This article originally appeared on the Irvine Housing Blog.
For those thinking about accelerated default, they can look forward to an average of 15 months before they have to leave their properties — and that is if they don’t game the system for more time.
Suspicions lead to questions
And questions to alibis
Is it just my imagination
Or has her love turned into liesThere’s a stranger in my house
Somebody’s here that I can’t see
Stranger in my houseRonnie Milsap — Stranger In My House
Attention renters looking to buy: Right now, there is a stranger living in your house — squatting in your house. Banks are refusing to foreclose on delinquent borrowers and allowing them to live freely in what should be your house. Are you waiting patiently for them to foreclose and kick out the squatters? Don’t hold your breath. Lenders continue to increase the time squatters get to live for nothing in your house. It isn’t your imagination; it is really happening. Squatters are gaming the system in order to stay in your house, and the government and the banks are conspiring to keep it that way.
Mortgage Default Update: Homeowners Staying in Homes Longer
By Lita Epstein Jul 8th 2010 @ 12:54PM
More than 7.3 million home loans are in some state of delinquency or foreclosure, and there’s no end in sight. That’s because the number of homeowners who are 90 days or more delinquent jumped 9.2 percent in May 2010 over May 2009, according to the Mortgage Monitor Report from Lender Processing Services (LPS).
When you add that to the inventory of home foreclosures (3.18 percent), 12.38 percent of homeowners are at risk of losing their homes.
In 12 states the delinquency rate is even higher — over 10 percent. These include Nevada (14.5 percent), Mississippi (14 percent), Georgia (12.3 percent), Florida (11.2 percent), Arizona (11 percent), California (10.8 percent), Rhode Island (10.6 percent), Tennessee (10.6 percent), Alabama (10.5 percent), Michigan (10.4 percent), Louisiana (10.3 percent), and West Virginia (10.3 percent).
Truly abysmal numbers. We have gotten so used to numbers several orders of magnitude outside of historic norms that we don’t think much of it. What are we going to do with all those mortgage holders in default?
Let them squat, of course.
The good news, if you can call it that, is that people in trouble are able to stay in their homes longer — even if they do default on a mortgage.
Thanks to the backlog from the record-breaking foreclosure activity, people in trouble might stay in their homes 449 days — starting from the time they are 30-days delinquent and ending at the foreclosure sale — which is a new all-time high.
If you had told me back in 2007 that lenders would simply allow people to live indefinitely in homes they were not paying for, I would have thought you were crazy. Isn’t that going to cause everyone to quit paying? Won’t that cause our entire mortgage-based property acquisition system to cease to function?
Well, we all know the answers to those questions. Many have quit paying, and strategic default is becoming the norm. If the government were not underwriting almost all new mortgages, private lenders would not be making new loans, and our system would grind to a halt. There isn’t much of a private mortgage market today, and with the extreme moral hazard we are creating, investors would be crazy to put their money into mortgage loans not insured by the federal government.
Were these problems will finally surface is in the jumbo market. Right now, the spreads between conforming and jumbo are very, very large, and there is little reason to think the jumbo loan market will recover. Why would banks underwrite loans with risk at very low interest rates when government-backed loans with no risk are available?
Eventually, the bad loans and bloated prices in the jumbo market will need to clear — unless we are going to give those homes away. If lenders don’t start to foreclose on these squatters soon, more will join their ranks, particularly if they no longer believe in the threat of foreclosure. Why would anyone pay when they can keep the house for free?
Banks are finally wising up and allowing more people to sell their homes using a short sale process rather than dragging their feet and waiting until they can foreclose. In March 2009 only 18,619 homes were sold using short sales. That number jumped 120.4 percent to 41,030 in March 2010. But even with that improvement, there were foreclosures on152,654 homes in March 2010 versus 90,695, an increase of 68.3 percent.
Is it really “wising up” or are they merely recognizing that they already have many more foreclosures in process than the system can handle? I watch the local trustee sale market very closely, and with an 80% postponement and cancelation rate and an 18 month supply of properties, closing a few more short sales isn’t going to relieve the pressure on the trustee sale backlog. Either process will put more inventory on the market, and the MLS inventory locally has already risen from 434 homes to 749 since January 1, 2010.
In the past two months more homes fell into a “worse” status. LPS found that two-and-one-half times as many loans rolled to “worse” status than “improved.” The number of “delinquent loans that ‘cured’ [become current] declined for every category” except those greater than six months delinquent. LPS thinks the improvement in the six-months category can be credited to newly completed loan modifications.
LPS also found improvement in the success of mortgage modifications. While 19.4 percent defaulted again in just three months, in the fourth quarter of 2008. In the fourth quarter of 2009, the number of new defaults dropped to 6.4 percent.
So that may mean that the banks and the government have gotten better at finding mortgage modifications that work.
LOL! Loan modification programs that work. ROFLMAO! Those borrowers will all default again. With a back-end DTI over 70%, these borrowers still have way too much debt. The only thing the loan modification did accomplish was moving the debt from the bank’s balance sheet to the government’s. The ripoff of the US taxpayer continues unabated.
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The squatters in default and shadow inventory explosion phenomena can be better understood if you understand the implications of an accounting standards rule implementation which the U.S. Congress pressured the Finanacial Accounting Standards Board to delay implementing in April of 2009. (See the Wall Street Journal article titled, “Congress Helped Banks Defang Key Rule” June 3, 2009 by Susan Pulliam and Thomas McGinty. And see, mark-to- market accounting on Wikipedia)
Because of this accounting change banks are able to carry defaulted mortgages at origination value rather than true market value, if they don’t foreclose or take possesion of the property. Completing a foreclosure would force the bank to reprice the asset (mortgage) or sell the property at true market value.
The squatters are helping the banks and other mortgage investors by preventing looting and vandalism. And, as long as they stay in the home the property taxes, homeowner fees and municipal assessments are (arguably) still their obligations. The mortgage lender isn’t the property owner until the foreclosure is complete.
The banks’ willingness not to foreclose makes one wonder about the effect of such repricing on bank balance sheets, and the true fractional reserves of banks with significant mortgage holdings. It also makes one wonder how mis-stated the financials of other big mortgage investors (like pension funds) might be.
Banks and investors seem to have decided to wait out the bad market. But, the question is, will the market recover with the uncertainty caused the huge overhanging shadow inventory. . . .