08 March 2011

What Ever Happened To Mortgages?

"11.1 million, or 23.1 percent, of all residential properties with a mortgage were in negative equity at the end of the fourth quarter of 2010, up from 10.8 million, or 22.5 percent, in the third quarter. The small increase reflects the price declines that occurred during the fourth quarter and led to lower values. An additional 2.4 million borrowers had less than five percent equity, referred to as near-negative equity, in the fourth quarter. Together, negative equity and near-negative equity mortgages accounted for 27.9 percent of all residential properties with a mortgage nationwide. . . .

The consensus is that home prices will fall another 5 percent to 10 percent in 2011. If so, the most that negative equity will rise is another 10 percentage points, all else equal. . . .

The aggregate level of negative equity increased to $751 billion in Q4, up from $744 billion last quarter but still below $800 billion a year ago. Over $450 billion of the aggregate negative equity dollars include borrowers who are upside down by more than 50 percent." . . . About 10% of homeowners with mortgages have more than 25% negative equity. . . . Just under $200 billion more is for borrowers who have 25% to 50% negative equity. . . .

In Nevada, over 65% of homeowners with mortgages owe more than their homes are worth [and another 5% have less than 5% equity]. Arizona and Florida are around 50%. Michigan, Georgia and California are all over 30%.

From here.

The total number of mortgages that are upside down or near upside down (which in practice means that sale costs would leave the seller upside down) is 13.5 million. In February, there were 13.7 million people unemployed (an unemployment rate of 8.9%). While there is no doubt significant overlap between the two groups, many of the unemployed don't have mortgages, rent, or aren't upside down in their mortgages, so the combined misery numbers are great. There are far more people in the United States who are upside down on their mortgages, in default on their consumer loans, and/or unemployed than there are who are members of unions (although the two groups, of course, are not mutually exclusive).

In Colorado, about 20% of homeowners with mortgage owe more than their homes are worth, and another 5% have less than 5% equity. Nationally, about half of homeowners have mortgages.

Nationally, about 13% of all mortgages are in default, including about 4.5% that are in the foreclosure process. The 2010 peak was 14.5%. Before the housing bust, 5.5% was typical and about 1% of mortgages were in the foreclosure process at any one time.

While 8.5% of all mortgages are in default (excluding foreclosures which are another 4.5%), the rates vary by loan type. For subprime loans the default rate is about 30% (another 14% are in foreclosure). For option ARMs it is about 20% (another 18% are in foreclosure). For Alt-A is it about 14% (another 8% are in foreclosure). For FHA/VA/etc. loans it is about 10%. For non-agency jumbo prime mortgages it is about 5% (another 2% are in foreclosure). For agency prime mortgages it is about 3% (another 1% are in foreclosure).

Non-agency jumbo prime mortgages are defaulting at the rate the all mortgages combined did six years ago.

About 30% of all real estate sales are either short sales or sales of foreclosed properties.

Three years of recession have trimmed $1.4 billion of consumer debt off the nation's balance sheets, bringing the total to $11.4 billion, but much of that has come from writeoffs rather than payoffs.

About 74% of all consumer debt is purchase money mortgage debt, 6% is home equity revolving credit lines, 6% is car loan debt, and 5% is student loan debt. Credit card debt comprises 6% of consumer debt, and 3% of consumer debt is of some other type. Thus, the vast majority (91%) of consumer debt is either secured by collateral or not dischargable in bankruptcy, and two-thirds of the rest is held by credit card companies. About 10% of all consumer debt is currently in default, more than double the norm in a boom economy.

Sometimes foreclosure sales do cover more than is owed on the loan, but the people losing their homes often only find out about their windfall much later: "In a search of just three Front Range counties — Denver, Arapahoe and Adams — The Denver Post found that dozens of former homeowners were owed more than $653,300 since 2008." The biggest surpluses approach $50,000, and many are in the $10,000 to $30,000 range. Little affirmative effort is taken to find those entitled to the funds (often letters are mailed to the foreclosed upon house!).

A settlement has been reached with five big banks in the Robo-Signing foreclosure process scandal:

The lenders could be fined under the final agreement or forced to write down the value of their loans to borrowers who owe more on their mortgages than their homes are worth. The banks are Bank of America, Citigroup, JPMorgan Chase, Wells Fargo and GMAC. Together, they have 59 percent of all U.S. home mortgages, according to Miller.

Also under the draft terms, a lender's denial of a mortgage modification reportedly would trigger a review by an independent individual or panel.


The fact that five banks have 59% of all U.S. home mortgages is itself remarkable. Their bad decisions (and bad decisions by lenders whose loans they purchased, often at a discount), are coming to roost, and in much of the nation a huge share of all families are under pressure as a result.

How do you even begin to have an economy on a basis that makes sense when 70% of homeowners with mortgages are upside down or have less than 5% equity, and your state has recourse loans, as Nevada does? I'd be willing to guess that Nevada also has a below average rate of free and clear homeownership, and that Nevada has a disproportionate share of loans that are more than 25% upside down which make up the lion's share of bank losses.

Why save money when you could be foreclosed upon at any time and have your savings seized for a deficiency judgment? Why pay your credit cards when you are in default on your mortgage, will lose you home in short order, and you will be subprime and unable to obtain new credit for the next seven years no matter what you do? The credit card company has no realistic possibilty of collecting out of your non-existent home equity, or your non-existent savings, and will have to compete with a huge deficiency judgment if you file for bankruptcy diluting their claim against any assets that you may have. They can hope to be first in line to garnish your wages for a while, but that is about it.

If the bankruptcy code provided for a cramdown for residential real estate, the creditable threat of it might lead to a mass produced mortgage modification wave with the consent of lenders in distressed real estate markets like these. But, it doesn't, thanks in part to the recalcitrance of people like Colorado Senator Bennet. So, tens of millions of people with upside down homes will soldier on with no incentive to make money. No amount of tax cuts can create an incentive to encourage people to maximize their productive earnings if creditors are in a position to immediately take all the tax savings away.

The priority that the tax code gives to child support and maintenance also creates a strong economic incentive for couples to divorce and shield some income from creditors (and squeeze out other garnishments of wages). Add to that the pressures that economic strife already places on families, and the situation becomes corrosive to families (althought this may be a ticking time bomb, right now, people can't afford to move out and form new households or hire divorce lawyers, so divorces are temporarily down).

There is really very little chance that the real estate in Nevada or California or Arizona or Florida will recover to their previously price levels any time soon either. Real estate in all of those states was grossly inflated by a price bubble that was deeply out of touch with any reality based measures.

If banks actively seek to enforce deficiency judgments against Nevada home owners, it isn't unthinkable that a third of more of all Nevadans could go bankrupt. A handful of banks are the beneficial owners of the lion's share of the real estate in Las Vegas and Reno.

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