Stat of the Day: Home loan delinquencies going bad faster than fixes
I see Diana Olick’s recent comments about government mortgage modification programs as proof that these props will not work.
Despite extraordinary loss mitigation efforts that have resulted in the execution of approximately two million loan modifications – including the federal government’s Home Affordable Modification Program (HAMP) trial periods – the number of new delinquencies since January 1, 2009, still exceeds this number by 25 percent.
What does that tell you?
Note, that right now only 16% of borrowers eligible for the HAMP received permanent modifications. I am not a big fan of all of the government programs designed to prop up house prices because they only put off the inevitable – and usually at higher cost to the mortgagee and economy. They are only good for banks who want to get as much money out of a mortgagee desperate to hold onto their property as they can.
But, the government has turned to a new fix: short sales. Olick writes in another recent post:
The government’s short sale program is designed specifically to lower the number of foreclosures by getting these homes sold quickly to financially able buyers.
The problem here is that no one wants to do a short sale. As a first lien holder, why would you write down your mortgage and do a short sale when you could just as easily extend and pretend?
Delinquencies are rising at a rapid rate.
But foreclosures are not rising anywhere near this fast (see my second chart from Strategic default: In come the waves again). That’s called extending and pretending.
Paul Jackson of Housing Wire, who provided the chart above says:
What the above chart should call attention to is the aging of loans in the default pipeline. Again using LPS data, for all loans more than 90 days in arrears, the average days delinquent is now at 272 days—up from 204 days in early 2008. For loans in foreclosure, the aging numbers are even more staggering: loans in this bucket average 410 days delinquent, up from 260 days delinquent in early 2008.
Ponder those numbers for just a second. On average, severely delinquent borrowers have gone more than 9 months without making a mortgage payment—and yet foreclosure has not yet started for them. For those borrowers who are in the foreclosure process, it’s been an average of 13.6 months—more than one full year—since they last made any payment on their mortgage.
Jackson goes on to say that short sales are not going to save the day and provides a very good analysis as to why, citing second liens and the size of the problem as the biggest stumbling blocks. Read the full account at his post Housing Recovery is Spelled R-E-O.
Also see The fake stress tests and the coming wave of second mortgage writedowns for more on second liens because this gives another take on why second lien holders don’t want to do short sales either.
Let’s go back to Diana Olick for a second, because she makes another point that is a particular stumbling block: taxes. Borrowers don’t want to do short sales as well.
Unfortunately any loan forgiveness [from a short sale] would be counted as taxable income.
That would cost beleaguered borrowers thousands of dollars after losing their homes! But no worries, Congress to the rescue; it quickly passed the Mortgage Forgiveness Debt Relief Act of 2007, which keeps homeowners from being liable for the canceled debt.
That law is in effect through 2012.
California did the same thing, except that its law expired at the end of 2008, so any Californian who got mortgage debt forgiveness in 2009 is potentially on the hook for a big bad state tax bill.
Translation: California borrowers, where the most people are the most underwater, are not going to like this new HAFA short-sale program at all because they will receive a massive tax bill.
Olick makes her case in the video below.
Bottom line: These programs are not going to get it done. The only thing that will is market-clearing prices, and prices won’t be a low enough to clear for a long time.
Loans Going Bad Faster Than the Fixes – Diana Olick, CNBC
California Could Tank Short Sale Stimulus – Diana Olick, CNBC
Home Affordable Foreclosure Alternative program – Treasury Department