Mortgage delinquencies much higher than reported, squatters rejoice
Mortgage delinquencies fall off delinquency reports when non-performing loans are sold by major banks to hedge funds.
The news on delinquencies over the last several years encouraged those who want to believe the mortgage mess is past. Most reports over the last several years show a declining mortgage delinquency rate, and despite the levels of delinquency and foreclosure being highly elevated from historic norms, most comfort themselves with hopes that a disastrous situation steadily improves.
A declining delinquency rate is to be expected as the economy improves, people go back to work, and borrowers catch up on their mortgage payments — at least that is the general impression the financial media wants everyone to believe. Unfortunately, that isn’t what’s happening.
There are several ways to cure a mortgage:
(1) catch up on back payments and stay current,
(2) sell the property and pay it off, either in full or a short sale,
(3) agree to a loan modification and remain current on modified terms,
(4) extinguish the debt through foreclosure.
As I mentioned, the financial media wants everyone to believe borrowers are catching up on their payments and staying current due to an improving economy. While the economy is getting somewhat better, almost no borrowers suddenly catch up after missing more than three payments and then remain current.
Lenders deny short sales, so most borrowers who want to sell and get rid of their mortgage are forced to wait for prices to rise high enough to bail them out. Unfortunately, about 20% of borrowers are still underwater, and another 20% are barely above water and unwilling to sell. This has removed about 40% of the for-sale inventory from the MLS and helped create the artificial shortage of homes that reflates the housing bubble.
In order to squeeze a few more payments out of desperate borrowers while waiting for prices to 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 improve a lenders bottom line, not keep people in their homes. (See: Lenders benefit from loan modifications, homeowners not so much and Today’s loan modifications are tomorrow’s distressed property sales)
The result everyone tries to avoid is foreclosure; however, I still believe most of these bad loans will be resolved this way in the end because it will simply take too long to fully reflate the bubble to bail everyone out with an equity sale.
Delinquency rates are under reported
I described above the methods for curing loans; however, there is a method of making delinquency rates decline that has nothing to do with curing the loan, a method of avoiding reporting becoming much more common: sell the non-performing loan to a hedge fund.
I recently wrote about investors buying non-performing loans to foreclose and obtain rental properties. One of the questions this practice raises is why lenders are bundling and selling these loans to investors at steep discounts. Is it because they fear the bad press from foreclosure? Is it because they need the cash? There is one potential answer I failed to consider: banks may be selling non-performing loans to improve their reported delinquency rates, thus improving their capital ratios.
… hundreds of thousands of NPLs that have been sold in the last three years, creating a ghost inventory of distressed loans owned by corporations that many have never heard of and that don’t report their delinquent loans to a trade organization such as the Mortgage Bankers Association or any government agency.
Lender Processing Services, the Mortgage Bankers Association, and the Federal Reserve report on delinquencies, and CoreLogic reports on shadow inventory; none of these organizations obtains data from private hedge funds, particularly those funds acquiring these loans for purposes of obtaining rental inventory.
These distressed loans in limbo continue to haunt the housing market in the form of stalled short sales … along with other protracted attempts to avoid foreclosure that could still ultimately end up in a foreclosure.
All roads eventually lead to foreclosure. It may be a long and winding road, but if the borrower is distressed, they will either wait until they have equity to make a sale, or they will quit paying when their loan modification blows up, or some life-changing event causes them to finally give up; then these bad loans fall to foreclosure.
According to an analysis by Foreclosure News Report, more than 72,000 nonperforming loans insured by the Federal Housing Administration have been sold since 2010 as part of the Distressed Asset Stabilization.
Program (DASP) administered by the U.S. Department of Housing and Urban Development — which posts the results of the sales on its website. But there is no public record for sales of loans not insured by the FHA, leaving an unreported gap of many more NPL sales — given that the FHA share of mortgage originations was just 30 percent of all originations even at its peak in recent years.
“We’re still very, very busy and yet every report you read in the news is that nonperforming notes are reducing significantly, foreclosures are down and everybody’s happy go lucky that the real estate market is back,” said Falk, …
I’m not the only one who noticed the financial media isn’t reporting what’s really going on.
Feb. 7 (Bloomberg) — JPMorgan Chase & Co. is offering $390 million of non-performing loans as banks including HSBC Holdings Plc and Regions Financial Corp. increasingly look to sell troubled mortgage debt.
JPMorgan put the pool of debt, a portion of which is tied to residential properties in New York, on the market this week, said two people with knowledge of the offering, who asked not to be named because the sale is private. HSBC hired BlackRock Inc. to manage the potential sale of as much as $1 billion in delinquent loans and Goldman Sachs Group Inc. is handling an auction of about $700 million of modified loans for Regions, according to two separate people.
Sales of the debt are accelerating amid financial regulations that force banks to pledge more capital for some assets they hold, including non-performing loans, or NPLs.
Banks are selling these loans to improve their capital ratios. They also can book profits by reducing the amount they hold to write off against bad debt.
“Banks have made a decision internally that a delinquent borrower is not a core customer,”Ashish Pandey, chief executive officer of Altisource Residential Corp., said at a conference in Las Vegas last month. Pandey, whose firm had 6,300 delinquent loans as of the third quarter of 2013, said he expects as many as 500,000 non-performing loans to sell in 2014.
The total number of reported delinquent mortgages in the United States numbers about 4,500,000 according to LPS. If 500,000 of those are sold to firms that no longer report them as delinquent — even though they are — the delinquency rate would drop about 11% just based on the sale of non-performing loans.
So when you read reports about improvement in delinquency rates recognize that improvements from loan modifications are short-term can-kicking, and much of the improvement is smoke-and-mirrors caused by the sale of non-performing loans to entities that don’t report them. At some point, these bad loans must be resolved. Perhaps it will be through a foreclosure purchased by the hedge fund as a rental, thus avoiding the MLS, but many of these sales will be distressed, and the overhang of these loans represents a long-term problem for the housing market nobody knows quite how to account for. Perhaps can-kicking to an equity sale will work; I have my doubts.