Feb112014

Rising house prices fail to match rising loan loss severities

Lenders deferred foreclosures in order to increase recovery on their bad loans; however, loss severities on bad loans are increasing faster than house prices go up. Lenders may quicken the pace of foreclosures as home prices level off to minimize their losses.

Lenders delayed foreclosures in an effort to liquidate REO and resolve bad loans at higher prices in order to recover more on their bad bubble-era loans. But what if waiting no longer serves their best interests? What happens when high servicing costs and deferred maintenance on the houses collaterlizing these loans causes loss severities to increase faster than house prices go up? In such circumstances, it would be in the lenders best interest to foreclose and get what they can today rather than wait and obtain less tomorrow. Could rising loan loss severities cause lenders to change their amend-extend-pretend can-kicking policies and begin foreclosing in earnest?

Longer foreclosures squeeze investor profit

Fitch: Loss severities rise for first time in years

Jacob Gaffney, January 23, 2014 12:00PM

Fitch Ratings sent a note today warning that extended foreclosure timelines are increasing the severity of losses in residential mortgage-backed securities.

Loss severities on liquidated RMBS loans rose last quarter following six straight quarters of declines, according to a statement from Fitch.

“Judicial foreclosure states were a particular problem spot with respect to longer timelines last quarter, even as timelines in non-judicial states start to level off,” said Fitch director Sean Nelson. “Longer liquidation timelines result in higher loss severities due to greater carry costs and higher potential for property deterioration.” …

Carrying costs on delinquent mortgages can run as high as 1% per month. House prices have to rise 12% or more per year just to keep up. While that happened over the last two years, it’s unlikely to persist into 2014 and beyond.

“Average timelines for loans remaining in the foreclosure process continued to extend, reflecting both the increased procedural challenges servicers face due to regulatory changes and some adverse selection of properties not resolved through short sales,” according to the report.

The problem is getting worse, not better.

Gundlach not buying the housing recovery

Avoids subprime, giving up gains, says houses ‘rotting’

Jan 24, 2014 @ 7:16 am (Updated 9:42 am) EST

For Jeffrey Gundlach, the U.S. housing recovery isn’t so rosy.

The founder of $49 billion investment firm DoubleLine Capital is largely avoiding the subprime-mortgage bonds that jumped about 17% last year after home prices surged by the most since 2006, deterred by the lengthy process to sell foreclosed houses and the destruction that’s creating.

These properties are rotting away,” Mr. Gundlach said last week on a conference call with investors, about homes stuck in foreclosure pipelines, adding that it could take six years to resolve defaulted loans made to the least creditworthy borrowers before the real-estate crash.

It isn’t just the least creditworthy; nearly all loanowners were offered loan modifications when house prices collapsed, and millions got them. Today’s loan modifications are tomorrow’s distressed property sales, so it will take several more years to clear out these bad loans as well as the squatters in shadow inventory.

The housing market is softer than people think,” Mr. Gundlach said, pointing to a slowdown in mortgage refinancing, shares of homebuilders that have dropped 13% since reaching a high in May, and the time it’s taking to liquidate defaulted loans. …

A measure of losses on mortgage debt rose last quarter for the first time since 2011, Fitch Ratings said in a report Thursday. The reversal was driven by an aging pool of loans in the foreclosure process, particularly in states such as Florida and New Jersey which give added legal protections to homeowners against repossessions.

About 32% of seriously delinquent borrowers, those at least 90 days late, haven’t made a payment in more than four years, up 7% from the beginning of 2012, according to Fitch analyst Sean Nelson.

These timelines could still increase for another year or so,” Mr. Nelson said, leading to even higher losses because of added legal and tax costs, and a greater potential for properties to deteriorate. …

Improvements in loss severities have failed to keep pace with the 24% gain in house prices since the 2012 trough. Real-estate values have been recovering for about two years, with prices climbing in October at the fastest pace since 2006, according to a Case-Shiller index of 20 cities.[dfads params=’groups=165&limit=1′]

“You see Case-Shiller price data showing strong markets, and you expect in a certain logical way that these loss severities should be coming down as home values are increasing,” said Mr. Gundlach, who started Los Angeles-based DoubleLine Capital in December 2009 and built it into the fastest growing mutual-fund firm ever in its first year. “Unfortunately, that’s being trumped or neutralized by this rotting away problem.”

It’s become a commonly accepted truth that lenders deferred foreclosures in order to increase recovery on their bad loans. As it turns out, this may not be the case. While rising prices certainly help, carrying costs are rising even faster. I recently wrote about the dangerous tipping point in favor of foreclosure. The market conditions today favor continuing the polices of the last couple of years that reversed the downtrend in market pricing and prompted a vigorous rally; however, as appreciation slows down, as lender’s costs go up, as lenders become strong enough to absorb losses, lenders will reach a tipping point where foreclosure makes more sense than can kicking or squatting. When that happens, foreclosure processing will pick up speed. This may happen quicker than previously believed.

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[idx-listing mlsnumber=”OC14025405″]

2907 West EDINGER Ave Santa Ana, CA 92704

$499,900 …….. Asking Price
$534,500 ………. Purchase Price
12/19/2007 ………. Purchase Date

($34,600) ………. Gross Gain (Loss)
($39,992) ………… Commissions and Costs at 8%
============================================
($74,592) ………. Net Gain (Loss)
============================================
-6.5% ………. Gross Percent Change
-14.0% ………. Net Percent Change
-1.1% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$499,900 …….. Asking Price
$17,497 ………… 3.5% Down FHA Financing
4.29% …………. Mortgage Interest Rate
30 ……………… Number of Years
$482,404 …….. Mortgage
$142,821 ………. Income Requirement

$2,384 ………… Monthly Mortgage Payment
$433 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$104 ………… Homeowners Insurance at 0.25%
$543 ………… Private Mortgage Insurance
$225 ………… Homeowners Association Fees
============================================
$3,690 ………. Monthly Cash Outlays

($663) ………. Tax Savings
($660) ………. Principal Amortization
$27 ………….. Opportunity Cost of Down Payment
$82 ………….. Maintenance and Replacement Reserves
============================================
$2,476 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$6,499 ………… Furnishing and Move-In Costs at 1% + $1,500
$6,499 ………… Closing Costs at 1% + $1,500
$4,824 ………… Interest Points at 1%
$17,497 ………… Down Payment
============================================
$35,319 ………. Total Cash Costs
$37,900 ………. Emergency Cash Reserves
============================================
$73,219 ………. Total Savings Needed
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