Would rising mortgage delinquencies cause another housing downturn?
A fresh outbreak of mortgage delinquencies won’t cause a crash in housing. As long as supply continues to be restricted and the percentage of all-cash purchases is high, prices simply won’t go down. Sales volumes may continue to decline, but prices will remain suspended where more buyers can’t afford them unless something changes at the banks and they begin approving more short sales or foreclosing on their delinquent borrowers rather than modifying their loans.
In the post Is San Francisco, the most overvalued US housing market, going to crash?, I challenged housing bears to construct a realistic scenario where house prices crashed. The good people at Patrick.net had a lengthy discussion on the topic, and many scenarios were considered; however, I still stand behind my conclusion: “As long as supply continues to be restricted and the percentage of all-cash purchases is high, prices simply won’t go down. Sales volumes may continue to decline, but prices will remain suspended where more buyers can’t afford them unless something changes at the banks and they begin approving more short sales or foreclosing on their delinquent borrowers rather than modifying their loans.”
I’ve had many long conversations with Keith Jurow over the last few years, discussing the housing market and how lender’s policies determine the fate of pricing. We both agree that the Pollyanna reporting of the mainstream media does not capture the seriousness of the problems facing housing, but we disagree on the final end game. I am convinced that lenders will keep can kicking, restricting inventory, and praying for equity sales to finally resolve the bad loans they temporarily removed from the market with loan modifications. So far that plan is working. Keith doesn’t believe this is possible. Prices are too far below the peak for lenders to recover their capital, and there are too many of these loans for them to resolve in this manner. My belief is that we will see a reflation bubble followed by a 90s-style slow decline tapering over many years. Keith believes another leg down in housing is likely — and in the Northeast where Keith lives, he might be right.
By Keith Jurow, February 5, 2014
For more than a year, the pundits have been trumpeting that the mortgage delinquency problem has been subsiding and that the worst is over. In forty articles over the past four years, I have shown compelling hard evidence that this is total nonsense.
Let’s take a good look at important new data on mortgage delinquencies. This is a table which I used in a recent presentation in Manhattan before institutional investors. It shows the number of pre-foreclosure notices which have been sent to delinquent owner-occupants in New York City and the two counties of Long Island.
These statistics need to be carefully explained. This table shows pre-foreclosure notice filings which have not been published by the NYS Division of Banking for more than three years. I am the only analyst in the nation who has these statistics.
A 2009 NYS statute requires all mortgage servicers to send a pre-foreclosure notice to all owner-occupants who are more than 30 days delinquent. This notice warns the borrower that they are in danger of foreclosure and provides information on what they can do to prevent this.
The law does not compel servicers to send this notice to owners of investment properties. After sending out these notices, servicers must report their numbers to the Division of Banking. That makes these figures the most comprehensive of any state in the nation.
Each quarter I receive updated figures from my contact. The tables shows the pre-foreclosure notices sent to delinquent borrowers in the five counties of NYC and the two counties on Long Island since early 2010. The latest figures include the third quarter of 2013.
The key statistic is the cumulative total of 636,548 notices sent out in these seven counties over the last four years. Since we have fairly solid figures on the number of first mortgages outstanding in these counties, it turns out that more than 40% of all borrowers in Suffolk County have received a pre-foreclosure notice and roughly 35% in New York City.
New York is an experiment in can-kickiing. Of all the metros in the US, New York has the fewest foreclosures relative to its mortgage delinquencies — which shouldn’t surprise anyone considering the financiers who created this mess live there. Besides not wanting to lower their own property values, the financiers in New York believe that no matter how ridiculous bubble-era house pricing was, eventually growth will bail them out. It’s the same reason lenders didn’t foreclose on squatters in the beach towns here in California. Lenders don’t feel any urgency to take a loss when they believe they can simply wait and rising prices will bail them out.
I am often asked this question: Haven’t many of these delinquent mortgages been resolved – either through foreclosure, short sale, or the borrower becoming current on the mortgage? When I answer “No,” I am greeted with skepticism. This is completely understandable.
Guess who was challenging him with that question?
The reason is quite simple – servicers do not foreclose on seriously delinquent borrowers throughout the entire NYC metro area. Completed foreclosures have actually declined rather dramatically throughout the nation in the past two years. The difference is that in the NYC metro, the servicers have not been foreclosing since the spring of 2009.
Now I finally have some really hard evidence to support this assertion. Black Box Logic is a mortgage data firm which has the largest and most credible database of what are called “non-Agency” securitized mortgages – more than four million of which are still active.
Black Box Logic ran the following numbers for me. It shows the delinquency percentages for the ten worst major metros through December 1, 2013. Take a good look.
Let me explain this table. The database of Black Box Logic contains slightly more than four million active non-Agency securitized mortgages. These are mortgages not guaranteed by Fannie Mae or Freddie Mac, nor insured by the FHA. Most of these are the badly underwritten mortgages from the bubble years of 2004 – 2007.
The table breaks down the percentage of delinquent loans for the ten worst major metros in the nation. You can see that after three Florida metros, the enormous NYC metro area (19 million people) had the highest delinquency rate.
The self-reported figures CoreLogic uses to calculate shadow inventory don’t include these loans. The delinquency rates reported by Lender Processing Services don’t include these loans.
I have long contended that low housing inventory is an indicator of residual mortgage distress. The number of reported delinquent or underwater properties is between 25% and 50% in most markets, but the shortage of inventory on the MLS is even higher because delinquencies are underreported. Federal Reserve, willfully ignorant to real cause of MLS listing shortage, proposed that sellers keep their homes off the market because prices are rising, but in 2004 when prices rose even faster than last year’s reflation rally, owners listed and sold their houses normally. No, the real reason the MLS listings are low is because residual mortgage distress is very high.
In the post Bold California housing market predictions for 2014, I predicted that delinquency rates would remain stubbornly high, so I agree with Keith’s basic premise of this post. Delinquency rates declined somewhat in 2013, mostly by loan modifications. In 2014 many loan modifications from 2009 through 2011 will reset to higher interest rates and higher payments. The delinquency rates on these loans is already appalling, and they will deteriorate. The sky-high redefault rates on loan modifications will cause overall delinquency rates to fall far less than expected. They may even go up on a year-over-year basis. I predict delinquency rates at the end of 2014 will be higher than 5.5%, more than 4 times normal.
What I want to focus on is that the percentage of mortgages actually foreclosed in the NYC metro was a piddling 0.6%. That was lower than any of the ten worst metros. Notice also that the total percentage of mortgages seriously delinquent by 90 days or more or in foreclosure is higher for the NYC metro than any of the ten worst except Miami.
Since 2011, I have been asserting that properties remain delinquent for years throughout the entire NYC metro without being foreclosed. This table shows with hard numbers that this is actually the case.
If you want additional evidence, take a good look at this chart for Suffolk County on Long Island.
This chart shows the number of monthly foreclosure filings (known as lis pendens) in Suffolk County on Long Island. Keep in mind that from the first table in this article, we learned that more than 180,000 pre-foreclosure notices had been sent to delinquent borrowers in Suffolk County.
You can see that for the last four years, fewer than 1,000 foreclosure filings had been served each month in Suffolk County. At that rate, it would take more than ten years to foreclose on all the outstanding delinquent properties in the county.
You might be wondering about the purple section at the top of each bar in the chart which began to appear at the beginning of 2009. The publisher of the Long Island Real Estate Report explained to me that these are refilings. What is that? New York State law permits a foreclosure filing to continue for a maximum of three years. If the property has not been foreclosed within three years, the lis pendens expires and a new one must be filed and recorded.
So the purple section at the top of each bar signifies property owners who have been delinquent for more than three years. I am quite certain that a majority of them are still living in their home. Quite a good deal, isn’t it? However, for those Long Islanders still paying the mortgage on their underwater home, it probably makes their blood boil.
For the past four years, I believe that I have been the only real estate analyst who has consistently asserted that this notion of a housing recovery is simply wishful thinking. My charts, graphs, tables and other solid data have been greeted with skepticism.
I am often asked this question: Are all the other pundits and experts simply wrong? Judge for yourself. I simply dig deep to find the answers to questions about housing markets that no one seems to be asking.
The delinquency table I have posted from Black Box Logic has never been seen before. In my view, the table completely confirms what the first table shows about the NYC metro. It also shows that the 21 million modifications and other “solutions” have not solved anything. They have simply kicked the can down the road.
If you read the latest call report filed with the FDIC by “too big to fail” banks, you will see that the first lien portfolio owned by two of them has a delinquency rate of more than 17%. No recovery in their portfolios! Had it not been for mortgage modifications, the delinquency rate would have been considerably higher.
You can believe the opinions offered by the pundits if you wish. I am confident that the hard data which I continue to publish reveals that major housing markets are still headed for a crash. Stay tuned.
Keith and I agree that lender can kicking is not the final resolution to the problem. I clearly demonstrated in 2014 will see the “Rise of the Short Sale” why loan modifications will fail; however, everything comes back to the basic disagreement Keith and I have: can lenders kick the can forever? Keith says no, and I say yes.
Back in 2009 lenders changed the rules: mark-to-fantasy accounting, loan modifications, shadow inventory, long-term squatting. Once the rules were changed, lenders were able to gain control of the flow of inventory, and house prices bottomed and the bubble reflated strongly. With all these measures in place, and with no pressure to remove them, a housing bust with rapidly declining house prices is very unlikely in the foreseeable future. What will pressure lenders to change this system that’s working well for them? What will cause the system to break down?
Until someone can persuasively answer those questions, I will continue to believe lenders can manipulate the market and keep prices artificially high.
19746 KINGSWOOD Ln Huntington Beach, CA 92646
$362,900 …….. Asking Price
$221,500 ………. Purchase Price
9/5/2002 ………. Purchase Date
$141,400 ………. Gross Gain (Loss)
($29,032) ………… Commissions and Costs at 8%
$112,368 ………. Net Gain (Loss)
63.8% ………. Gross Percent Change
50.7% ………. Net Percent Change
4.3% ………… Annual Appreciation
Cost of Home Ownership
$362,900 …….. Asking Price
$12,702 ………… 3.5% Down FHA Financing
4.31% …………. Mortgage Interest Rate
30 ……………… Number of Years
$350,199 …….. Mortgage
$105,104 ………. Income Requirement
$1,735 ………… Monthly Mortgage Payment
$315 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$76 ………… Homeowners Insurance at 0.25%
$394 ………… Private Mortgage Insurance
$196 ………… Homeowners Association Fees
$2,715 ………. Monthly Cash Outlays
($361) ………. Tax Savings
($477) ………. Principal Amortization
$20 ………….. Opportunity Cost of Down Payment
$65 ………….. Maintenance and Replacement Reserves
$1,962 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$5,129 ………… Furnishing and Move-In Costs at 1% + $1,500
$5,129 ………… Closing Costs at 1% + $1,500
$3,502 ………… Interest Points at 1%
$12,702 ………… Down Payment
$26,461 ………. Total Cash Costs
$30,000 ………. Emergency Cash Reserves
$56,461 ………. Total Savings Needed