Fitch released an analysis that shows that mortgage cure rates, meaning the proportion of borrowers who manage to get current once they fall behind, have tanked. From the Wall Street Journal:
The report from Fitch Ratings Ltd., a credit-rating firm, focuses on a plunge in the “cure rate” for mortgages that were packaged into securities. The study excludes loans guaranteed by government-backed agencies as well as those that weren’t bundled into securities. The cure rate is the portion of delinquent loans that return to current payment status each month.
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.
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.
On top of that, Greg Weston looked at the underlying New York Fed data for Fitch’s comment, and found another sobering factiod, namely that banks are not foreclosing. The reason most often given is that the bank doesn’t want to write the mortgage down even further (we’ve heard it bandied about for loss severities is 60% and Weston had a chart that shows it is worse for subprime, at 70%with Alt-As not as bad at 50%), so 60% is a representative level) but another reason is that if the bank does not take possession, the taxes are still the owner’s responsibility.
You’d expect, with this trend, for banks to then be more aggressive about foreclosing on seriously delinquent mortgagers. Yet we see the opposite: The next set shows what banks do for loans than are 90+ days delinquent.
So banks have gone from foreclosing on about 45% of their severely delinquent Alt-A loans each month to 20%.
So if you own a house that’s underwater, in practice you can probably keep living there (or collecting rent payments) for a year or so without making payments to the bank. You have 3 months before the loan is bad enough for the bank to foreclose, around 3 more months before the bank starts the foreclosure process and who knows how much longer before the bank actually moves to take possession of your home.
Of COURSE cure rates have collapsed. No one has a job, the asset is worth much less than the loan and the loan is non-recourse. If the mortgagor wipes out the loan, they will be free again to move to where the jobs are (if any). And always remember, "the mortgagor is poor."
Cure is for collateral that is worth something. Indeed, the bank doesn't want the collateral, and has been resorting to things like never holding the auction so that the tax burden will (unknowingly) still be on the evicted mortgagor. You don't discharge that tax burden in bankruptcy, and the statute of limitations on the debt is typically 20 years. Nice, huh? The bank will get the "delinquent" one way or the other.
I suspect that the cure rates on nonperforming mortgages have collapsed for two reasons (though CR might have a more dimensional view). To begin with, most of those mortgages are hopelessly underwater, and the home occupiers have had this point hammered home to them in the process of evaluating how and whether to get current on payments. They are colossally losing bets that will cost 30-50% more than they will ever be worth. The second reason is that these houses are underwater because they were in fact valued at ridiculous levels, and that those prices were so high that many mortgage payers cannot in fact afford their note. Period. They hoped to 'refinance' but with the home egregiously underwater that's impossible. Sending the bank more money, then, is ridiculous self-injury. It's their hide that's curing in the sun as long as they are nailed to their property, and those folks going quickly to zero payments have grasped this fact.
And then one asks oneself, briefly,"Well, _why_ aren't banks foreclosing quickly to cut a loss off their books?" And the answer which occurs to me is "who cares about losses since the Feds have notified all the major players that they not only will be allowed, nay all but required to criminally falsify their books but that if they do so the Feds will reward themselves with huge subsidies and guarantees from the taxpayers _and_ gift them maximally low rates so that they can profit from everyone else on the spread." See losses matter in reality based accounting, which US financial regulators formally abandoned in March of this year. Now what matters is image based accounting. Foreclosing on mortgages says, "There's a problem here." Ignoring nonperforming loans says, "Problem? No problems here, chief." Banks would have to be stupid to draw attention to problems while the government invites them all over to the Treasury for dinner morning, noon, and night.
Myself, I just wonder where this will all end. My reading of economic history is not exhaustive, but that said I simply can't think of another instance in modern history of such massive official financial fradulence. Yes, kings and empires tended to lie when receipts and obligations had mismatches. But it's difficult to think of a major public entity which has decided that 'they make their own reality' at the level we see with official response to the collapse—not too strong a word—of the US financial system. The zombies are just as dead and rotting as they were a year ago, and two—no! they're worse, because loss rates have increased, and wider classes of septic assets have burst asunder. Hard to believe but true: the banks _are deader_ as we speak than they were in, say, November, 2008.
Denial is the worst 'coping' strategy because reality testing shorts out. That's where we are today. In official denial. I don't know it all ends worse this way than the set-up was a year ago, but I can all but guarantee this will end badly.
I received the following email last night from my accountant:
I have been in Santa Fe since last Thursday. Lots of places for rent, businesses that have closed down. Also lots of houses for sale. BUT nobody is lowering the price on anything. I just don't know how people think. You would surmise that if somebody could pay $1,000/month and not the $2,000/ month, then why not lease it for $1000 a month and get something instead of an empty building.
I responded as follows:
I have heard of two instances in the last six months of antiques dealers, one in Houston and one in Albuquerque, where their landlords raised their rents. Both dealers, struggling to make it through the recession, elected to close their businesses instead of paying the higher rents.
I read the other day that the percentage of people seriously delinquent on their mortgage has jumped 50% over the last 12 month, from 6% to 9% of total mortgages.
I don't know exactly how to explain all this, but we clearly live in a defactualized world.
I too don't see how it can end well.
I do not expect this mess to resolve in any favorable way. The most favorable outcome might well be an immediate, complete, collapse that requires a bank holiday, the nationalization of a great many banks and quite probably the devaluation of the dollar.
The current program of bailouts and special lending facilities do nothing more than delay the resolution of the problem.
Now the fact that banks are not foreclosing is a clear indication that the probable incurred loss will drive the bank to bankruptcy. It is this fact that suggests that nationalization may be the only reasonable way to extinguish that debt that cannot be serviced.
For inquiring minds, "cramdown legislation" is the answer. Yes, if my neighbor gets to cut his mortgage in half I'll be pissed, but that's irrational envy. I'm actually better off is he stays in his house with a lower mortgage than if he defaults and the home becomes a foreclosure sale. Yes, the lender will take a loss, but most of the mortgage investors live overseas or are large funds that should fire the managers who made such foolish loans in the first place. When the dust settles, the market will be stable, inventory will have been liquidated and, most importantly, those who made stupid loans will have paid for their stupidity.
Instead, we have banks trying to pass these loans off to the taxpayer — me — in which case I'll pay twice for my neighbor's mistake and still have the tenant from hell move in after some shark investor buys by neighbor's home.
Be very careful what you wish for. A cramdown will not really solve the problem. If there is to be a reduction in the principal balance, that reduction will have to come at the initiation of the holder of the debt.
If the holder of the debt will be bankrupted by repudiation and or cramdown, enter the FDIC. Enter the lawyers.
A program of nationalization that restructures the institution into good bank/bad bank will put a substantial burden on the tax payer. The alternative is to continue as we are until such time as the Treasury finds that it can nolonger sell bonds and nolonger can finance the operation of the government. Got a Kalishnikoff?
Banks aren't foreclosing where loss severity leaves less than an expected 20-30k in net proceeds. There's no point when selling the house is more expensive than letting it fall into municipal hands. This is where things go in places like IL, IN, OH and MI when loan amounts are ~100k and loss-severity has sailed past 70%. Someone else already speculated how the banks may be carrying these loans on their books, but many have been prudently charged off.
The financial system may be an intubated zombie, but I, for one, hope they don't take the tube out until real estate values stop falling.
If the banks are not forced to mark their toxic assets to market, banks will continue to refrain from commercial lending (since they are unable to determine LTV, and out of fear of further defaults). A radical rethinking of our immigration policy may well be the solution to these problems.