Nov302011

Mortgage bankers admit to many more years of foreclosure pain ahead

The banks finally are getting serious about foreclosing on the delinquent mortgage squatters living in shadow inventory. Even though delinquencies are declining, they are still elevated well above historic norms, and they have been so high for so long that the banks have a huge backlog they must work through.loan_qualification

Fewer mortgages going bad but foreclosures expected to increase

The Mortgage Bankers Assn. says it could take three or four years to return to a normal pattern of delinquencies and foreclosures.

November 18, 2011 —  By E. Scott Reckard, Los Angeles Times

Fewer home loans are in trouble these days, but despite some improvements, the nation is not even halfway through cleaning up the foreclosure mess, industry experts said.

It could take three or four years to return to a typical pattern of delinquencies and foreclosures, the Mortgage Bankers Assn. said in releasing its quarterly delinquency report Thursday.

A surprisingly candid and accurate assessment of the situation. Realistically, it will take much longer than four years as the foreclosure inventory will have a very long tail, but the bulk of the problems will be resolved in the next three to five years.

An economist for the trade group declined to estimate how many households had lost their homes since the mortgage meltdown four years ago, or how many more foreclosures were to come.

But the Center for Responsible Lending, a nonpartisan advocacy group that accurately predicted a foreclosure tidal wave in 2006, issued its own assessment Thursday: 2.7 million American households had lost their homes as of February, with an even greater number to come.

The advocacy group, which analyzed 27 million home loans made from 2004 through 2008, estimated that an additional 3.6 million mortgages were in foreclosure or likely to fail.

If we have already completed 2.7 million, and if we have 3.6 million to go, they are projecting a total 6.3 million foreclosures. That’s a lot of houses.

“That means the nation is not yet midway through a foreclosure crisis that mires the economy,” the Durham, N.C., group said in releasing its study.

Lost Ground Exec Summary

The mortgage industry stopped funding high-interest subprime mortgages and other risky loans in 2007, when the meltdown made it impossible to sell them. But the backlog of soured mortgages from that era was enormous and has been compounded by lingering unemployment of about 9% nationally and about 12% in California.

Unemployment is clearly a problem, but the strategic default from the legions of underwater loan owners is the real problem.

Things are slowly improving, said Mike Fratantoni, the mortgage bankers’ economist. The number of borrowers who had missed at least one payment but were not yet in foreclosure dropped below 8% for the first time since the fourth quarter of 2008. Just a year ago, it was 9.13%.

The percentage of home loans mired in the foreclosure process was up slightly from a year earlier at 4.43%, compared with the 1% that once had been considered normal, Fratantoni said.

The backlog remains high in part because lenders eased up on foreclosures for much of 2011 after revelations that they had mishandled legal paperwork and procedures when repossessing homes in the past.

The regulatory pressures on home lenders include a lengthy investigation by a task force of state and federal officials. California Atty. Gen. Kamala D. Harris is also pursuing a separate probe in hopes of forcing more write-downs of principal for troubled California borrowers.

Does she carry a gun while she robs the banks? If she is attempting to force lenders to write down principal, how is that not stealing?

Longtime industry observer Guy Cecala, publisher of Inside Mortgage Finance, said he believes it will take at least two more years to resolve the crisis.

“A lot depends on how fast banks … can clear out defaulted mortgages and foreclosed properties,” he said.

Fratantoni said that with the industry more confident that it has fixed its foreclosure procedures, “a couple of big servicers” he didn’t identify had recently stepped up foreclosures. Many of those, he said, involved boom-era subprime loans that had been modified at least once but fell back into delinquency.

Reflecting this push, the percentage of loans on which foreclosure actions were started during the third quarter was 1.08%, up from 0.96% in the second quarter. California had the nation’s fifth-highest rate of new foreclosures: nearly 1.5% in the latest quarter.

Banks are finally getting around to foreclosing on the squatters. This marks the beginning of the end of this crisis — assuming they complete what they start.

The statistics also reflected a much higher backlog of unresolved foreclosures in states where they are handled in the courts, compared with states like California that do not normally require court approval.

The rate of homes in foreclosure was highest in Eastern and Midwestern states that route all home repossessions through the courts, with Florida at more than 14% and New Jersey at 8%.

California, which for years had one of the highest rates of loans in foreclosure, fell to 19th on the list at a bit over 4%. Of states that handle foreclosures without court procedures, Nevada was the only one high on the total foreclosure-rate list, with nearly 8% of its mortgages in foreclosure.

In a separate report Thursday, mortgage finance giant Freddie Mac said the typical rate on a 30-year fixed-rate home loan this week was an even 4%, a statistically insignificant rise from 3.99% a week earlier. The 15-year fixed loan rates rose to 3.31% from 3.30%.

Expressing some optimism about the business, Frank Nothaft, a Freddie Mac economist, said the economy “is showing potential for further gains in the near term” as the near-record-low mortgage rates persist.

Retail sales rose for the fifth straight month in October, consumer confidence rose for the third straight month in early November, and home builder confidence rose this month to the strongest level since May 2010, Nothaft noted.

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Is the economy getting any better?

I had lunch yesterday with a close friend who is a mergers and acquisitions attorney. He said the deal flow over the last several months has been almost non-existent. With all the debt problems around the world, and including the US, lenders are only willing to loan money to those who don’t need it. There is plenty of capital available, but very few who qualify to get it. This lack of capital flows is causing ongoing weakness in our economy.

In my own industry, I have seen some signs of improvement as developers who are looking to deliver houses in 2015 are beginning to work on projects. Nobody is in a hurry, and few in the building industry are going back to work, but at least the phones are ringing, and proposals are going out the door.

Interestingly enough, my friend told me he believed part of the weakness in the mergers and acquisitions area is due to the low interest rates that are supposed to restart the economy. People who own companies who might want to sell out are hesitant to give up steady income for a large lump sum because they don’t have any place to put it. There are few investments which can earn a decent return, and since the values of the businesses they would be selling are also depressed, most business owners are content to keep doing what they were doing.

Further, few businesses have much need to expand as there is so little demand. Unless the low interest rates cause the deployment of capital and increased production, the economy will continue to go nowhere. I have long maintained that housing will not lead us out of this recession as it will take a catalyst from another industry to set the economy in motion. So far, no other industry has stepped up, and my friend and I don’t see the light at the end of the tunnel.