Consumer Law

It's Bad Out There

By Alan White

Highlights of the First Quarter National Delinquency Survey
By Alan White

For the third quarter in a row, foreclosures and mortgage defaults are rocketing upwards, according to the Mortgage Bankers Association report on foreclosures and delinquent mortgages as of March 31, 2008. Not surprisingly, delinquencies and foreclosures are up dramatically in almost all categories, compared with the December 31, 2007 report, which already had record numbers.

As of March 31, MBA counted 1.12 million mortgages in a pending foreclosure, in its sample of about 80% of the market. This extrapolates to 1.4 million American homes that were in foreclosure at the end of the first quarter (up a quarter of a million from December 31, 2007.) About 53% of pending foreclosures are on subprime mortgages. Adding 60- and 90-day delinquencies brings the total to nearly 3 million homes. Even allowing for some investors, this crisis is directly affecting more than 5 million people.

MBA also reported 457,000 new foreclosures started in the 1st quarter, which would extrapolate to 571,000 for the entire market. If that rate continues, there will be 2.2 million new foreclosures started in calendar 2008, and all indications are that the numbers for the second and third quarter will continue to grow, rather than leveling off.

Subprime adjustable-rate mortgages (ARMs) are deteriorating especially rapidly. The combined rate of foreclosures and 90-day delinquencies for subprime ARMs went from 15.6% last September 30, to 20.4% as of December 31, 2007 and stood at 24.1% as of March 31. These increases are unprecedented, and indicative of the serious problems that pervaded the subprime market in the last three years.

In the one bit of good news, FHA mortgages, while experiencing higher foreclosure rates than prime loans, saw serious delinquency rates go down in the past quarter, and the foreclosure inventory rate holding relatively steady, compared with all other categories. The foreclosure rate for subprime loans is now four times the rate for FHA mortgages. That is a testament both to FHA?s underwriting and its loss mitigation programs.

The clogging of the foreclosure pipeline is illustrated by the rapid growth in loans that are more than 90 days delinquent but are NOT in foreclosure. Historically less than one-third of one percent for prime loans, and around 2 and one-half percent for subprime loans, the rate has doubled to 0.8% for prime loans and 5.8% for subprime. If we add the 90-day delinquent mortgages to the foreclosure total, and given MBA?s market coverage, it works out to 2.3 million American homes either in foreclosure or very likely to be there very soon.

Comparison with HOPE NOW: HOPE NOW reported about 180,000 loan modifications for the first quarter (and 323,000 repayment plans) and estimated based on January and February data that there would be about 519,000 foreclosures started in the first quarter (compared with MBA?s 571,000).

Two comparisons can help to measure the scale of the loan modification effort: modifications compared with new foreclosures started, and modifications vs. the universe of mortgages in or approaching foreclosure.

The first relationship shows whether the modifications are keeping pace with the growth in the problem, measured by new foreclosures. The second relationship shows how many of the troubled mortgages out there are being resolved with modifications.

For the universe of troubled mortgages it makes sense to use the 60-day and 90-day delinquencies combined with the pending foreclosures, as HOPE NOW does in its reports. That number would be about 2.9 million as of March 31, based on the MBA report.

Thus, the first quarter?s 180,000 loan modifications were out of a universe of nearly 3 million mortages in or near foreclosure, and compared with 571,000 foreclosures added to the inventory in the same quarter. Of course the inventory of foreclosures is reduced by the number of homes foreclosed or sold during the quarter, and the diminishing number of cases where a homeowner is able to refinance.

Note that MBA?s survey is reported to cover ?80% to 85%? of the market. I have used the 80% figure for purposes of extrapolation.

Full post as published by CL&P Blog on June 06, 2008 (boomark / email).