May142013

62% of delinquent loans are more than 90 days past due in May 2013

Lenders created a kinder, gentler euphemism for their stupid bubble-era loans; legacy loans. The word legacy has a regal connotation conjuring up images of revered ancestors and royal traditions. In reality, label is being applied to some of the most unconscionably stupid and irresponsible loans ever underwritten. What lenders call legacy loans should be called cancer loans because they are a malignant tumor on the balance sheets of lenders everywhere.

Since the credit crunch of August 2007, lenders clamped down on their foolish underwriting standards. The stopped making all sorts of loans nobody would ever repay. Unfortunately, that also meant prices would need to come down significantly, so even though their underwriting improved immeasurably, the loans from late 2007, 2008, and part of 2009 still performed very poorly. Many of those loans were made with very little money down, and the borrowers quickly submerged deeply underwater and strategically defaulted.

Since 2009 loan performance on new loans has steadily improved, largely because the buyers didn’t fall deeply underwater. The loans from 2012 are performing very well because most of those borrowers have new-found equity. Unfortunately for lenders, the crappy loans from the bubble linger on like a bad odor. Lenders attempted to cover this pungent aroma with the perfume of loan modifications. What they’ve got now is a compost pile of bad loans they keep turning over with loan modifications that redefault over and over again at rates of between 41% for prime loans and 65% for subprime.

Lenders made no progress on their resolution of legacy loans over the last year. The delinquency rate of all loans inched down from 6.8% in March of 2012 to 6.59% in March of 2013. Given the improvement shown by recent vintages, that means the delinquency of legacy loans is unchanged, and itt may have gotten worse. As lenders kick the can with loan modifications, borrowers are redefaulting faster than lenders can remodify their loans. The only net reduction in legacy loan delinquencies is coming from the trickle of foreclosures. As a result, legacy loans now account for 62% of long-term delinquencies.

Lenders are committed to a policy of can kicking until prices come back. They are foreclosing on a handful of committed squatters in an attempt to spook the herd and prompt them to agree to loan modifications. From their perspective, the plan is working. Remember, negative equity is another lender euphemism. It disguises the fact that lenders have a huge exposure to loans without collateral backing, and it makes borrowers feel like they have hope of actual equity again while they rent from the bank. (Notice the deception in the chart below that cuts off the bottom 10% to make the improvement look better than it is).

Delinquency rate rises, but inventory eases in Q1: MBA

NEW YORK | Thu May 9, 2013 10:04am EDT

(Reuters) – The delinquency rate on U.S. home mortgages rose in the first quarter as more homeowners fell behind on payments for the first time, data from an industry group showed on Thursday.

The seasonally adjusted delinquency rate on all loans rose to 7.25 percent from 7.09 percent in the first quarter, but was down from 7.40 percent a year ago, according to a report from the Mortgage Bankers Association.

The number of loans that were 30 days late on payments rose to 3.21 percent from 3.04 percent at the end of last year. Mortgages that were 90 days or more past due, which are considered less likely to get back on track, edged down to 2.88 percent from 2.89 percent. …

Among the different types of loans, subprime fixed and adjustable rate mortgages saw the largest increases in delinquencies, though there were fewer subprime loans sitting in the foreclosure process.

The two categories make up more than 10 percent of overall mortgages, MBA said.

Lenders are keen to paint a picture of an improving housing market and improvements in loan performance. However, their track record with regards to legacy loans leaves much to be desired. Their can kicking is helping as it’s restoring collateral value behind these bad loans, so I expect lenders to continue the same. However, these loans will not be resolved in the next 3 to 5 years, at their current rate of cure on legacy loans, they will be dealing with squatters for another decade or more.

I still believe the final resolution of most of these loans will be either a foreclosure or a semi-distressed sale by a struggling borrower that sells the moment they are above water. Lenders will push for the latter resolution because they don’t have to recognize any losses. Loan modification entitlement will be rescinded as prices near the peak, and lenders will finally resolve these pesky legacy loan issues.