Yesterday, we discussed Lender-Abandoned, Non-REO Foreclosures.

That started a robust discussion, leading to a follow up piece by Bob Ivry of Bloomberg: Lenders Buried By Foreclosures Let Late Borrowers Stay in Homes.

According to Ivry:

"Banks are so overwhelmed by the U.S. housing crisis they’ve started to look the other way when homeowners stop paying their mortgages.

The number of borrowers at least 90 days late on their home loans rose to 3.6 percent at the end of December, the highest in at least five years, according to the Mortgage Bankers Association in Washington. That figure, for the first time, is almost double the 2 percent who have been foreclosed on.

Lenders who allow owners to stay in their homes are distorting the record foreclosure rate and delaying the worst of the housing decline, said Mark Zandi, chief economist at Moody’s Economy.com, a unit of New York-based Moody’s Corp. These borrowers will eventually push the number of delinquencies even higher and send more homes onto an already glutted market. "We don’t have a sense of the magnitude of what’s really going on
because the whole process is being delayed,” Zandi said in an
interview. "Looking at the data, we see the problems, but they are
probably measurably greater than we think.”

That’s quite astonishing: Conditions are actually worse, not better, than the already miserable numbers we hear being reported each month. And, the trend is accelerating downwards

Some specific data from the Bloomie piece:

- Lenders took an average of 61 days to foreclose on a property last year, up from 37 days in the year (RealtyTrac)

- Sales of foreclosed homes rose 4.4% in 2007 (LoanPerformance First American CoreLogic)

- Inventory of foreclosed homes more than doubled last year (LoanPerformance First American CoreLogic)

Given those numbers, its no surprise that the number of "Reluctant Banks" are also increasing.

What are "reluctant banks?"

Some banks are letting people stay in their houses until someone through foreclosure and beyond. One distressed mortgage buyer said people have been staying in their home "Until someone comes to kick them out . . . Sometimes no one comes to kick them out.”

Also of interest: The surge in Foreclosures is completely overwhelming much of the legal system. Court houses cannot keep up with the new foreclosure applications. And, Mortgage servicers are weeks if not months behind in  starting the foreclosure process.

~~~

There’s a lot more detail and interviews in the full piece . . .

>

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Source:
Lenders Buried By Foreclosures Let Late Borrowers Stay in Homes
Bob Ivry
Bloomberg,  April 4 2008
http://www.bloomberg.com/apps/news?pid=20601109&sid=aefAJU_88vfs&

Category: Data Analysis, Economy, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

47 Responses to ““Reluctant Banks” Let Defaulted Borrowers Stay in Homes”

  1. wedwards says:

    What I find amazing is that the vast majority of people do not seem to understand the magnitude of the issues.

    When it does get worse and people do start to understand, the amount of bleeting that will occur by people saying that they didn’t realize how bad it could get is going to be sickening to those who do have clue.

  2. Roger says:

    Yep, things are pretty bad. But if you’ve been short since early March on all this bad news, you’ve gotten crushed. The markets anticipated all this bad news by going down 20% in a couple of months. Stocks are going up now and there are a ton of long trades that are working again.

  3. wunsacon says:

    Someone on this board once mentioned lenders did this in 30′s.

  4. Movie Guy says:

    “That’s quite astonishing: Conditions are actually worse, not better, than the already miserable numbers we hear being reported each month. And, the trend is accelerating downwards.”

    Why would you have not expected this to occur?

    I would have been astonished if this wasn’t happening. Disappointed, too.

  5. Pat G. says:

    “What are “reluctant banks?”

    As in to lend? We know they’re flush with our money.

  6. wedwards says:

    My take on the markets is that the Fed chairman, Treasury secretary, etc are usually so far behind the curve in recognizing that a recession is occurring, that the economy is in the early stages of recovery before they publicly admit concern.

    My belief here is the markets are looking at Bernacke’s recent comments as a sign of hope that the end is near! Sigh.

    I wish I was more ignorant and could view the world with rose-colored glasses like the rest of the market participants do!!

  7. Eddie says:

    As Roger says, this is why bank stocks are down 50%+ and giving double-digit dividend yields.. This is already baked into the cake.

    Things are bad, but it’s not the end of the world as we know it. Let’s throw some crazy numbers and see how bad things can be.

    Let’s say that 20% of all mortgages will end in foreclosure. And the bank will lose 50% of the mortgage value after reselling it at a loss and whatever other fees are involved. Even with these EXAGGERATED numbers, we’re still talking about only a 10% haircut on their existing mortgages. Is that the end of the world for these banks?

    If anybody knows the real numbers, it’d be fun to play with.

  8. Shane says:

    dang . . . where is cinefoz when you need him?

  9. craig says:

    Roger: yes a lot of shorts huting in the near term and some long trades working again…totally agreed. however, how long does that dynamic last? given:
    -Weakening consumer spend could continue 2-8 qtrs
    -Corporate profit margins at all time highs and very likely to compress which will take S&P EPS down
    -Financial sector was large portion of S&P EPS (30-40%-ish) and will contribute materially less to the EPS go fwd for some time because some of the highest profit margin biz is now way less (CDO type products)
    -MEW and construction spend way down and could stay down for 2-8 qtrs will be a material drag on GDP
    -PE on S&P 500 is still pretty high relative to historic average
    -Inflation in food and energy still higher than past few yrs and bites into already squeezed consumer budgets

    given all that it might be very tough for the S&P 500 Index to get a higher PE on lower EPS outlook in order to get the index to rise materially from here.

    not saying it won’t happen, markets can defy fundamentals for years, but given the headwinds it may very likely trade sideways and gains like the past few weeks are given back over the next 6-12 months.

    just my 2 cents worth. and i’m net long and would prefer mkts to rise over time. but…over the long term fundamentals need to support the valuation and there are so many neg headwinds/conditions right now.

  10. craig says:

    Eddie: agree it’s not end of world but where the banks get in trouble is similar to why consumers get in trouble when they put 5% down and borrow 95% to buy a house (assume $100,000 house). So i have $5,000 of capital in the house (banks are levered also…not usre if it’s 19:1 though). Lets say the house goes down 5% in value (similiar to banks losing 5% on total loans out). My capital is reduced to zero. Fine, I can walk away and do a jingle mail, but I think banks are required by law to have a certain amount of capital per loans out. so a small 5-10% hit means a lot to a bank’s solvency and/or it’s ability to lend new capital.

    i’m not a banker but i think that’s why a small hit means a lot to banks. any bankers out there can confirm or refute?

  11. craig says:

    Eddie: agree it’s not end of world but where the banks get in trouble is similar to why consumers get in trouble when they put 5% down and borrow 95% to buy a house (assume $100,000 house). So i have $5,000 of capital in the house (banks are levered also…not usre if it’s 19:1 though). Lets say the house goes down 5% in value (similiar to banks losing 5% on total loans out). My capital is reduced to zero. Fine, I can walk away and do a jingle mail, but I think banks are required by law to have a certain amount of capital per loans out. so a small 5-10% hit means a lot to a bank’s solvency and/or it’s ability to lend new capital.

    i’m not a banker but i think that’s why a small hit means a lot to banks. any bankers out there can confirm or refute?

  12. Mac & Bumble says:

    Eddie, do you understand the concept of leverage? Look it up and get back to us.

  13. Mac & Bumble says:

    Eddie, do you understand the concept of leverage? Look it up and get back to us.

  14. Mac & Bumble says:

    Eddie, do you understand the concept of leverage? Look it up and get back to us.

  15. Mac & Bumble says:

    Eddie, do you understand the concept of leverage? Look it up and get back to us.

  16. Mac & Bumble says:

    Eddie, do you understand the concept of leverage? Look it up and get back to us.

  17. Mac & Bumble says:

    Eddie, do you understand the concept of leverage? Look it up and get back to us.

  18. Mac & Bumble says:

    Eddie, do you understand the concept of leverage? Look it up and get back to us.

  19. Mac & Bumble says:

    Eddie, do you understand the concept of leverage? Look it up and get back to us.

  20. Mac & Bumble says:

    Eddie, do you understand the concept of leverage? Look it up and get back to us.

  21. Mac & Bumble says:

    Eddie, do you understand the concept of leverage? Look it up and get back to us.

  22. Mac & Bumble says:

    Eddie, do you understand the concept of leverage? Look it up and get back to us.

  23. ron says:

    The refi business rather then new home purchase is the real culprit behind the large number of foreclosures and the vast reach into all aspects of the homeowners market. Basically people have presold their homes to themselves and taken the money and spent it, now they either can’t afford to live in the home given the new loan amounts or would rather walk away rather then paying a upside down mortgage.
    The value of SFR as collateral for future expansion of the economy is lost.

  24. SR says:

    “What I find amazing is that the vast majority of people do not seem to understand the magnitude of the issues….”

    Well…the property tax office here (Bedroom community of Portland, OR) fully understands the ramifications.

    20% (per year) penality for deliquent property taxes.

  25. robster says:

    I am sorry but this is not such a big deal and it makes good sense.

    The value of the house and the neighborhood are less likely to deteriorate if the foreclosed houses are not empty or abandoned.

    Further, if the banks ever get around to it, there is the opportunity to collect rent from the occupiers (if they were evicted they would have to pay rent somewhere in order to live).

    Presumably if an offer were to be made on a property, the bank could then evict the owner unless they can match within a certain time period.

  26. Philippe says:

    When taking into consideration that hedge funds and mortgage lenders do not have access to the Fed discount window and three layers of « victims » do not receive the same treatment.It is more and more unsure that banks are the lightest casualties for now and in the very next future.

    Please see hereunder

    rhttp://bankimplode.com/

    Imploded*” Banks:
    Bear Stearns
    Northern Rock PLC
    Coast Bank

    http://hf-implode.com/

    Since mid-2007, at least 74 funds at 41 outfits have “imploded*”

    http://ml-implode.com/

    Since late 2006
    247 major U.S. lending operations have “imploded

  27. Marcus Aurelius says:

    We’d be in difficult times without a housing bubble and bust. With the bubble thrown in (and all of the attendant toxicity and contagion), Looks like this is shaping up to be a doozy of a downturn.

  28. Peter_BK says:

    Love this quote:

    The most experienced people you can bring in are origination people,” Stern said. “But for a bank it’s a moral hazard to have the same people who originated the loans now modifying those loans. That wouldn’t be desirable. Once around is enough

    Fudge mortgage applications like we saw in that chase letter, then turn around and get paid to process the forclosures. I bet there is a decent amount of this going on, because the banks have shown how much they care about moral hazards.

  29. Jim D says:

    The only thing astonishing is that you’re astonished.

    And yes, this is what happened during the depression – it’s win-win, since they’ll keep up the home, and be less likely to trash it when finally asked to move, since they’ve been shown something resembling compassion.

    As for how bad it can get: 20% foreclosure rate assumes that things don’t get too bad in the economy – given that we’re going to lose about $5-$8 trillion in capital, figure the odds on that one. (We’re already at 5% or more on some packages from 2005, and it’s just getting started.) And only 50% off? Guess again – in many markets (CA, FL, AZ, NV), that’s going to be the writedown on the list price, so the mortgage recoup values could go even lower. And of course all seconds and helocs in that scenario go to zero. But that’s only for originations from 2003 onward. If we knew what percentage of loans were made in the last 5 years, we’d have a better picture of where things were going.

    Unfortunately, I live in SFO, and I know ZERO people who have a loan structure older than 5 years… I’m sure it’s not that bad elsewhere, but I don’t have any other datapoints.

    I can get very, very bad. This is dead cat bounce, people.

  30. Jim D says:

    “I can get very bad” is actually, “This can get very bad”. Freudian slip?

  31. Eric says:

    Bearish Blind Squirrels was right when he called the bottom at 1285, but you told us to go “crazy short” on the same day.

    I wish I had listened to Bearish Blind Squirrels.

  32. Roger Bigod says:

    Today’s New Finance Concept: jingle return-to-sender.

  33. Mephisto says:

    Let’s just make sure the homebuilders get their tax break. They need to stay solvent to further add to the inventory.

    8^)

  34. Big Pic, it’s sensible to understand foreclosures by looking at the incentives of banks involved. The banks’ decisions matter in short sales as well: even with a willing buyer, many short sale deals languish for months. From the banks’ perspective, they continue to get mortgage payments, and then go to foreclosure anyway. In markets where the inventory of foreclosures aren’t through the roof, they can sell out of foreclosure for the same price and collect some payments along the way.

  35. Big Pic, it’s sensible to understand foreclosures by looking at the incentives of banks involved. The banks’ decisions matter in short sales as well: even with a willing buyer, many short sale deals languish for months. From the banks’ perspective, they continue to get mortgage payments, and then go to foreclosure anyway. In markets where the inventory of foreclosures aren’t through the roof, they can sell out of foreclosure for the same price and collect some payments along the way.

  36. william roth says:

    Sometimes it is hard to see how all the feedback loops are making this situation much worse than you might think.

    Austere budget brings threats of prisoner releases, bank failures

    TALLAHASSEE, Fla. Threats of early prisoner releases and the potential for bank failures emerged Wednesday as a series of austere spending measures advanced in the Senate as part of the budget-writing process.

    Several prison guards sat in the front row as one panel unanimously agreed on a justice system budget that includes eliminating 2,200 positions from the Department of Corrections and 382 from court support staff. The cuts would amount to 8 percent for Corrections and 11 percent for the courts.

    One lawmaker, meanwhile, said banks could be at risk if decimated courts are forced to delay foreclosure cases.

    Lawmakers expect to spend about $5 billion less than this year as tax revenues continue to decline due to the state’s slumping economy

    “It’s not beyond the realm of possibility that prosecutors will not be able to prosecute certain cases,” Perry told the committee. He said charges may be dropped if defendants cannot get speedy trials.

    Perry said the courts also are being deluged with foreclosure cases. Without enough resources, that could mean greater financial losses for banks and other lenders due to long waits before they can sell distressed properties, particularly if courts shift resources to criminal cases. Sen. Alex Villalobos, R-Miami, suggested that could result in bank failures.

    http://www.heraldtribune.com/apps/pbcs.dll/article?AID=/20080402/APN/804020853&template=printart

  37. william roth says:

    Sometimes it is hard to see how all the feedback loops are making this situation much worse than you might think.

    Austere budget brings threats of prisoner releases, bank failures

    TALLAHASSEE, Fla. Threats of early prisoner releases and the potential for bank failures emerged Wednesday as a series of austere spending measures advanced in the Senate as part of the budget-writing process.

    Several prison guards sat in the front row as one panel unanimously agreed on a justice system budget that includes eliminating 2,200 positions from the Department of Corrections and 382 from court support staff. The cuts would amount to 8 percent for Corrections and 11 percent for the courts.

    One lawmaker, meanwhile, said banks could be at risk if decimated courts are forced to delay foreclosure cases.

    Lawmakers expect to spend about $5 billion less than this year as tax revenues continue to decline due to the state’s slumping economy

    “It’s not beyond the realm of possibility that prosecutors will not be able to prosecute certain cases,” Perry told the committee. He said charges may be dropped if defendants cannot get speedy trials.

    Perry said the courts also are being deluged with foreclosure cases. Without enough resources, that could mean greater financial losses for banks and other lenders due to long waits before they can sell distressed properties, particularly if courts shift resources to criminal cases. Sen. Alex Villalobos, R-Miami, suggested that could result in bank failures.

    http://www.heraldtribune.com/apps/pbcs.dll/article?AID=/20080402/APN/804020853&template=printart

  38. VennData says:

    Larry Kudlow might want to have a chart that shows how long was Goldilocks allowed to stay in the Three Bear’s place.

  39. D. says:

    Is the next trick on Paulson’s agenda cahnging the law on squatters’ rights… six months and the house is yours!

  40. Roger Bigod says:

    Those prisoners are lucky duckies. Not only do they get out early, but there are all those empty houses for them. I just hope it doesn’t mess up all the progress we’re making in winning the War on Drugs.

  41. Movie Guy says:

    I expect they will head for New Orleans. Perfect environment.

  42. JudgeJudy says:

    ‘The markets anticipated all this bad news’

    Let me guess, they are looking 24 months out or something now? In other words, the market has skipped discounting 6 months for earnings anticipation and decided to borrow for many more months into the future? If so, we should just accept every explanation for a rally as being true. Hey, the market rallies because people lose their jobs and that means more money for companies and less for payroll. Hey!

  43. Juan says:

    If we try taking account of all the links between and including borrowers and investors, it may not be correct to speak of ‘the banks’. The traditional system is long gone. There are questions of ownership now which did not exist during earlier periods.

  44. tom a taxpayer says:

    Thank you, Mr. Roth, for the article indicating how bad things are likely to get before this crisis is over. The early release of prisoners is truly frightening. If these prisoners do not get jobs, they are likely to endanger the public.
    We need to give these prisoners jobs that use their talents.

    These criminals would fit right in at the mortgage lenders, homebuilders, appraisal companies, commerciial banks, Wall Street investment banks and brokerages, rating agencies, Federal Reserve, Treasury Department and SEC… the entire gang that raped and pillaged the mortgage industry, ruined the housing market, destroyed the credit system, endangered municipal financing, pension funds, and the banking system, and sent the economy into a downward spiral.

    Many of these organizations are still working hard to perpetuate the Ponzi scheme that is in danger of collapse without new tricks. The prisoners will provide a fresh new workforce with lots of pent-up creative energy that will help these organizations continue the swindle.

    The SEC issued “clarification” of accounting rule SFAS 157 last week suggests the SEC has already hired some prisoners. The “clarification” allows financial companies to avoid writedowns of Level 3 assets if the prices are the result of a forced liquidation or distressed sale. This bold, brilliant aiding and abetting of the Ponzi fraud could only come from a career criminal.