Are mortgage delinquencies much worse than reported?

Do the reported delinquency rates understate the magnitude of the problems faced by the major banks?

selling_NPLsThe news on delinquencies over the last several years encouraged those who want to believe the mortgage mess is past. Most reports over the last several years show a declining mortgage delinquency rate, and despite the levels of delinquency and foreclosure being highly elevated from historic norms, most comfort themselves with hopes that a disastrous situation steadily improves.

The common narrative in the mainstream media is that an improving economy put hard-working Americans back to work, and in the spirit of bootstrapping redemption, these hard-working Americans caught up with their missed mortgage payments and cured their bad loans. Unfortunately, that isn’t how it happened.

Borrower-Initiated Cures

There are several ways a borrower can cure a mortgage:

(1) catch up on back payments and stay current,
(2) sell the property and pay it off, either in full or a short sale,
(3) agree to a loan modification and remain current on modified terms,

As I mentioned, the financial media wants everyone to believe borrowers are catching up on their payments and staying current due to an improving economy. While the economy is getting somewhat better, almost no borrowers suddenly catch up after missing more than three payments and then remain current. Since option one isn’t possible in most cases due to a lack of savings, most borrower-initiated cures rely on the other options. Further, since the loan modification allowed the borrower to stay in their home and the bank to avoid loss recognition, the loan modification option is everyone’s favorite.

Banker-Initiated Cures

However, some borrowers simply won’t cooperate. Many delinquent mortgage squatters want to stay in the home making no payments at all. In that circumstance, the banks can cure a mortgage in ways that don’t require any cooperation or action from the borrower:

(1) foreclosure,
(2) sell the non-performing loan to a hedge fund,

Sine the first method is politically and financially unpalatable, when loanowners fail to cooperate, the banks increasingly sell the non-performing loans to hedge funds, who generally foreclose and convert the property to a rental. (See: Investors buying non-performing loans to foreclose and obtain rental properties)

Waiting for the world to change

Lenders deny short sales, so most borrowers who want to sell and get rid of their mortgage are forced to wait for prices to rise high enough to bail them out. Unfortunately, about 20% of borrowers are still underwater, and another 20% are barely above water and unwilling to sell. This has removed about 40% of the for-sale inventory from the MLS and helped create the artificial shortage of homes that reflates the housing bubble.

Why the Housing Market Collapse is Set to Resume

June 2, 2015, by Keith Jurowabyss

Analysts continue to be baffled by the weakness of the housing recovery.  Mortgage rates have remained exceptionally low for several years.  Yet new home sales are still at one-third the level of the bubble years.  Existing home sales have never come close to peak year levels. …

For nearly five years, I have shown why this housing recovery has never been anything but an illusion – a mirage that disappears on closer examination.  Had those analysts considered even a few of the key factors I have focused on, they would not be so perplexed.

I have also written extensively on what Keith refers to as the mirage of a housing recovery. I refer to it as reflation of the housing bubble because it’s an artificially induced increase in price not caused by fundamental improvements in underlying factors. (See: The 6 most unusual and bearish features of the housing recovery)

Let me explain why the housing collapse is ready to resume in earnest.

Deception of mortgage delinquency data

Housing optimists always point to the consistent decline in the percentage of first liens that are seriously delinquent.  The latest foreclosure report from CoreLogic showed that the national delinquency rate had declined to a mere 3.9%, down from the record 8.6% in early 2010.

The number reported by the federal reserve is much larger, but current delinquencies are only three-times historic norms rather than the five-times normal reported in 2010. The leveling off of delinquencies began when mark-to-fantasy accounting encouraged can-kicking loan modifications over foreclosure. After two years of attempting to reduce delinquency through foreclosure and loan modification, lenders abandoned foreclosures and focused on modifying any loans where the borrower was willing to participate, which brought delinquency rates down substantially.

bank delinquency rates 2015

How could this not be a good sign for the housing market?

If the mainstream media narrative were correct and these loan cures were caused by borrowers regaining their footing, making up the past payments, and dutifully making all current payments, then it would be a huge plus for housing, which is why the mainstream media keeps repeating that lie.house_lemmings

Let’s tackle this question head on by taking a look at the first-lien mortgage portfolio of the too-big-to-fail banks – Wells Fargo, JPMorgan Chase and Bank of America.  Together they own nearly $600 billion first mortgages on their balance sheet.

In their latest call reports filed with the FDIC, these three banks show the following mortgage delinquencies:

Wells Fargo – 13.8%
JPMorgan Chase – 13.3%
Bank of America – 12.9%

If you are willing to dig, the link above provides verification of the reported figures directly from the banks’ own reporting.housing_black_hole

How could the delinquency rate of these huge banks be more than three times the CoreLogic figure?  Let me explain.

First, the delinquency rate for these banks is based on the total outstanding balance of their mortgage portfolio.  So 13.7% of the outstanding mortgage balance of Wells Fargo’s portfolio is delinquent.  The same is true for the other two banks.

The CoreLogic data is completely different.  Their delinquency rate of 3.9% is based on the number of loans.  So 3.9% of the outstanding loans in CoreLogic’s massive database were delinquent as of March 2015.  It has nothing to do with outstanding balance.

This rate versus amount problem shows why the banks are so motivated to reflate the housing bubble. If they can recover 100% of the value on these non-performing loans through a foreclosure at some point, then the delinquency rate is merely a drag on their returns. If they can’t reflate the housing bubble, and if they foreclose while collateral value does not back these loans, the losses will wipe them out. Realistically, foreclosure is not an option for the banks until peak prices are restored.a_shadow_inventory_atlas

Why is this important?  The vast majority of outstanding mortgage loans are relatively small loans originated in smaller towns, cities or metros that never experienced a housing bubble.  You can see this in the size of the average loan guaranteed by Fannie Mae – $159,000.

The housing bubble was not nationwide.  It was highly concentrated in roughly 25 larger metros in California, Florida, Arizona, Nevada, and the Northeast.  It is in these metros where speculation was rampant, prices skyrocketed in 2004-2006 and the bulk of jumbo mortgages were originated.

Bubble reflation has been very successful in Coastal California where the losses would be the largest, but prices in Florida, Arizona, Nevada, or California’s inland areas are all still well below peak values, and it will be many, many years before they inflate prices enough to get out without major losses in those states.

For more than four years, I have shown that mortgage servicers have been reluctant to foreclose on the large loans that were shoveled out in these bubble metros.  But they have had no problem foreclosing on smaller loans.

Large bubble-era jumbo loans make up the bulk of the delinquent inventory of the too-big-to-fail banks. The latest data we have for securitized jumbo loans not guaranteed by the GSEs – from March 2013 – shows delinquency rates of 17-19%.  That is why the delinquency rate for the first-lien portfolio of these huge banks is so high.

(See: Delinquent jumbo loans in Coastal California pollute bank balance sheets)

Here is further proof that the delinquency problem is much worse than the CoreLogic data would have you believe.  CoreLogic’s data comes from the database of its subsidiary – Loan Performance.  Its database includes roughly 97% of all the non-Agency (i.e., not guaranteed) securitized mortgages outstanding today.

The firm BlackBox Logic has sophisticated tools to analyze this non-Agency database.  They have provided me with up-to-date details on the delinquency rate of these non-guaranteed mortgages in major metros.  The numbers are truly shocking.

Non-Agency Securitized Mortgages
Worst Delinquency Rate for Major Metros

Name of CBSA

Total Delinquency Rate

NY  – LI – NJ – PA 39.06%
Miami – Ft Lauderdale 37.59%
Tampa – St. Petersburg 36.81%
Las Vegas 29.74%
Chicago  – Naperville –  Joliet 28.25%
Source: BlackBox Logic; graphics by AJ Kaps Group

BlackBox logic is a data provider that describes themselves as “BlackBox Logic (“BlackBox” or “BBx”) provides comprehensive solutions to mortgage market participants, including Residential Mortgage-Backed Securities (RMBS) loan-level data aggregation and processing services, as well as whole loan modeling tools.” Just like CoreLogic, the quality of their data is their livelihood.

The delinquency percentage includes all distressed properties – those delinquent anywhere from 30 days to more than 90 days, in foreclosure with a notice of default (NOD), repossessed by the lender (REO) or where the borrower has filed for bankruptcy.

Adding in 30-day delinquencies makes the numbers much higher as many of those loans cure, but for default rates to get as high as those reported above, a significant percentage must be delinquent long term.rock_and_hard_place

What stands out immediately is that the highest figure belongs to the huge New York City metro area – covering three states with roughly 19 million residents.  How could nearly 40% of all first liens be delinquent or already foreclosed?

For four years, I have written in-depth articles explaining what has been happening in the New York City metro.  The speculative bubble was enormous there and mortgages were offered to just about anyone who applied.  Many were jumbo loans too large to qualify for Fannie/Freddie guarantees.

When delinquencies soared and prices tanked in 2008 and early 2009, the servicing banks made a conscious decision to radically cut back on foreclosing.  They also dramatically reduced the number of repossessed properties put back on the market.  For more than five years, this strategy has continued. …

While Las Vegas represents the extreme of what can happen if all delinquent loans are foreclosed on, the New York metro is the other extreme showing what happens if none of the loans are foreclosed on. In Las Vegas, the crashing prices caused a great deal of strategic default, and many delinquent mortgage squatters live in cheap homes they aren’t paying for. In New York, the elimination of the threat of foreclosure caused a great deal of strategic default, and many delinquent mortgage squatters live in expensive homes they aren’t paying for.


Skeptics will argue that I have overstated the delinquency problem because mortgage modifications have kept millions of homeowners from losing their house to a foreclosure.

But the re-default rate on the non-guaranteed securitized mortgages that have been modified ranges from 30% to 80%.  The rate of re-defaults on the most recent modifications continues to climb sharply.

In order to squeeze a few more payments out of desperate borrowers while waiting for prices to rise, lenders cut deals with borrowers by modifying the terms of their loans; however, this merely delays the inevitable. Redefault rates on modified mortgages are upwards of 50%. Loan modifications are designed to improve a lenders bottom line, not keep people in their homes. (See: Lenders benefit from loan modifications, homeowners not so much and Today’s loan modifications are tomorrow’s distressed property sales)


The result everyone tries to avoid is foreclosure; however, I still believe most of these bad loans will be resolved this way in the end because it will simply take too long to fully reflate the bubble to bail everyone out with an equity sale.bring-back-robo-signer

The fact that the delinquency rate is low in small towns and cities across America is of little consequence.  My concern is with the jumbo mortgages of $400,000 and up in the major bubble metros with double-digit delinquency rates.  These are sitting on the balance sheets of numerous mortgage REITs, which I discussed in my previous article.

Those mortgages are also on the balance sheets of the too-big-to-fail banks.  Let’s not forget the more than $200 billion of home equity lines of credit (HELOC) that the big three banks hold.  Most of these HELOCs are on underwater homes and – because almost all of them are second liens — have little value at all.

250,000 HELOCs due to recast in Orange and LA Counties, but most of these loans, like similar loans everywhere, will be can-kicked as necessary for the banks to avoid major losses.

When you read reports about improvement in delinquency rates recognize that improvements from loan modifications are short-term can-kicking, and much of the improvement is smoke-and-mirrors caused by the sale of non-performing loans to entities that don’t report them and through loan modifications doomed to fail. At some point, these bad loans must be resolved. Perhaps it will be through a foreclosure purchased by the hedge fund as a rental, thus avoiding the MLS, but many of these sales will be distressed, and the overhang of these loans represents a long-term problem for the housing market nobody knows quite how to account for. Perhaps can-kicking to an equity sale will work; I have my doubts.

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