Feb242014
Mortgage mess resolved or foreclosures merely delayed?
Reporters in the mainstream media convince beleaguered homeowners and potential homebuyers problems with bad mortgages is past; however, this may not be an accurate depiction.
The mainstream financial media, in it’s insatiable desire to please and tell people what they want to hear, churns out story after story about a recovering housing market. To be sure, house prices are up, but as I asked in Home sales down, household formation down, purchase applications down: Housing recovery?, if house prices are up yet all fundamentals are weak, can we really call it a housing recovery?
I’ve stated many times my contention that the housing recovery is built on a foundation of market manipulation; distressed inventory dried up because lenders opted to modify loans rather than foreclose and purge the bad debt from the economy. Unfortunately for lenders, today’s loan modifications are tomorrow’s distressed property sales, and in my opinion, the mortgage mess is not resolved, the outcome has merely been delayed.
Mortgage Troubles Near Prerecession Levels
Improvement Could Lessen Any Slowdown in Housing Market
By Conor Dougherty, Updated Feb. 20, 2014 5:59 p.m. ET
[Notice the hopeful pandering in the assertion that improved mortgage performance will keep the old bubble reflating at full speed?]
Five years after the end of the U.S. recession, the number of Americans who are behind on their mortgages and the backlog of homes in the foreclosure process are finally narrowing to prerecession levels.
The U.S. mortgage delinquency rate—loans that are a payment or more behind but not yet in foreclosure—fell to 6.39% of loans in the fourth quarter of 2013, down from 7.09% a year ago and the lowest rate since the early months of recession in the first quarter of 2008, according to a report Thursday by the Mortgage Bankers Association.
The chart above looks positively heartwarming. Unfortunately, if you look at the delinquency rates at the major banks, a different picture emerges.
Does the graph above look like delinquencies are anywhere near pre-recession levels? If the reporter telling this tale were trying to speak the truth, wouldn’t a chart like the one above be more revealing? However, if the intention was to make people feel good, to inspire confidence, then the chart at the top tells the story the reporter wanted to relay, which was obviously why the reporter used that chart instead.
But why? Why not look at the truth? The chart for delinquencies at the major banks shows great improvement. After nearly four years with double-digit mortgage delinquency rates, their can-kicking through loan modifications finally brought the delinquency rate under 9%. Surely that is cause for celebration, right? Of course, it does require people to ignore the fact that these loan modifications will fail in the future, but the short-term improvement looks good, doesn’t it?
The backlog of foreclosure inventory also fell to its lowest level since 2008, while the number of loans on which lenders initiated foreclosure was the lowest since 2006, which was when the housing bubble was starting to burst.
The policy of can-kicking is having the desired effect. The reporter fails to mention why the backlog of foreclosure inventory is down and whether or not this decrease is permanent, both problems I discussed above, but by failing to mention it, he implies the problem must be getting better for the right reasons as the market magically heals itself.
The report on foreclosures and delinquencies comes as news in the housing-sales market points to a cooling after a sharp run-up in sales and prices during 2013. In the fourth quarter, a combination of rising prices and higher interest rates eroded housing affordability and pushed many buyers to the sidelines.
Being pushed to sidelines makes it sound like pent-up demand, another hopeful implication not matched by reality. Buyers on the sidelines merely need to be coaxed back into the market by more hopeful news stories and realtor bullshit, right?
But the decline in troubled loans means that even if the cooling trend continues or intensifies, there is less danger of the market getting clobbered by a massive foreclosure wave.
There is no danger of the market getting clobbered by a massive foreclosure wave; banks figured out how to avoid that over the last four years of can-kicking. What we do have is a massive overhead supply of underwater distressed mortgages temporarily removed from the market by loan modifications. That supply will return eventually, and it will be priced in the clouds.
Another encouraging sign:
Looking for encouraging signs, are we? The reporter’s intent should be obvious by now: encourage, not inform.
Three-quarters of the nation’s troubled loans were made in 2007 or earlier, and delinquency rates for loans made after that point are around historical norms, according to the Mortgage Bankers Association. “The legacy of very high foreclosure rates is a problem of older loans,” said Michael Fratantoni, the MBA’s chief economist.
That means that three-quarters of the delinquent mortgage squatters have been living for nothing for as long as seven years.
Foreclosures are down partly because the economy and unemployment rate have improved.
Not really. While it’s true that the economy has improved slightly, and the unemployment rate has improved — though mostly from discouraged workers leaving the workforce — the improvement in foreclosures is not due to people going back to work, making up the missed payments, and curing their mortgages. That’s what is implied, but that isn’t what’s happening.
Also, banks have reined in many of the looser lending practices that allowed many borrowers to get in over their head.
That part is right. Over the last several years, banks stopped loaning money to deadbeats, and delinquencies on new loans is very low, particularly since house prices started going up again.
But where is a discussion of the real reasons foreclosures are down?
Foreclosures are down because the government discouraged them, and banks sought ways to avoid them so they didn’t have to recognize the losses on the bad loans they currently carry on their books.
So what? Why does this matter?
If the mortgage mess were truly behind us, if the bad debt were purged from the system, I would be very bullish because nothing would stand in the way of a wage-growth induced house price rally. The lack of bad debt would not weigh down the economy as capital would be more efficiently deployed, and workers wouldn’t be burdened by excessive debts. The improved economy would stimulate spending and employment, and the elusive “escape velocity” economists desire would be real. However, as long as the system is burdened with bad debt, the economy will sputter, and the overhand of bad mortgage debt will loom over the housing market. So whether or not the mortgage mess is resolved or delayed is important, and unfortunately, I believe the final resolution has merely been delayed.
The site will go down for several hours this afternoon
This week I will be migrating over to a new website software with a custom IDX property system. There will be disruptions, particularly this afternoon when the site will go down for several hours as we migrate over. I will be working out the bugs over the rest of the week. If any of you spot anything that doesn’t appear to work properly, I would appreciate you pointing it out to me either in comments or by email at [email protected]
Later this week and over the next several, I will have posts describing the new features. For those of you not interested in searching for real estate, my posts will go on much as before. The only difference you should note is perhaps a change in formats, and some search functions in the header you can ignore. I want to keep the reader experience much as it was before.
Thank you for your patience during this transition.
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Home Sales Fall to 18-Month Low
Existing-home sales slowed last month to a seasonally adjusted annual rate of 4.62 million—their lowest level in a year and a half—as ongoing inventory constraint lifted prices, the National Association of Realtors(NAR) reported Friday. The drop represents a 5.1 percent decline compared to both December and January last year.
On just the single-family side, sales were down to a rate of 4.05 million, a decline of 5.8 percent month-to-month and 6.0 percent year-over-year.
According to NAR, last month’s sales activity was the slowest since July 2012, when transactions stood at a rate of 4.59 million.
“Disruptive and prolonged winter weather patterns across the country are impacting a wide range of economic activity, and housing is no exception,” said NAR chief economist Lawrence Yun.
At the same time, Yun noted “we can’t ignore the ongoing headwinds of tight credit, limited inventory, higher prices and higher mortgage interest rates.”
“These issues will hinder home sales activity,” he said, “until the positive factors of job growth and new supply from higher housing starts begin to make an impact.”
NAR president Steve Brown, meanwhile, pointed to the impact of elevated flood insurance rates in certain impacted markets.
“Thirty percent of transactions in flood zones were cancelled or delayed in January as a result of sharply higher flood insurance rates,” Brown said. “Since going into effect on October 1, 2013, about 40,000 home sales were either delayed or canceled because of increases and confusion over significantly higher flood insurance rates. The volume could accelerate as the market picks up this spring.”
Congress is currently considering legislation to put a hold on new flood insurance rates while emergency agencies review their potential impact on housing affordability.
All-cash sales made up one-third of January transactions, up from 32 percent in December and 28 percent last year. Individual investors purchased 20 percent of homes last month, falling between last month’s 21 percent and January 2013’s 19 percent.
Meanwhile, first-time buyers accounted for only 26 percent of purchases, the lowest market share since NAR began monthly measurements in October 2008. First-time buyers should normally make up about 40 percent of sales, according to the group.
Existing-home sales decreased in all four regions as prices continued to rise. In the Northeast, sales were down 3.1 percent to an annual rate of 620,000 as the median price climbed to $241,100. In the Midwest, transactions fell 7.1 percent to a pace of 1.04 million, while the median price was up more than 7 percent to $140,300.
Sales were down 3.5 percent in the South to an annual level of 1.95 million, with the median price coming up nearly 10 percent to $161,500. Sales in the West dropped 7.3 percent to a rate of 1.01 million; the median price there was up 14.6 percent to $273,500.
Nationally, NAR puts the median existing-home price at $188,900 last month; the median price for just single-family existing homes was the same.
First-Time Buyers Face Affordability Issues
The degree to which a homebuyer can afford a house depends greatly on whether the buyer already owns a home, according to a report released Thursday by Mark Fleming, chief economist at CoreLogic.
After a few years in a favorable market, first-time buyers are starting to face a tougher time, Fleming reports. The market overall is being affected by the intersection of rising home prices, rising interest rates and stagnating incomes, which puts first-time buyers behind the curve that has benefitted them greatly since 2007.
According to CoreLogic, affordability—the measure of buyers’ ability to purchase a home and make a down payment given their income and the prevailing interest rate—was low in the early 2000s, particularly in the four years between 2003 and 2007, when market prices rose modestly and interest rates were as high as 8 percent. Then in 2007, home prices started to decline. The situation was exacerbated by the Great Recession, leading to a sharp drop in housing prices, open markets and historically low interest rates through 2012 and 2013.
In that time frame, Fleming says, the drop in housing prices and interest rates created a market that first-time buyers could take advantage of. But with the economy growing, despite relatively flat incomes, first-time buyers increasingly face higher home prices in drier markets.
This news, when taken with historical perspective, is hardly the “affordability shock” some economists make it out to be, Fleming says. Yes, affordability (as measured by the National Association of Realtors’ Housing Affordability Index) is down as much as 22 percent from its January 2013 peak, but is still far higher than it was in the early 2000s.
Moreover, Fleming says, there is almost no change in affordability for buyers who already own a home. The simple reason is that existing homeowners have equity that can be directly transferred to the purchase of a new home, meaning that existing buyers—particularly those in good financial standing—have fewer concerns over making down payments or establishing new mortgages.
Whether current trends will make houses unaffordable to most buyers by the end of 2014 remains to be seen, Fleming says. But he is sure of one thing—whatever happens, first-time buyers will be the ones who feel it the most.
Government Turns Profit on GSEs: Assumes $4.1 Trillion in Liabilities
Fannie Mae released its Comprehensive Income Statement for the fourth quarter of 2013, noting a quarterly comprehensive income of $6.6 billion. It was the eighth consecutive quarterly profit for the government-sponsored enterprise (GSE).
The report noted the positive quarterly income “contributed to Fannie Mae’s positive net worth of $9.6 billion as of December 31, 2013.”
Annual net income for Fannie Mae was $84 billion.
The company will pay $7.2 billion in dividends on senior preferred stock to the U.S. Department of the Treasury in March, 2014. The payment marks “the first time in which the company”s cumulative dividend payments to Treasury will exceed its total draws,” the statement reports.
Through the end of December, 2013, Fannie Mae requested cumulative draws totaling $116.1 billion and paid $113.9 billion in dividends to Treasury. The March payment will exceed total Treasury draws.
The report comments, “Fannie Mae has not received funds from Treasury since the first quarter of 2012.”
Since January 1, 2009, Fannie Mae has provided $4.1 trillion in liquidity to the mortgage market through its purchasing and guaranteeing of loans. The GSE enabled borrowers to complete 12.3 million refinancings, 3.7 million home purchases, and financed 2.2 million units of multifamily housing.
Fannie Mae credits the strong earnings of Q4 2013 to stable revenues, credit-related income, and fair value gains. Credit-related income specifically received boosts from an increase in home prices, a decline in the delinquency rate, and “updated assumptions and data used to estimate the company’s allowance for loan losses in 2013.”
The report notes further factors in the increased income: “Fannie Mae’s 2013 financial results also were positively affected by the release of the company’s valuation allowance against its deferred tax assets and the large number of resolutions the company entered into during the year relating to representation and warranty matters and servicing matters.”
However, the report is cautious about the foreseeable future, noting that while it expects to remain strong in the coming years, net income in the future is expected to drop from 2013.
Home Listings Up 3.1% in January
Realtor.com released Thursday its National Housing Trend Report for January. Despite severe weather conditions, the report notes positive trends in the number of listings and median list prices of homes.
The number of listings rose 3.1 percent from January 2013, and the median list price of homes is up 8.3 percent year-over-year to $195,000.
“In January 2013, just 8 markets registered increases in inventory. This January, 83 markets (58 percent) of the 143 markets tracked by realtor.com showed increases in inventory, year-over-year,” the report said.
The median age of inventory is unchanged at 115 days, indicating a potential shift to a more stable market in 2014.
“January’s start compared to year-ago levels is an encouraging sign of sellers’ interest, particularly given the adverse conditions brought on by the polar vortex,” said Errol Samuelson, president of Realtor.com.
“We saw the tight-supply market of last fall carry all the way into November—later than is typically expected—and this early rise in inventory is a welcome trend. The sustained median list price growth supports the gains we saw last year, and sellers are responding with confidence in that consistency,” Samuelson said.
The National Association of Realtors (NAR) projects home prices to rise by 5 to 6 percent in 2014. Job growth and pent-up demand are cited as motivating factors of the positive outlook from NAR.
Wow. I can’t believe what a moron the author is. Why would he try to make his point that housing is improving by saying this,
“Three-quarters of the nation’s troubled loans were made in 2007 or earlier”?
Readers are going to immediately conclude that the banks are either stalling foreclosures to protect themselves or to create a fake recovery.
The author definitely needs someone to edit his work before it goes to press. Talk about “shooting yourself in the foot”!
He’s probably hoping most readers wlll gloss over that ugly fact just like he did. Or worse, they will make the assumption that because these loans have been bad for so long, they must not matter.
In a way, he is confirming what Keith Jurow has been saying….which is pretty bleak for the future of the market
Irvine Renter – the way this is being spun in some parts of the press is, “Sales are down because supply is down…if there were more supply there would be more sales.” Of course, if sellers could get the price they want they would put their properties on the market and sales would increase, but right now it seems like there is a supply/demand mismatch. All the worse since we are approaching the upper limits of affordability in many markets. I wonder if the stats break out what percentage of current sales are to firms time buyers. I have a friend who spent many years in the single family residential market, appraising properties but also buying and selling. He always told me, “first time buyers drive the market.”
The lack of supply is another red herring. The distressed sales which used to make up the market are gone, and the stuff that remains is overpriced. We could double or triple the inventory, and it wouldn’t make much difference because the supply would be overpriced and out-of-reach for most buyers. As you noted, we are at the affordability limit in most markets, yet sellers need to get more out of the sale to pay off the loan. The supply/demand mismatch will continue because sellers can’t lower their prices, so sales volumes will suffer.
The first-time homebuyer percentage is running about 28% instead of the normal 40%, and that’s showing no sign of improvement.
“The first-time homebuyer percentage is running about 28% instead of the normal 40%, and that’s showing no sign of improvement.”
But this isn’t a normal market. Maybe 28% is normal for THIS market? Maybe it’s 20%, maybe it’s 30. Historical percentages mean nothing unless the precise historic conditions on which they are based are all miraculously perfectly balanced and exist in today’s market. The S&P 500 has averaged 10.5% since 1930, does that mean I can count on exactly 10.5% this year?
“We could double or triple the inventory, and it wouldn’t make much difference because the supply would be overpriced and out-of-reach for most buyers.”
Wouldn’t the number of salable homes increase proportionally assuming equal distributions? If only 10% of homes currently have enough equity to transact, if I triple the total number of listings, won’t I triple the number of homes that can sell? I.e. 3 x (100 X 10%) = 30 homes vs. 10 homes? And, when salable volumes fall, prices tend to rise if demand is constant. When this happens, prices rise, and more equity sales can occur.
The first-time homebuyer percentages aren’t that historically volatile. It’s only been since the housing bust and the severe contraction of credit that first-time homebuyer participation dropped so low. Also, the influx of investors has crowded them out as well.
I don’t believe additional inventory would come to market in the same proportions. The salable homes are already there. Any new inventory would be cloud inventory homes which are only salable at a price the market hasn’t reached yet; that’s why I believe additional inventory wouldn’t make any difference for sales.
I’m confused as to why the two plots of delinquency rates do not agree. The plot in the article shows a delinquency rate that has decline from a peak of about 9% in 2010 to 6.4% today. The graph you added shows a delinquency rate of 11% in 2010 and about 8.5% today.
What is the difference in methodology in generating these graphs? What am I missing?
The graph I posted is from the federal reserve. It shows the delinquency rate at the major commercial banks, which is higher because they have been can-kicking more than the GSEs. The other graph is from a different data source looking at a broader range of loans.
I think you’re wrong. The graph from the Fed is including foreclosures in the total, so you need to compare it to the sum of delinquencies and foreclosures on the first graph.
The first graph = 6.4% + 2.9% = 9.3%
The Fed = 8.6%
That means the second graph is actually the less scary of the two and it shows that commercial banks have lower delinquency rates than the market as a whole.
Of course, the first graph includes condos, mobile homes, and other higher risk property types, whereas, the second graph is for SFR’s only, so you would expect it to be lower.
The first graph is showing 30-day delinquencies which are always much higher. Look at the beginning of that graph showing a level of 4%= in 2006.
The second graph from the federal reserve is a 90-day delinquency rate. Look how it was well below 2% in 2006.
Why would anyone assume that delinquenciy rates as reported by banks are credible?
Because there’s no evidence that they’re not.
Are you serious? Where have you been the last few years The banks are involved in fruad after fraud, cover up after cover up, lies, cheating, etc. The overwhelming evidence is that nothing they say or do can be trusted as anything other than selfserving lies and falsifications.
“Because there’s no evidence that they’re not.”
Ha-ha-ha-ha-ha-ha! That was funny!
I realize that your whole point in asking was to launch an attack on me (and IR seems to sanction this even though he was the one using the “fraudulent” data), but let’s think this through for a minute. The banks don’t have to mark-to-market and they have access to free capital from the Fed, plus implicit backing by the Federal government as TBTF banks. What would be the motive for lying about the delinquency rates?
Since you don’t have any evidence, at least try to provide a motive. Do you think they are lying to prevent an uproar from the American public? Do you think people really care? And why would they report delinquency 5-8x the norm, but not the real delinquency? Why wouldn’t they just claim it was only slightly elevated if what you are saying is true?
I wasn’t sanctioning anything. I try not to get involved in bickering, but I did think his comment was funny, and the banks haven’t been paragons of virtue over the last several years. It is appropriate to be skeptical about the data they provide, particularly when revealing the worst won’t help people’s confidence in our banking system. They do have an incentive to minimize the numbers, and the federal reserve has incentive to let them under-report.
“The banks are involved in fruad after fraud, cover up after cover up, lies, cheating, etc”
They never actually admitted any wrong doing. They paid billions in fines, but they were apparently honest and above-board in all their dealings. They can be trusted…
~~ giggles to self ~~
And what should one think about those who do trust them and think there is no evidence that they are not credible? I know you want to giggle, but think about this for a minute. Mellow is not alone is his ignorance. There is a whole herd, the majority, out there who think that if the banks publish or report that there is no reason to question the veracity of their information, but there is some government agency protecting them from falsehoods.
“However, as long as the system is burdened with bad debt, the economy will sputter, and the overhand of bad mortgage debt will loom over the housing market. So whether or not the mortgage mess is resolved or delayed is important, and unfortunately, I believe the final resolution has merely been delayed.”
Undoubtedly. But, have you considered that by delaying the resolution of bad loans, the impact of the crisis has been lessened for the rest? Not all paths are equal even though they end at the same destination. By sequestering the bad debt via modifications, the rest of the market can “play on” in a more or less normal, or abnormal, fashion – depending on your view of course.
Placing one defective home and one defective homeowner in their respective penalty boxes to serve out a 10 year major, seems like an appropriate way to deal with the situation. From the boxed players view, the crisis won’t be resolved for the duration of the debt, but for the rest of us, the problem was resolved with their removal.
I don’t know that foreclosures will be much of a threat to market prices going forward. First of all, the banks aren’t going to act as their own executioner. They quickly realized in 2009 that a speedy resolution wasn’t in their best interest. Second, foreclosures are either bought by REITs looking to rent them out or flippers looking to make a quick buck. REITs also won’t harm their bottom line by flooding the market with rentals. And flippers are taking the distressed inventory, renovating it, and reselling at non-distressed prices. In many if not most cases, the resold homes are of higher quality than surrounding homes. In this aspect, the distressed homes are driving up area prices.
“Undoubtedly. But, have you considered that by delaying the resolution of bad loans, the impact of the crisis has been lessened for the rest? Not all paths are equal even though they end at the same destination. By sequestering the bad debt via modifications, the rest of the market can “play on” in a more or less normal, or abnormal, fashion – depending on your view of course.”
This is exactly what Japan did that contributed to their lost decade — and ours.
I can see the argument that forcing assets on the market at a time when buyers are scarce causes an overshoot to the downside and misprices the asset in the opposite way of a bubble, which is also undesirable. However, invariably, once the market starts to become manipulated, all price discovery is lost, and the manipulators will keep the prices artificially high to avoid losses. These mispriced assets cause ongoing economic distortions. For example, homebuilders get a signal to build when more houses aren’t really in demand. As we continue to misprice assets, we misallocate capital, which reduces economic efficiency in the whole economy.
In Japan they also had a shrinking population, so they had demographic issues that probably dragged out their misery longer than necessary, but behind that, they also had a terrible problem with mispriced assets and lingering bad debt causing a misallocation of capital. Now we have the same.
I am going to make a guess by the look of your graphs, we will not be seeing mark to market accounting comeback for the next few years.
Certainly not at the major commercial too-big-too-fail banks.
I don’t think a time limit was placed on FAS-157:
http://www.fasb.org/summary/stsum157.shtml
[…] 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 […]