The golden age of delinquent mortgage squatting continues. Those who aren’t paying their mortgage today can expect their free ride to continue indefinitely. We know from the report released by ForeclosureRadar.com that MLS inventory is NOT coming as foreclosure filings dry up. In California, the number of NODs declined 20.4% last month signaling that lenders are in no hurry to process their bad loans and push out the squatters. This slow processing creates a strong incentive for borrowers to strategically default because if they quit paying, they get to live for free, probably for a very long time. Rising prices will prompt many to keep paying, and delinquent mortgage squatters will miss the recovery rally, but despite these incentives to stay current, the September delinquency rates mysteriously and unexpectedly surged 7.72% to levels last seen in January of 2012. The 2012 progress from loan modifications and foreclosures to turn the tide on delinquencies was wiped out in a single month. The magnitude of the increase was the largest since the peak in January of 2010 and represents much more than a statistical blip.
Shadow inventory is growing
Shadow inventory is the total number of delinquent mortgages not yet served with a foreclosure filing. CoreLogic also includes REO inventory, but since that inventory is visible, I don’t include it as a shadow number. Shadow inventory grows as borrowers default on their mortgages. Shadow inventory declines whenever there is a loan modification, short sale, or a foreclosure. As we all know, the number of foreclosures has been declining — not due to a lack of delinquent borrowers — but due to policies at the major lenders that permit squatting. In 2012, foreclosure has not been a major method of reducing shadow inventory.
The new HAMP guidelines allowed underwater buyers to refinance, and the major banks have renewed their efforts to rehabilitate their delinquent loans by offering more and more attractive loan modifications. These programs have picked up the slack were the foreclosures left off; however, loan modifications are merely can-kicking. About 14% redefault immediately, and 1/2 to 1/3 redefault again within three years. Most of these loan modifications will end up either as foreclosures or short sales. Loan modification programs have been a consistent failure, and they will continue to be. As I have cynically pointed out from the start, these programs were never intended to benefit borrowers. Their real goal was to benefit banks, and although the banks would have preferred the borrowers resume payments, delaying foreclosure until prices rise to provide collateral backing works just the same.
Lenders pushed for more short sales in 2012 because short sale losses counted toward their settlement penalties, foreclosures losses don’t. This gives lenders a huge incentive to process short sales, but such sales require the delinquent borrower to want to sell. Most would rather squat until their foreclosure. What is their hurry to complete a short sale and start paying rent, particularly when the bank actually tries to extort money from the seller to cooperate. So short sales are not chipping away at shadow inventory either.
With the increased loan modifications and short sales, lenders hoped they would offset their slowed foreclosure processing and continue to reduce shadow inventory. Unfortunately, it isn’t working out that way. There are still far too many underwater and distressed borrowers, and they are defaulting in large numbers despite rising prices. This must be a shocking and dismaying development for lenders who hoped that rising prices would motivate borrowers to keep paying with the lure of equity. It isn’t working out that way.
LPS “First Look” Mortgage Report: September Month-End Data Shows Significant Rise in Delinquencies; Foreclosures Drop
Month-over-month delinquencies increase 7.72 percent
|Total U.S. loan delinquency rate (loans 30 or more days past due, but not in foreclosure):||7.40%|
|Month-over-month change in delinquency rate:||7.72%|
|Year-over-year change in delinquency rate:||-4.19%|
|Total U.S. foreclosure pre-sale inventory rate:||3.87%|
|Month-over-month change in foreclosure presale inventory rate:||-4.05%|
|Year-over-year change in foreclosure presale inventory rate:||-7.37%|
|Number of properties that are 30 or more days past due, but not in foreclosure: (A)||3,700,000|
|Number of properties that are 90 or more days delinquent, but not in foreclosure:||1,530,000|
|Number of properties in foreclosure pre-sale inventory: (B)||1,940,000|
|Number of properties that are 30 or more days delinquent or in foreclosure: (A+B)||5,640,000|
|States with highest percentage of non-current* loans:||FL, MS, NJ, NV, LA|
|States with the lowest percentage of non-current* loans:||MT, AK, SD, WY, ND|
Will lenders need to change course?
Eventually, lenders will have to foreclose on the committed squatters. Right now, lenders are still in denial that these people exist. Lenders assume they can get people to agree to loan modifications or short sales and solve their problems that way. It won’t happen because the incentives are all wrong. The delinquent mortgage squatter has every incentive to rebuff their lender’s offers and simply live in the house for nothing. When borrowers no longer fear the threat of foreclosure, they simply won’t pay. The number of borrowers who think this way is far larger than lenders are currently willing to admit. Many, many more foreclosures are coming. It’s just a matter of when they will occur and how quickly the lenders dispose of them. Irregardless of when they boot these people out, lenders will continue to release foreclosures only at a rate the market can absorb. We may see air pockets and isolated downdrafts, but a large market crash isn’t very likely.
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Proprietary Irvine Housing News home purchase analysis
$849,900 …….. Asking Price
$841,000 ………. Purchase Price
1/10/2005 ………. Purchase Date
$8,900 ………. Gross Gain (Loss)
($67,280) ………… Commissions and Costs at 8%
($58,380) ………. Net Gain (Loss)
1.1% ………. Gross Percent Change
-6.9% ………. Net Percent Change
0.1% ………… Annual Appreciation
Cost of Home Ownership
$849,900 …….. Asking Price
$169,980 ………… 20% Down Conventional
3.47% …………. Mortgage Interest Rate
30 ……………… Number of Years
$679,920 …….. Mortgage
$159,000 ………. Income Requirement
$3,042 ………… Monthly Mortgage Payment
$737 ………… Property Tax at 1.04%
$117 ………… Mello Roos & Special Taxes
$212 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$4,107 ………. Monthly Cash Outlays
($676) ………. Tax Savings
($1,076) ………. Equity Hidden in Payment
$186 ………….. Lost Income to Down Payment
$232 ………….. Maintenance and Replacement Reserves
$2,775 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$9,999 ………… Furnishing and Move In at 1% + $1,500
$9,999 ………… Closing Costs at 1% + $1,500
$6,799 ………… Interest Points
$169,980 ………… Down Payment
$196,777 ………. Total Cash Costs
$42,500 ………. Emergency Cash Reserves
$239,277 ………. Total Savings Needed