Prime loan delinquencies escalate
New data flies in face of 'market stabilization' reports
By Steve Bergsman, Friday, May 28, 2010.
Earlier this year, while attending a mortgage industry technology gathering in California, I decided to attend a press conference put on by Lender Processing Services Inc.
While most consumers have never heard of LPS, this Jacksonville, Fla.-based technology firm probably has heard of you. That's because its technology platform, in one form or another, is used by the 50 largest banks in the country.
Not only does LPS service loans, but its in-house economists have begun to extrapolate pertinent data points. And that caught my interest.
"We have 40 million first loans and 5 million home equity loans and lines of credit in our repository and we see a lot of things from a trend perspective," Grace Brasington, LPS' executive vice president of strategic consulting services, told me after the press conference.
I got a strong hint of what LPS was seeing, but it all sounded so out of joint with other prognostications that I decided to do a follow-up call to Steve Berg, managing director at LPS' applied analytics unit.
At the press conference, Berg's partner in the analytics department noted prime loan total delinquencies were escalating, which was somewhat disturbing since other sources were reporting the housing market to be stabilizing.
In February, the Standard & Poor's/Case-Shiller Home Price Index was reporting seven straight months of price gains. This good news was accompanied by numerous economists babbling that the price increases were "further evidence that conditions in the house markets continue to stabilize" and "people are realizing the bottom is creeping away."
Berg and his analytics partner thought those sentiments were a bunch of crap. According to Berg, there is a huge inventory of prime loans in delinquency and heading for the wrong side of the market.
"We like to look at rates of change or velocity of deterioration," says Berg. "If you look at a grouping of loans as prime, subprime, option ARM and FHA, you expect the prime group to have the lowest delinquencies, which is still the case, although prime loans reached 6.7 percent of total delinquency in the first quarter."
While that looks good for prime, one of the important things to take into consideration is total deterioration of the group. Using January 2005 (a month of relative market stability) as a base, prime loans have deteriorated 305 percent relative to total delinquency rates at the beginning of 2005. The surprise is that deterioration vastly outpaces subprime, which vaulted 230 percent, and FHA, which has been flat in terms of total delinquency.
"This is an interesting way of predicting where the pockets of problems will be coming from," says Berg. "If you look at the small "jumbo," just over the conforming limit of $417,000, that bucket is 8.3 percent delinquent, up 1,500 percent from January 2005. There is no liquidity in that bucket now unless you got significant amounts of cash to put down."
If one injects these data points into geographic-area surveys, serious problems being to emerge.
Berg uses Los Angeles County, home to a significant number of very high-priced residences, as an example. Looking at the data at the end of last year, the number of "dirty sales," either short sale or REO, as a percentage of all total sales in the $250,000-and-below bracket, reached as high as 78 percent. However, the number of homes in that bracket that were in default or foreclosure was relatively modest, meaning the pipeline was shrinking.
In the lower-price home bracket where short sales and REOs had been concentrated, prices are not going to drop much more because it is already totally saturated with REOs and short sales -- and the damage has been done.
As a comparison, in the highest price band, $750,000 and greater, only 16 percent of transactions were dirty sales. But, the number of properties in default and foreclosure are now higher than in the low-priced bracket and that, says Berg, "is going to whipsaw the home-sale market."
Just below the high-price band, the jumbo-mortgage bracket of homes ranging from $500,000 to $699,000 is exhibiting similar ascending behavior. Dirty sales as of December 2009 were just 29 percent of total sales, the second-lowest percentage to the high-end band, but there were almost 40,000 jumbo loans already in default and foreclosure and those will eventually roll into the dirty sales category.
The band of prime loans for houses costing $350,000 to $499,999 performed moderately well with 41 percent of the total transactions as dirty sales. Unfortunately, the band had the highest concentration of defaults and foreclosures as of December 2009, more than 42,000 mortgages that would be sliding into dirty sales.
When dirty sales increase, home prices decrease.
Fitch Ratings took a look at mortgage delinquencies in U.S. prime residential mortgage-backed securities and noticed through February 2010, they had risen for 33 consecutive months.
Since delinquencies began to rise in second-quarter 2007, prime jumbo loan delinquencies nearly tripled in 2009 and were up through the first two months of the year by 69 basis points, Fitch Ratings reported. And, overall, prime jumbo RMBS 60-plus-days delinquencies rose to 9.9 percent in February, up from 9.6 percent the month before.
The five states with highest volume of prime jumbo loans outstanding were California, New York, Florida, Virginia and New Jersey. Together those five states represent about two-thirds of total delinquencies.
A friend who lives in Orange County, Calif., recently e-mailed me a PDF of a Los Angeles Times article that reported the median prices for homes sold in Southern California counties have risen substantially through mid-February. The newspaper interpreted that as great news, but what I wondered was, if you peeled away the data, the rise could be due to the fact that more higher-priced homes were going through the dirty sales process than ever before, thus inflating the median. And, really, that's nothing to cheer about.
"The number of homes of $500,000 or more in value that are in danger of foreclosure and default are so much higher than we have seen in the past, it could flood the REO market," Berg observes. "I don't think a lot of people are thinking in this context. From a house-value perspective, the problem is migrating up the economic ladder to higher-priced property bands."
Steve Bergsman is a freelance writer in Arizona and author of several books, including "After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade."
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Submitted by Nick Chucales on May 28, 2010 - 6:03am.
Steve,
Thanks for reporting what main stream media won't, the economy will continue to deteriorate until there is “true” regulation on Wall Street and China is forced to “play” fair. Did anyone else notice that the latest downturn on Wall Street coincided with the talk of reform and regulation on Wall Street by Congress and the Senate? Now that they have started to strip out or “watered-down” the most aggressive amendments to the reform legislation Wall Street has regained some if it’s recent losses. There still hasn’t been any action towards China and the fact that they have kept their currency undervalued, even though the current administration had promised action. Think things are bad now, wait until the unemployment benefits run out for all those that have lost their jobs the past couple of years.
Nick Chucales
NMC Consultants
Submitted by Fielding Lamason on May 28, 2010 - 9:29am.
Steve,
Thanks for your intelligent artcile. I feel that I spend an enormous amount of time sorting through the fluff put out by NAR and other pro-industry cheerleaders. Your article is fully supported by the data and I appreciate your attention to citing sources. The industry is in a "crack-the-whip" cycle of media sensationalism . . . where good news and bad news snaps the mood of the industry back and forth. Trend analysis takes patience and data and is much more reliable for decisionmaking. The trends that you discuss are consistent with my sense of the state of the market. I will look forward to further articles by you.
Fielding E. Lamason, Jr., Founder and President
Synergy Real Estate Consultants, LLC
www.synergyseattle.com
Submitted by Din SFLA on May 28, 2010 - 6:16pm.
Steve,
Thank you for this article.
TRUST ME everyone who is in foreclosure or heading that way has heard of LPS.
Below you will find my blog... you can find most of their creative master pieces there.
They are always on my top posts towards the right.
Thank you
DinSFLA
www.StopForeclosureFraud.com
Submitted by Avram Goldman on May 29, 2010 - 2:23pm.
There are no surprises here. What we have to leave behind is NAR vs. the Naysayers. We have to take the emotion out of economics and housing prognostication. What is occurring is neither good nor bad---it just is. Wall Street is largely responsible for the state of economy and the housing market. They couldn't do it alone, everyone has had a role to play. It will take several years to unwind. There will be many more losers than winners this time around. Steve Bergsman has only pointed out the obvious. We on the ground know exactly what is going on. We are a ways from a stabilized market. REOs and Short Sales are setting the low water mark. We are beginning to see real appreciation at the very lower end of the market. And yes, many savvy investors have already done quite well. I agree with Steve. The over $500K mark is still adjusting. Banks have been very reluctant to start foreclosing on the upper end properties because of the losses that they would have to write off. It is just a matter of time. If we (meaning the banks, the government, and the real estate industry) can acknowledge what the true reality is, the faster we will be able to deal with the consequences. Maybe slowing the flood waters has prevented a total collaspe of our economy and maybe we should still continue to control the rate of dumping non-performing properties on the market to have an orderly unwinding. But what we shouldn't do, is live in denial or having a pollyanna view of where we really are.
Submitted by Leslie Ebersole on May 29, 2010 - 6:28pm.
Thank you for your clearly written article. I have sent the link to a number of clients. As a listing and seller agent (and homeowner) who primarily works in "lower priced jumbo" price band, I an certainly experiencing the issues around declining prices every day. I spent six straight days in the car with two different transferees this week, and I try to explain that the $550,000, 5 year old houses are really $700,000 houses (as built) just a few years ago. I try to explain that homes have relative value, not absolute value. The listings that will sell are owners with relo buyouts or who have significant equity in the home to sell at today's prices. I have developed a new approach to considering offers on these listings. If it appears that the home will sell for significantly less than appears to be owed on the property, we will require proof of funds that must be brought to the table -- proof before acceptance, not during attorney review. Otherwise a buyer could waste money for a home inspection and weeks in attorney review only to find that the home cannot be closed at the agreed upon price. (What ever happened to the net sheet -- some agents have never had to do anything so unpleasant!) And the homes listed at $700,000 today are likely next year's short sales and foreclosures. We have a long, long way to go before we are out of this.
Submitted by Jan Hurren on June 10, 2010 - 4:21pm.
Thank you all for some intelligent dialog on our situation. I appreciate the data supporting the observations. It seems logical that the high end naturally would lag the low end. Those folks who had more resources could wait longer and in fact in terms of short sale or loan mod, they would have to wait until they were in a hardship situation(eccept for the strategic default option).
I am in Los Angeles county, and we have seen a significant drop in foreclosures which has driven the market back up a bit in my area. The days to foreclosure have increased from 247 days in 2008 to 436 days. The number of canceled (short sold?) properties is up. I have seen the number of NODS and NTS increase on high end homes and a few even get foreclosed. Add in I am personally aware of folks ($600-1M)who have not made a mortgage payment in 1-2 yrs and have not recieved even a notice.... I am left trying to understand the fundamentals of our future market.
Obviously job recovery is key to everything...but that aside...What I don't quite grasp is the volume and volley of the toxic subprime and now, potentially prime mortgages.
The banks only kept some 10-20% of the loans. They service the rest which were bought, sliced and diced into RMBS. Now, I learned that former Goldman Sachs employee, treasury Sec. Tim Geitner,(talk about fox in the hen house!) (let Lehman fail)insisted the government should pay the profit on Goldmans Vegas bet on the Credit Default Swaps the insurance companies were unable to pay. NOT THE ACTUAL LOANS, (they never owned the assests they insured!!) Those were or still are losses the buyers will endure or...will they????
I get so lost. Where are the toxic loans the feds garaunteed? Are they the 80% of loans sold and we understand are held by investors. (Which include Main St. pension funds, IRA's etc.) How much of that did Fannie & Freddie buy back or garauntee. Does this exclude the Loss Share Agreements the feds made which make buying failed banks (and with TARP funds) so attractive to the already too big to fail banks left??? (Glass Stiegal Anyone? Anyone?)
So is that in addition to the toxic loans the feds bought?.. (and who are the feds?? FDIC or Fannie and Freddy or???)
Then we have side stories that may have far reaching consequences. When I read that BofA who was paid $1.4B in claims by MBIA (a heloc mortgage insurer)..and has failed subsequently to produce the complete files to prove their validity, is now being sued. (If the loan files prove that underwriting did not adhere to the standards... (liar loans)the insurance company can recover their payments....
Might not this hold true for the investors who bought packaged loans as well. I am sure they have lawyers interested to see those same and other files. If the banks who brokered the loans cannot show the paper and also prove the loans were properly underwritten,...they can recover the loss from the bank or ultimately... the government?
Please someone draw me a diagram. You don't have to predict, just show me what went where and who's holding the bag at the moment!!