The good news in the mainstream media is that delinquency rates are down year-over-year. Of course, they ignore the fact that delinquencies have flatlined since the settlement agreement in February 2012 because that fact doesn’t fit with their optimism bias. The delinquency rate is a national average, so it doesn’t reflect where the delinquencies have declined and what segments of the loan market are recovering. The assumption most casual observers make is that delinquencies are concentrated in poorer subprime areas and the more affluent prime areas like Coastal California are relatively free from mortgage delinquency problems. Nothing could be further from the truth.
Subprime loans became delinquent early in the housing crash because these borrowers were often given the extremely toxic 2/28 loan and only qualified based on the teaser rate, and the teaser rates on these loans were scheduled to recast and reset earlier than prime loans. Further, subprime borrowers have fewer resources than prime borrowers, so when they got in trouble, they immediately imploded. As a result, subprime borrowers were foreclosed on in large numbers in 2007 and 2008 while alt-a and prime borrowers waited their turn at the gallows. The situation got so bad that the government changed the accounting rules to allow lenders to keep delinquent loans on their books at fantasy value, and since Bernanke lowered interest rates to zero thus reducing the bank’s carrying costs, lenders allowed their more affluent delinquent borrowers to squat. The situation hasn’t changed much over the last three years.
The GSEs and the FHA don’t allow squatting in their properties. During the bubble, the GSEs lost market share to private lenders, but since the bubble burst, the GSEs and the FHA have insured 95% or more of the loans in the market. In addition, they have been the dumping grounds for banks as they picked up liability for many of their bad loans through the numerous failed loan modification programs run by the government. As a result, many bad mortgages under the conforming loan limit came under the control of the GSEs, and they have not allowed delinquent borrowers to squat. The delinquency rate at the FHA is very high, but then again, they have been issuing 3.5% down loans in a declining market. The GSEs and FHA try to modify loans, but when the modifications fail, they push the properties through foreclosure.
So where does that leave the bad loans? On bank balance sheets concentrated in affluent areas dominated by jumbo loans — think Coastal California.
More than four years after the financial crisis, many big banks have regained their footing. But Bank of America and Citigroup remain dogged by the past.
On Thursday, the two banks disclosed that substantial legal costs undercut their fourth-quarter earnings. The expenses, the banks said, stemmed from huge settlements involving their mortgage businesses. …
“The 2008 collapse was not the flu — it was a major debilitating disease,” said Lawrence Remmel, a partner at the law firm Pryor Cashman. “It takes time rebuilding your strength,” he said, and it is “unpredictable when some of the institutions will fully recover.” …
“Litigation expenses have taken a huge toll,” said James Sinegal, an analyst with the research firm Morningstar. …
For Bank of America and Citigroup, the recent mortgage settlements are a reminder of past mistakes. During the housing boom, Citigroup, like other Wall Street firms, sold to investors billions of dollars of securities backed by subprime mortgages that later hurt its balance sheet. Bank of America largely inherited its mortgage woes through Countrywide Financial, the subprime lending giant it bought in the depths of the financial crisis.
Now, the banks are hoping to close a dark chapter in their histories. This month, Bank of America and Citigroup, along with eight other banks, signed a sweeping $8.5 billion settlement with the Federal Reserve and the Office of the Comptroller of the Currency over foreclosure abuses like erroneous fees and flawed paperwork.
The settlement allowed them to a halt an expensive review of millions of loans in foreclosure. The pact follows a $26 billion deal in February involving the five largest mortgage servicers and 49 state attorneys general, an agreement to resolve accusations that bank employees were blowing through mountains of documents used in foreclosures without checking for accuracy.
Banks may have finally stopped the bleeding from the consumer lawsuits hanging over them. They must still deal with put-back suits from the GSEs and lawsuits from buyers of their bad ABS pools, but with the consumer lawsuits out of the way, they can focus on other issues — like what to do with all the people not paying their mortgages.
It’s obvious to everyone that loan modification programs are not the answer. The first of these programs failed more than 75% of the time. The recent mortality rate in loan modifications runs at about 50% per year. 14% don’t even survive the initial three-month trial period. Loan modifications are a portrait in failure.
As a result of failed loan modifications and a slow foreclosure rate, delinquency rates have remained about 10% at the major banks since 2009. They are making almost no progress toward solving their delinquency problems.
Another way to look at the delinquency rate is to look at its inverse, the percentage of current loans. Currently, the rate of current loans in the United States is 83.7% with the bulk of performing loans being in flyover country. By definition, that means 16.3% of all loans are not current. That’s nearly one in five.
We’ve known since 2010 that jumbo loans are defaulting at higher rates than conforming loans. Perhaps it isn’t the subprime borrowers who are the deadbeats after all.
Nationally, 6.3% of jumbo loans are delinquent. These delinquent loans are largely concentrated on the coasts. The jumbo loan delinquency rate in California is 8.4%.
Orange County California has a jumbo loan delinquency rate higher than the national average, and since our market is historically so inflated, we have a lot more jumbo loans than other markets across the country.
It should be clear from the charts above that the much of the problem with shadow inventory and long-term delinquent mortgage squatting is concentrated in coastal California housing markets, particularly in the jumbo loan sector. These markets have been performing well lately causing many to tout their strength. This strength is an illusion created by allowing large numbers of jumbo loan owners to squat for years on end. Right now, the banks who hold most of this toxic paper are content to let them squat hoping they can liquidate at higher prices. Perhaps they will be successful, but the segment of the housing market most in danger of future declines is the coastal California jumbo loan market.
Why are banks allowing high-end squatting?
Basically, there are many, many more bad jumbo loans than there are prudent and well-qualified borrowers to assume them. If lenders were to foreclose on all their delinquent jumbo loanowners and sell the properties, the carnage would be as bad as the subprime disaster of 2008. Banks know this, so instead, they allow a lot of squatting, and hold many properties on their books for better days. Five years later, they are still waiting.
Today’s featured properties is one of the first REOs I’ve seen priced over a $1,000,000 this year. Banks are ready to foreclose on properties under $800,000 because with today’s super-low interest rates and high conforming limit, they have a buyer for it. For properties over $800,000, they don’t have as many buyers, particularly now that they can’t use a DTI greater than 43% or use interest-only loans (each restriction eliminates 15% of the jumbo loan market). So what lenders have been doing is trickling these properties out one-by-one testing the market to see if they have any demand. So far, the slow rate of processing shows the demand in this segment is still very weak, particularly when compared to the market under $800,000 eligible for government insurance.
- This property was purchased for $797,000 on 5/19/1998. The former owners used a $637,600 first mortgage, a $79,700 second mortgage, and a $79,700 down payment.
- On 2/1/2000 they obtained a $180,300 HELOC.
- On 10/31/2001 they refinanced with a $775,000 first mortgage and obtained a $344,000 HELOC.
- On 3/6/2004 they refinanced with a $765,500 first mortgage.
- On 6/3/2003 they opened a $735,000 HELOC.
- On 6/8/2006 they refinanced with a $1,500,000 Option ARM and obtained a $435,000 HELOC. Countrywide was so stupid. Who underwrites a $1,500,000 Option ARM, and who then puts a $435,000 HELOC on top of it? BofA deserves the losses they are enduring for buying that portfolio.
- On 7/3/2007 they refinanced with a $1,950,000 first mortgage and a $450,000 HELOC from Washington Mutual. I guess there was a bank even less intelligent than Countrywide.
- This gets worse. On 12/20/2007 they got Washington Mutual to refinance them with a $1,980,000 first mortgage, then they took a $300,000 loan from their own IRA.
- Total property debt was $2,280,000, and total mortgage equity withdrawal was $1,542,700. That’s a lot of money!
Given the size of the losses lenders must take on stupid loans like these explains much of why they are in no hurry to foreclose. So how did the lenders play this one?
JP Morgan Chase foreclosed on 9/27/2010. They sat on the property for two and half years. They just put it on the market this week.
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Proprietary OC Housing News home purchase analysis
$2,394,303 …….. Asking Price
$797,000 ………. Purchase Price
5/19/1998 ………. Purchase Date
$1,597,303 ………. Gross Gain (Loss)
($191,544) ………… Commissions and Costs at 8%
$1,405,759 ………. Net Gain (Loss)
200.4% ………. Gross Percent Change
176.4% ………. Net Percent Change
7.5% ………… Annual Appreciation
Cost of Home Ownership
$2,394,303 …….. Asking Price
$478,861 ………… 20% Down Conventional
4.01% …………. Mortgage Interest Rate
30 ……………… Number of Years
$1,915,442 …….. Mortgage
$457,908 ………. Income Requirement
$9,156 ………… Monthly Mortgage Payment
$2,075 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$599 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$11,829 ………. Monthly Cash Outlays
($1,517) ………. Tax Savings
($2,755) ………. Equity Hidden in Payment
$668 ………….. Lost Income to Down Payment
$619 ………….. Maintenance and Replacement Reserves
$8,844 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$25,443 ………… Furnishing and Move In at 1% + $1,500
$25,443 ………… Closing Costs at 1% + $1,500
$19,154 ………… Interest Points
$478,861 ………… Down Payment
$548,901 ………. Total Cash Costs
$135,500 ………. Emergency Cash Reserves
$684,401 ………. Total Savings Needed