Foreclosures Ease a Bit

By Alan White

Two new foreclosure reports are out today, one from HOPE Now and one from the federal bank regulators (OCC and OTS).  November foreclosure filings are down in a trend that started in August, and modification numbers overall are increasing.  The number of foreclosure sales also eased off a bit in November, and we will probably end calendar 2008 with a little less than one million completed foreclosure sales.  The combined effect of various state (like Florida) and lender-initiated moratoria (like Citi and Marshall & Ilsley) and the growth in modification agreements seems to be having an impact. 

At the same time, the OCC/OTS report cautions that mortgages modified in the first quarter of this year were redefaulting at high rates.  After three months, 19% were more than 60 days past due, and that rate grew to 37% after six months.  Although the vast majority of mortgages are securitized (about 88% in the OCC/OTS sample) the regulators did find that redefault rates were substantially lower for mortgages held by lenders in their own portfolios.  This could be due to the lenders' greater flexibility to make aggressive modifications, such as reducing principal and forgiving past-due interest rather than capitalizing those amounts.  This hypothesis is consistent with data from Credit Suisse and Merrill Lynch showing that modifications that reduce interest, principal and payments have better performance than modifications that capitalize unpaid amounts and do not reduce interest.  The increasing number of modifications still consists mostly of the wrong kind.

In sum, modifications and moratoria are slowing down foreclosures but are not getting homeowners into sustainable debt repayment, yet.  Many of the failed modifications from 2008 will be back in 2009; the question is whether we will have learned enough, and broken through the legal and other obstacles, in order to start the process of deleveraging homeowners in earnest.   

Comments

[Joseph]

Roger is right -- the ARMs that I see in default started out unaffordable. When lenders originated these awful products they threw the entire kitchen sink of bad features in to catch higher fees. These features included inflated principal, balloon payments, and interest rate resets (inevitably to higher payments) -- anything that would increase the face value of the notes while still enabling them to be gamed into their underwriting systems. Freezing interest rates will not do the trick because they aren't causing the default. These were loans designed to fail in almost every way and they won't perform unless they are completely redone.

[Roger Bertling]

I would disagree with Living wills slightly. Some foreclosures are caused by interest rate spikes, but there are a certain percentage of foreclosures that derive from people who got loans they could never afford even if the interest rate never adjusted. These are generally, in my experience anyway, caused by brokers and originators who closed loans with no regard for the borrower's ability to pay. That is why these "loan modifications" that the industry is trumpeting are worthless. Freezing interest rates and backloading principal will help only a very small percentage of homeowners in trouble. This is going to get a lot worse as the econoomy sickens because the working class people with these loan mods are going to be the first to get hit with layoffs and slowdowns. Is the industry going to be willing to re-modify these loans? Wouldn't it be easier and cheaper to do real loan mods in the first place?

[Living wills]

Good article.Foreclosures are caused by interest rates hiking and families not being able to afford the monthly payments on their home loans.
Thank you.