Mortgage delinquencies rose as lenders slowed foreclosure processing

Foreclosure rates are declining across the Southwest. Lenders are slowing foreclosures because they want house prices to bottom and start going up due to a lack of distressed supply on the MLS. This would be a natural occurrence once shadow inventory is eliminated, but right now, this slowing of foreclosures is a contrived policy of a cartel desperately hoping they can force prices to move higher. If foreclosures were declining because lenders were out of delinquent mortgages to foreclose on, we would all be celebrating the housing market recovery. However, lenders are not out of delinquent mortgage squatters to boot out of the houses they are not paying for. In fact, lenders have slowed their foreclosure rates so much, they are no longer keeping up with current new delinquencies. As a result, shadow inventory is growing again.

It is difficult to imagine how house prices can put in a durable bottom with millions of delinquent mortgages yet to be processed. The federal reserve and government regulators have done everything possible to create conditions favorable to lenders. Zero percent interest rates lower the cost of capital to banks to near zero enabling them to sustain billions in non-performing loans on their books without bankruptcy. Suspension of mark-to-market accounting rules allows lenders to pretend their bad loans are still worth face value to give the appearance of solvency. Both of these measures have one thing in common; they buy time. Ultimately, neither measure will cause house prices to go up. Low interest rates make housing much more affordable which induces buying, but only improved credit conditions, lower unemployment, and higher wages will make house prices go up.

The market-has-bottomed meme currently touted by every major media outlet is a concerted effort to improve buyer sentiment and induce people to enter into a transaction that may not be in their best interest. Affordability is currently quite good in nearly every housing market due to the low interest rates — and that is a good reason to buy — but sheeple are so accustomed to buying for appreciation that the market-has-bottomed meme must be pounded into the public’s heads to knock people off the fence. A secondary benefit of a widespread belief in future appreciation is a reduction in strategic default.

Rising prices through artificially reduced foreclosure rates has a price. Lenders hope rising prices will curb strategic default, but they must face the reality that reducing foreclosure rates increases strategic default because borrowers know they get a free ride. In the latest Mortgage Bankers Association survey, the increase in delinquency rates is being blamed on a weak economy. I don’t think that’s the reason. The economy is not strong, but unemployment is still declining. The increase in delinquencies is not due to people losing their jobs. It’s much more likely the increase in delinquencies is caused by strategic default.

Mortgage Delinquencies Increase in Latest MBA Survey

MBA — 8/9/2012

WASHINGTON, D.C. (August 9, 2012) — The delinquency rate for mortgage loans on one-to-four-unit residential properties increased to a seasonally adjusted rate of 7.58 percent of all loans outstanding as of the end of the second quarter of 2012, an increase of 18 basis points from the first quarter, but a decrease of 86 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey. The non-seasonally adjusted delinquency rate increased 41 basis points to 7.35 percent this quarter from 6.94 percent last quarter. Delinquency rates typically increase between the first and second quarters of the year.

The long-term trend is still down. For the last five years, underwriting has been much tighter as the government started backing all new loans. I don’t foresee delinquencies rising to new highs, but the longer lenders slow their foreclosures, the longer it will take to get back to normal.

The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure.

I didn’t realize they excluded loans in the foreclosure process. That makes this a good measure of shadow inventory because the visible inventory is removed from the calculation.

The percentage of loans on which foreclosure actions were started during the second quarter was 0.96 percent, unchanged from last quarter and from one year ago.

The number of foreclosures is unchanged nationally because as lenders slowed foreclosure processing in the Southwest, they greatly increased it in the Northeast.

The percentage of loans in the foreclosure process at the end of the second quarter was 4.27 percent, down 12 basis points from the first quarter and 16 basis points lower than one year ago. The serious delinquency rate, the percentage of loans that are 90 days or more past due or in the process of foreclosure, was 7.31 percent, a decrease of 13 basis points from last quarter and a decrease of 54 basis points from one year ago.

Seriously delinquent loans don’t cure. Those are the committed squatters waiting until foreclosure.

The combined percentage of loans in foreclosure or at least one payment past due was 11.62 percent on a non-seasonally adjusted basis, a 29 basis point increase from last quarter, but a 92 basis points decrease from the same quarter one year ago.

That’s a big number! Nearly 12% of all outstanding mortgages are non-performing.

Jay Brinkmann, MBA’s Chief Economist said, “Mortgage delinquencies were up only slightly over the last quarter. Perhaps more important than the small size of the increase, however, is the fact that it reversed the trend of fairly steady drops in delinquencies we have seen over the last year. This is consistent with the slowdown in the economy during the first half of the year and our stubbornly high unemployment rate. Whether this is just a temporary blip or a sign of a true change in direction for mortgage performance will fundamentally depend on the direction of employment over the remainder of the year.”

Actually it depends more on whether or not lenders start foreclosing on shadow inventory in the Southwest or not. The link to unemployment sounds plausible, but it simply isn’t the case.

Brinkmann continued, “While the rate of new foreclosure filings was unchanged, that rate would have fallen were it not for the considerable jump in foreclosure starts on FHA loans. This quarter’s rate set an all-time record for FHA loans, but it was only slightly higher than the previous high set in 2010. The jump was due to one or more large servicers of FHA loans restarting foreclosure actions on delinquent FHA loans after the completion of the Department of Justice review and the mortgage servicing settlement.

FHA mortgage delinquency rates are rising fast. If the FHA doesn’t do something fast, they will be overwhelmed by their own shadow inventory of unprocessed foreclosures. I suggested that to prevent an FHA bailout, regulators should lower the conforming limit on GSE loans. It will take some time for this idea to gestate, but I think it will ultimately happen.

It does not, however, represent a significant decline in FHA performance. These loans had been considered seriously delinquent for some time and have now been moved from the 90-plus day delinquency bucket to the in foreclosure bucket, with little net change. …

This particular increase in FHA foreclosure processing doesn’t represent a significant decline in FHA performance, but coincidentally there is one.

On a seasonally adjusted basis, the overall delinquency rate increased for all loan types except FHA loans….

  • 4.24 percent for prime fixed loans …
  • 9.19 percent for prime ARM loans. …
  • For subprime loans, the delinquency rate … 19.85 percent… subprime fixed loans …
  • 22.60 percent for subprime ARM loans. …
  • VA loans … 6.65 percent,
  • FHA loans … 11.89 percent.

The percent of loans in foreclosure, also known as the foreclosure inventory rate, decreased from last quarter to 4.27 percent. …

  • prime fixed loans … 2.42 percent
  • prime ARM loans decreased … 8.31 percent.
  • subprime ARM loans … 21.12 percent…
  • subprime fixed loans … 10.15 percent.
  • FHA loans … 4.23 percent
  • VA loans … 2.28 percent.