The real ticking time-bomb...

Subprime was just a warning shot. Option ARMs are the real thing, and they're starting to blow up now. The key thing to understand about Option ARMs was the main reason people chose them was they could not afford the house without negative amortization. The only non-foreclosure exit strategies for these loans were:

1. refinance to another Option ARM


2. substantial home price gains to create equity, substantial increase in income and then refinance to traditional mortgage


3. moderate home price gains to cover neg-am and then sell

The first one isn't really an exit, it just passes the problem to another lender. I think we can all agree that the second and third options are off the table. Now from the Wall Street Journal:

For the third straight month, option adjustable-rate mortgages are generating proportionally more delinquencies and foreclosures than subprime mortgages, the scourge of the housing crisis. ... "The realization of the issues related to option ARMs is just beginning," says Chris Marinac, director of research at Atlanta-based FIG Partners.

Known as Pick-A-Pays - a brand name popularized by Wachovia Corp. - the mostly adjustable-rate loans were typically issued to creditworthy homeowners, and allowed borrowers to make a range of monthly payments. The payment options include a partial-interest payment that adds the unpaid interest to the loan's balance. On many of the loans, balances have risen while values of the underlying properties have plummeted amid the nationwide housing crisis.

As of April, 36.9% of the loans were at least 60 days past due, while 19% were in foreclosure, according to data from First American CoreLogic, a unit of Santa Ana, Calif.-based First American Corp. (FAF).

By contrast, 33.9% of subprime loans were delinquent as of April, while 14.5% were in foreclosure.

The loans are heavily concentrated in the worst-hit regions in the housing market, including California and Florida, making option-ARM borrowers inordinately vulnerable to declining property values.

More on the backlog...

By way of Calculated Risk, more from L.A. Land on the concept of a clogged foreclosure pipeline: while the rate of mortgage defaults has nearly doubled in LA county in the past year, the rate of foreclosures has actually fallen slightly. The result is

the "foreclosure backlog" now looming over the housing market. It's caused by various government-mandated and voluntary foreclosure moratoriums, and possibly by lenders trying to manage the flow of repossessed homes entering the market.

My sense is this pattern is being repeated almost everywhere to some degree, with most government and private programs designed to reduce or prevent foreclosures simply resulting in delaying them.

"You can't control what you can't measure"*

By way of Calculated Risk comes a story from the Atlanta Journal-Constitution on just how widely reported foreclosure numbers vary:

When the most frequently quoted source of foreclosure information [RealtyTrac] released its April statistics, it estimated that 3,746 properties in metro Atlanta’s five core counties had been slapped with foreclosure sale notices. But a review of local legal advertisements – the only official source of Georgia foreclosure information – suggested a decidedly different number for April, with 7,462 properties slated for auction on the courthouse steps.

How can governments determine if any of their foreclosure prevention measures are working if they don't know how many are happening to begin with? The answer is they can't, and I agree with CR that this data would be extremely valuable. Read the rest of the article for some good quotes from researchers and officials on the issue.


*Title of this post is a famous quote in the software development world, originating with Tom DeMarco's seminal work Controlling Software Projects: Management, Measurement and Estimation.

What's in a headline?

Consider these two headlines out of Massachusetts today:

• Foreclosures in Mass. plummet 58.6% in May - Boston Globe
  
• New foreclosure proceedings jump in May - SouthCoastToday.com
  

Hurray! Oh noes! Surprised to learn they're reporting the same story? The Boston Herald takes a more balanced approach:

• Massachusetts foreclosures fall, but actions to seize homes rise - Boston Herald

In any event the drop in foreclosures seems significant, and the rise in proceedings seems in part to be a reflection of an artificially low number last year. From the Herald:

Timothy Warren, CEO of the Warren Group, noted that foreclosure petitions were “artificially depressed” in May 2008 by a state law that required lenders intending to foreclose to give delinquent borrowers 90 days to catch up on missed mortgage payments. ... In May, 582 foreclosure deeds - the number of homes that were actually foreclosed upon - posted a dramatic 59 percent drop from 1,405 in May 2008. Experts said the dropoff shows that lenders are modifying troubled loans with better terms.

Clogged Pipes

From ForeclosureRadar by way of L.A. Land comes the observation that only a very small percentage of potential foreclosures are getting all the way through the process:

ForeclosureRadar has more evidence of a foreclosure backlog in its monthly data, released today: In May, a record 111,824 California homes were scheduled for foreclosure sales, but just 16% were auctioned. By comparison, last May, sales were held for 49% of homes slated for foreclosure. Of last month's postponed foreclosures, 40% were delayed at the request of the lender; an additional 33% were postponed by agreement between the lender and borrower.

As mentioned in an earlier post, the foreclosure pipeline is clogged and cannot handle the flow. I'll keep an eye out for any more color on why a lender would request a delay without an agreement with the borrower (other than the obvious reason of not having time to adequately prepare for the auction).

CA announces 3 months free rent for defaulters

No they didn't actually word it that way, but that's what the new law will amount to in most cases where it applies. From the Sacramento Bee:

After more than 365,000 California foreclosures since early 2007, the state's long-awaited 90-day foreclosure moratorium law goes into effect Monday. But it doesn't mean foreclosures will stop. The law goes into effect as lenders are ramping up repossessions following expiration of earlier moratoriums, according to housing trackers.

Lenders can exempt themselves from the delay by complying with the Making Home Affordable Program a loan modification program that includes the eligibility requirement "You have income sufficient to support the new mortgage payments", so it's unlikely to benefit anyone who has either lost a job or relied on an unrealistic stated income to qualify for the original mortgage.

Foreclosure filings surpass 300K for the third straight month

From Bloomberg, May down a tad from April but still up substantially year over year. Amid the numbers I found this remark interesting:

"The foreclosure bucket is filling faster than it’s emptying," Jay Brinkmann, chief economist of the Washington- based Mortgage Bankers Association, said in an interview. "It will continue through next quarter at least."

This is important to keep in mind. The problem is so large its overwhelming the existing institutions and processes. About half of all real estate transactions in California right now are foreclosures, yet banks are still foreclosing faster than they can sell the houses and debtors are still defaulting faster than banks can foreclose. Not only will it continue through next quarter, at least in some parts of the country it will reach true crisis levels, and you may see the $1 house phenomenon spread beyond Detroid.