David Gaffen at the Wall Street Journal’s MarketBeat blog found some information showing why subprime borrowers lose their homes via foreclosure. The data is from a Countrywide presentation at the Bank of America investing conference, courtesy Peridot Capitalist:
Causes of Foreclosure (July 2007)
58.3% Curtailment of income
6.1% Investment property/Unable to sell
5.5% Low regard for property ownership
1.4% Payment adjustment
Now admittedly with a big wave of subprime resets hitting next year, we are bound to see an increase in the amount of foreclosures triggered by payment adjustment. But I have been told by former Countrywide employees that the bank routinely contacted borrowers well before their resets (not the proactive six months, but two or more years in advance) to sell them into more expensive products relative to their current mortgage. So Countrywide’s sample may show a higher level of payment adjustment than other banks.
Regardless, however, look at the causes. Paulson’s plan will do nothing for a fall in income, medical problems, or divorce. Currently, death is more than twice as large a cause as payment adjustment. You’d have to see a more than five-fold increase in payment adjustment as a cause for it to approach the top three in importance.
That in turn says if the Treasury program does lead to a significant number of mortgages being adjusted, many will be free riders.