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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