Aug302013

700,000 borrowers quit paying their mortgages in June

The conventional wisdom is that mortgage delinquencies are falling because the economy is improving, borrowers are going back to work, and they are resuming payments on their mortgages. Unfortunately, reality bears little resemblance to this spin. In truth, almost no borrowers resumed making payments according to the original terms of their mortgage. Delinquencies are falling because lenders are offering greatly reduced payments to squeeze a few more dollars out of debtors while everyone waits for prices to rise back to the peak. And despite lenders best efforts to make their loan modification deals too-good-to-be-true, nearly half of those given these loan modifications end up defaulting again.

Mortgage delinquencies take a sharp turn up

By: Diana Olick | CNBC Real Estate Reporter — Published: Thursday, 25 Jul 2013 | 12:43 PM ET

After five straight months of improvement, mortgage delinquencies rose dramatically in June. The national delinquency rate is 6.7 percent, up nearly 10 percent from May and the highest level since February, according to a report from Lender Processing Services.

This data follow another read on the mortgage market showing that nearly half of the loans modified in 2009 under the Obama administration’s housing rescue program defaulted again.

The Home Affordable Modification Program has helped 865,100 homeowners avoid foreclosure, but more than 306,000 could not keep up with even the modified monthly payments, according to the Special Inspector General for the Troubled Asset Relief Program. The program does not force banks to write down mortgage principal.

Overall mortgage delinquencies are still down 6.5 percent from a year ago, according to Lender Processing Services. Some of the spike may be attributed to “a seasonal phenomenon,” according to LPS analysts, but this particular spike is larger than usual. Delinquencies ticked up just 3.4 percent in June 2012. The rise also spanned products and regions.

To make matters worse for lenders, delinquencies rose and cure rates fell. So those people who stopped paying their mortgage didn’t make much effort to fix the problem.

In the grand scheme to reflate the housing bubble, this will be of little consequence. Lenders will keep kicking the can. The number of delinquencies doesn’t really matter. None of these will become forced sales or REO until prices rise enough to cover the balance of the loan. That’s the nature of cloud inventory and the strategy lenders have for dealing with their bad loans.

I do expect to see foreclosures pick up as prices near the peak because lenders will finally be able to recover their lost capital. But until then, delinquencies will likely trend downward through loan modification can-kicking, and foreclosures will trend downward until prices rise high enough for lenders to take action. Until then, everything will look like it’s improving, and the mainstream media will be surprised at the future rise in foreclosure rates as lenders finally clean up their books.

The legacy way

It’s fitting that today’s featured property is on a street called Legacy Way. The bad loans the banks refuse to deal with are called “legacy loans” by lenders. This is a great euphemism as it makes the worst behaving borrowers and the stupidest loans lenders every made sound regal and respectable. These bad loans given to Ponzis like the former owners of this house are the lasting legacy of the Great Housing Bubble.

  • This property was purchased on 8/10/2000 for $495,000. The owners borrowed $464,062 and put $30,938 down.
  • On 6/25/1004 they opened a $100,000 HELOC.
  • On 10/15/2004 they refinanced with a $500,000 first mortgage.
  • On 7/31/2006 they refinanced with a $787,500 first mortgage.
  • On 10/3/2006 they opened a $150,000 HELOC.

After extracting nearly half a million dollars in mortgage equity withdrawal, they quit paying the mortgage. They defaulted early on and the bank took back the property on 7/21/2009, then the bank sat on it for four years. At the current asking price, they will be made whole on their bad loans. Expect this pattern to be repeated.

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85 LEGACY Way Irvine, CA 92602

$929,250 …….. Asking Price
$495,000 ………. Purchase Price
8/10/2000 ………. Purchase Date

$434,250 ………. Gross Gain (Loss)
($74,340) ………… Commissions and Costs at 8%
============================================
$359,910 ………. Net Gain (Loss)
============================================
87.7% ………. Gross Percent Change
72.7% ………. Net Percent Change
4.8% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$929,250 …….. Asking Price
$185,850 ………… 20% Down Conventional
5.11% …………. Mortgage Interest Rate
30 ……………… Number of Years
$743,400 …….. Mortgage
$203,296 ………. Income Requirement

$4,041 ………… Monthly Mortgage Payment
$805 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$194 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$212 ………… Homeowners Association Fees
============================================
$5,252 ………. Monthly Cash Outlays

($1,137) ………. Tax Savings
($875) ………. Principal Amortization
$373 ………….. Opportunity Cost of Down Payment
$136 ………….. Maintenance and Replacement Reserves
============================================
$3,748 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$10,793 ………… Furnishing and Move-In Costs at 1% + $1,500
$10,793 ………… Closing Costs at 1% + $1,500
$7,434 ………… Interest Points at 1%
$185,850 ………… Down Payment
============================================
$214,869 ………. Total Cash Costs
$57,400 ………. Emergency Cash Reserves
============================================
$272,269 ………. Total Savings Needed
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