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A Mammoth One in Five Borrowers Will Default

October 3, 2010

A leading mortgage analyst predicts over 11 million homeowners will default and lose their home if the government fails to take more radical intervention.

Amherst Securities Group LP, one of the most respected names in mortgage research, has trumpeted an ambitious call-to-government arms in its October mortgage report.

“The death spiral of lower home prices, more borrowers underwater, higher transition rates (to default), more distressed sales and lower home prices must be arrested.”

The authors dismiss recent talk of mortgage performance improvement as statistical sleight-of-hand magically conjured by modifications.

 

“This ‘improvement’ (in mortgage performance) simply reflects large scale modification activity having served to artificially lower the delinquency rate” (Please see the chart above of mortgage balances delinquent and re-performing. All charts in this post are from “Amherst Mortgage Insight” dated October 1, 2010.).

The report offers an astounding forecast of the fate of severe negative-equity properties. Nineteen percent of properties with a loan-to-value (LTV) of 120% or greater are defaulting every year. A death-defying 75% of mortgages on 120% LTV properties will eventually go bad (19% + 19% + 19%, …).

 

The current crop of mortgages is already “impaired” at the one-of-five level. Nine of 100 are seriously delinquent. Six of 100 are “dirty current” (made current by modification). Five of 100 are seriously underwater (LTV greater than 120%) (Please see the chart above categorizing the forecast of 11 million defaults.).

The authors, who describe current conditions as leading to “an impossible number” of defaults and one that is “politically unfeasible”, unveil a major arms race of measures to counteract the default tide.

The solutions include mandatory principal reductions, looser underwriting of new mortgage loans, leveraged capital pools for investors, and penalties for defaulting homeowners. Amherst reports that a family who defaults can live rent-free for 20 months on average. They propose that missed mortgage payments, including property taxes and insurance, be counted as W2 income.

They make note of recent new signs of distress including two record-low readings of existing home sales in the last two reports. Another block is that underwriting standards have grown much stricter at Fannie and Freddie. Only 2% of Freddie purchases are now bad-credit borrowers where they represented about 20% of borrowers in 2006. FHA purchase mortgages, however, which have by definition much more lenient lending guidelines, have exploded upwards from roughly 10% of their lending in 2006 to more than 50% today.

The buyer pool is also compromised by the fact that 17% of borrowers now have a seriously compromised credit history. After mortgage default a typical wait-time to qualify again is anywhere from 3 to 7 years. One of the more desperate measures suggested by the authors seeks a new mortgage for those who are now behind or in danger of failing. “This (default) can be fixed by re-qualifying borrowers who are in a home they can’t afford into one they can afford.”

 

Risk is so high in today’s real estate market that private money has largely left the mortgage category. The retreat is most easily seen in the jumbo mortgage market. Total jumbo mortgage origination has fallen from a high of $650 billion in 2003 to $92 billion in 2009 (see the chart above). Government loans account for 90% of current originations.

“If government policy does not change, over 11.5 million borrowers are in danger of losing their homes (1 borrower out of every 5),”‘ the report said, which estimates the total of homes with a first mortgage at 55 million. “Politically, this cannot happen.”

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PRINT A MAMMOTH ONE IN FIVE BORROWERS WILL DEFAULT

Thank you for carrying the story to Business InsiderImplodeJesse’s Cafe Americain, Patrick.net.

Michael David White is a mortgage originator in 50 states.

 

 

 

 

 

42 Comments
  1. Jon permalink
    October 11, 2010 3:20 pm

    Hi Michael,

    Of all the interesting info in this post, i find the Jumbo Loan chart the most interesting While jumbo loans apply to both commercial (e.g. rental properties) as well as residential, they are likely focused in markets where property values reached the highest ranges. Locally (Boston area), the real estate pumpers are jumping back into the fray. I am curious how the “locality” theory of real estate markets will play out. Will prices in the higher-end markets (like Boston) actually begin to creep up again, or does that Jumbo loans chart put the lie to that argument ?

    Thanks

    • October 11, 2010 3:44 pm

      Hi Jon, if mortgage volume is falling fast in jumbo loans, it might be a bearish signal for expensive properties in all markets. i worry about the jumbo mortgage lenders leaving this category and the property owners having hell to pay. thanks for your comment. Mike

  2. franc permalink
    October 8, 2010 10:45 am

    always informative, thank you. but can you clarify the numbers for me? the headline at first led me to believe that 1 in 5 of entire home owners will be defaulting, totalling 11 million. my first reaction was that if there are only 55 million home owners in the U.S. then i am missing out on the biggest rental market on the planet.. upon further reading, i see that you are actually talking about loans that are already in distress, and what you refer to as borrowers with a “LTV” of 120% or more. this is the kicker and should be front and centre in this statement… frankly, i am surprised that that figure is so low.. it is obvious that just about every home sold (in N.A.) in the past 20 years was overvalued because of a number of factors but mainly because of the irrational belief that home prices will always rise.. this belief in my opinion stems from a total lack of consideration and understanding of our value system and therefore anyone caught up in this “LTV” offset, is in my opinion, totally to blame.. when will people realize that the the true value of a home only reflects the bricks and mortar it’s built with and the land it sits on. and the estimated value, the one that reflects what someone is willing to pay, is completely arbitrary and dependent on volatile factors.
    as a witnessed to the madness in the real estate market over the past 25 years, i am surprised by your figures, i would have guessed that this market correction would have put many, many more borrowers at the wrong end of the LTV then mentioned. and very surprised that only 20% will be walking away from those loans.. myself, i own a few and only bought value over the years, (read dumps), repaired and rented , and currently all payed for, still believe that i over payed and would be lucky to get my investment back if i sold everything right now… hopefully this madness will bring back the old days when a house was a home and not just another commodity…
    thanks again for your article.

    • October 8, 2010 7:49 pm

      Hi Frank one-in-five homeowners with a mortgage will default (not one-in-five homeowners). thank you for your comment. mdw

  3. Maggie permalink
    October 7, 2010 2:19 pm

    “They propose that missed mortgage payments, including property taxes and insurance, be counted as W2 income” – interesting; this would certainly tend to make people who CAN pay but choose instead to walk away because they’re underwater stop and think, at least. And if you’ve missed mortgage payments due to jobloss then having the extra income on your W2 wouldn’t make that much of a difference in extra tax paid (since your income would be less anyway).

    • October 7, 2010 3:59 pm

      Hi Maggie, we should look at ways to improve mortgage performance. we should also look at proposals for right-sizing systemic mortgage debt. many systemic debt reduction plans will, by their nature, hurt mortgage investors and mortgage performance. thanks for your comment. Mike

      • gordon permalink
        October 9, 2010 3:48 pm

        Shouldn’t the IRS forgiveness be changed back? That ENCOURAGES walking away.

  4. October 7, 2010 11:42 am

    Hoiw in the world do you expect to get income tax from someone unable to meet the monthly mortgage payment(notion of missed payments converted into taxable income???). Even the IRS can’t get money from a (stone)broke citizen. Where do you expect to put all the law breakers………….20% default rate? Prisons/jails cost big bucks.

    • October 7, 2010 3:56 pm

      Hi Dee Tee, I don’t personally agree with making missed mortgage payments income, but I reported the proposal for the sake of argument. Thanks for your comment. mdw

  5. Ron Caldwell permalink
    October 7, 2010 10:54 am

    The cure is a healthy economy that supports housing price close to 3X income and rental property that is purchased for 10X monthly generating a positive cash flow. High housing prices driven by easy credit only create long term problems which has surfaced on a national basis . The most likely long term job source for most Americans is in the service sector which will not support the expansion of expensive urban lifestyles and continue to generate high foreclosure and BK rates based on prior years home prices. The current housing situation cannot be contained through administrative responses such as principle reductions since in the end the homeowner owns only a mortgage with little or no increase in income to cover basic costs of maintenance and raising RE taxes.

    • franc permalink
      October 8, 2010 10:48 am

      rentals at 10x monthly income? maybe in 1972, todays numbers just don’t add up and people live with negative cash flow convinced that the return will arrive on re sale? do they teach any common sense anymore??

  6. October 7, 2010 8:30 am

    Get to all CURRENT mortgage payers who still have ARMs. Immediately re-fi this group with the low fixed rate loans that are available now. This may represent only a fraction of the group but every little bit would help.

  7. October 5, 2010 7:13 pm

    I agree that home prices/values should continue to correct until the prices are more relative to average household incomes based on a conventional 30-year fixed loan with 20% down.

    A couple of major problems we are faced with in the interim: If the banks release all of the actual delinquent/REO properties to the market, 1) values would absoltuely get crushed (probably not a bad thing) and 2) the moment the foreclosure occurs and the home transfers ownership to the new owner, the banks then would have to report the loss. Assuming that 8+ million homeowners are currently delinquent (and that number is growing daily), all banks would essentially become insolvent the moment these losses are realized.

    Who would be left to lend after the smoke clears?

    • October 5, 2010 11:51 pm

      Hi JJ, there’s plenty of new equity out there to fund new lending in the case of systemic bankruptcy of the current lending institutions. thanks for your comment mdw

    • Maggie permalink
      October 7, 2010 2:13 pm

      Private investors who have been savers and are getting sick of 1% ROI?

  8. Anonymous permalink
    October 5, 2010 4:51 pm

    “If government policy does not change, over 11.5 million borrowers are in danger of losing their homes (1 borrower out of every 5),”‘ the report said, which estimates the total of homes with a first mortgage at 55 million. “Politically, this cannot happen.”

    Borrowers will not “lose” their homes since they don’t actually own them. Most would be better off renting.

    Taxpayers would certainly be better off letting the market work than being stuck with yet another bank bailout sold to us as assistance to homewoners.

    • October 5, 2010 6:09 pm

      Hello Anonymous, I’m on the side of you and market forces. thanks for your comment. Mike

  9. Eric permalink
    October 5, 2010 2:59 pm

    A sensible policy includes reducing incentives to default. Giving people relief from forebearance and property taxes isn’t good. This isn’t unfair to anyone: forebearance looks, smells and tastes just like income on every balance sheet I’ve seen and property taxes are owed by the owner (title holder) and that doesn’t change just because an owner may be delinquent/in default on a loan to a secured lien holder. I don’t agree with the idea of free “rent” being some kind of income, however: people own their homes until they surrender their title, so they don’t owe rent to anyone until then. People found to have illegally diminished the value of the collateral (stripped or trashed the house on the way out) should face much more severe consequences – long and severe credit impairment for example (20 years for example). Anything that resonably makes the option of paying a loan relatively more attractive than default should be on the table. Debtors’ prisons are unreasonable, but expecting a borrower to pay taxes on income that they acquire via forebearance or on property that they own is hardly unreasonable. If somebody looks at the 5-year cash flow of this and decides that paying the mortgage is “only” $125/month worse than not paying considering this, when they thought it was more like $500/month – plus you need a new place to life and have a blemished credit history – maybe you’ll get a higher cure rate. I’m under no illusions that there still won’t be a mountain of bad debt to address somehow, but a smaller mountain is better than a bigger one.

  10. Jack permalink
    October 5, 2010 1:15 pm

    Let the chips (and housing prices fall). Sure those who bought at the high will either keep paying the mortgage on their underwater house or go default. this is not the government’s problem. If the gov’t(taxpayer) doesn’t pay your medical bills if you get sick or get hit by a truck, (both outside your control) why should the gov’t (taxpayer) come to the rescue when able minded individuals signed on to a mortgage that they couldn’t pay. Returning to traditional downpayments, income/debt ratios will be the only way to get prices to meet demand. These are not nice guidelines but vitally important standards that need to be met. Since incomes are pretty well stuck in the 70’s then housing prices will need to be there as well.

    • October 5, 2010 3:43 pm

      Hi Jack, buying houses at seventies prices sounds good to me. thanks for your comment. Mike

  11. John permalink
    October 5, 2010 9:38 am

    In Australia they have a housing bubble three times more leveraged then in the peak of the USA. The government there is raising interest rates and the currency and economy are on fire.

    Whats the difference? They have High Paying Jobs and strong positive Immigration policies allowing skilled and blue collar tradesmen to move there and start families.

    That and the government is far from bankrupt. Amazing what you can do when you have a country free of the upper classes and their bank bailouts.

    • Rob permalink
      October 5, 2010 11:41 am

      LOL. This is a joke right?

    • October 5, 2010 3:42 pm

      Hi John it sounds like there could be some bad news underneath the good news there. i don’t know what you mean by property being three times more leveraged, but however you are calculating it, it sounds like too much leverage. assuming that the USA was overleveraged. we were and are. thanks for your comment. mdw

    • October 5, 2010 7:06 pm

      I’m glad you have a positive outlook, John. This is a zero sum world, something will have to give.

      “…. on fire.” If it’s on fire, it will turn to ash…. soon enough. lol

  12. Jim permalink
    October 5, 2010 5:41 am

    Interesting. It’s worse than that. I worked for the largest mobile home company in the nation in the 1980s. Repossessed homes sent them into bankruptcy in 1987. I studied repossessed homes in great detail prior to the company’s collapse. In round numbers, I found that a GNMA pool with 100 loans and an 8% past due rate would experience about 40% repossessed homes. That 40% rate is UNDERSTATED because many homes repossessed more than once each (due to the current equivalent of ‘short sales’ and ‘loan mods’).

    The US past due rate for attached residential homes of >9% (and soon to get much worse with under 30 days past dues having spiked) infers to me the ultimate rate of foreclosure will be found to be more than 1 in 2.

    Jim

    • October 5, 2010 3:40 pm

      Hi Jim, interesting research. FYI current past due rate is 14%. thanks for your comment. mdw

  13. October 5, 2010 1:16 am

    The people who wrote this really wanted to punish the borrowers. Home price should go lower. The Government should encourage default and stop buying loans. It’s the way to save the economy, cause people have money to spend on products and services; thus, that creates jobs. The losers are big banks.

    But that’s not going to happen.

    The tax payers will pay for everything. That’s democracy.

    • October 5, 2010 1:58 am

      Let me be clear, it’s not about you. It’s about the United States (The Power to be exact). Printing money is the best weapon against pegged monetary system. China will learn that soon enough.

      Don’t worry, Big Ben and Geither will not let Americans down.

      If you don’t understand it, just laugh like you do.

    • October 5, 2010 3:38 pm

      hi d-artish, i think i’m also on the side of encouraging default. thanks for your comment. mdw

  14. Ken James permalink
    October 5, 2010 12:46 am

    I’m 80 years old and poor. I work at a low paying job and collect social security. I rent an apartment, drive a 12 year old car and have zero other assets.

    Tell me again why I should help subsidize your jumbo mortgage so YOU can live cheaper on my nickel? Please. Tell me again why.

    Mike: you’re dead bloody wrong.

    • October 5, 2010 3:36 pm

      Hi Ken, I think we agree that mortgages should not be subsidized. In the article I present the views of the Amherst authors. My personal prescriptions for the housing crisis are not presented in this post. Thanks for your comment. Mike

  15. October 5, 2010 12:29 am

    Enough with the bailouts really. Do you think us investors want to compete with anointed investor firms backed by government money? That is yet another STUPID idea which would force real investors out of the market, and give free government money to anointed firms and management companies.

    Really, it is time for the government to quit picking who wins and loses, and get out of the way.

    Also, I’m not so sure all of those categories above are mutually exclusive…

    • October 5, 2010 3:35 pm

      Hi Roberto, i’m marketing a government-be-gone spray if you would like to place an order. mdw

  16. October 5, 2010 12:05 am

    Finally someone with the cajones to call it , great job I just found your blog today. What you are saying is dead on, all of this make believe that has been going on has only delayed the inevitable . Great Job

  17. Mark G permalink
    October 4, 2010 6:25 pm

    Price fixes everything. Let prices fall, let people default and walk away

Trackbacks

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