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Foreclosure Crisis Update

By Alan White

New numbers are out for the second quarter from the Mortgage Bankers Association?s National Delinquency Survey and HOPE NOW.  After three years, the ramp-up phase of the foreclosure crisis seems to be ending, as the rate of mortgages in default or foreclosure has leveled off, albeit at historically unprecedented and appalling levels.  The bad news is that new (30- and 60-day) delinquencies are still high, although down just a bit from their early 2009 peak, so that the foreclosure pipeline will remain primed for many months to come.   Equally problematic are the huge numbers of very-overdue loans not yet in foreclosure, still at five times their normal level, and portending continued high foreclosure inventory and sale rates for the foreseeable future.

The NDS confirms the catastrophic failure of subprime adjustable-rate mortgages.  There are still 4.5 million subprime ARMs out there in the NDS sample, which extrapolates to 5.3 million in the U.S., or about 10% of all outstanding mortgages.  Fully half of the loans in this category have defaulted:  28% are behind in payments and another 23% are in foreclosure.   There are an additional 5% of U.S. home  mortgages that are fixed-rate subprime loans, one-third of which are in default or foreclosure.

Pennsylvania seems to be having some success in foreclosure prevention, perhaps because of its emergency mortgage assistance program and/or its aggressive court diversion and mediation programs.  Pennsylvania?s foreclosure inventory rate is considerably below those of neighbors New Jersey and New York, which have similar short-term delinquencies, and Pennsylvania is also well below the national foreclosure average.

Florida and Nevada, on the other hand, stand out as having foreclosure inventory rates of triple and double the national average, respectively.   Inventory can be affected by lengthy foreclosure processes, as well as by weak resale markets that discourage servicers from adding more completed foreclosures to their unsold property inventories.   Don't look for home prices to rebound in the sand states any time soon.

In the foreclosure mitigation department, HOPE NOW has been reporting monthly permanent mortgage modification numbers at all-time highs since December 2009.   While this seems encouraging, as do some preliminary signs that modified loans are performing better, the investor reports on subprime and alt-A mortgages I follow tell a different story, showing total permanent mods down considerably since HAMP was introduced in early 2009.  According to HOPE NOW's numbers, the recent decline in mortgage workouts subsidized by the HAMP program is more than offset by continuing increases in "proprietary modifications", i.e. mortgage servicer initiatives not funded by TARP money.   In any event, while the crisis would certainly be worse without modification programs, they have failed thus far to even begin bringing foreclosures back down to non-crisis levels.

Full post as published by Credit Slips on September 03, 2010 (boomark / email).