Bank’s residential loan delinquency rates more than FIVE times historic norms
Shadow inventory is primarily a problem for major commercial banks. The GSEs have been processing their foreclosures, and although delinquencies at the FHA are increasing, these are fresh delinquencies, not long-term shadow inventory. The too-big-to-fail commercial banks have been endlessly can-kicking to delay what I believe are inevitable write downs.
For as long as records on delinquencies were kept, rarely did the rate exceed 2%. Currently, it is over 10%! To make matters worse, the delinquency rate for commercial banks is not declining as fast as delinquencies overall. Over the last two years, the rate dropped from from a peak of 11.2% to the current 10.2%. If lenders continue at that pace, it will take another 16 years for delinquency rates to get back to historic norms.
Are we really at the bottom?
To me it is a source of some consternation that more than 10% of all residential mortgages held by the banks are delinquent. What is the future of those borrowers and their properties. Isn’t it likely that many, if not most, of these properties will be distressed sales as either short sales or foreclosures? Won’t those sales pressure prices?
I consider loan modifications can-kicking. Few of these borrowers are going to permanently cure their loans and sell with equity. Lenders are merely hoping to delay their losses and hope prices will go up which will minimize the carnage. Unfortunately, the liquidation of these bad loans requires an MLS sale — an additional sale the market would not ordinarily absorb. These sales will serve as a drag on appreciation if not a cause of outright price declines. That isn’t what lenders fantasize about.
It is nothing more mysterious than supply and demand. For the first time in a number of years, the supply of both new and used homes available for sale has dropped below demand.
No matter what the product or service, whenever demand exceeds supply, rising prices are sure to follow. Housing is no exception. …
Actually, housing is an exception. With ordinary goods and services, buyers are not limited in their ability to raise their bids. With housing they are. A precipitous drop in supply may prompt those few with the ability to bid higher to do so, but it may also serve to drastically reduce sales volumes, which is what’s happening here in the West. This is an important point because most pundits like this guy fail to understand (perhaps through willful ignorance) that less supply does not automatically mean house prices will go up.
This turnaround in prices is apparently convincing would-be homebuyers that it does not pay to delay …
Buy now or be priced out forever, right?
As a result, buyers have begun to deal. Home sales are up more than 20% from a year ago, while pending sales are now at a 2-1/2-year high.
The rise in home sales is almost entirely due to the influx of cash from hedge funds buying low-end properties as rentals. Owner-occupant buying is at a standstill.
And here is where banker’s fantasies truly take flight….
This should kick home prices even higher, and thus spur even more buying.
No, it won’t. If anything, higher prices will inhibit buying because the hedge funds buying rentals won’t chase the market higher. The fantasy contains a hidden erroneous assumption; there are not legions of fence-sitters who can be cajoled into buying. Rising prices won’t spur more demand. The warm bodies with jobs, down payments, and qualifying FICO scores simply aren’t there.
Housing … prices are still more than 31% of their peaks and may take years to recover. With 11.4 million, or 23.7%, of all residential properties with a mortgage under water, and a shadow inventory worth $246 billion, according to CoreLogic, a true housing recovery is far away.
Tuesday’s Case-Shiller release, with data through June 2012, showed home prices continuing to recover. Both the 10- and 20-city composites finally recorded annual gains (0.1% and 0.5% respectively), prompting index Chairman David Blitzer to say:
We seem to be witnessing exactly what we needed for a sustained recovery; monthly increases coupled with improving annual rates of change. The market may have finally turned around.
Everyone who touts rising prices or declining inventory ignores why it’s happening. As the chart at the top of the page proves, the banks are not out of delinquent borrowers they need to process.
… There are several reasons to remain skeptical…. Goldman’s economics research team understands that much of the improvement in housing markets can be attributed to a fall in the percentage of distressed transactions, which accounted for 50% of sales in 2009 and has now fallen to 25%. (Read Steve Schaefer‘s piece, Why The U.S. Housing Recovery May Be Due For A Stumble for more on this).
And most of this reduction is entirely due to policy changes at the major banks to comply with the settlement agreement. Lenders simply stopped taking on more REO in hopes they can resolve these bad loans through short sales instead. When banks finally reach their quotas, likely by next spring, they will turn their attention to forcing out the committed squatters.
The typical foreclosure discount is on the order of 27%, according to John Campbell, chair of Harvard University‘s economics department. Thus, a falling percentage of distressed sales mean a lower percentage of discounted transactions. The number of distressed sales also affects the size of the foreclosure discount, which in May was reported to be about 20%, according to Goldman. A falling rate of distressed sales provides a double-whammy then, reducing the discount and the number of discounted transactions.
When the banks really are out of delinquent mortgage squatters to foreclose on, we will see the same phenomenon. The share of distressed sales will fall, the remaining inventory won’t need to be discounted as much, and prices will begin to rise. The issue today is that this activity is premature. It is not a natural bottom caused by a lack of distressed inventory. It is an artificial bottom caused by changes in bank policy.
While the number of distressed sales vis-à-vis regular sales has fallen quite dramatically since March 2009, its decline was more moderate from May 2011 to May 2012, when it went from 31% to 25%. The historical average, though, is far away, at about 5%.
So not just are the bank’s residential loan delinquency rates more than five times historic norms, the share of distressed sales is also five times historic norms. That sounds like a recipe for a housing market bottom, right?
While Goldman expects the percentage of distressed sales to slowly tend toward this average, they understand this could take many years:
In our view, returning to a more normal proportion of distressed sales will take several years, given the large number of borrowers with negative equity, the large current delinquency and foreclosure inventory, and the long current foreclosure timelines.
In other words, the bank’s can-kicking is dragging this out.
As mentioned previously, the most recent data on underwater mortgages shows that nearly a fourth of all residential properties with a mortgage are underwater. That’s 11.4 million as of the end of the first quarter. At the same time, financial institutions including big banks with exposure to the mortgage business like Bank of America, JPMorgan Chase, and Citigroup are sitting on a shadow inventory of 1.5 million units... . Worth $246 billion, the shadow inventory will certainly weigh on lending and economic conditions going forward.
… Regulation (such as the robo-signing sparked foreclosure moratorium) has helped to slow distressed sales, while vast number of underwater mortgages and size of the shadow inventory suggests housing markets can face a sudden increase in the number of distressed properties. It will be a bumpy ride for residential real estate.
Since lenders aren’t being pressured financially or by regulators to liquidate, it’s not likely we will see a flood of foreclosures, but certain areas may see some deep air pockets along the way. The sudden appearance of competing supply creates opportunities for buyers who recognize it.