Treasury: Millions more foreclosures coming

The Assistant Secretary for Financial Institutions Michael S. Barr gave written testimony before the House Financial Services Committee today that put things into perspective.

[W]e recognize that any modification program seeking to avoid preventable foreclosures has limits, HAMP included. Even before the current crisis, when home prices were climbing, there were still many hundreds of thousands of foreclosures. Therefore, even if HAMP is a total success, we should still expect millions of foreclosures, as President Obama noted when he launched the program in February.

The thing to keep in mind is that there is no chance that HAMP will be a total success. For instance, only 3 percent of seriously delinquent borrowers received a mortgage modification that "reduced their monthly payments in the year after they got into trouble" and only 8 percent of borrowers received any modification.

Some of these foreclosures will result from borrowers who, as investors, do not qualify for the program. Others will occur because borrowers do not respond to our outreach. Still others will be the product of borrowers who bought homes well beyond what they could afford and so would be unable to make the monthly payment even on a modified loan.

This last category that Barr's testimony refers to can be seen in two other recent reports. One of them concerns the Option ARM mortgages.

Performance on U.S. option ARM RMBS is likely to continue its decline as $134 billion of these loans will recast over the next two years, according to Fitch Ratings.
Of the $189 billion securitized Option ARM loans outstanding, 88% have yet to experience a recast event, though it should be noted that Fitch rated only approximately 5% of Option ARM transactions. Of these loans that have not yet recast, 94% have utilized the minimum monthly payment to allow their loans to negatively amortize.

These are shockingly bad numbers. For those of you who don't know, negative amortization mean that borrowers aren't even paying enough to keep the principal on the mortgage from rising. Normally these contracts are structured so that once negative equity rises to 110-125% the mortgages will automatically recast. That means that mortgage payments will suddenly jump to a level that will not only not allow negative amortization, but also the borrower will start paying down the principal as well. This usually means a jump of over 63% in mortgage payments on average.
So can these borrowers afford that jump in payments? Extremely unlikely.

Further evidence of option ARM underperformance in the last year lies in the number of outstanding securitized Option ARMs either 90 days or more delinquent, in foreclosure or real estate-owned proceedings, which has increased from 16% to 37%. Total 30+ day delinquencies are now 46%, despite the fact that only 12% have recast and experienced an associated payment shock.

These people are already defaulting even before their loans have recast.
This situation is so predictable it is obscene. What serious home owner would have gotten themselves into such a predicament if they could afford the house in the first place?

Option ARMs aren't the only mortgage class that is likely to blow up over the next few years. Interest-only loans are also getting ready to reset.

Like millions of buyers during the boom, the Mollers leveraged their way into a house they could not otherwise afford by taking out a loan that required them to make only interest payments at first, putting off payments on the principal for several years.
It was a “buy now, pay later” strategy on a grand scale, meant for a market where home prices went only up, and now the bill is starting to come due.
With many of these homes under water — worth less than the loans against them — many interest-only mortgages will soon become unaffordable, as the homeowners have to actually start paying principal. Monthly payments can jump by as much as 75 percent.

It's becoming a consistent theme - people that require an exotic mortgage to get into a home can't really afford it anyway. There are 2.8 million interest-only loan mortgages out there, constituting $908 Billion in mortgages.
Interest-only mortgages put off paying the principal for 5 to 7 years. To make it worse, the mortgages are still generally 30 year. Therefore the principal will have to be paid off in 23-25 years, rather than in 30 years.

The Option-ARM and interest-only mortgages aren't subprime. These are usually middle-class neighbors, and they will be defaulting by the millions in coming years. Sometimes these people are even living in rich neighborhoods.

(Bloomberg) -- Wealthy individuals’ Chapter 11 bankruptcy filings jumped 73 percent in the second quarter from a year earlier, according to the National Bankruptcy Research Center, a research firm in Burlingame, California.
More individuals or families with at least $1,010,650 in secured debt and $336,900 unsecured are using Chapter 11 of the U.S. bankruptcy code typically associated with business reorganizations. Falling U.S. home prices leave them unable to refinance or sell properties when they drop below the value of the mortgage, said Joseph Baldi, a Chicago bankruptcy attorney.

Wealthy people have an additional problem when they go bankrupt - they are locked out of Chapter 7 because they make too much money.
4.3% of U.S. homes, or one in 25 properties, were in foreclosure in the second quarter of 2009 alone. It's a record high since the statistic has been tracked.

“Real estate is an incredible thing on the downside,” said Jason Green, a bankruptcy attorney based in Washington. “Equities can only go to zero. Property can go well below zero,” because of expenses such as property taxes, insurance and maintenance on primary residences, vacation homes and investment properties.

In the face of this real estate meltdown is the government desperately, and hopelessly, trying to re-inflate the housing bubble. In doing so they have made the taxpayer the bagholder.

"Absent government intervention, there would be no lending," said Nicolas P. Retsinas, director of Harvard University's center for housing studies.
All told, the government now stands behind 86 percent of all new home loans, up from about 30 percent just four years ago, according to Inside Mortgage Finance.

If you think that is a good thing, then consider that Fannie Mae and Freddie Mac are a $260 Billion Black Hole that will require another round of massive taxpayer bailouts. That's assuming that they don't lose more money by investing in a falling real estate market in the coming years, something they seem committed to doing.
The two GSE's have posted $165.3 Billion in net losses over the last two years, and have required $95.6 Billion in taxpayer bailouts since November.

Meanwhile, you can get taxpayer-backed FHA loan, and use the $8,000 taxpayer credit towards the 3.5% downpayment. If that doesn't sound like an exotic loan I don't know what would. Not to be outdone, Fannie Mae is offering mortgages at 105% of home value. Despite all this, even the Fed has questioned the effectiveness of Fannie and Freddie at helping lower-income homeownership.

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Comments

I've been wanting to write this one up

but I haven't found the time. While a lot of the media focus has been on the foreclosure rate as a percentage of all mortgages, there's another number that matters. Foreclosed homes for sale as a percentage of all homes for sale. THe Indy Star had a great piece about this over the weekend.

How acute is the problem? The Indianapolis Star reviewed more than 8,400 residential sales in Marion County from January 2008 through this June -- an 18-month stretch. The sales were filed with the Department of Local Government Finance. A key finding:

At least 47 percent of the homes sold during that period are considered "distressed" properties -- foreclosed on by private lenders, sold at a sheriff's sale or by a federal agency such as the Federal Housing Administration or Veterans Affairs. That number matches national figures for the first quarter.

As the article notes, close to half of homes for sale nationwide are foreclosed properties. Obviously this tends to depress home sale values. Who wants to pay market value for a house when you can get the same thing for a third the price?

And it's not just homeowners looking to sell that are impacted. In Indiana, and I imagine many states, one of the procedures to challenge a property tax assessment is to show that other, comparable, homes in the area have been sold at a lower price per square foot than your house. Think about that.

If you cut the assessed value per property by half or more without a massive expansion of the number of properties being taxed, it means a drop in local government revenue. And this has to be made up from other sources, or budgets have to be cut. It's a massive mess.

Whatever happened to Obama's plan to allow foreclosed on families to get their mortgages reset?

Until the market is cleared this is going to be a drag on housing prices, and that is going to hit local government hard.

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MfM, you'll be interested in this report.

Falling property tax revenues isn't the only concern for local gov'ts. Look at this updated report from the Center on Budget and Policy Priorities. Virtually every State Gov't is looking at very serious budget shortfalls, and the current estimates are probably low. My wife is a school teacher who has already been told that there will be 3 furlough days before Dec. 31st. The Board of Ed also approved 7 more for the remainder of the school year, but so far they can't figure out how to get it done without actually cancelling school days. Keep in mind, there is a lot of Federal money coming right now or the situation would be worse. It is a deep abyss we are all peering into, and a road none of us is ready to travel.

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Virginia Postrel's legacy

I recall having an online argument with libertarian Virgina Postrel about the disaster which would befall us from the consistent offshoring of jobs. She believed there would be no fallout, that there is an infinite number of jobs being produced (possibly now there is, by Foreign Direct Investment overseas by American-based multinationals).

How can anyone be so ignorant yet write on economics? Boggles the mind. Obviously, as the rest of us understand, each time a job is offshored, so goes a chunk of the GDP, and with lowered personal and national income, so goes the economy.

And with Obama Administration appointments such as Diana Farrell (editor of that marvelous text extolling offshoring, titled: OFFSHORING, as well as that phony McKinsey Global Institute report extolling the same), the future has been pretty much established.

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McKinsey

there associated business are in the business of labor arbitrage and offshore outsourcing.

Personally, I think those who use their degrees etc. to write up very obvious bogus "reports" and "studies" should be stripped of their PhDs. I mean literally the school should rescind the degree for such BS.

They litter congressional staffers desks with such noise, try to claim this as truth and frankly, who has time to read the original "paper" and realize it has major statistical or logic flaws...

few. They are not going to realize it's a bunch of spin in "econspeak".

I went and read them, esp. the Catherine Mann McKinsey report you are referring to and it is pure, absolute garbage. She should be publicly called out for writing such fiction.

I'd have to go back to the original paper to pull out the flaws and there are so many...but anything that is taken seriously it's a good idea to go through it and specifically post the obvious flaws. I've done that a few times here esp. when Congressional staffers email boxes are being snowed with corporate lobbyist BS using one of those.

Congress doesn't just need a spam filter, they need lobbyist bullshit filter.

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Hearing link and testimony

Progress of the Making Home Affordable Program: What Are the Outcomes for Homeowners and What Are the Obstacles to Success?

testimony of Barr.

I don't get this, his testimony looks like fiction. My understanding of the loan modifications, esp. to reduce principle is it's just for show, a huge rat maze with no cheese, like banks saying "they lost the paper work" or the individual "didn't turn in the right paperwork", refusal to take people's calls, return calls...

i.e. huge maze of blow off tactics all the while that person is being foreclosed on.

Where's that testimony? Also, why does CATO institute get to testify? Why do all of these large bank executives get to testify and where is the testimony of all of those individuals who are being interviewed on the news an in the press about this inane run around, no actual loan modification kabuki dance?

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you volunteering?

;) if so, I believe there might be some 60 minutes clip or a "dateline" (I cannot recall which covered it but some major network did) or reports on this "rat maze of denial" that's going on.

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foreclosures for Aug: 358k

Bloomberg:

Foreclosure filings in the U.S. exceeded 300,000 for the sixth straight month as job losses that boosted the unemployment rate to a 26-year high left many homeowners unable to keep up with their mortgage payments.

A total of 358,471 properties received a default or auction notice or were seized last month, according to data provider RealtyTrac Inc. That’s up 18 percent from a year earlier, and down 0.5 percent from July, the Irvine, California-based company said in a statement. One in 357 households received a filing.

Analysts getting real and saying people plain can't afford their mortgage because they are out of a job and nothing will change until the unemployment rate drops.

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Foreclosures

Banks are moving so slowly that I wonder whether they are not, as a matter of policy, stringing the process out to keep from realizing losses. and new non-recoverable costs (taxes, insurance, utilities, repairs, security, operational costs, etc.). I realize this is an abstraction and does not have big effect on bottom line, but for many individuals, renting now makes more sense than ownership, since renters have more mobility (and perhaps more liquidity). As the banks have not only non-performing assets but also depreciating liabilities (empty properties), you would think they would be more actively managing and modifying, or are they just kicking the can down the road?
Frank T.

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Frank T.