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.