Repeat foreclosures result from failed lender can-kicking
As loan modifications redefault, lenders will either modify the loans repeatedly, or they will finally foreclose and resolve the bad loan permanently.
When lenders first embarked on the charade of loan modifications to delay foreclosures, I didn’t believe they could effectively use this ruse to stop foreclosures and remove the distressed inventory from the MLS because recurring foreclosures would force them to follow another course. I was wrong.
The first round of loan modifications failed miserably, as I thought they would, but rather than change course, lenders increased their bets and went “all in” on loan modifications. By choosing can-kicking over foreclosure no matter the price, lenders managed to gain control of MLS inventory and engineer the bottom in house prices.
Lenders ostensibly modified loans to get people over the “rough patch” caused by the recession. From the beginning I said these programs would fail largely because the people being helped simply couldn’t afford their homes. They were Ponzis.
When a borrower has gone Ponzi, a“rough patch” is whenever they are cut off from more Ponzi borrowing. Their diminished income has nothing to do with lower wages they earn due to the recession. Ponzis depend upon fresh infusions of borrowed money to sustain their lives and their debts, and lenders foolishly enable this behavior because Ponzis don’t have the capacity to repay the loans: Ponzis don’t earn enough money.
Since I firmly believed the problem was one of permanent Ponzi dependency rather than a temporary decline in income due to a recession, I stated on many occasions that all loan modification programs would fail. Conventional wisdom was that these programs would succeed because the US economy would recover from recession and the people receiving loan modifications would go back to work and regain their earning power. It hasn’t worked out that way. It never could. Diminished earning power was never the problem — unless they count the Ponzi borrowing as earning power — Ponzis certainly do.
My view is even more cynical. Despite the widespread ignorance spread in the mainstream media, I think bankers themselves always knew these programs were going to fail. One of our astute observers in the comments had this observation:
The performance of the program has wildly exceeded all expectations.
In 2010, Fitch predicted that 65-75% of HAMP mods would redefault within 12 months and S&P predicted 70%. Here we are 60 months later, and the rate of default has just now cracked 50%.
Obviously, everyone had low expectations. I believe lenders were using loan modification programs merely as a ruse to get a few more payments out of hopeless Ponzis. Any income is better than no income, and since they were already processing foreclosures faster than the market could absorb them, modifying loans and getting something was preferable to letting the loanowner squat and pay nothing. Loan modification programs were classic can-kicking. Lenders pushed the problem off into the future when they could more effectively deal with the necessary foreclosures.
We are several years into their can-kicking policy, and perhaps lenders are strong enough to absorb losses on some of their extremely delinquent loans and clear out the squatters. Is this the start of mortgage and foreclosure crisis 2.0?
After the worst national housing crash in history, the picture of distress continues to improve, but now with one worrisome aberration. For the first time in more than two years, the number of repeat foreclosures took a U-turn and was higher in January compared to a year ago.
Whether or not this is a long-term problem depends on the source of these foreclosures. If these are delayed foreclosures from judicial foreclosure states, then it’s a long-expected increase in foreclosure processing; however, if these foreclosures are from redefaults on failed loan modifications, then it represents a threat that I’ve written about on numerous occasions but that few others recognize or acknowledge.
Repeat foreclosures are when a home has been in the foreclosure process once, was somehow saved by either a loan modification or payment program, but then goes back into foreclosure. This can happen when the borrower either can’t or won’t keep up with the new payments. New repeat foreclosures rose 11 percent in January from December and accounted for more than half of all new foreclosures, according to Black Knight Financial Services.
The problem is worst in states where a judge is required in the foreclosure process. These so-called “judicial” states have a far longer time horizon for processing foreclosures and therefore have huge backlogs of troubled loans in limbo.
Analysts at Black Knight say they are unsure what’s driving the numbers. They point to some seasonal factors and do not believe the problem is due to the government’s mortgage bailout program (the Home Affordable Modification Program), which has a five-year term. Some of those first modifications from 2009 are turning into pumpkins. As such, they do report a slight uptick in resets under the program but say those would not materialize into new foreclosures until May at the earliest. The problem may in fact be far more basic.
“It’s not surprising because so much tinkering was done with defaulted borrowers over the last five or six years. It’s not surprising they’re running into problems again,” said Guy Cecala, CEO and publisher of Inside Mortgage Finance.
The popular perception of these programs is that they were designed to truly help borrowers avoid foreclosures and keep their homes long-term. For those who believed this fantasy, the problem of redefaults will be a surprise; after all, they believe the problem was solved, not merely papered over.
During the worst of the crisis, banks were put under increased pressure to modify loans even outside the government bailout program. They lowered interest rates, but in the end, many of their borrowers simply didn’t have the basic cash flow to pay, whatever the rate. Re-default rates were expected to be high, with some calling even 40 percent conservative.
Early failure rates were in excess of 50%. Lenders kept making the terms better and better until it became far cheaper to make payments on a loan modification than to strategically default and rent; at that point, redefaults dropped because default was a less desirable alternative.
In the meantime, completed foreclosures have been decreasing more rapidly than the backlog of seriously delinquent loans. The hope had been for the opposite and a quick return to a more normal level of distress.
Notice that this was mere hope, and any objective view of reality would have quickly squelched that false hope.
There are still more than twice as many troubled loans than normal, despite rising home values and an improving economy. In other words, the mortgage mess isn’t all cleaned up just yet.
When I said that, few believed me.
Mortgage delinquencies will rise again, and they will remain elevated above historic norms for much longer than anyone currently anticipates. This will “surprise” economists and others who accept the financial media spin without understanding why and how the mortgage delinquency rates were lowered in the first place.
Even when lenders do start foreclosing on their delinquent borrower rather than modifying their loans again and again, the rate at which they process these foreclosures will be slow enough for the market to absorb them without pushing prices lower.
Slowing the sales rate of must-sell inventory is the key to preventing housing market crashes. It’s the reason can-kicking began in 2009, and it’s still the focus of all lender policies toward resolving bad loans now.