1) the largest category of delinquent loans are fixed rate prime loans, and 2) this is not just a "sand state" problem. Brinkmann argued the foreclosure crisis is now being driven by economic problems as opposed to the bursting of the housing price bubble - and this is showing up in prime loans and all states.

I'm sure he meant "fixed rate prime loans given to poor people after CRA forced Wall Street to go a little crazy," but it's alarming nonetheless.

Comments

[Spag]

The correct comparison is the percentage of prime rate loans in default vs. the percentage of subprime loans in default.

The main reason for defaults right now is unemployment. Prime rate loan defaults may also be increasing as unemployed workers deplete their savings, whereas subprime loan defaults were more likely to be held by persons who had no savings and thus went through foreclosure much sooner.

Also happening are mortgage companies overwhelmed by homes in default with not enough legal staff to act promptly.

I argued with Caserta previously that this wasn't just a "sand state" problem and was caused by unemployment. He argued to the contrary, believing that negative equity was the driving factor. That isn't the case in any of the bankruptcies I am seeing and I see a lot.

[Account Deleted]

Maybe somebody on staff in the edcone.com graphics department could correlate the unemployment rate in NC with the increased foreclosure rate?

Looks like our state's rate goes from 7 to about 12 percent according to the link.

[Andrew Brod]

Ironically (because Spag and I agree on so little), I had a similar argument with Caserta some months ago in which I too argued that while falling equity may have caused the rise in defaults, high unemployment was sustaining it. Jim wasn't buying.

I don't know what the graphics department will come up with, but I note from Table 1 of our most recent Triad Business Index that growth in foreclosures in the Triad has slowed at the same time that the unemployment rate and employment level have leveled off. This is just a correlation, but it's consistent with what Spag and (ulp) I have claimed.

[Jim Caserta]

It's not 'just' a sand-state problem, but look at the top 4 states in terms of foreclosure/deliquency. The point I was echoing was originally from this same site that Ed is pointing to, so if there is a problem, it is with CalculatedRisk also. Falling equity has a bigger impact on whether a default becomes a foreclosure than whether someone originally defaults, up to the 25% point CR points to below, but there are very few properties in NC with 25% neg-eq. If someone is delinquent and has equity, their loan gets worked out or they sell regularly. If someone is just slightly underwater, they can generally get a short-sale. If someone is > 25% underwater AND delinquent in their loan it is nearly always a foreclosure. This is what CR says here

Not all are really "shadow inventory" since some of these loans will be modified, some will be cured (probably very few), and some are probably already listed as short sales. But it does suggest a significant number of distressed sales coming.

http://www.calculatedriskblog.com/2010/05/report-112-million-us-properties-with.html

Obviously unemployment is a driver of default and foreclosure, but you guys don't seem to get the idea of the impact that high negative equity foreclosures have relative to small negative equity foreclosures. In a friend's neighborhood, a builder got foreclosed. The bank ended up selling the home for about the amount their outstanding loan! That does not happen in cases of large negative equity. A point CR is making is that distressed sales will drive down prices, something that's already happened in FL. This particular case, the price was competitive, so not really impacting the 'market values' of the other homes in the neighborhood.

I would agree that what is driving defaults & FC's in NC is unemployment, but in NV & FL the negative equity situation greatly compounds any other factors. That is why their rates are > 2X NC's, while their unemployment rates are nearly equal. Seriously DQ & FC rate in FL is > 3X NC.

[Jim Caserta]

Negative equity and unemployment have much different impacts when the owner of a property is an 'investor'. FWIW, most of the specu-investors (specuvestors for short) have already been worked through the system, and they were a significant chunk of 'owners' in some states. 33% of all sales nationwide in 2005 went to people not planning to live in the home. 85% of condo sales in Miami were investments! Guess who wrote the original stuff - Calculated Risk - the same author as this piece.

OK, I submit. Falling equity was the primary driver of delinquencies and foreclosures in the past, but moving forward, unemployment will be the main source of new delinquencies. However, the equity position of a borrower will impact how their delinquency is handled.

[Jim Caserta]

This debate is important to get right because our gov't is putting a lot of effort into mortgage mods and not getting a whole lot out of them. Let's look at two borrowers who are 3 months behind, both lost their jobs. One (A) has a $360k loan balance on a home that will sell for $200k, the other (B) has $198k loan on a home that will sell for $200k (one place prices have fallen 50%, the other 10%, both used 10% down payments). Should we really treat both cases as if they were equivalent? You should be able to work out B's loan, but it will be very difficult to fix A's.

I am up for helping B out, but am really torn if we should help A out. What do you guys think? Just toss him a $160k principal reduction? Should we tax that loan forgiveness? (good luck getting the $40k in taxes).

There are a lot of delinquent loans out there. If we waste time on loans that have very little probability of being cured, we are shunting resources away from loans that can actually be fixed.

[Spag]

The loan forgiveness would not be taxed right now, but that temporary exemption ends next year. If A's house is that much under water, A is out of luck. His investment did not pay off and he paid too much. Perhaps a forbearance would be a solution but if that doesn't work, not much you can/should do.

[Jim Caserta]

Sam, you may be more lenient than I would be with 'A'. Another thought I had was that it might cost $12k to keep B in their home and get them back to current. If it costs $168k to 'fix' A's problem, we're trading off helping 14 families in B's situation to help one family in situation A.

A & B may be neighbors. Consider someone who bought in FL in 06/07 as A, and someone who bought in late 08/09 as person B. The neighbors are in different situations, and acted differently to get themselves there, but it bugs me a little to help one out w/o helping the other. You could look at it as offering $12k to 'cure' a loan to both, knowing that the 12k would do little to help and it would really just flow straight to A's loanholder.

I think different states may tax the loan forgiveness differently - may or may not have a temporary exemption.

[Spag]

I'm not sure what you mean by "we" and what it means to "help out". All I suggested was a possible forbearance for some limited time.

[Jim Caserta]

We refers to taxpayers, as there has been a lot of money thrown at foreclosure mitigation. Helping out is the providing of some money towards people whose loans are behind. If you give A a forbearance, with no assistance, you'll have to lump the missed payments onto the existing loan, putting them further underwater. This is what CalculatedRisk and others refer to as 'extend and pretend'. That is a link from almost a year ago, but the re-default rate is very high for mortgage mods because the mod is not actually fixing the problem.

An argument for more foreclosures

[Jim Caserta]

Mortgage delinquency vs. unemployment graph.

FL & NV are outliers due to the presence of negative equity and "significant investor activity during the housing bubble."

This lumps defaults and foreclosures together. My main idea in the past regarding default/foreclosure & negative equity is that the less positive equity or more negative equity, the much more likely a default ends up as a foreclosure. You have a chance to work out a loan when there's some equity, but when a borrower is > 25% underwater, the prescription (principal reduction) is too bitter a pill for lenders. The opposite may be true also, as if there is equity in a home, a bank can foreclose and book a profit. Hopefully they'd choose to work out a modification than foreclose for profit.

Say someone has 15% equity, but is way delinquent. Bank could foreclose & resell getting a small profit or breaking even? A work-out would be better in that case.