The golden age of delinquent mortgage squatting continues. Those who aren’t paying their mortgage today can expect their free ride to continue indefinitely. We know from the report released by ForeclosureRadar.com that MLS inventory is NOT coming as foreclosure filings dry up. In California, the number of NODs declined 20.4% last month signaling that lenders are in no hurry to process their bad loans and push out the squatters. This slow processing creates a strong incentive for borrowers to strategically default because if they quit paying, they get to live for free, probably for a very long time. Rising prices will prompt many to keep paying, and delinquent mortgage squatters will miss the recovery rally, but despite these incentives to stay current, the September delinquency rates mysteriously and unexpectedly surged 7.72% to levels last seen in January of 2012. The 2012 progress from loan modifications and foreclosures to turn the tide on delinquencies was wiped out in a single month. The magnitude of the increase was the largest since the peak in January of 2010 and represents much more than a statistical blip.
Shadow inventory is growing
Shadow inventory is the total number of delinquent mortgages not yet served with a foreclosure filing. CoreLogic also includes REO inventory, but since that inventory is visible, I don’t include it as a shadow number. Shadow inventory grows as borrowers default on their mortgages. Shadow inventory declines whenever there is a loan modification, short sale, or a foreclosure. As we all know, the number of foreclosures has been declining — not due to a lack of delinquent borrowers — but due to policies at the major lenders that permit squatting. In 2012, foreclosure has not been a major method of reducing shadow inventory. 
The new HAMP guidelines allowed underwater buyers to refinance, and the major banks have renewed their efforts to rehabilitate their delinquent loans by offering more and more attractive loan modifications. These programs have picked up the slack were the foreclosures left off; however, loan modifications are merely can-kicking. About 14% redefault immediately, and 1/2 to 1/3 redefault again within three years. Most of these loan modifications will end up either as foreclosures or short sales. Loan modification programs have been a consistent failure, and they will continue to be. As I have cynically pointed out from the start, these programs were never intended to benefit borrowers. Their real goal was to benefit banks, and although the banks would have preferred the borrowers resume payments, delaying foreclosure until prices rise to provide collateral backing works just the same.
Lenders pushed for more short sales in 2012 because short sale losses counted toward their settlement penalties, foreclosures losses don’t. This gives lenders a huge incentive to process short sales, but such sales require the delinquent borrower to want to sell. Most would rather squat until their foreclosure. What is their hurry to complete a short sale and start paying rent, particularly when the bank actually tries to extort money from the seller to cooperate. So short sales are not chipping away at shadow inventory either.
With the increased loan modifications and short sales, lenders hoped they would offset their slowed foreclosure processing and continue to reduce shadow inventory. Unfortunately, it isn’t working out that way. There are still far too many underwater and distressed borrowers, and they are defaulting in large numbers despite rising prices. This must be a shocking and dismaying development for lenders who hoped that rising prices would motivate borrowers to keep paying with the lure of equity. It isn’t working out that way.
LPS “First Look” Mortgage Report: September Month-End Data Shows Significant Rise in Delinquencies; Foreclosures Drop
Month-over-month delinquencies increase 7.72 percent
| Total U.S. loan delinquency rate (loans 30 or more days past due, but not in foreclosure): | 7.40% |
| Month-over-month change in delinquency rate: | 7.72% |
| Year-over-year change in delinquency rate: | -4.19% |
| Total U.S. foreclosure pre-sale inventory rate: | 3.87% |
| Month-over-month change in foreclosure presale inventory rate: | -4.05% |
| Year-over-year change in foreclosure presale inventory rate: | -7.37% |
| Number of properties that are 30 or more days past due, but not in foreclosure: (A) | 3,700,000 |
| Number of properties that are 90 or more days delinquent, but not in foreclosure: | 1,530,000 |
| Number of properties in foreclosure pre-sale inventory: (B) | 1,940,000 |
| Number of properties that are 30 or more days delinquent or in foreclosure: (A+B) | 5,640,000 |
| States with highest percentage of non-current* loans: | FL, MS, NJ, NV, LA |
| States with the lowest percentage of non-current* loans: | MT, AK, SD, WY, ND |
Will lenders need to change course?
Eventually, lenders will have to foreclose on the committed squatters. Right now, lenders are still in denial that these people exist. Lenders assume they can get people to agree to loan modifications or short sales and solve their problems that way. It won’t happen because the incentives are all wrong. The delinquent mortgage squatter has every incentive to rebuff their lender’s offers and simply live in the house for nothing. When borrowers no longer fear the threat of foreclosure, they simply won’t pay. The number of borrowers who think this way is far larger than lenders are currently willing to admit. Many, many more foreclosures are coming. It’s just a matter of when they will occur and how quickly the lenders dispose of them. Irregardless of when they boot these people out, lenders will continue to release foreclosures only at a rate the market can absorb. We may see air pockets and isolated downdrafts, but a large market crash isn’t very likely.
He quadrupled his mortgage
You would think lenders would be wise enough to identify Ponzis. It seems pretty obvious to me that if someone quadruples their mortgage over a ten year period, that borrower is likely a Ponzi. At first, he merely doubled his mortgage, and another lender saw fit to triple it. If that wasn’t stupid enough, B of A have him a HELOC which quadrupled his mortgage. Shouldn’t it have been obvious he was relying on mortgage equity withdrawal to finance his life? Lenders who loan to Ponzis generally go out of business — unless of course, they are deemed too big to fail.
- This property was purchased for $174,500. The owner used a $157,050 first mortgage and a $17,450 down payment.
- On 8/15/2003 he refinanced with a $300,000 first mortgage.
- On 6/1/2004 he obtained a $75,000 HELOC.
- On 9/6/2007 he refinanced with a $417,000 first mortgage.
- On 5/5/2008 B of A gave him a $189,000 HELOC. What were they thinking?
- Assuming he maxed out the HELOC, total property debt was $606,000.
- Total mortgage equity withdrawal was $448,950, about three times his original mortgage, and more than 25 times his initial investment.
- He defaulted sometime in 2008, and he was allowed to squat for three and one half years.
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Proprietary OC Housing News home purchase analysis
11162 CROSBY Ave Garden Grove, CA 92843
$424,900 …….. Asking Price
$174,500 ………. Purchase Price
3/12/1998 ………. Purchase Date
$250,400 ………. Gross Gain (Loss)
($13,960) ………… Commissions and Costs at 8%
============================================
$236,440 ………. Net Gain (Loss)
============================================
143.5% ………. Gross Percent Change
135.5% ………. Net Percent Change
6.1% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$424,900 …….. Asking Price
$14,872 ………… 3.5% Down FHA Financing
3.46% …………. Mortgage Interest Rate
30 ……………… Number of Years
$410,029 …….. Mortgage
$105,819 ………. Income Requirement
$1,832 ………… Monthly Mortgage Payment
$368 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$106 ………… Homeowners Insurance at 0.3%
$427 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,734 ………. Monthly Cash Outlays
($271) ………. Tax Savings
($650) ………. Equity Hidden in Payment
$16 ………….. Lost Income to Down Payment
$126 ………….. Maintenance and Replacement Reserves
============================================
$1,955 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$5,749 ………… Furnishing and Move In at 1% + $1,500
$5,749 ………… Closing Costs at 1% + $1,500
$4,100 ………… Interest Points
$14,872 ………… Down Payment
============================================
$30,470 ………. Total Cash Costs
$29,900 ………. Emergency Cash Reserves
============================================
$60,370 ………. Total Savings Needed
The property above is available for sale on the MLS.
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27 Responses to “September delinquencies skyrocket 7.72%, foreclosure filings decline 20.4%, shadow inventory grows”
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Shorting LEN; 38.49
PulteGroup Profit Tops Estimates as New-Home Sales Climb
Ryland reports strong orders growth, profits
“I love the smell of napalm in the morning” –Kilgore
http://finance.yahoo.com/echarts?s=LEN+Interactive#symbol=len;range=5d;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;
You timed that one well for a day trade. Are you planning to hold it longer?
It’s a bit early for full-on shorts so scaling-out, first target hit: just sold a third @ 36.66. Next, 34.19. Final, 32.71 (subject to change). Depending.
Justice Department Sues BofA for Over $1B, Alleging Mortgage Fraud
The U.S. Department of Justice sued Bank of America for over $1 billion for alleged mortgage fraud related to the sale of loans to Fannie Mae and Freddie Mac, Manhattan U.S. Attorney Preet Bharara announced in a release Wednesday.
According to the release, the civil fraud suit is a first for the Justice Department for mortgage loans sold to the GSEs.
The lawsuit stems from origination practices from Countrywide, which BofA acquired in 2008.
According to the complaint, from 2007 to 2009, Countrywide implemented a loan process called the “Hustle,” which pushed loans through the origination process by eliminating quality checkpoints and by compensating employees based on the volume of loans originated.
For example, the complaint stated Countrywide eliminated the use of an underwriter for many high risk loans and instead used loan processors who previously weren’t even qualified to answer borrower questions.
The complaint further alleges Countrywide informed Fannie Mae and Freddie Mac that it had actually tightened its underwriting guidelines during this time. As a result, the complaint stated thousands of defective loans were sold to Fannie Mae and Freddie Mac, resulting in over $1 billion in losses and loans that went into default.
“For the sixth time in less than 18 months, this Office has been compelled to sue a major U.S. bank for reckless mortgage practices in the lead-up to the financial crisis,” said Manhattan U.S. Attorney Preet Bharara.
The civil mortgage fraud lawsuit was also filed by the Federal Housing Finance Agency and the Special Inspector General for the Troubled Asset Relief Program (SIGTARP).
Bank of America spokesperson, Lawrence Grayson, said the bank “has stepped up and acted responsibly to resolve legacy mortgage matters,” further adding “the claim that we have failed to repurchase loans from Fannie Mae is simply false.”
“At some point, Bank of America can’t be expected to compensate every entity that claims losses that actually were caused by the economic downturn,” Grayson said.
I like the little detail about using people too unqualified to answer questions from the public to process loans. It’s just that little touch that makes the story so much more (take your pick) pathetic, hilarious, anger-inducing, etc. It reminds me of one of those “stupid criminal” stories where a guy gets cheated on a drug deal so he goes to the police to complain.
How much dough did Angelo Mozzillo retire with again? I think when Countrywide was sold to BofA he made several hundred million on his shares – taxed as capital gains, of course, not ordinary income. BofA’s outgoing CEO Ken Lewis left with some lovely parting gifts worth about $100MM. So failure on a huge scale is amply rewarded in these United States.
Success to CEOs is negotiating the employment contract. Any performance after the fact is irrelevant. Dick Fuld guided Lehman Brothers into the abyss, and he escaped with most of his personal fortune.
I love this one:
“At some point, Bank of America can’t be expected to compensate every entity that claims losses that actually were caused by the economic downturn,” Grayson said.
Actually, B of A can be expected to pay for losses caused by the economic downturn. The plethora of bad loans they underwrote is why we had an economic downturn. If they had responsible underwriting, we wouldn’t be in the mess we are today.
Go back and look at the top tax bracket when the USA was a great country. They were up to 92% and as a result CEO’s never raped their own companies. You tend not to screw over everyone around you when you know you have to stick around for a while before you can retire.
Fed reaffirms policy of unlimited housing stimulus
Pointing to slow employment growth and an “elevated” unemployment rate, the Federal Open Market Committee said Wednesday the Federal Reserve “will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.”
At the same time, the FOMC said it would maintain the target federal funds rate at 0 to 1/4 percent and said the “exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.”
The Committee voted 11-1 with only Richmond Fed President Jeffrey M. Lacker dissenting.
The FOMC decision and action had been expected.
The policy actions will not directly address the FOMC’s dual policy mandates of maximum employment and price stability, but are expected to “put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative” and “to support a stronger economic recovery.”
Despite its observations about the labor sector, the Committee, in its last meeting before Election Day, painted a slightly upbeat picture of the economy.
“Household spending has advanced a bit more quickly, but growth in business fixed investment has slowed,” the FOMC said at the conclusion of a two-day meeting. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation recently picked up somewhat, reflecting higher energy prices. Longer-term inflation expectations have remained stable.”
The statement said though “the Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions” adding “strains in global financial markets continue to pose significant downside risks to the economic outlook.”
In addition to continuing its MBS purchase program designed to keep mortgage rates low, the committee said it will also continue through the end of the year “its program to extend the average maturity of its holdings of Treasury securities” and its policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.
Those actions, the FOMC said, will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year,” to keep rates low.
Lacker, the Committee said, voted against the policy because he “disagreed with the description of the time period over which a highly accommodative stance of monetary policy will remain appropriate and exceptionally low levels for the federal funds rate are likely to be warranted.”
This is why your statement; “Eventually, lenders will have to foreclose on the committed squatters. Right now, lenders are still in denial that these people exist. ” is completely wrong.
They will never have to recognize these losses! I know its hard to wrap your head around this but it was also hard for people. To accept the Feds new policy.
Until you show me WHY they will have to recognize these delinquent homes and explain what will happen if they dont…your statement is wrong.
They will eventually have to foreclose on these people, otherwise they will be giving away millions of homes to people who aren’t paying for them. Lenders may be willing to delay loss recognition indifinitely, but they won’t give away free homes. Best case scenario for them it so reflate house prices above their basis then foreclose to regain their capital without a loss. With as far as many of these properties are underwater, I can’t see them waiting 10 years or more to recover their capital.
Why couldnt a small petcentage never be foreclosed on? Its a great 2 for 1. Banks never lost any money and over extended borrowers are rewarded with the ultimate principle reduction. It would never even hit the mainstream media so the moral hazard debate would never happen. Oh wait! This is (or as I predict) HAS happened.
Until this blog hits mainstream, ignorance and my prediction has already occured.
OMG how depressing. If I was El O I’d short da GDP
The sawtooth pattern in a downward trend continues. And the beat goes on and on and on…
Perhaps, but you must admit, this rise was unexpected both in direction and scale. I think it’s a direct result of their slowdown in foreclosures. Unless the banks increase their foreclosure filings, delinquency rates won’t resume their downward trend.
The cynic in me thinks reality is being suspended only until early November. Why? If the banks are rooting for Romney, wouldn’t they want Obama to look bad? Not really, since having foreclosures and continued weakness in the housing market at the center of attention before the election would force both candidates/parties to propose real solutions, and neither party wants to do so. If voters were really worried about the economy they might react in unpredictable ways, so it’s best to just suspend reality until the next administration is anointed.
I completely agree that the slow down in filings is driving it. It’s a bit of an artificial measure because a loan in foreclosure should still be counted delinquent, but LPS never presents the total number of delinquencies including foreclosures. Therefore, the monthly changes don’t give an accurate picture of what’s really happening and can be skewed by a drop in filings.
“The sawtooth pattern in a downward trend” was one of el O’s favorite expressions when prices were bouncing around the bottom over the past few years. He hasn’t been able to use it lately so I thought I would in his honor.
This aint the bottom.
You’re right. Three and a half years ago was.
Every day I get a list of properties under 800K in San Clemente and San Juan Capistrano. I’ve been getting the same list for 7 years, so I can see some good trends. A couple of months ago the list was the smallest I’d ever seen but lately its increasing. Most of the new listings are standard sales. I believe that because the restricted inventory has caused prices to rise and is giving non-bank owners some hope that they can sell at the new higher prices. It will be interesting to see where the market goes when the number of properties increases.
I don’t think it will take much inventory to stop prices from going up. Demand isn’t really that strong, supply is just greatly reduced. A small increase in supply will satisfy the demand.
That will be interesting to watch. Most of the fools that bought in early 2010 to beat the tax credit expiration are probably above water again.
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