San Diego Housing Market News and Analysis
Guest Commentary: Ramsey on Default and Foreclosure Volume
Submitted by Rich Toscano on March 13, 2007 - 9:16am
The prior guest piece by Ramsey (San Diego foreclosure guru and orderer of Chinese restaurant meats with questionable provenance) was a big hit, and Ramsey has kindly agreed to let me publish more of his thoughts...
THOUGHTS ON DEFAULT AND FORECLOSURE VOLUME
For those who have been receiving my weekly SD foreclosure updates, you know I have been somewhat puzzled by the week to week bumpiness.
I finally figured out a number of factors that are most like responsible for what I consider erratic foreclosure data.
Be forewarned that this email is almost entirely MY OPINION or hearsay with no data to substantiate my theories.
(Before continuing, I am linking to two blogs by Tanta: Mortgage Servicing for UberNerds and A Tantamentary on "Messier Mortgages." She is probably the most knowledgeable servicer who is posting on the net that I know of. It is recommended reading if any of you like to have a better understanding of loan servicing and how it impacts the mortgage foreclosure market.)
We know that 80/20s are responsible for a high percentage of defaults today. Each defaulting 80/20 borrower most likely started off with two foreclosure actions (NODs) when they originally defaulted. The holders of the 20s soon found out they were pursuing a lost cause and quickly dropped out to avoid incurring more non-recoverable costs.
In the beginning of the cycle, my guess is the NODs, even NOTs, could be double counted. Junior lien holders initiated foreclosure proceedings while keeping current all senior delinquencies such as mortgage payments to the 1st, property tax, and insurance, hoping for recovery in the end.
I suspect the learning curve is quite steep, as junior lien holders realized they were suffering total losses. Junior lien servicers today are probably instructed to do some loss analysis before incurring foreclosure cost and investors are less likely to throw good money after bad.
If this theory is correct, then more NODs will become NOTs and REOs in the near future. Furthermore, the process will be faster, without the 20s getting in the way of the 80s. Unfortunately, I know of no source that could affirm this theory.
Aggressive Work Outs
A friend attended the MBAA National Mortgage Servicing Conference recently and told me about a presentation at the conference. The presenter, a subprime servicer, apparently projected that 80% of their loans will default at recast. To combat this problem, they will go to the extreme of offering the defaulting borrower fixed rate mortgages at the rate prior to recast. The reason this is not widely publicized is obvious. They do not want to encourage widespread defaults.
So how many defaults are cured? Is this a long term fix or just a short term band-aid?
Loan Servicing – Tricks of the Trade
Refer to what Tanta posted and apply it to all the subprime blowups we have been experiencing in the last few weeks.
For example, think about the motivation of a subprime servicer, servicing a portfolio that they had sold or securitized. Would it not be in this servicer’s best interest to make sure there are no first payment defaults to avoid triggering a repurchase? Would it not be in the servicer’s best interest to drag out the other people’s loans while promptly foreclosing on their own loans? Could it be that I am just too cynical?
Refinance Volume and Type
I still believe that refinancing is the best indicator going forward. We know there are a mountain of 2/28s, 3/1 and 5/1 hybrids facing recast every day. The most bullish indicator would be high refinance volume compounded by a high fixed-rate mortgage to adjustable-rate-mortgage (FRM/ARM) ratio. On the other hand, low refinance volume would imply that more and more borrowers are stuck with the recast. Refinancing in ARMs would imply that borrowers are buying time.
My cyber friend Calculated Risk offered me this refinance chart using the MBAA data. May be someone has a FRM/ARM chart that we can follow.
Regulators and Legislations
The new and improved guidelines are out.
We also know both the Senate and the House are finally close to introducing bills that will change the mortgage industry.
We know about the 2/28s and the 80/20s, but the most restrictive could be the stated income alt-a loans. What percentage of these alt-a loans are “liar loans”? According to a recent UBS presentation, there were $28.7 Billion alt-a loans originated in 2001 vs $206.1 billion in 2006. I can think of no legitimate reason for this explosive growth. Furthermore, alt-a loans are loaded with the option ARMs and neg-am ARMs.
I can’t wait to watch Bob Pisani explain what an alt-a loan is on CNBC.
I heard demands have already started from borrowers who are looking for relief from the originators. Who is going to take the “blame” for the stated income loans, when everyone from borrower to the ultimate buyer of the loans knew the application contained fraudulent incomes?
Status quo is not an option. Live by the bubble, die by the bubble. To keep the bubble inflated, the market needs to recreate similar conditions as before, which were rapidly declining interest rates, favorable underwriting terms, and the resulting home price appreciation.
Regulations, legislation, and most importantly, market conditions are going to un-layer the layered risk. Low FICO, no downpayment (100% LTVs), stated income for W2 borrowers, and stated income with no tax returns for self-employed are all going to be gone.
The following is a projection of “subprime” foreclosures for 2006. Any projections for 2007 (don’t forget to add alt-a)?
CRL Projected Foreclosure Rates for 2006 Subprime Mortgage Loans
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