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One in Ten Mortgage Borrowers Will Lose Their Home To The Bank

May 19, 2010

New Observations is forecasting that a minimum of one in ten homes with a mortgage today will be lost to foreclosure in the next two years and that this loss represents a staggering five-million-unit addition to inventory-for-sale.

A record high 4.63% of mortgages were in foreclosure at the end of March The Mortgage Bankers Association reported Wednesday. Much worse, a mammoth 9.54% of mortgages are 90-days or more past due.

Given cure rates are slim-to-nothing-at-all beyond a 60-day delinquency, in practical terms, all of these seriously-delinquent homes will be lost through a sheriff’s auction, a short sale, a deed-in-lieu passing title from borrower to bank, or some other variant of distressed sale. Amherst Securities Group in a Sept. 2009 report said of the cure rate: “The cure rate on 60+ loans has decreased from 66% in early 2005 to 5% in Q2 2009.”

What is obvious and apparent from the cure-rate chart (see above-click for a clear view) is that borrowers who miss a payment are giving up quickly. After two payments are missed, the mortgage is a goner. It’s a new phenomena and adds a serious risk of falling prices for those who currently own homes.

If 50 million homes carry a mortgage, and with 10 percent lost to the bank in the next two years, five million units will be added to the current for-sale inventory. The five million bank-repo homes works out to about 10 months of sales at an average rate. Amherst estimated 7 million liquidations to the bank, but it was unclear over what period of time. The numbers will have even a more exaggerated impact if mortgage-payment performance continues to fall.

Current inventory is at eight months. The recent inventory high was 11 months in April 2008. Our figures already show current supply for-sale at 3.6 million units – which we have estimated is excessive by over 900,000 units (see chart “Units For Sale”-click for a clear view). In an average month 500,000 existing homes sell.

In another derogatory sign, purchase applications fell 27 percent to their lowest point since May 1997. A government-paid down-payment program ended April 30th.

The guesstimate that one-in-ten mortgage borrowers will lose their home is not a wild proclamation. It’s basic math based on the cure rate. What is wild is considering what will happen to real estate prices should mortgage failure gain greater momentum. Serious delinquencies are 30% greater today than a year ago.

A crash has the same irrational exuberance as a mania, except that greed is liberating and fear is terrifying. We have already lost 30 percent of house prices nationwide. There is simply no question that a radical loss in value may still lie ahead. Mortgage performance has gone down hill, and only a strong employment recovery can change the math.

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PRINT — One in Ten Mortgage Borrowers Will Lose Their Home

On the mortgage-payment data see also Calculated Risk.

Thanks for carrying the story to Business InsiderJesse’s Cafe Americain, Mortgage Lender Implode-O-Meter, Patrick, Yahoo. Please forward questions, corrections, and reactions to comments below or send me an email. Please send an email if you would like to take out a new mortgage. mike@mynewmortgage.com

Michael David White is a mortgage originator in Chicago.

27 Comments
  1. romeotybalt permalink
    May 22, 2010 2:34 am

    I must admit that I am part of the “problem?” I recently walked away from a 350k nightmare. I lived in the house over a year mortgage free, and was able to use my 3k monthy savings to buy a bank foreclosure free and clear. Ironically, it was from the bank that held the paper on my original home.

    However, I don’t feel guilty. In Chicago, the schools are crap, and I am left paying over 2k monthly for private school tuition.

    I suprised more Americans are not doing the same. Walkaways are part of market forces at work!

    • May 22, 2010 2:45 am

      Hi Romeo, it sounds to me like you did something smart. mdw

    • None permalink
      May 22, 2010 3:04 pm

      Be careful they will come after you for assets including the house you just bought.

  2. JLee permalink
    May 21, 2010 3:30 pm

    If bankers want to extend and pretend then homeowners get to do the same thing. They pretend that they own a house and they pretend that they have a mortgage. And then they pretend to pay it! It’s the same old game isn’t it. Let’s all lie about how much income and wealth we have, but I’ll take 2&20 on the transaction. Wasn’t it the lies and pretend that got us into this whole mess in the first place? And the lies continue on Main street, the lies continue on Wall Street, and the lies continue on BP Ave. and on Penn Ave.

    • May 21, 2010 7:19 pm

      Hello JLee, one variable not addressed in the post is that banks may not foreclose. that’s a strange one. mdw

  3. anon permalink
    May 21, 2010 7:18 am

    No surprise here at all. For 10-15 years, there has been virtually no loan underwriting. A home loan should be no more than 30% of gross income. Now we see what happens when people can get more debt than they can re-pay.

    Prices will fall to the level where the loan underwriting is sound, and banks & investors feel they will be re-paid over the long-term.

    I noticed this news :

    http://www.housingwire.com/2010/04/21/private-label-securitization-market-starts-to-thaw-with-jumbo-prime-rmbs/

    The average down-payment in this loan pool is 45%.

    It’s a whole new ball-game now. A lot of people will not be happy with the “new terms”.

    • May 21, 2010 7:17 pm

      Hello Anon, strict downpayment requirements will in and of themselves correct bubble pricing. thanks for your comment. mdw

  4. May 20, 2010 11:29 pm

    What bothers me are that Banks have no incentive currently to actually foreclose on these homes unless it makes monetary sense. Since the delinquent loans are not counted as a loss on their balance sheet until the house is actually foreclosed on. The government is letting these banks “extend and pretend” with the Banks hoping inflation or massive government to bail them out of their current insolvency. Meanwhile hundreds of thousands of Joe and Jane Irresponsible get to squat in their home rent free while the tax payer and responsible savers gets it between the eyes.

    If housing stays elevated while incomes continue to stay stagnant you get a society of renters or debt slaved homeowners. In either case America’s standard of living is “Gone Baby Gone”.

    The government really needs to stop this charade and take their medicine, let homes prices adjust by the laws of Supply and Demand, not government subsidies determined to prop up home prices to save all the insolvent banks out there.

  5. May 20, 2010 11:29 pm

    What bothers me are that Banks have no incentive currently to actually foreclose on these homes unless it makes monetary sense. Since the delinquent loans are not counted as a loss on their balance sheet until the house is actually foreclosed on. The government is letting these banks “extend and pretend” with the Banks hoping inflation or massive government to bail them out of their current insolvency. Meanwhile hundreds of thousands of Joe and Jane Irresponsible get to squat in their home rent free while the tax payer and responsible savers gets it between the eyes.

    If housing stays elevated while incomes continue to stay stagnant you get a society of renters or debt slaved homeowners. In either case America’s standard of living is “Gone Baby Gone”.

    The government really needs to stop this charade and take their medicine, let homes prices adjust by the laws of Supply and Demand, not government subsidies determined to prop up home prices to save all the insolvent banks out there.

    • May 21, 2010 2:58 am

      Hi Ty, I’m all for market forces. Let the foreclosures speed up. thanks for your comment. mdw

  6. May 20, 2010 1:59 pm

    It is no wonder those with mortgages 60 days or more delinquent choose to punt. With a 60 day delinquency, your credit rating is screwed for years. With a foreclosure, it is screwed for years. With a bankruptcy, it is screwed for years. Since the negative outcomes are all the same, why would a borrower choose to dig himself out of a financial hole? In addition, if they are upside down on the mortgage, why go the extra mile to save the house? It literally isn’t worth it. It is better to remove oneself from the debt burden and rent for the next 7 years. You might as well since that 60 day delinquency is certain to make you a renter anyway.

    • May 20, 2010 5:26 pm

      Hello Cowtown, everything you say about a credit profile makes sense to me. what’s currently different is the willingness of borrowers to look at hard facts as you are. thanks for your comment. mdw

  7. Iska Waran permalink
    May 20, 2010 1:55 pm

    Don’t forget either that most of these people who “lose” (or give back) their home to the bank will be unable to qualify for a new mortgage for 2-4 years thereafter. So there’ll be a smaller pool of buyers to mop up the extra inventory. Investors could buy the properties to rent out to the recently-foreclosed people, but investment property loans require a minimum of 20% down. The government will be sorely tempted to strong-arm lenders into loosening their underwriting guidelines in order to re-inflate the housing bubble.

    • May 20, 2010 2:23 pm

      I would only rent to a couple defaulting on their loan only if they cough up 3 months security and pay a 25% premium on the monthly rent. I would advise all landloards to do the same. This is not being insensitive – just good common business sense.

      • May 20, 2010 5:30 pm

        Hi Steve, asking for a fat security deposit is a reasonable request. thanks for your comment. mdw

      • Mike Serafin permalink
        May 21, 2010 9:32 am

        Steve Quinn, you wrote: “I would only rent to a couple defaulting on their loan only if they cough up 3 months security and pay a 25% premium on the monthly rent. I would advise all landloards to do the same. This is not being insensitive – just good common business sense.”

        3 month security?? You are crazy. I wouldn’t do it. First and foremost what if YOU default on your loans and go bankrupt? Good luck to ME if that happens as you would not pay me back my 3 months or anything for that matter. In this terrible housing market LOT’s of landlord end up foreclosing leaving their tenants on the street. Besides there are, in this market, TONs of places folks can rent. It’s a renters market. You are still thinking pre-real-estate-bust days. Get up to speed buddy. You sound like an uptight landlord anyway. BTW I have apartments I rent and I never play that Charles Dickens kind of crap you are.

      • uff the fluff permalink
        May 21, 2010 12:59 pm

        Sorry, but it’s quite doubtful that you have much, if any, bargaining power in this market.

    • May 20, 2010 5:29 pm

      Hi Iska, it sure is true that the federals have done everything and anything to keep house prices high. thanks for your comment. mdw

    • May 20, 2010 5:42 pm

      Hi Iska, it sure is true that the federals have done everything and anything to keep house prices high. thanks for your comment. mdw

  8. steve sabatini permalink
    May 20, 2010 1:07 pm

    Interesting and scary!

  9. Kelly permalink
    May 20, 2010 8:49 am

    A couple of years ago, I remember the evening news would say how many “housing starts” in construction there were for each month. That number seemed to be representative of “economic growth.” Initially after the financial crash – construction jobs were deemed as one of the growth indicators and when construction was back up, then we were growing and will have recovered. However, with high housing inventory – which will nearly double in the next couple of years should the current trend continue- that new construction starts should remain low. If not, then there will a glut of homes on the market that will further drive down the value of homes.

    • May 20, 2010 5:37 pm

      Hi Kelly, it always makes me laugh when i see an increase in housing starts treated as a sign of recovery. in a market with excess units for sale, an increase in housing starts is a sign of stupidity. thanks for your comment. mdw

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