New Records...

From the in-case-you-thought-the-worst-was-behind-us-already-department, the Mortgate Bankers Association reports:

The percentage of loans in the foreclosure process at the end of the third quarter was 4.47 percent, an increase of 17 basis points from the second quarter of 2009 and 150 basis points from one year ago. The combined percentage of loans in foreclosure or at least one payment past due was 14.41 percent on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey.

The percentage of loans on which foreclosure actions were started during the third quarter was 1.42 percent, up six basis points from last quarter and up 35 basis points from one year ago.

The percentages of loans 90 days or more past due, loans in foreclosure, and foreclosures started all set new record highs.

CR has some nice graphs showing the divergence in the delinquency and foreclosure rates, almost certainly attributable to banks dragging their feet on foreclosing while trying (fruitlessly) to follow the governments directive to modify more loans.

D4L

The pragmatist in me likes this idea, though it seems like there are enough restrictions on eligibility to make the program unlikely to have much effect in the grand scheme of things.

Fannie Mae is offering a way around foreclosure that will actually let some families stay in their homes (as renters) for at least a year. It's called Deed for Lease (D4L 4 short), and is a combination of Deed in Lieu (DIL) plus a rental agreement. If you're unfamiliar with DIL the quick synopsis is the homeowner simply gives the house back to the bank and the loan is forgiven, skipping foreclosure and short sale. This is sometimes colloquially known as "just walking away", but what if you don't actually want to leave? D4L is the answer--mortgage goes away, but you stay in the house, presumably at rent you can afford.

Even if that rent is substantially below the old mortgage payment the bank may come out ahead of the alternatives. Since all of the loan mod programs are proving to be utter failures and the appeal of ruthless defaults is rising many people are simply staying in their homes paying nothing until they've exhausted all of their tactics for delaying foreclosure (see e.g. the Kempffs' story).

Deed-for-Lease Program (efanniemae.com)

Now that's just all kinds of classy...

From the L.A. Times comes this lovely story. Can't find a protagonist in this crew, but I suppose you can just root against them all.

1. rich couple lose shirt in Madoff scheme
2. Wells Fargo forecloses on his fancy Malibu condo
3. exec in Wells Fargo foreclosure division decides instead of selling it to use it as weekend party pad
4. nosy not-quite-as-nouveau-riche-as-you neighbors and a spurned real estate agent rat her out to the press
5. Times reporter rings the buzzer and gets a bunch of "um no" answers from the mysterious female occupant

I'm probably going to hell for this post...

...but the fact that the subject of this story is a cancer patient doesn't excuse the mindless "banks are evil and prey on innocent homeowners" meme spouting sloppy journalism. I suggest you read the article before reading the rest of my post but here are the salient facts:

• The Kempffs are facing foreclosure after deliberately missing payments on their mortgage


• They bought their house in 2002 for $430,000


• They now owe $786,802

This means in 7 years they have extracted over $350,000 through cash out refinances. That's about $50,000 per year tax free, roughly equivalent to the spending power of $80,000 per year of taxable income. Nice work if you can get it.

So what crisis (other than the tragic disease) has triggered this? Per the article the "Kempffs' option adjustable-rate mortgage payment skyrocketed to $4,300 a month from $2,500". Yikes! Is their heartless bank jacking their interest rate to 20% or something? Um, no. They are simply requiring (as all Option loans eventually do) that the payments begin amortizing. Ever wonder what an amortizing payment on a $786,802 loan looks like? Well at a perfectly reasonable 5.16% rate it's, wait for it, $4,300. (That's slightly better than the current average for 30 year fixed conforming loans). So all the evil bank was asking for was that they actually pay principal and interest at what is historically speaking a pretty low interest rate. This cannot in any scenario be considered unreasonable, can it?

Did anything else contribute? Perhaps loss of income?

Lois is struggling to keep up her business as a piano instructor in the dwindling economy. "I went from having 40 students a week to 13 students a week, so my income just crashed," Lois Kempff said. "From October to May, I lost all those students."

What is unreasonable is that you can borrow the equivalent of an $80,000 salary every year for 7 years and expect that you'll never have to repay it. It's even more unreasonable to believe that you can repay it teaching piano lessons. Let's assume the statement is accurate and she really did have 40 students per week. At $20 per student for 50 weeks per year that's $40,000 per year. Her house was "earning" twice as much as she was. This debt was never going to be repaid by any means other than selling the house, and the house was probably never really worth that much (they now estimate it to be worth about $550K).

"70% of July home sales in Las Vegas were foreclosures"

From L.A. Land. Foreclosures are no longer a substantial part of the market, they are the market. Still unfair to include them as comps?

Incurable...

When a loan goes delinquent there are a number of possible outcomes. The good ones (from the bank's perspective this means anything other than foreclosure) are called "cures". The simplest cure is the borrower simply makes up the lost payments (e.g. after a temporary unemployment), but the other common cure is to sell the house (effective only if the price received is more than the balance of the loan). More elaborate "cures" include modifying loan terms, typically by adding missed payments to the principal balance and reamortizing the payments. If a loan doesn't cure it will eventually go into foreclosure. This means that the overall foreclosure rate is a function of the delinquency rate times one minus the cure rate. We are all well aware by now that delinquency rates have reached record territory, but what of cure rates? Well the news there is perhaps even worse than with delinquency rates. From the WSJ:

Fitch found that the cure rate for prime loans dropped to 6.6% as of July from an average of 45% for the years 2000 through 2006. For so-called Alt-A loans -- a category between prime and subprime that typically involves borrowers who don't fully document their income or assets -- the cure rate has fallen to 4.3% from 30.2%. In the subprime category, the rate has declined to 5.3% from 19.4%.

"The cure rates have really collapsed," said Roelof Slump, a managing director at Fitch.

For prime loans we've gone from almost 1 in 2 of delinquent loans curing themselves to about 1 in 16. Think about that from the banks perspective for a second--if you notice a borrowers going delinquent you now just have a tiny chance the loan won't need to be foreclosed on. Should you even keep trying to modify loans? Or should you kick it into high gear and foreclose aggressively? The government is arguing for keeping trying the modification route, but the numbers seem to indicate this is fundamentally fruitless. What's going to happen then? More foreclosures:

Because borrowers are less willing or able to catch up on payments, foreclosures are likely to remain a big problem. Barclays Capital projects the number of foreclosed homes for sale will peak at 1.15 million in mid-2010, up from an estimated 688,000 as of July 1.

We're shoveling as fast as we can...

Interesting post at Effective Demand on the flow of foreclosed homes into the market, primarily making the point there's not a huge "shadow inventory" of REO

The net difference between REO resales and Trustee sales since the beginning of 2008 is around 30,500 homes, about a months to a month and half supply at current REO absorption rate. This number can easily be explained as mostly homes in the pre-list stage getting readied for sale.

While I believe the situation is more nuanced than this particularly (there are differences region to region and may even be differences from bank to bank) the big backlog is in delinquent but not yet foreclosed homes. Banks simply cannot foreclose fast enough to keep up.