had so many housing units in foreclosure:
This is the trend that we should be following. So far, we have seen no major decline in actual foreclosures. Negative equity is a big reason for the defaults and California is one of the prime negative equity states:
Source: Congressional Oversight Panel
30 percent of California homes with a mortgage are underwater (equals 1.745 million home owners/debtors). 35 percent are near negative equity. That is why pushing the 3.5 percent down with FHA loans is such a losing proposition. If homes decline say another 5 or 10 percent, there goes another batch of people into negative equity positions which increase the chance of foreclosure. The data is right here but gimmicks trump good public policy. Nationwide 20 percent of mortgages are underwater. Not good.
I’ve been searching for a chart that measured the overall foreclosure rate with unemployment for some time now. It would reason that higher unemployment would lead to more foreclosures. Yet that isn’t always the case:
You’ll notice in the early 1990s recession that as unemployment went up, foreclosures merely moved sideways. In the early 1980s, unemployment shot sky high yet foreclosures modestly increase. But during this decade, housing and employment coupled. Why? Our entire economy became dependent on the housing bubble. What this meant was that wherever housing went, unemployment was sure to follow. Now, foreclosures are busting through any historical trends.
The Congressional Oversight Panel also doesn’t believe in the hype of another housing bubble:
If anything, the futures market doesn’t see any price increase well into 2013. So much for the housing shills pumping up the current market. They fail to see that the recent price increase is based on:
-First time home buyers
-$8,000 tax credit
-Fed buying $1.25 trillion in GSE MBS keeping rates artificially low
These things can’t go on forever. Those betting with actual money in the markets don’t believe this either. Why? Employment is still weak. We have a glut of housing to last us through 2013. That is why you don’t see massive home building even 2 years after the bubble burst.
We also have an artificial amount of inventory on the market with government programs:
As I discussed before, the HAMP is largely a misguided program because it is based on the extend and pretend philosophy. So far, only 1,711 modifications have been permanent through HAMP. But you’ll love this data. Remember that HOPE program?
Bwahahahaha! 94 refinanced loans since the program launched in 2008! I remember talking about this back in 2007 when it was pre-launch. It turned out to be a bigger joke than even I could have imagined.
Even when we drill down in the 1,711 HAMP perm-mods, you will notice that the loans are largely fixed rate products:
So much for redoing those Alt-A and option ARMs here in California. By the way, good luck on getting a 31 percent ratio on some of these homes in mid to upper tier SoCal areas. These homes are underwater to the point of needing a scuba diving suit to refinance the mortgage. Plus, most people will strategically default on these places anyways. Banks on the other hand, will probably prolong the foreclosure process as long as they are sucking taxpayers dry.
What were reasons given from the HAMP modifications?
The top 3 reasons include, loss of income, excessive obligations, and unemployment. Basically the job market! You will not solve housing without having a solid employment base. Some people have asked me why doesn’t Wall Street and the government see this? They do. They just don’t care. Their assumption is that if Wall Street is raining, somehow some little drops will sprinkle on the poor typical American. Ask the 27 million unemployed and underemployed how happy they are that the S&P 500 is now up 62 percent from the March low. Lagging indicator? To the point of lagging you out of a decade.
And let us look at the data of what is being done. This is the actual ruse of the HAMP mods. It is extend…
The loan rate is only low for a fixed time. The principal is fully intact allowing banks to claim these loans at full face value which is a crock. Without the HAMP government subsidy, these loans would need to be foreclosed. I have no problem working with homeowners only if the banks fit the bill. Yet they are so corrupt and cynical that they want the money for the mods to come from the government! Bail us out and then pay for the mods. What a load of insanity. Seriously? Enough of this and let the trials begin. It looks like a couple of hedge fund gurus are being taken down with more to follow. I’ve sent letters to Congress, called up representatives, and some agree but the sense I got from many is “what can I do?.”
Also looking at the extend and pretend, you can’t modify property taxes and insurance. These are based on the assessed value of the home which according to the bank is still up in the peak ranges. What horrible policy.
The OCC and OTS have some more data in other types of modifications:
The same kind of pattern emerges as the 1,711 HAMP mods. That is, extend the term and pretend to lower the rate for a few years. You can also capitalize some of the principal on the back end rendering many of these option ARM-lites. That is why the re-default rates are through the roof. I imagine the HAMP re-default rates will be equally high. You saw the reason for payment problems. You didn’t see, “because my payment was too high” but more employment based. For those that saw reductions in their income, what if they lose their job? This is basically underwriting ala 2005 again.
People ask then what is really the solution? I’ve said it many times but you can’t have an economy without job growth. This sounds obvious but it would appear to be off the radar for Wall Street and our government. If you focus on the job situation, then housing will right itself. Notice that 1991 recession and foreclosures? What happened? Well we had the technology boom and added 20 million jobs over the decade. That was a bubble and that burst but you can see that yes, you can have an economy that runs outside of housing. But this decade housing was the economy. And the government and Wall Street basically want that industry back. Well it isn’t coming back. They need to figure out what to do.
And there is nothing wrong with renting! In fact, it is a shame that there is no actual initiative encouraging renting. Some of these people in distress will do much better to downsize. They are even telling the HAMP mod survey that they are financially strained. Maybe renting a lower priced home will help. Nothing wrong with that until you land on your feet again. Yet this notion that everyone deserves to own a home is largely a reason we are in this mess. Wall Street exploited this “American” desire and people ate it up. In fact, the dream was no longer to own a modest home but to own some oversized McMansion and drive a gigantic V-10 tank that got 8 miles per gallon. When did the American Dream become a Marvel Comic?
Some suggestions are to bring back our industrial base to the U.S. Make ourselves more competitive. Flipping homes to one another while quant jocks play Halo on one screen and do billion dollar trades on another Bloomberg Terminal is not a real economy. It basically strips the value out of the real economy. These banks posting record profits? JP Morgan making $3.6 billion last quarter. Really? Most of it was through their i-banking and private equity division. If they want to act like a hedge fund so be it but they have zero access to the Fed and U.S. Treasury. Instead, they are a primary dealer.
Healthcare is a big part of our economy and will remain that way with over 70 million baby boomers entering retirement age. Surely we can create some jobs in this arena. At least it is better than installing granite countertops in every home and adding Jacuzzis and pretending we are keeping up with technological innovations of other countries. In large part, housing has become a major distraction. It is a cultural neurosis like Tulip Mania or watching UFOs on TV taking away a kid but in the end, it is all fake. The equity in these California homes was fake. The Wall Street profits were a sham. So until we can return to a real economy, focusing on housing only serves as a form of therapy.
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