by Calculated Risk on 5/17/2008 06:06:00 PM

I've reviewed a copy of a memo from Sun Trust concerning HELOCs (Home Equity Line of Credit) that I believe to be authentic. In the memo, dated yesterday, Sun Trust announced new HTLTV ("HELOC Total Loan To Value") restrictions in certain circumstances (like declining markets, new condominiums, 2nd homes), and they are apparently even eliminating their Flex Equity program completely in several key states (like Arizona, California and Nevada).

This is nothing new. A number of banks have announced HELOC restrictions this year, see Chase: Max HELOC LTV 70% in Certain Areas

Note: HousingWire has been covering the HELOC news extensively: Focus shifts to HELOCs

Bill Fleckenstein also wrote about HELOCs in his Daily Rap on Thursday (with comments from his source the "Lord of the Dark Matter). For more excerpts, see: Fleck: HELOCs: The New Subprime

"A couple of us tuned into Dexia's conference call yesterday, looking for clues on HELOCs. We got plenty, and they were important. In February Dexia said the absolute worse case loss for their monoline subsidiary FSA was going to be $125 million. Yesterday, they added $195 million to that. The reason given on the conference call for the poor guidance is that the servicer on their wrapped HELOC portfolio, Countrywide, had such a backlog that FSA didn't get the news that delinquencies were skyrocketing until very recently."
excerpted with permission, emphasis added

Is this really the reason FSA (and BofA) provided poor guidance recently ... servicer delays?

Perhaps something more fundamental is happening. What if certain HELOC borrowers were using the HELOCs as ATMs, paying their HELOC (and first lien) monthly payments using borrowed money? Yes, a different bred of NegAm loans! Then, when the lenders started to rescind or reduce these HELOCs earlier this year, many of these Home ATM junkies were stuck without a fix.

Then - if this story is correct - as the Home ATM junkies have started to default, the lenders have discovered that their secured lines of credit were really unsecured (there was no "HE" in the "HELOC") - and the lenders' losses on home-equity loans started to rise rapidly. This seems more likely to me than "servicer delays".

For more on HELOCs, I recommend Tanta's HELOC Nonsense, The HELOC As Disability Insurance and Banks Freezing HELOCs.

by Calculated Risk on 5/12/2008 11:01:00 AM

From the Radian conference call this morning:

“We continue to see the poorest relative performance in our Alt-A book and California and Florida continue to heavily influence overall portfolio performance. 60% of the increase in defaults in Q1 was attributable to Alt-A loans and 50% of the additional 1st lien reserves can be attributed to California and Florida . We estimate the peak to trough national price declines in a range between 8-13% using the OFHEO index. That would be in line with the Case Shiller approximated range of 16-26%. We could clearly see declines in areas of California and Florida that are twice the national rate.”

by Calculated Risk on 4/25/2008 11:30:00 PM

From the WSJ: Calpers-Linked Land Partnership Gets Default Notice

A large California land partnership involving one of the largest U.S. pension funds has received a notice of default on a $1 billion loan after failing to meet certain terms of its lenders.

LandSource Communities Development LLC, a partnership that involves the California Public Employees' Retirement System, received the default notice Tuesday, amid talks to restructure $1.24 billion of debt. The partnership ... owns 15,000 acres in Southern California ...

LandSource's trouble followed mounting stress at two large joint ventures in Las Vegas ... One partner in these ventures said Friday that it is unlikely that it will meet its obligations to the deals. The partner, home builder Kimball Hill Homes, announced Wednesday that it had filed for Chapter 11 bankruptcy protection.

Here come the defaults and builder bankruptcies.

UPDATE: Remember this photo from January 1, 2008? Anyone think housing bubble?

Click on photo for larger image.

This is a photo taken at the Sacramento Airport by Itamar

by Calculated Risk on 4/22/2008 12:41:00 PM

Update: press release added at bottom.

From DataQuick: The number of mortgage default notices (NODs) filed against California homeowners in Q1 2008 increased by 39% over Q4 2007, to the highest level on record.

This graph shows the annual NODs filed in California since 1992. For Q1 2008, a record 113,676 NODs were filed in California, compared to 254,824 total NODs in 2007. This is more than double the 46,670 NODs filed in Q1 2007.

Click on graph for larger image.

For 2008, the number of NODs was estimated at 4 times the Q1 rate. Based on recent experience - with NODs increasing every quarter for the last 3 years - this is probably conservative.

As bad as 2007 was, 2008 will be much much worse.

Not all NODs go to foreclosure, but the percentage has been increasing (well over 50% now).

From DataQuick: Another Jump in California Foreclosure Activity

Lending institutions sent homeowners 113,676 default notices during the January-to-March period. That was up by 39.4 percent from 81,550 the previous quarter, and up 143.1 percent from 46,760 for first-quarter 2007, according to DataQuick Information Systems.

Last quarter's number of defaults was the highest in DataQuick's statistics, which go back to 1992.

"The main factor behind this foreclosure surge remains the decline in home values. Additionally, a lot of the 'loans-gone-wild' activity happened in late 2005 and 2006 and that's working its way through the system. The big 'if' right now is whether or not the economy is in recession. If it is, the foreclosure problem could spread beyond the current categories of dicey mortgages, and into mainstream home loans," said Marshall Prentice, DataQuick's president.

Most of the loans that went into default last quarter were originated between August 2005 and October 2006. The median age was 23 months, up from 16 months a year earlier.
...
Last quarter's default numbers were a record in almost all of the state's 58 counties. The notable exception being Los Angeles County, which was particularly hard hit by the recession of the early 1990s. During last quarter, the county's 20,339 defaults represented 94.8 percent of its peak quarter back in Q1 of 1996, which saw 21,444 defaults.
...
Of the homeowners in default, an estimated 32 percent emerge from the foreclosure process by bringing their payments current, refinancing, or selling the home and paying off what they owe. A year ago it was about 52 percent. The increased portion of homes lost to foreclosure reflects the slow real estate market, as well as the number of homes bought during the height of the market with multiple-loan financing, which makes 'work-outs' difficult.
emphasis added

Wow, now 2/3 of NODs are going to foreclosure!

by Calculated Risk on 4/15/2008 09:36:00 AM

From Bloomberg: U.S. Foreclosures Jump 57% as Homeowners Walk Away

U.S. foreclosure filings jumped 57 percent and bank repossessions more than doubled in March from a year earlier as adjustable mortgages increased and more owners gave up their homes to lenders.

More than 234,000 properties were in some stage of foreclosure, or one in every 538 U.S. households, Irvine, California-based RealtyTrac Inc., a seller of default data, said today in a statement. Nevada, California and Florida had the highest foreclosure rates. Filings rose 5 percent from February.
...
``We're not near the bottom of this at all,'' said Kenneth Rosen, chairman of Rosen Real Estate Securities LLC, a hedge fund in Berkeley, California and chairman of the Fisher Center for Real Estate at the University of California at Berkeley. ``The foreclosure process will accelerate throughout the year.''

It is very likely that the foreclosure activity will continue to increase throughout 2008, negatively impacting inventory and house prices.

Note that the "walk away" headline isn't supported by any evidence in the article.

by Calculated Risk on 4/14/2008 06:36:00 PM

Here are some comments from the Wachovia conference call (hat tip Brian).

On "walking away":

Q: Kevin Fitzsimmons, Sandler O'Neill: Could you give a little more detail on -- you cited dramatic change in customer behavior or consumer behavior and that led to the decision to cut the dividend, increase capital and so just wondering if you could be particular by -- I'm assuming it's California, but are you talking about people walking away from houses and if you can give any specific examples, thanks.

Ken Thompson, Wachovia Corporation - CEO: I'll let Don talk specifically but I would just say that what we are seeing is that when equity in the home approaches zero, behavior changes. And that's what the model tries to do is to then take that behavior along with house price depreciation and factor that into future losses. Don?

Don Truslow, Wachovia Corporation - SEVP, Chief Risk Officer Ken, that's exactly right. And Kevin, it's just this pattern almost that somewhere -- I don't know where the tipping point is, but somewhere when a borrower crosses the 100% loan to value, somewhere north of that and they presumably run into some sort of cash flow bump, whether it's reduced income or kind of normal things in life that have created past dues before, their propensity to just default and stop paying their mortgage rises dramatically and I mean really accelerates up and it's almost regardless of how they scored, say, on FICO or other kinds of character, credit characteristics.

It's difficult on the walk-away part of the question, that is going on, clearly and there's lots of evidence of that in the market. It's hard to quantify though, from the standpoint of how many of our defaults are just walk-away and the reason is people, they don't tell you. And so we do our best to try to gauge but that portion of the defaults is just kind of hard to quantify. But that behavior is going on. We're seeing in our portfolio the most significant declines and defaults activity in California and of course it's the largest concentration for us in the pick a payment portfolio by far. What I don't know and I guess we're just learning over time is whether the same sort of behavioral trends and patterns will spread to other markets or be observed in other markets at the same pace that they have been in California. But in essence, it built our correlations in the model to assume that they do.

Ken Thompson, Wachovia Corporation - CEO: I might just add that you also see evidence of what Don is talking about if you look across our industry and look at credit statistics on equity loans and equity lines. Because there, at many banks, you're seeing those loans going obviously above 100% loan to value and you're seeing dramatically increasing default rates and losses.”

On REOs and outlook for the housing market:

Truslow (Risk Officer): “[W]e are focused in our efforts to quickly move foreclosed properties related to the pick a pay portfolio as we've talked about before and during the quarter, we took in about 1100 homes and the team did a great job of getting over 800 sold during the quarter in a tough time of the year and in a tough market. So we ended the quarter with just over 900 homes in inventory originated through the pick a payment channel and part of this aggressive action basically served to provide the severity that we recognized on average in the first quarter up to about 32% from about 24% in the fourth quarter and I would just also remind people that included in those severities, we have accounted for basically the disposition cost such as the brokerage fees and even costs that are normally accounted for in period costs such as mowing the grass and fixing up the homes.”

“... the overarching assumption here is that we're about halfway through the decline in housing prices with the trough expected to occur sometime around the middle of 2009.”

On the dramatic change in outlook and "shadow" inventory:

Q: Jonathan Adams, Oppenheimer Capital - Analyst: [I]f I look on page 19 of your presentation, it strikes me that there's nothing in the 90 day past due trends that would justify the kind of change that you have made in your outlook. You can pick a different -- a number of different metrics, whether it's the dividend in suggesting that over a broad range of scenarios it wouldn't need to be cut and then five or six weeks later coming to a different conclusion, or it's some other metrics as well. But it just strikes me as difficult to understand how management's view of the environment has changed so dramatically.

Don Truslow, Wachovia Corporation - SEVP, Chief Risk Officer: Well, I guess -- this is Don. One thing that doesn't show on the chart is the level of cures between 90 days and further severities and defaults have been dropping. The severities in the market place when we take a house back, it takes a lower price to get homes sold and our outlook is -- and as I think everybody has been reading, there is an expectation that there's a broad accumulation of foreclosed properties that haven't hit the market yet and perhaps even some shadow foreclosures that haven't emerged as yet. So our concern, looking forward is that -- and again, what we're beginning to see more evidence of and sense more of in the first quarter is that conditions are going to continue to get tougher and there's an overhang of inventory out there that is going to be costly for the industry to work through.

So on the default rates at 90 days, not a dramatic change in pace but it's more the role rates, the propensity to go all the way to foreclosure, the higher severities taken on disposing of properties and then the, just further understanding and recognition that there is an inventory of foreclosed properties building out there that are eventually going to have to get dealt with.

All emphasis added.

by Tanta on 4/11/2008 09:05:00 AM

To summarize this MarketWatch article: the parties who are actually in first loss position--whose money is on the table if these things go south--have learned their lesson about no-down financing. The parties who just like to party haven't gotten the memo yet.

Mortgage Guaranty Insurance Corp., for example, changed its guidelines last week to exclude coverage of 100% mortgages. At a minimum, borrowers need a 3% down payment and a credit score of at least 680 to be eligible for coverage. In selected markets where home prices are declining, a 5% down payment is the minimum required. . . .

"It's obvious why they're making these changes," [Broker*] Brown said of the insurance companies. "They have to eliminate the losses they're taking." Mortgage insurance companies have been hit hard by the increasing number of defaults and foreclosures, he pointed out.

At MGIC, the changes to underwriting of low loan-to-value loans -- as well as increases to the pricing on some products -- were made due to the recent performance of loans with those characteristics, said Michael Zimmerman, senior vice president of investor relations. But the changes, he said, also reflect a return to more historically normal underwriting standards.

"The more equity that a borrower has -- or, if you will, skin in the game -- in any investment, the more likely they are to have a higher degree of responsibility toward it," he said.

Goldhaber [of Genworth] said that those in the mortgage industry also have a responsibility to put homeowners into the proper mortgage product. These days, it's irresponsible to give people a loan for 100%, he added.

"In soft markets like we have today, with declining home-price appreciation, to put someone in a zero down is really inappropriate," he said. "It's the kind of product choice that gets consumers in trouble."

Let us pause just for a moment to reflect on a distinction I haven't posted jillions of words on for a least a year, probably, but that is really crucial here: loss frequency versus loss severity. Requiring a 5% down payment from a borrower is not really about substantially lowering a lender's or insurer's loss severity, or how much you will lose if the thing defaults. It is about substantially lowering loss frequency, or how often defaults occur. This is what the concept of "skin in the game" means: it means having a borrower with a first-loss stake in the deal that is significant, in dollars, to the borrower. A borrower who does not wish to lose a 5% investment in the property, the logic goes, is less likely to "ruthlessly default" immediately should home prices drop; that borrower has some motivation to hang in there until they recover. (And if current prices are still so high that they have a long way to fall and little likelihood of ever recovering, whatever are you doing putting a borrower into such a loan with only 5% down? That's asking for "ruthless default.")

But the idea here is that the "skin in the game" is significant to the borrower, not representative of the lender's likely loss. If a 95% financed loan defaults tomorrow, even with no change in the home's value, the lender/insurer is still going to lose somewhere in the neighborhood of 20% of the loan amount. Default servicing and foreclosure and resale of REO is expensive, more expensive than that 5% down is going to cover. Down payments in this view of the world are set to "what the borrower can't afford to lose," not "what the lender can't afford to lose." Or again, it is about making defaults less frequent--because borrowers are motivated not to default "optionally"--than about making defaults less severe, although they surely do mitigate severity.

Try telling these mortgage brokers that:

That said, while the conventional no-down-payment products may have disappeared, there are still ways to buy a home without a down payment, said A.W. Pickel, CEO of LeaderOne Financial in Overland Park, Kan., and former president of the National Association of Mortgage Brokers.

"You have to broaden your definition of no-down payment," he said, adding that loan options are available, if not in the form they were in before.

A gift from a family member or a community grant can take the place of a down payment, for example, he said. And down-payment assistance programs are available to help those seeking loans backed by the Federal Housing Administration, he added. . . .

"You will see more unique products coming out," he said, as companies search for ways to help down-payment challenged buyers get into a new home.

But as of now, there are fewer options than there were before for would-be buyers who don't have ample cash reserves. And Brown sees that as an overreaction.

He believes consumers should have the option of financing their entire purchase -- even if it comes with extra fees or higher rates. Someone who doesn't have a lot of cash, but is a good credit risk, for example, should have that option, he said.

To quote Professor Krugman, "gurk." It's as if this "conversation" between mortgage insurers and mortgage brokers is happening on two different planets. I have gone on record as being a bit skeptical that "ruthless default" is as widespread as some breathless media stories want to imply--mostly because I suspect that the borrowers in question really can't afford their mortgage payments--but only a fool (which I try not to be) would claim it has never happened and won't keep happening if you put people into "free put option" contracts where there is no financial downside to just walking away from a loan.

And yet here we are, treated to brokers discussing ways borrowers can use OPM (Other People's Money) to leverage 100% financing, even in a falling market, because we can declare them "good credit risks" at the same time we put them in loans that offer no downside to default. What kind of "good credit risks" are these people? Folks who will continue, doggedly, to make mortgage payments on an upside-down property for years and years, unable to move, unable to refinance, all in the name of the sanctity of debt obligations? How, exactly, would any lender or insurer measure this kind of "willingness to repay"? With a FICO? Now that we're being told that many borrowers are keeping up the MasterCard payments--they don't want the downside of having the card cut off--while missing the mortgage payment, because there's little downside there?

There is, of course, one possibility here: we could measure "willingness to repay" by a kind of proxy measure, like, um, "willingness to put one's own money on the table in the form of a down payment." This, however, would involve all of us being on the same planet. And clearly we aren't all there yet.
____________

*Actual title is "a certified mortgage planning specialist"

by Tanta on 4/01/2008 08:12:00 AM

Our friend PJ at Housing Wire had a nice post up the other day about Michael Perry, CEO of IndyMac, and his startling announcement that IndyMac would be changing the way it collected and presented statistics on delinquent and defaulted loans. Of course I'd say it's a nice post; I contributed around two cents' worth to an earlier draft of PJ's. Self-serving motives of my own aside, though, PJ is making a very important point about how what we choose to measure--and how we define our measurements--influences what we perceive to be the risks of mortgage lending:

But if we’ve learned anything in this credit mess, it’s that all prepayments are not created equal — and that prepayments aren’t the only reason loans in a portfolio will run off.

First off, there are prepayments that are voluntary, and those that aren’t. Think of it this way: a borrower that would have defaulted in 2006 refis into a new loan in 2006 and now defaults in 2008. That’s very different sort of prepayment than a creditworthy borrower deciding to refinance because they simply want a lower payment. The real problem with the 2006 and 2007 vintages, at the core, isn’t prepayments per se; it’s that the game of musical chairs finally stopped for those borrowers whose previous defaults had essentially been “revintaged.”

So the 2003-5 vintages end up looking great from a credit perspective, even if prepayment velocity is off the charts; analysts start making complex models that only look at the effect of prepayments in whatever static pool they’ve got, and everyone declares credit risk mostly irrelevant. In contrast, the 2006-7 vintages look horrible from a credit perspective, prepayments slow and become much more volatile, Wall Street takes a look at its models and realizes some important data was missing — and, of course, lender CEOs have to pen very public explanations explaining that prepayments are “screwing everything up.”

In my view--which I laid out a bit in our March newsletter, as you subscribers will know--the prepayment picture is also muddled if you use a very narrow definition of "default." If any loan that pays in full is treated as a simple "prepayment" unless it pays off via foreclosure or you actually took a principal loss on it (that is, it "settled for less" rather than "paying in full"), then you completely miss the problem of "revintaging" as well as missing the signs of the stress level on a pool or vintage or book of loans. That's because you treat a loan that refinances while it is delinquent, or a home that sells while the loan is delinquent, as the "same thing" as a non-distressed refi or sale. If you use a more sophisticated measure of "default" that many investors do use--one that counts loans on which you didn't take a loss, but that paid off out of a prior delinquency status--then you don't get so badly fooled by the "musical vintage" problem, because you can see it coming.

Not that taking the perspective of an investor in static pools of mortgages is always helpful: that does tend to lead to the mindset that a "prepayment" means a loan "goes away" and no longer needs to concern us. What distinguishes a "static pool" like an MBS from a dynamic book of business is that in the former, no new loans are ever added. MBS "run off" by definition. Newly-issued MBS will have new loans in them that were originated as refinances, but because we're now talking about a "different deal," there is no conceptual encouragement to see these "new" loans as the prepayments from an older pool. Even the new purchase-money loans in a new pool may represent a property that "defaulted" from an older pool.

Yet investors seem to be remarkably tolerant of a situation in which very little, if any, attention is paid to where these loans in these new pools came from. It's sort of credit risk as Groundhog Day: each pool issue is new again. Borrowers and properties have no history. Prepayment analysis is always forward-looking--attempting to model the future of this pool--rather than retrospective--attempting to account for how prepayments--voluntary and involuntary, distressed and non-distressed--generated the pool we're looking at today which has not yet experienced a "prepayment."

Perhaps a concrete example will help. Shnaps directed my attention to this one in yesterday's Chicago Tribune, largely because the example given doesn't make any sense. So it's an imperfect example; I'm going to have to "make up" a couple of details in order to illustrate my point. You may reflect on why we so often seem to have to do that when reading the newspapers. I'm after other fish to fry this morning:

Janice Lee fears she will lose her 1,400-square-foot Wilmette home next month.

Lee, a former pharmaceutical representative from Minneapolis who owns Chinoiserie restaurant in Wilmette, found herself heading for trouble after she was diagnosed with lymphoma in 2003. To keep pace with her medical bills, Lee sought a $70,000 equity line on her home in 2004. Two years later, she sought a second line.

Nearly half of her $130,000 loan, or $60,000, went toward her mortgage and property taxes. But that pushed her monthly payments to $4,000 from $2,500 in two years.

In January 2007, she refinanced, pushing her monthly payments to more than $6,000, she said. She missed her first payment last March and received a foreclosure notice in June.

We do not know when Ms. Lee bought that home, or even if she borrowed money to buy it, although we have to suspect that she already had a first-lien mortgage on this loan when the HELOC series began. Otherwise we can make no sense of the payments indicated (which have to be combined first and second lien payments, or else they're payday loans.)

For the sake of example, then, I'll make up the idea that Ms. Lee bought the house in 2002 with a first-lien purchase-money loan. Why 2002? Well, cognoscenti of matters vintage will know that 2002 was once considered one of the cruddiest mortgage vintages ever to disgrace the earth. Heh. After 2005-2008, of course, old 2002 makes us all nostalgic for the "good old days." But that's kind of my point in building out this example.

So we have, in Ms. Lee's case, the following appearances in the following vintages:

2002: A new purchase-money first-lien loan
2004: A new cash-out HELOC second-lien loan
2006: A new cash-out HELOC second-lien loan that pays off the loan in the 2004 vintage
2007: A new cash-out first-lien loan (I think) that pays off both the 2002 loan and the 2006 loan and that is in FC. It was also, you note, an EPD (early payment delinquency), since it seems to have missed either its first or its second payment and was in FC by payment 5 or 6.

If you do a certain kind of simple-minded "vintage analysis" of the kind PJ is complaining about, you would get the following:

2002: A good vintage, since the loan never defaulted and paid in full
2004: A good vintage, for the same reason
2006: Ditto
2007: A very bad vintage

But what, really, about those earlier vintages was so "good"? Were these "good loans," or did we get lucky by having another lender around willing to "revintage" the loans via refinance? From hindsight, the lender in the earlier vintages looks like it got lucky, because someone else was holding this bag in 2007 when the music finally stopped (it's obligatory to mix metaphors in this context). At the time, of course, they might well have been complaining bitterly about prepayments erasing their yield on those pools (or their servicing income). In fact, they might have been so bitter about it that they developed these noxious "prepayment penalty" things to keep those apparently "good" loans in place. Yeah, that looks like a good idea now, doesn't it?

The Tribune article, of course, doesn't tell us whether Ms. Lee was ever delinquent on those earlier loans. I suspect she was, since it looks like she was paying real subprime interest rates on at least the last two, and that might well have been because her prior mortgage history wasn't good. If that's true, then the earlier vintages really dodged a bullet here: they escaped a loss on the loan only because a greater fool stepped in to refinance it.

Thus, as PJ notes, the problem with our most recent vintages: the greater fools got run over by a truck, and so loans aren't "moving" any longer. They stay where they are until they finally fail. It will undoubtedly take a long time until we get another vintage as ugly as 2007-2008, but that's not just because (we hope) it will take a while for memories to fail and lending standards to become as stupid as they have been. It's because the lack of an "exit" means that those vintages will be forced to "show" the real defaults.

It is also important to really notice the implications of a point PJ makes here: if you look not at individual pools of loans but at the entire outstanding "book" of subprime and Alt-A loans in the aggregate, you are going to see "rising" delinquency numbers even if "nothing gets worse" than it already is. That is because, until further notice, no or extremely few new subprime or Alt-A loans are being made. The whole "book" is in "run-off" mode. That means, if you use a "current balance" to calculate delinquency and default, the "current balance" just keeps getting smaller and smaller, because no new balances are added to it. The average loan age just keeps getting older, for the same reason. In other words, we really do, for once, have a "prepayment" situation in which liquidated loans just do "go away." You can think of lender REO inventory as exactly that: the old loan for the old owner "went away," but since there's no new buyer wanting a new loan, there is no new "loan vintage," just a nasty REO inventory in a kind of "limbo."

What Perry of IndyMac is up to, of course, is deciding to quit reporting "raw delinquencies" on current balances right at the time when that kind of statistic is going to just keep looking worse for a long time, and substituting an alternative kind of reporting that will look better. That doesn't mean that the alternative reporting is "false." It means, in the most generous case, that we're looking at the part of the cup that's half-full. But switching measurements (and universes of loans to be measured) at the beginning of the unwind is going to play havoc with our ability to understand history. Those of us not looking forward to being doomed to repeat it do care about that.

by Calculated Risk on 3/14/2008 07:36:00 PM

From the WSJ: Two Projects in Default Dog Big Home Builders

Two massive housing developments in Las Vegas, involving several of the nation's largest home builders, have received default notices on about $765 million in debt ... two joint ventures, involving builders Toll Brothers Inc., KB Home and Lennar Corp. among others, have each missed an interest payment in recent weeks ...

Earlier this week, in a filing with the SEC, Toll warned of potential "significant losses" from joint ventures projects:

We have investments and commitments to certain joint ventures with unrelated parties to develop land. These joint ventures usually borrow money to help finance their activities. In certain circumstances, the joint venture participants, including ourselves, are required to provide guarantees of certain obligations relating to the joint ventures. As a result of the continued downturn in the homebuilding industry, some of these joint ventures or their participants have or may become unable or unwilling to fulfill their respective obligations. In addition, we may not have a controlling interest in these joint ventures and, as a result, we may not be able to require these joint ventures or their participants to honor their obligations or renegotiate them on acceptable terms. If the joint ventures or their participants do not honor their obligations, we may be required to expend additional resources or suffer losses, which could be significant.

by Calculated Risk on 3/05/2008 06:30:00 PM

Thornburg Mortgage filed a form 8-K with the SEC today warning of a material event: (hat tip RW)

Thornburg Mortgage, Inc. (the “Company”) has entered into reverse repurchase agreements, a form of collateralized short-term borrowing, with various counterparties.

The Company received a letter from JPMorgan Chase Bank, N.A. (“JPMorgan”), dated February 28, 2008, after failing to meet a margin call of approximately $28 million. The letter states that an Event of Default as defined under that certain Master Repurchase Agreement, dated as of August 3, 2006, as amended on February 7, 2007 by and between the Company and JPMorgan (the “Agreement”) exists. The letter also notified the Company that JPMorgan will exercise its rights under the Agreement. The aggregate amount of proceeds lent to the Company under the Agreement was approximately $320 million.

The Company’s receipt of the notice of an event of default has triggered cross-defaults under all of the Company’s other reverse repurchase agreements and its secured loan agreements. The Company’s obligations under those agreements are material.

by Calculated Risk on 3/04/2008 09:50:00 AM

Fed Chairman Bernanke today called for lenders to reduce principal on homeowners with negative equity. He also noted that for properties foreclosed in the fourth quarter, the estimated total losses exceeded 50% percent of the principal balance. Bernanke argued this gives lenders significant incentive to avoid foreclosure and write-down principal.

From Fed Chairman Ben Bernanke: Reducing Preventable Mortgage Foreclosures

This situation calls for a vigorous response. Measures to reduce preventable foreclosures could help not only stressed borrowers but also their communities and, indeed, the broader economy. At the level of the individual community, increases in foreclosed-upon and vacant properties tend to reduce house prices in the local area, affecting other homeowners and municipal tax bases. At the national level, the rise in expected foreclosures could add significantly to the inventory of vacant unsold homes--already at more than 2 million units at the end of 2007--putting further pressure on house prices and housing construction.

Bernanke notes that temporary measures just postpone foreclosure, and he urges lenders to consider reducing principal for homeowners underwater:

Measures that lead to a sustainable outcome are to be preferred to temporary palliatives ...

In cases where refinancing is not possible, the next-best solution may often be some type of loss-mitigation arrangement between the lender and the distressed borrower. Indeed, the Federal Reserve and other regulators have issued guidance urging lenders and servicers to pursue such arrangements as an alternative to foreclosure when feasible and prudent. For the lender or servicer, working out a loan makes economic sense if the net present value (NPV) of the payments under a loss-mitigation strategy exceeds the NPV of payments that would be received in foreclosure. Loss mitigation is made more attractive by the fact that foreclosure costs are often substantial. Historically, the foreclosure process has usually taken from a few months up to a year and a half, depending on state law and whether the borrower files for bankruptcy. The losses to the lender include the missed mortgage payments during that period, taxes, legal and administrative fees, real estate owned (REO) sales commissions, and maintenance expenses. Additional losses arise from the reduction in value associated with repossessed properties, particularly if they are unoccupied for some period.

A recent estimate based on subprime mortgages foreclosed in the fourth quarter of 2007 indicated that total losses exceeded 50 percent of the principal balance, with legal, sales, and maintenance expenses alone amounting to more than 10 percent of principal. With the time period between the last mortgage payment and REO liquidation lengthening in recent months, this loss rate will likely grow even larger.
...
To date, permanent modifications that have occurred have typically involved a reduction in the interest rate, while reductions of principal balance have been quite rare. The preference by servicers for interest rate reductions could reflect familiarity with that technique, based on past episodes when most borrowers' problems could be solved that way. But the current housing difficulties differ from those in the past, largely because of the pervasiveness of negative equity positions. With low or negative equity, as I have mentioned, a stressed borrower has less ability (because there is no home equity to tap) and less financial incentive to try to remain in the home. In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.

Of course, if it becomes common for lenders to reduce principal, their phones will be ringing off the hook!

by Calculated Risk on 3/03/2008 12:32:00 AM

From the WSJ: Countrywide's Mortgage Woes Deepen

The ... lender's annual filing with the Securities and Exchange Commission ... showed a big increase in late payments on option adjustable-rate mortgages, known as option ARMs. ...

As of the end of 2007, payments were at least 90 days overdue on 5.4% of option ARMs held as investments by Countrywide's banking arm, up from 0.6% a year earlier. Countrywide held $28.42 billion of such loans as of Dec. 31. The company said 71% of the borrowers were making minimal payments. Only about a fifth of the borrowers were required to document fully their incomes before receiving the loans.
...
Countrywide disclosed that half of the $87.04 billion of mortgage loans held by its bank are backed by homes in California and Florida, two of the states hit hardest by falling home prices.

by Tanta on 3/01/2008 01:30:00 PM

Some of you could stand to know in somewhat more detail how repayment plans for delinquent mortgages work. The rest of you are reading this for reasons I am still unable fully to understand, but I have come to accept that Calculated Risk junkies have a tolerance for outright nerdiness that never fails me.

I am still getting emails directing my attention to this post of Mish's from last week, which claims to be "evidence of walking away" based on a set of monthly numbers from a gnarly old (2007) WaMu Alt-A pool:

The chart shows performance by month since July, 2007. Rows 2-6 are delinquencies through REO (Real Estate Owned). In theory, this should work like an assembly line: Mortgages enter 30 days delinquent, the next month that subset goes into 60 days, then 90 days, then foreclosure, then REO. It's a process that takes time.

Look at this most recent jump from December, 2007 to January, 2008. Foreclosures increased a whopping 4.92%, yet in December, 2007 the 90 days delinquent bucket was only 3.79% (If every 90 day delinquent loan went to foreclosure, the jump would only have been 3.79%) How could this happen? The evidence suggests that people are walking away 30 days or 60 days delinquent without even waiting for foreclosure.

I'm sorry Mish, but this isn't "evidence of walking away," nor is your theory on foreclosure timelines quite right. I'm not here to beat up on Mish, but as I was the one who got snotty and demanded evidence for the "walking away" story, I suppose I need to explain why this isn't it.

First off, I am going to perform the incredibly tedious act of demanding that we define our terms. Yes, I'm one of those. "Walking away" is hardly a precise term, and it undoubtedly means different things to different people. The claim I am having a problem with has been made in slightly different ways by different people; this is the WSJ's formulation of it (which I think we can call the new "conventional wisdom"):

As home prices plummet, growing numbers of borrowers are winding up owing more on their homes than the homes are worth, raising concerns that a new group of homeowners -- those who can afford to pay their mortgages but have decided not to -- are starting to walk away from their homes. . . . some homeowners in weak markets are concluding that house prices won't recover anytime soon, and therefore they are throwing good money after bad.

Let us understand the elements of this claim. In this sense, the "walking away" group are:

1. Upside down on their mortgages.
2. Fully aware that they are upside down on their mortgages.
3. Fully convinced that this is a long-term problem.
4. Able to make their mortgage payments under existing mortgage terms.
5. Ceasing to pay those mortgages, and making no attempts to postpone or prevent foreclosure by working with the servicer beyond, possibly, requesting (successfully or not) a deed-in-lieu (a/k/a "jingle mail") or short sale.
6. Either occupying the property "rent free" until the sheriff shows up, or simply abandoning the property (presumably renting elsewhere or perhaps buying a cheaper one) to sit vacant until the servicer can foreclose.

This is a strong set of claims. There is no reason to think this set of claims cannot be empirically verified. However, we need to get straight on what might or might not constitute empirical verification.

It is not enough to point to foreclosure rates, vacancy rates, or servicer reports of "no-contact borrowers." You can have a "no-contact borrower" because the borrower is dead, in jail, in the hospital, in another state looking for work, or in the middle of a nervous breakdown caused by financial distress that leads him or her to refuse to answer the phone. You can have servicers with the wrong phone number on their databases, and phone service that has been disconnected. You can have servicers who don't really actually try very hard, and you can have servicers whose collections staff are such unmitigated horse's asses or rank incompetents (I would here include those with limited command of the borrower's spoken language) that borrowers who have had prior contacts with them simply see no point in talking to them any further, and this might be a rational decision. I am not saying that all no-contacts are these cases; I am saying that the fact of a borrower reported as "no contact" is not direct evidence of the walk-away claim. Large numbers of no-contact borrowers being reported may support this claim, or is at least consistent with it, but it doesn't prove it.

Vacancy of the subject property doesn't prove the strong walking away claim, either. It's quite likely many of these vacant properties were speculative purchases. Speculators walk away from mortgages quite frequently in an RE downturn, but that is often because they are speculators: they did not buy this property as a long-term investment, and are therefore entirely unprepared, financially as well as emotionally, to hang onto it. It was and is a huge scandal of the last several years that we made mortgage loans for speculative real estate purchases to people who couldn't possibly ever carry that mortgage payment if the flip didn't flip on schedule. There is something a great deal more than a little odd about including this group in the "people who can afford their mortgage" bucket.

Otherwise, you can quite frequently find that financially-distressed borrowers end up vacating their homes, because they lost their jobs and are looking for or have accepted employment elsewhere, or they are so distressed that they can't even keep the lights on or feed themselves even while skipping the mortgage payment, and have moved in with family or something. Again, I am not making a claim about whether all or most vacated properties fall into this group; I am saying that it happens this way in at least some cases, and therefore while vacant properties may be consistent with "walking away," they are not proof of "walking away" in the strong sense.

Of course it should be clear to everyone that the strong claim involves assertions about the borrower's knowledge and motivations that could only be proven or disproven by interviewing those borrowers. Items 2 and 3 are not verifiable in reference to any source of information other than the contents of the borrowers' own minds. You simply cannot get there from statistics on foreclosures gleaned from remittance reports or property listings. Yet items 2 and 3 are central to the claim being made: you cannot say borrowers are doing the "ruthless put" unless you are saying that they know what the situation is and have done the personal cost/benefit analysis.

Such evidence as we might get for that is likely to be anecdotal. Enough anecdotes, rigorously analyzed and uncontaminated by preconceived notions of the story-teller or reporter are not, in my view, worthless as evidence. I am, however, still waiting for even one that fits all the conditions of the strong claim and provides enough detail about the facts of the case that we can assure ourselves it isn't an after-the-fact interpretation of a series of events. And let me observe that even with a round handful of such unambiguous anecdotes (I have ten fingers, myself, so let's call that ten), you still have some trouble with the "trend" part. There are in the vicinity of 40 million first-lien mortgage loans outstanding in this country at the moment. It is, statistically, almost certain that you could find a dozen ruthless defaults. I suspect you could find a dozen mortgages that are delinquent because the borrower made a donation he couldn't afford to the New Universal Church of Jesus On a UFO. You could probably find at least one loan that was 90 days down but the borrower was saved from foreclosure at the last minute by buying a winning lotto ticket. Trends, folks. Mean bigger numbers that what I've seen thrown around in the anecdote department.

Does the very existence of this YouWalkAway.com website prove that it has a lot of takers? Does the very existence of websites offering to take several hundred of your dollars to provide you with a sure-fire way to avoid paying your income taxes prove that the non-tinfoil-hat crowd is flocking to those sites in startling numbers? Some days I do worry about the conclusions drawn by reporters who don't really hang out on the Internet much.

Any serious investigator would start, not with stories passed around on the Internet, but with servicer logs. It is hard to get your hands on that kind of information, but it's there and serious investigators--hi, Fed guys!--surely ought to be able to work up a project. You really need to look at real case histories, to see if servicers have ever been able to document a case like the one described here in items 1-6. Perhaps a collector made one contact with the borrower, who said he wasn't going to bother to pay the mortgage because he was upside down, so there. (That would be documented in the collector's call log.) Perhaps the servicer had contact with a listing agent or appraiser, who provided this information about the borrower. Perhaps a servicer really did get one of those letters prepared by the YouWalkAway.com clowns.

Even with that, you also need some evidence that these folks are truly not financially distressed. That could come in a number of ways, but I warn you right now that if you look at one of these things and see that the original loan was made on stated income at a DTI of 45% using an interest-only loan and no down payment because the borrower had zero savings at the time, I am going to question your claim that affordability isn't an issue. You will have to prove that the borrower's finances improved since loan closing, as far as I'm concerned. I did not spend a whole mortgage boom arguing that loans like that were evidence that people cannot afford homeownership at current prices, only to roll over for you now and say people who have such loans can afford to carry their debts and just don't feel like it.

So let's get back to Mish's claim. It has to do, basically, with the assertion that a fast foreclosure is indirect evidence of walking away. The claim, I think, is that if large numbers of loans go to a status of foreclosure after only a 30- or 60-day delinquency, that means that the servicer has concluded that the borrower "just walked away" and there is no point to anything other than immediate foreclosure proceedings. (I don't know how else to interpret "without even waiting for foreclosure," since he's looking at loans in a foreclosure status.)

The problem is that this is drawing conclusions without enough information. For starters, we need to distinguish between "days delinquent" and "time." Mish is correct that on the whole, most servicers don't start foreclosure proceedings until a loan is 90 days or more past due. That means, technically, that the "last paid installment date" (LPI) on the servicing system is 89 or more days in the past (depending on the method you use; that part isn't important right now). It does, indeed, take three months to rack up a consecutive 90-day delinquency. It can, however, take a year, if the borrower skips payments that are not made up but does not do so consecutively. That is why the reference point is LPI: servicing systems do not assign payments to the month you mailed them, they assign them to the earliest due date. If you skipped the February payment and then made a payment in March, the payment received in March would be applied to the February 1 due date, moving the LPI from January 1 to February 1, and meaning that you are still "30 days delinquent." If you make the next six consecutive payments on time, but never make up that missing payment, you will be "30 days delinquent" for six months. In some states it is actually possible for a servicer to start foreclosure proceedings against you for being 30-days down for six months. Whether it is likely that a servicer would chose to do that is another matter. In my experience it is more likely that a servicer would initiate foreclosure on an uncured rolling 60 than on an uncured rolling 30.

It is also important to bear in mind that "foreclosure" is a process, not a discrete event in time, in this context. The reports you see like the one Mish captures from Bloomberg are based on servicer remittance reports to the security trust, and what is reported in the "FC" bucket is loans for which the foreclosure process has been started. The "start" in this particular context (reporting to the investor) is the day the servicer turns the file over to its foreclosure counsel or a public trustee (for non-judicial power-of-sale foreclosures). As a general rule, this step occurs after a whole lot of other nasty things have already happened, such as the borrower getting a "breach letter" that "accelerates" the mortgage (demands all sums due and payable). The exact sequence of events is different in different states; the point for purposes of reading remittance data is that the loan goes into a status of "FC" when this legal process commences, and it stays in that status for as long as it takes to get to the day the property is sold on the courthouse steps. (After that, the loan either goes away--it is liquidated via application of proceeds from the purchase of the property by a third party, or it becomes REO. These days nearly all loans become REO. They stay REO until someone buys the property from the servicer, at which point the loan goes away.)

It is therefore typical that loans can stay in FC status for months--even years in the uglier cases--and that loans can go in and out of that status. If a borrower sells the home, brings the loan current, or agrees to some workout plan after the file was referred to the legal people, then the loan can be taken out of FC status and put back to plain old seriously delinquent of the relevant number of days or current, depending on the circumstances. "Loans in Foreclosure" is a pipeline, not a report of final dispositions of loans. Final dispositions would be reported in some category like "foreclosures completed for period x," and you don't get that on remittance data displayed on Bloomberg. This is why, over time, that "FC" bucket starts to pile up. In the current environment we have FC starts seriously outpacing FC completions, so month-to-month the FC pipeline gets bigger. (Same goes with "REO": if you are completing FCs faster than you're selling the REO, the inventory piles up and you see the REO category getting larger every month.) Someday we'll get to the point where we're closing cases faster than opening them, and those numbers will begin to shrink.

The really important thing here is that we do know that servicers are busy offering some sort of workouts. We know from the MBA that most of them, at the moment, don't seem to be permanent modifications; they're repayment plans or forbearance. Often, a repayment plan is a precursor to modification: the servicer agrees to permanently modify the mortgage only if the borrower successfully completes a repayment plan first, so the two categories aren't mutually exclusive.

I refuse to take responsibility for the way other people throw terms around, but I will take responsibility for my own terms. A repayment plan is an agreement to allow the borrower to resume making regular payments and make up past-due payments on an installment basis for a limited period of time. The resumed payments might temporarily be at a lower rate, which would be appropriate if the servicer is offering the plan prior to a permanent modification; this servicer wants to see you make three to six or nine payments at the reduced interest rate before permanently modifying the mortgage terms. In other cases the resumed payments are at the original contractual terms.

A forbearance is a short-term agreement to let you make no payments, or less than the contractual payments, as long as you bring the account current by the end of the forbearance period. This is, for instance, the one we might see with a borrower who has a documented hardship and a real sale pending: it gets the collections people off the borrower's case while waiting for the sale to settle. Or the borrower is temporarily disabled but will go back to work once the stitches come out. It is not the most widely available kind of workout by any means. In most data sources, forbearances are lumped in with repayment plans, as they are in the MBA data, but it's important to know that the number of true forbearance arrangements is small; almost all temporary workouts are repayment plans.

That matters because the terms of the temporary plan will affect how the loan's delinquency status is reported. Imagine a loan that goes 90 days down (three consecutive payments missed), and then is given a 90-day forbearance agreement some time in the month preceding the 90th day of delinquency. That means that the servicer will report that loan for the next three months as 90, 120, and 150-days down until the expiration of the forbearance; at that point either the borrower brings the account current or foreclosure is initiated. This is why you would see loans reported as 90+ days down but not in FC status.

Take the same situation (a borrower three payments behind) who is given a nine-month repayment plan. Typically, this borrower would be required to 1) bring current all outstanding fees immediately, 2) make scheduled payments each month, on time, for the next nine months, plus 3) make a payment equal to one-ninth of the past-due payments each month for nine months. For the next nine months this loan would be reported as 90, 90, 60, 60, 60, 30, 30, 30, current. (One-ninth of the past due amount or one-third of a payment accumulates in a suspense account until you have enough to apply a whole payment, which advances that LPI another month.)

This kind of thing complicates the assumption that Mish is operating under about the "normal" movement of loans to successive delinquency statuses. The picture is further complicated because nobody I know of ever offers a borrower who is 90 days or more down any forbearance or repayment plan without forcing the borrower to sign an agreement, usually called a "stipulation," that says that the servicer is suspending, not dismissing, foreclosure proceedings, and that allows the servicer to restart the FC process at the original point of suspension if the borrower defaults on the repayment plan. In other words, the "clock" does not restart at zero, requiring another three months (or whatever is required in a state) before FC can be refiled; the "clock" resumes at wherever we were when the repayment plan was signed. Honestly, folks. Servicers can be stupid, but they've never been that stupid.

So take our repayment plan borrower, and assume he only makes it for six months in his plan and then misses a payment again: his loan goes from 90 to 60 to 30 to FC, because missing a repayment plan installment "puts him back" to where he was in the foreclosure process.

If you have a servicer who is doing a lot of repayment plans, and the MBA data suggests we have that, then you're going to see a lot of delinquency statuses going "in reverse," and you're also going to see, unfortunately, a lot of loans going from 30-days or 60-days down straight to FC, because the MBA data tells us that 29% of all FCs in the third quarter of 2007 happened after a repayment plan failed. That nasty fact may tell us something about the wisdom or practicality of these repayment plans. It may tell us that borrower financial distress just keeps increasing. It may tell us that borrowers get demoralized long before they're done with the repayment plan and just give up. It may tell us that some borrowers entered the repayment plan in less than complete good faith. We'd need more evidence to decide that. But the last thing it tells us is that borrowers are "just walking away" with no attempt to save their homes.

Reading and analyzing real-time remittance reports is a complicated matter that can lead you down the wrong path if you aren't well-versed in how it all works. I fault no one, certainly not Mish, for not being an expert in remittance analysis. It is only recently that this became something non-experts were interested in, after all. (For most of my years in this business I'd have called you a liar if you'd said the day would come when huge numbers of civilians would avidly read websites that post long treatises on boring technical mortgage-related crap when they were not forced to. I'd have been wrong.)

To return to the MBA report:

During the third quarter [2007], mortgage servicers put in place approximately 183 thousand repayment plans and modified the rates or terms on approximately 54 thousand loans. Lenders modified approximately 13 thousand subprime ARM loans, 15 thousand subprime fixed rate loans, 4 thousand prime ARM loans and 21 thousand prime fixed-rate loans. In addition, servicers negotiated formal repayment plans with approximately 91 thousand subprime ARM borrowers, 30 thousand subprime fixed-rate borrowers, 37 thousand prime ARM borrowers and 25 thousand prime fixed-rate borrowers. During this period the industry did approximately one thousand deed in lieu transactions and nine thousand short sales.

Plus this one reporter found this one guy who said, "I don't think that house is going to recover in value any time soon . . . I'd just be throwing the money away."

Even if only 20% of all those repayment plans and modifications were appropriately done only for borrowers with a commitment to keeping the house, not just tossed out like candy to someone who only wants to delay the sheriff's sale, Dr. Data says that "being dragged kicking and screaming" borrowers are outnumbering reported cases of "walking away" borrowers. I've read about more cases of borrowers bitterly contesting foreclosures (with more or decidedly less heart-wrenching situations) than I have borrowers who just don't care whether the lender takes the house or not.

I do not claim that "just walking away" isn't increasing; I don't have enough facts one way or the other. I remain convinced, however, that it's pretty damned convenient for the mortgage industry to convince you that these folks can afford their loans and are not even trying to get caught up. Blaming it on borrower ruthlessness deflects attention from lender ruthlessness, like the ruthlessness of making loans to people who cannot display any particular evidence that they can afford the payments. I simply refuse to play into their hands here.

I certainly agree that the industry is scared to death that "just walking away" will become fashionable. But that's a slightly different matter. We are having more than enough troubles with borrowers who simply cannot afford to keep making house payments and can't sell. It will surely be Armageddon if the better-heeled among us just walk off. On the other hand, these people with money are going to have to live somewhere, and if they're walking away in order to rent from struggling investors or buy REO, then while they're passing the losses onto the lenders, they're not so clearly contributing to further price drops. It's possible to imagine--just as an exercise--that the whole thing stabilizes only when the moneyed walk-aways make it stabilize, at the expense of lenders and investors as bagholders. My guess is that's the kind of ending the industry didn't have in mind. But you can easily imagine that the industry is sounding the alarm about "walk-aways" because they're rather desperate to show their lawmakers and their regulators and their monetary policymakers that they're the "real" victims here.

by Calculated Risk on 2/29/2008 01:35:00 AM

Here are a couple of interesting articles on "walking away", aka jingle mail, or more technically "ruthless defaults".

From Ruth Simon and Scott Patterson at the WSJ: Borrowers Abandon Mortgages as Prices Drop

As home prices plummet, growing numbers of borrowers are winding up owing more on their homes than the homes are worth, raising concerns that a new group of homeowners -- those who can afford to pay their mortgages but have decided not to -- are starting to walk away from their homes.
...
A rise in the number of people choosing to default on their mortgages would represent a significant departure from past behavior of American homeowners, who during past housing downturns tended to walk away only as a last resort, often because they couldn't afford to pay because of unemployment, illness, divorce or other life-altering changes that reduce income.
...
What's different now, analysts and economists say, is that home prices have fallen so far so quickly that some homeowners in weak markets are concluding that house prices won't recover anytime soon, and therefore they are throwing good money after bad. Also, many borrowers who bought in recent years have put down little if any equity. "If they haven't lived in [the home] very long and haven't put any cash in it, it's a lot easier to walk away," says Chris Mayer, director of the Milstein Center for Real Estate at Columbia Business School.

From John Leland at the NY Times: Facing Default, Some Walk Out on New Homes

You Walk Away is a small sign of broad changes in the way many Americans look at housing. In an era in which new types of loans allowed many home buyers to move in with little or no down payment, and to cash out any equity by refinancing, the meaning of homeownership and foreclosure have changed, economists and housing experts say.
...
“I think I could make a case that some borrowers were ‘renting’ (with risk), rather than owning,” Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard University, said
...
“When people don’t have skin in the game, they behave like they don’t have skin in the game,” said Karl E. Case, a professor of economics at Wellesley College

Unfortunately these articles don't really advance the ball. Tanta did an excellent job of suggesting some question the MSM media could ask: Let's Talk about Walking Away

What we have, so far, is a series of industry insiders making a general claim that "ruthless default" is on the rise. What we do not have, so far, is any rigorous quantification of the extent of this problem, or even any really detailed definition of what "a borrower who could afford to pay" is. We have no one offering baseline measures (what, for instance, a lender's analytical models might have predicted is the "normal" level of walking away), and hence no clear sense of the magnitude of the "change" in borrower behavior and attitudes (not to mention much rigor in distinguishing between the two). Hence, we don't yet really know if it's a change in borrower behavior as much as a change in definitions, servicer data collection and interpretation, or media exposure. Or a handful of anecdotes that are being pluralized into "data."

by Tanta on 2/21/2008 07:49:00 AM

Bloomberg reports:

Feb. 20 (Bloomberg) -- A record 41 companies with high- yield, high-risk credit ratings are in danger of breaching terms of their loan agreements within 12 months as the slowing economy cuts into corporate profits, Moody's Investors Service said. . . .

The percentage of speculative-grade bonds that are distressed, meaning their yields are at least 1,000 basis points higher than benchmark rates, rose to 20.9 percent as of Feb. 15, about the same ratio as in the months preceding the recession that began seven years ago, according to Merrill Lynch & Co.

Debt is 20 times more likely to default within a year once it's crossed the distressed threshold, according to data by Martin Fridson, chief executive officer of high-yield research firm FridsonVision LLC in New York.

Seven borrowers rated by Moody's, including Montreal-based printer Quebecor World Inc., defaulted in January, up from zero in December. The default rate for junk-rated issuers may soar to more than 8 percent this year, the highest since Enron Corp.'s collapse rippled through markets in 2002, according to an analysis of data by Zurich-based UBS AG shows. The rate was 0.9 percent at the end of 2007, the lowest in 26 years, Moody's said.

Then again, there's always a silver lining:

Sharper Image Corp., the seller of $300 electric shavers and $1,999 massage chairs, and catalog retailer Lillian Vernon Corp. filed for bankruptcy protection today after struggling with declining sales. Neither company is on the Moody's list.

Could we be looking at a world without monogrammed silver dog bowls? That'd be the best news I've heard in a long time. . . .

by Calculated Risk on 2/16/2008 04:13:00 PM

From Joe Rauch at the Atlanta Business Chronicle: Georgia loan problems worst in Southeast. (hat tip Edward)

A few excerpts:

Georgia banks reported the highest number of problem loans, with 4.74 percent of banks' loans either past due or foreclosed, the highest level of any state in the Southeast, according to data prepared by FIG Partners LLC.

That figure is a sharp increase from 3.26 percent, the figure reported at the end of third-quarter 2007.
...
Florida's banks reported a 3.26 percent default rate. That dwarfs Georgia's other immediate neighbors such as North Carolina at 1.82 percent, South Carolina at 2.16 percent and Alabama at 3.46 percent.

Metro Atlanta has an especially serious problem, with defaults reaching 6.54 percent of "local banks' balance sheets" in Q4 2007. There is also a 5 year supply of undeveloped lots in metro Atlanta (146,000 lots):

"Lot loans are the prime concern for us," said [Rob Braswell, commissioner of the Georgia Department of Banking and Finance, the primary state bank regulator]. "Developers are having a difficult time carrying these lots and we don't want banks to get into the real estate business."

Why is Georgia, and especially Atlanta, seeing so many defaults?

Click on graph for larger image.

For the most part, Atlanta didn't participate in the price boom. This graph compares the Case-Shiller house price index for Atlanta and Miami. Although prices rose much quicker in Miami, and are now falling faster, Atlanta has a higher percentage of loans in default.

One reason might be that Georgia led the nation in Interest Only loans. Another might be that lenders are able to foreclose quicker in Georgia: From the NY Times last July: Increasing Rate of Foreclosures Upsets Atlanta

Despite a vibrant local economy, Atlanta homeowners are falling behind on mortgage payments and losing their homes at one of the highest rates in the nation, offering a troubling glimpse of what experts fear may be in store for other parts of the country.
...
A big reason the fallout is occurring faster here is a Georgia law that permits lenders to foreclose on properties more quickly than in other states.

Although different markets will experience different dynamics (probably fewer homeowners are upside down in Atlanta compared to Miami), this shows that loan problems are occurring almost everywhere.

by Tanta on 2/15/2008 10:43:00 AM

This was a pretty amazing article in the Financial Times:

Homeowners are being advised that it would be cheaper to walk away from big mortgages than incur further losses on their household budgets, increasing the chances that more high-end real estate transactions will collapse.

This advice from lawyers contrasts with the conventional wisdom that homeowners would risk serious damage to their credit scores if they were to default on their loans.

But legal advisers argue that the future credit costs homeowners would incur in such cases would be far lower than the cash they would have to bring to closing if they sold their homes, given the current cataclysmic conditions in the housing markets.

“It is the tipping point argument,” said a senior partner at one of the biggest mortgage firms, who asked not to be named. “The borrowers have so many issues with their balance sheets that they are considering a new policy.”

Wow, that's pretty brazen. Of course it is. I made it up. This is what the FT actually says:

Leading banks are being advised that it would be cheaper to walk away from big buy-out deals than incur further losses on their funding commitments, increasing the chances that more high-profile private equity transactions will collapse.

This advice from lawyers contrasts with the conventional wisdom that banks would risk serious damage to their reputations if they were to drop out of deals.

But legal advisers argue that the break-up fees banks would owe in such cases would be far lower than the write-downs they would have to make on their loans, given the current cataclysmic conditions in the capital markets.

“It is the tipping point argument,” said a senior partner at one of the biggest private equity firms, who asked not to be named. “The banks have so many issues with their balance sheets that they are considering a new policy.”

(Thanks, e!)

by Tanta on 2/14/2008 11:38:00 AM

While we're on the subject of mortgage insurance:

WINSTON-SALEM, N.C., Feb 13, 2008 /PRNewswire-FirstCall via COMTEX/ -- Triad Guaranty Inc. today reported a net loss for the quarter ended December 31, 2007 of $75.0 million compared with net income of $8.1 million for the same quarter in 2006. . . .

Mark K. Tonnesen, President and Chief Executive Officer, said, "The trends we encountered in the third quarter accelerated in the fourth, especially the rise in defaults in locations where home prices are under pressure. While the total portfolio default counts increased 38% during the quarter, in California and Florida, default counts rose a combined 85%. The rapid and significant deterioration in the housing markets and its effect on our portfolio performance has prompted us to implement various measures reflected in our underwriting standards, capital management, loss mitigation and expense management."

Mr. Tonnesen continued, "During the fourth quarter, we took a leadership role in our industry by tightening underwriting guidelines. Our new guidelines, which address loan to value limitations, credit scores and loan documentation, and incorporate volume limitations in distressed markets, led to our reduced fourth quarter production and are expected to further limit production in 2008. The Company has developed and is actively pursuing a plan to manage and enhance its capital resources. Although, at this time, we can give no assurance that we will be able to successfully implement our plan, we realize these efforts are critically important to the future of Triad Guaranty. Thus, enhancing capital resources is a top priority. Capital management dictated our decision during the quarter to withdraw from Canada and contribute this capital to our U.S. insurance subsidiary." . . .

Net losses and loss adjustment expenses of $191.7 million for the fourth quarter of 2007, compared to $106.8 million for the third quarter of 2007 and $41.3 million for the fourth quarter of 2006, reflect the substantial changes that have occurred in the mortgage and housing markets during the second half of 2007 and especially during the fourth quarter. Net losses and loss adjustment expenses for the fourth quarter of 2007 include a reserve increase of $150.7 million compared to $76.6 million and $23.3 million for the third quarter of 2007 and the fourth quarter of 2006, respectively. Paid claims totaled $36.3 million in the fourth quarter of 2007, compared to $28.5 million for the third quarter of 2007 and $16.6 million for the fourth quarter of 2006.

Average severity on Primary paid claims was $41,600 in the fourth quarter of 2007, up from $36,900 in the third quarter of 2007 and $28,100 in the fourth quarter of 2006. The average severity on Modified Pool paid claims in the fourth quarter was $57,900, which also was up significantly compared to $41,300 in the third quarter of 2007 and $26,200 in the fourth quarter of 2006. The Primary delinquency rate was 3.81% at December 31, 2007 compared with 2.80% at September 30, 2007 and 2.47% at December 31, 2006. The Modified Pool delinquency rate rose to 6.09% at December 31, 2007 compared with 4.42% and 2.67% at September 30, 2007 and December 31, 2006, respectively.

by Tanta on 2/10/2008 01:58:00 PM

Much has been reported, on this blog and elsewhere, about claims by industry participants that affluent (or at least fully solvent) borrowers who could afford to pay their mortgages are walking away from them, particularly in California where lenders cannot pursue deficiency judgments on purchase-money loans. I have seen two media articles (here and here) in the last few days actually crediting us—a blog!—for being on this and related stories, so I'm going to take this opportunity to talk about where all the reporting on this subject might go from here.

I certainly appreciate the willingness of professional media outlets to attribute this blog. It suggests that editors are getting over their preference for misleading information from named sources with institutional affiliations and a book to talk up (Hi, NAR!) over solid information from anonymous bloggers who are accumulating credibility the hard way (by, you know, being credible). So I don't want the following to sound like carping from a Blogger Who Is Never Happy. I mean this to be quite constructive.

I actually believe that reporters should never abandon their skepticism anywhere, including here. This is not simply because you must evaluate us as a source: it is because the ideal result of your hanging out here is that you take what we come up with and improve it, by bringing to the table reportorial skills and access that we may not necessarily have. If we can function most of all to give you the background knowledge in how these things work, and sufficient exposure to the issues to help you know what questions to ask of your sources, we're happy to get "scooped" by you. We've done our part.

The "walking away" story is a great place to think about this idea. What we have, so far, is a series of industry insiders making a general claim that "ruthless default" is on the rise. What we do not have, so far, is any rigorous quantification of the extent of this problem, or even any really detailed definition of what "a borrower who could afford to pay" is. We have no one offering baseline measures (what, for instance, a lender's analytical models might have predicted is the "normal" level of walking away), and hence no clear sense of the magnitude of the "change" in borrower behavior and attitudes (not to mention much rigor in distinguishing between the two). Hence, we don't yet really know if it's a change in borrower behavior as much as a change in definitions, servicer data collection and interpretation, or media exposure. Or a handful of anecdotes that are being pluralized into "data."

Let me give you a for-instance: here's the claim from a recent WSJ article:

And some borrowers, even those who can theoretically afford to keep their homes, realize they owe much more than what comparable houses in the neighborhood are selling for -- and think that prices won't rebound anytime soon. So they're walking away, according to anecdotal reports as well as recent statements by top executives of both Wachovia and Bank of America. [My emphasis]

But what made them "realize" this? How do we know what they're thinking about future price recovery prospects?

We do have some data indicating that borrowers in general are not, on the whole, likely to be highly-informed about the current value of their homes unless they are actively trying to sell or refinance.

NEW YORK (CNNMoney.com) -- Despite numerous reports showing home values in historic decline, more than three out of four homeowners believe their own home has not lost value in the past year, according to an online survey.

The survey was conducted by Harris Interactive for Zillow.com, a Web site that gives estimated home values.

The survey of 1,619 homeowners found 36% believe their home has increased in value, and another 41% believe their value has stayed the same. Only 23% believe their home has lost value. . . .

Moore said it's important to remember that only a small fraction of homeowners try to sell their home in any given year, and unless they are trying to get new financing or a home equity line of credit, there's no reason most will be confronted with the decline.

Stories--for what they're worth--from the Option ARM world suggest we have at least a few borrowers who are not even very clear on how much they currently owe until they try to refinance, let alone what their home value is.

So is the claim here that people recognize that they are increasingly "underwater," attempt to sell or refinance, fail at doing so, and then decide to "walk away"? If so, how did they really know how far underwater they were before they tried listing the property or getting a refinance appraisal? If we are talking about a subsection of the borrower pool who religiously monitors such things as the current comparable sale data in their neighborhoods, and who are unsentimental enough to realize that their own homes aren't "special cases," then how big is this group? I'm quite sure that our commenting community is overrepresented there, but how representative are we of the wider world?

Or are we talking about borrowers in neighborhoods with high vacancy levels (such as unsold new developments) or already-high numbers of for-sale signs planted along the street, who cannot help but notice that either nobody wants to or is able to move in or everybody else seems to want out?

Mish at Global Economic Analysis reports the following anecdote from a reader:

The first house in our subdivision was foreclosed about 9 months ago. That wasn’t a walk away; that was a get out notice from the sheriff. A few months later, there was another house that had a for sale in the front lawn, and the owner moved out a few weeks later. Another house went on the market one day and the owner loaded up a U-haul the next and drove away at 4am. And since September, we have seen six more homes that are “for sale” but the owner is long gone. . . .

After reading your work, I began to examine the attitudes of my neighborhood. The first foreclosure was one of those borderline families you often write about. They were in over their heads and couldn’t afford the house they were living in. Most likely mortgage reset. In any event, the scuttlebutt around the neighborhood was one of scorn, shame, and embarrassment. No thought was given to the negative impact to the value of all our homes in this subdivision. With each subsequent “pre-foreclosure,” people’s attitudes softened about their ex-neighbors. Gone was the Scarlet F; it was replaced with empathy, understanding, and even compassion. Maybe the attitudes have changed because people now realize that the value of their homes have fallen off a cliff. They don’t have time to shame their ex-neighbors when they are worrying about their wealth is being vaporized or a $400 natural gas bill or car payment or the kids or whatever.

This anecdote links borrower distress, listed homes and vacancies in the immediate (visible, visceral) area, and shifting attitudes (not, interestingly, a direct report of the attitudes of the "walkers," but of the neighborhood witnesses thereto) in a way that seems difficult to untangle. I have, for instance, personally moved my household by starting out at 4:00 a.m. in a U-Haul, but I'm a coward who doesn't want to drive a long truck she's not used to handling around the city during morning rush hour, and who prefers driving in the dark in the familiar area and still having daylight at the new area. Are we even sure that what we are witnessing is "furtive" moving?

My guess is that servicers do not have the kind of information that would let us answer these questions directly. The term "jingle mail" is a fine joke (the mail "jingles" because the borrowers are just sending the keys to the servicer instead of a mortgage payment), but we need to bear in mind that it's a joke. True "walk-aways" do not call or write to the servicer to inform them of their intent to stop payment permanently and wait to see how long it takes to foreclose. (There are always some borrowers who request a deed-in-lieu when they are in distress, but that's not really what we mean by "jingle mail" or "walking away," which implies that the borrowers are letting the banks foreclose, not voluntarily surrendering the deed.) It isn't always easy, then, to identify intentional walk-aways in your foreclosure caseload.

In fact, it seems possible that the borrowers being labelled "walk-aways" are those who 1) do not respond to servicer attempts to contact them at the first or subsequent delinquencies, and/or do not respond to offers of loss-mitigation efforts (forbearance, modification, short sale, anything short of foreclosure) and 2) do not show financial distress as indicated by the servicer's review of a current credit report. If they aren't responding or cooperating, they aren't sharing details of their current income or expense situation with the servicer; it seems probable to me that the servicers are deciding that these folks could carry the mortgage payment, if they wanted to, because they have pulled a credit report and find no evidence of increased debt levels from origination or defaults on non-mortgage debt.

The no-contact borrower is a difficult one to make assumptions about, since any servicer will tell you that borrowers in true economic distress caused by circumstances well outside of their own control are quite often non-responsive: depression, shame, fear, and having had the phone cut off, among other things, often keep people who could be helped from getting help. A Freddie Mac credit policy expert notes:

Unfortunately, as detailed in a groundbreaking study conducted by Freddie Mac and Roper Public Affairs in 2005, 61 percent of delinquent borrowers did not know that there are workout options and significant percentages of those borrowers did not return lender phone calls out of embarrassment or a lack of faith that anything can be done to help them.

There is some difficulty, then, in deciding whether a "no-contact" problem involves shame or shamelessness. It is therefore unwise, it seems to me, to assume that all borrowers who seem to just "disappear" are "walk-aways."

Similarly, the assumption that a borrower's current credit report proves that they can carry the mortgage payment is fraught with difficulty. As we have seen in a number of recent reports, the customary assumption in mortgage servicing was that borrowers in distress would prioritize payments such that they would skip the credit cards, personal loans, and auto loans (in that order) before failing to make the mortgage payment. When that pattern held true, one could more confidently assume that a borrower current on all other obligations was probably able to make the mortgage payment.

However, we seem to have some observers suggesting that the divergence between mortgage and credit card delinquency rates indicates that borrowers are skipping the mortgage payment first and keeping the cards current when they are in financial distress. They may well, for instance, believe that in a temporary reduction of income, like a layoff, it's more important for them to keep revolving credit lines open for emergencies, and to keep their cars for transportation to work, than to worry about foreclosure on the mortgage, which they probably know will take some time and can probably be reinstated when they are employed again. Surveys still show, however, that the overwhelming majority of distressed borrowers indicate that they would prioritize the mortgage payment over other debt. An Experian study from last year accounts for the contradiction here by indicating that while prime borrowers still pay the mortgage first, subprime borrowers are more likely to keep the credit cards current and let the mortgage payment lapse. There does seem reason to question the automatic assumption that a clean credit report (in terms of non-mortgage debt) automatically means that the borrower in question could afford the mortgage payment but is choosing not to make it.

There is evidence that substantial numbers of foreclosure "cures" (loans with an initial foreclosure filing that do not result in ultimate foreclosure) are in fact due to borrowers making up missed payments, not to lender workouts. From the Conference of State Bank Supervisors' State Foreclosure Prevention Working Group:

The October data from Reporting Servicers shows that most mortgage payment delinquencies are resolved by action taken by the homeowners themselves. Of the loss mitigation efforts closed in October, 73% of all resolutions were due to the borrower bringing the account current.

This is not to suggest that workouts are unnecessary because most borrowers can find the money to bring their loans current; it is merely to recognize that there are borrowers out there bringing their loans current out of some source of funds other than sale or refinance. It would certainly be useful to know what that source is; I have yet to see any reported data on that, and servicers may not be collecting it consistently. Are borrowers suffering from temporary loss of income? Temporary increase in obligations? Are they paring household budgets down to ramen and bus fare in order to make up mortgage payments? Are they raiding retirement accounts to stay in their homes? If any of these things is true, that complicates the picture of ruthless walk-aways, since whether it is wise or not to make severe financial sacrifices to keep a home right now, if folks are making those sacrifices, they aren't thinking like the "rational agents" of options theory gone awry.

I suspect--but have no data to prove--that servicers are also extrapolating from bankruptcy filing rates here, the assumption being that if a borrower were truly unable to make the mortgage payment and didn't want to keep the house, he or she would file for bankruptcy. But it is also not clear to me that a borrower's failure to file for bankruptcy necessarily means that the borrower's income is sufficient to carry the mortgage, given how stringent means-tests in BK have become. I for one am not willing to assume that borrowers are not in valid economic distress just because they don't meet BK filing requirements or are unwilling to try to survive on Chapter 13 budget plans.

Aside from the obvious reasons to care about the extent to which "walking away" is a significant part of the problem or just rare but annoying food for moralists, headline writers, and bankers who want to blame their borrowers' morals rather than their own for life's troubles generally and earnings reports particularly, there is the danger that more legislation will be passed--the 2005 bankruptcy reform springs to mind here--to combat "bad consumer behavior" while not coincidentally attempting to bail lenders out of stupid credit-granting practices.

Here's a proposal, made by a writer with whom I probably agree on a lot of things (but not this):

In the future, Congress should require California to allow lenders to garnish wages of affluent borrowers who walk away from their homes. It's dishonest to have it both ways: (1) federal tax money backstops investor and bank losses when homeowners walk away from homes, and (2) California law allows homeowners to walk away without liability - even if they have money to pay. It's not that the California statute is bad alone; it's that it's wrong for federal taxes to guarantee huge loans without homeowners guaranteeing those loans too.

The purpose of non-recourse laws is not, actually, to give borrowers the motive or the means to stiff lenders without penalty. That is not a social goal state legislatures get behind, as a rule. The purpose is supposed to be to prevent bad lending practices in the first place: if lenders know they are secured only by the real estate in a purchase transaction--not by any additional recourse to other assets--then, in theory, they will institute sane LTV limits and pay attention to decent appraisals. Quite obviously that didn't work during the boom. While nobody I know is thrilled with the idea of the taxpayers bailing these lenders out, I am also not thrilled with the idea of repealing recourse laws to allow lenders to make themselves whole out of anything left in the borrowers' pockets.

It may sound appropriately populist to be in favor of making the rich pay up, but then again we could use some hard evidence that people can, in fact, afford to pay before we go down this road. My own sense is that such a proposal would be more likely to garnish wages of already-struggling families than it would to force the fat cats to liquidate the jewelry collection to pay off Countrywide. And certainly, if we impoverish borrowers in order to stave off lender failure, then we taxpayers will have impoverished former homeowners to cope with.

I am trying to lay all these questions and concerns out in hopes that we move forward from popularizing the idea of "walk aways" to some slogging through the issues and hard numbers to try to get a more nuanced view. Personally, I'm willing to believe that we have a real increase in "ruthless defaults" in the prime mortgage book; it's too rational for too many people for it not to go on. But I'm not willing to take it as a matter of faith, and I'm impatient with pronouncements from banks and rating agencies that aren't backed up with better data. Unfortunately, I am also very willing to believe that servicers and servicing platforms are broken: that we aren't collecting the right kind of data, that contact efforts (rather than just responses) are inadequate, and that it's just plain easier for understaffed outfits to credit "borrower attitudes" for rising defaults than to send those defaulting files through a rigorous analysis process, one that looks carefully at the original loan underwiting and reverifies more than just a current FICO.

We did just go through this in 2005 with the credit card lenders, who preferred to talk about consumers being irresponsible with the credit they were granted, not lenders being irresponsible to the borrowers they spent a small fortune soliciting. While the legislative efforts we're seeing at the moment seem largely pro-consumer (eliminating taxes on debt forgiveness and increasing borrowing opportunities with the GSEs and FHA passed, cram-downs at least on the table), there's always the possibility of backlashes forming as discussion of "moral hazard" shifts from lenders who took too much risk to borrowers who loaded up the U-Haul at 4:00 a.m.

I therefore suggest to the media that we've done about all we can usefully do just by reporting on unsupported claims being made about walk-aways. Granting credence to claims about motivations and social attitudes simply because the person making the claim is in the industry seems a bit rich at the moment; we haven't even distinguished ourselves lately as mortgage lenders, which is what we're supposed to be, let alone as sociologists. It's time to demand the evidence and to analyze it in the context of other information we have about borrower distress and repayment patterns. Otherwise the danger arises that an "echo chamber" starts to create conventional wisdom about default behavior, which may be hard to challenge if it turns out to be a bit of an exaggeration.