Foreclosure Comic

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A Decade of Delinquency and Charge-offs

According to data from the Federal Reserve the Delinquency Rates seen by US Banks in Q4-2008 reached 10-year highs in Q4-2008.

The Delinquency Rate on Single Family homes in Q4-2008 was 6.29%---Up 107 basis points from Q3-2008's 5.22%. Clearly as unemployment continues to rise, delinquencies will continue to rise.

The Delinquency Rate on Commercial Mortgages rose from 4.74% in Q3-2008 to 5.36% in Q4-2008---Also a rate much higher than anything we have seen in the past decade.


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What is interesting is when you look at the Charge-Off Rate for Single-family homes. Q4-2008 mortgage charge-off rate was only at 1.58%--compared to 1.46% in Q3-2008. I believe this is because many more banks started to try "work-outs" with the delinquent consumers and also wanted to "wait and see" what Obama's plan would be help out homeowners behind in their payments. I predict that Q1-2009 (Data to be released ~May 2009) will show continued slow growth in charge-offs, but sooner or later the banks will have to pay the piper and charge-off rates on single family home mortgages will spike up (Likely Q2 & Q3-2009).

The Charge-off Rate for commercial real estate was up from the 1.16% in Q3-2008 to 2.04% in Q4-2008. This is the highest rate since 1992, and could continue to climb as businesses fall on hard time and demand for office and retail space dwindles making the leverage taken out on such properties much more difficult to service, and much more likely to be charged-off.

History 101---Comparing Japan's Real Estate Bubble to our own

Recently, I was watching TV and a commercial for the National Association of Realtors came on saying something to the effect of, "There has never been a better time to buy a home"---Obviously the were referencing the recent price drops in property values---But what's to say that they can't drop even more.

Just this week,JP Morgan cut its dividend so that it could be prepared for a 40% Peak to trough drop in housing prices in the united states---But what if things get worse.

So I went to the trusty source of Wikipedia and found the following chart from the Economist in June 2005.

The article starts off hitting the nail on the head--stating, "The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops"

The Chart Compares Japan from 1980 - 2005, and an index of US, UK & Australia from 1995 - 2005. If you look at Japan---House prices dropped for at least 15 Years! (1990 - 2005)

It's also important to note 2 things (1) The UK & Australia had higher home appreciation from 1998 -2005 (2) The US Market continued to appreciate in 2005, 2006 and 2007.

Looking at this chart and better understanding what happened to Japan, I'd say Caveat Emptor--Buyer beware---Prices were being inflated for over 12 years in the US, UK and Australia, and it will likely take longer than just 2 years to make the National Association of Realtors correct in their premise that, Now is the best time to buy a home.

JP Morgan's Dividend Cut Announcement cites Unemployment Rate & House Price Decline Estimates

This afternoon JP Morgan announced that it is cutting its dividend from $0.38/share per quarter to $0.05/share per quarter. What is interesting what they shared as their rationale for cutting the dividend.

Below, I have attached Slide #2 from the presentation in which JP Morgan provides a "highly stressed environment" in which they model a:

• 2 Year Recession
• 10% Unemployment Rate
• 40% Decline in Housing Prices (Peak to trough)
  

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Should this "stress case" come to a reality, many more mortgages will be underwater and millions more homeowners will lose their income and possibly lose their homes---This will cause the mortgages and mortgage securities that JP Morgan holds to lose value a pressure their capital base.

Conventional 30-Year Mortgage Rates reach 40 year lows

According to a chart from the St. Louis Fed the interest rates on 30 year-fixed conventional mortgages has hit all time lows in February 2009. (Or at least since the beginning of the chart---1970's).

What is also interesting is that for every recessionary period (highlighted in gray), the mortgage rate dropped.



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What does this mean? If you haven't yet looked into refinancing your mortgage, you may wish to consider it---However, given that unemployment continues to rise I think it's safe to say that the recession will continue for a few more months (or quarters). So there's a chance that mortgage rates could drop further---But if you can refinance, definitely look into it--and be sure to get 3 or 4 quotes from competing mortgage lenders.

Crisis of Credit --- The Video

Jonathan Jarvis has created a 'user-friendly' video that explains the credit crisis---and shows how mortgages, sub-prime mortgages, CDO's, Credit Default Swaps, Investors, Brokers and others created the credit crunch.

If you or somebody you know gets confused by the financial alphabet soup that the media is constantly talking about, this video does an excellent job of explaining the mortgage mess in laymen's terms...


The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

(10 min 50 sec)

Mortgage Lender Implode-o-Meter

If you're wondering how many mortgage companies have gone out of business during the current credit crunch, you should check out "The Mortgage Lender Implode-o-Meter" (http://ml-implode.com/).

As of 2/19/2009, 334 mortgage lending businesses have gone the way of the do-do and shuttered their doors since late 2006---never to write a mortgage again.

Moody's estimates more big drops in home values

Crains Chicago published a pretty interesting story today that shows what the drop in home values have been since the peak (to Q3-2008) and what Moody's Economy.com estimates the total home value price drops will be.

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According to Moody's:

• The United State's home prices will bottom in Q4-2009 after dropping 36%
• Miami's home prices will drop over 66% from the peak
  
• Phoenix home prices will drop 58% from the peak
• Las Vegas will drop 56% from the peak
• Los Angeles will drop 53% from the peak
• Washington DC will drop 38% from the peak
• New York City will drop 33% from the peak
• San Francisco will drop 27% from the peak
• Boston will drop 26% from the peak
• Chicago will drop 17% from the peak

These are big drops and mean that many many home owners will be underwater in their mortgages. This will be felt for many people who needed PMI and only put down a down payment of 5% or 10%---But in many areas (Miami, Phoenix, Vegas, California)---even conforming loans and jumbo loans that were issued in 2005, 2006 and early 2007 will be underwater.

Unemployment/Underemployment Rates vs Freddie Mac and Fannie Mae Mortgage Delinquency Rates

Given Barack Obama's Stimulus Package and efforts to curtail the amount of mortgage foreclosures that are occurring in the market place, I thought it would be an interesting exercise to compare the unemployment rate and underemployment (U6) rate in America with the mortgage delinquency rates that Freddie Mac and Fannie Mae are experiencing.

Looking at data for 2006 - 2008, you can see the impact of a vicious feedback cycle. As people get delinquent in their mortgages, banks and other investors have to write assets down and constrict credit, this feeds into the economic contraction which causes more companies to scale back on headcount and hours worked--causing increases in the unemployment rate and underemployment rate.


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In my opinion, as you look out into 2009 (and 2010) the economic contraction and credit crunch will continue to cost people their jobs--and this will cause an escalation in delinquent loans throughout 2009 and part of 2010---It will hit conforming loans, Alt-A loans, sub-prime and jumbo mortgages.

Expect Helicopter Ben to try and solve much of the problem by printing more money and trying to push long term rates near all-time lows.
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For more information on underemployment click here: unempmloymentadvice.blogspot.com

Freddie Mac vs Fannie Mae Mortgage Delinquency Rate 2005 - 2008

In a couple of recent posts I showed how from 2005 to 2008 Fannie Mae's Delinquency rate on single family mortgages has more than tripled and during the same time Freddie Mac's delinquency rates on single family mortgages have more than doubled---so I thought it would be useful to put all that data on a single chart.

Below you will see delinquency statistics for Freddie Mac (Green Lines) and Fannie Mae (Red Lines) from 2005 to 2008. Throughout 2005 and much of 2006, the difference in delinquency rates between the two firms was ~10 basis points. However, by the end of 2008 Fannie Mae was seeing significantly higher delinquency rates than Freddie Mac.

In November 2008, Fannie had delinquency rate that was 61 bps higher than Freddie for "Total Single Family" mortgages---And 228 bps worse for Fannie when you are only looking at single family mortgages with credit enhancements (i.e. Private Mortgage Insurance)


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Freddie Mac Mortgage Delinquency Rate More than Doubles from 2005 to 2008

According to data from Freddie Mac it saw delinquency rates on single family more than double from 2005 to 2008. Total Single-Family home mortgage delinquency rate (3+ months behind or in foreclosure) for Freddie Mac mortgages was 1.72% in December 2008, and rose more than 100 basis points in 2008.


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The delinquency rates for Freddie Mac mortgages with Private Mortgage Insurance (PMI) or other credit enhancements was 3.79% in December 2008---Up over 200 basis points in 2008.

Fannie Mae's Mortgage Delinquency Rate more than triples from 2005 to 2008

According to data & statistics from Fannie Mae the amount of mortgage delinquencies on single family home mortgages have more than tripled from early 2005 (0.64% in 2/2005) to the end of 2008 (2.13% seriously delinquent in 11/2008).

The chart below looks at conventional single-family mortgages that are three months ore more past-due or in foreclosure as a percent of the total number of conventional single family mortgages.


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The figures for Credit Enhanced Fannie Mae mortgages is worse than average with a serious delinquency rate of 5.69% in November 2008 (and rising). (These are loans with Private Mortgage Insurance (PMI) or some other type of credit enhancement).

60 minutes segment on a Golden West Financial Whistleblower

For those of you who missed 60 minutes last night, they did a 13 minute segment on Paul Bishop a whistle blower at World Savings Bank (which was Golden West Financial's bank subsidiary) who tried to alert bank management to the risks associated with the Pick-a-Payment Option ARM mortgages.

Wachovia bought out the bank near the peak of the market at $25 billion

"World of Trouble" (13 minutes)


Watch CBS Videos Online

25% of Mortgages are Underwater in Southern California's San Diego County

As this graphic shows many of the area codes in San Diego County California are underwater (More is owed on the mortgage than what the property is worth). In many zip-codes between 20% to 50%+ of the homes are underwater.

This makes it very difficult to sell your house, and consequently you can expect further increases in short-sales, foreclosures and property price declines in San Diego County.

19 Years of Mortgage Origination Data 1990 - 2008

The Mortgage Bankers Association publishes quarterly data on the amount of mortgage originations for homes (1 - 4 family homes)

If you plot the mortgage data (See chart below) you will see the quarterly flows of mortgage orignations for purchase (Blue bars) and Refinancing (Purple Bars)---You can see that in 1990 & 1994 there was very little refinancing--due to high interest rates, and then from 2001 - 2008 just about every quarter saw a greater amount of refinancing than purchase mortgage financing

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Whenever you look at quarterly data it can be a little lumpy, so I transformed the mortgage data to be a rolling 4 quarter average (i.e. the data shown below in Q4-1990 represents the average data for Q1, Q2, Q3, & Q4-1990).

What you will see is that amount of mortgage originations for purchases peaked at Q1-2006 and mortgage refinancing peaked in 2003.

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In my estimation, if the Obama stimulus package is successful in lowering mortgage rates during the first half of 2009, you may see an increase in refinancing and purchase mortgage originations---But much like a python swalling a pig---eventually (1) everyone who could refinance will have refinanced their mortgage and (2) market rates will creep back up---That coupled with fewer homes being sold and dropping real-estate prices will cause the purchase mortgage originations to be dropping in 2010 and 2011 as well.

What do you think?

Mortgage Debt Outstanding 1952 - 2007

If you look at Census data for total mortgage debt outstanding during the 55 years spanning 1952 to 2007 you will see that total mortgage debt outstanding grew at a 9.7% Compound Annual Growth Rate (CAGR) for the 55 year period.

Mortgage debt for single family homes grew the most--from $58 Billion in 1952 to $14.5 Trillion in 2007--A 10% CAGR over 55 years!

Multi-family mortgages grew at a 8.1% CAGR over the past 55 years, while Commercial Mortgage debt outstanding grew at 9.8% CAGR and Farm land mortgage debt outstanding grew at a 5.2% CAGR over 55 years reaching $117 Billion in 2007.
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If you look at the last 20 years more closely---you'll see that the growth in home mortgages has grown at an even faster clip. The CAGR for home mortgage debt outstanding for single family homes from 1997 to 2007 was 11%

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What you can see if you look at the annual growth rate in mortgage debt outstanding you'll see that over the last 55 years, the growth rate for single family home mortgage debt outstanding was teh most consistant and was never negative (Like Multifamily, Commercial, and Farm mortgage debt outstanding).

If you do a little "What-if"/"Scenario-Analysis"---And ask, "what if for the last 10 years (1997-2007) Household mortgage debt outstanding did not grow at the 9.2% CAGR which it did---but instead grew at the 6.6% CAGR seen in Commercial Mortgage Debt outstanding (1997 to 2007)---Well if that were the case, instead of having $11.1 Trillion of mortgage debt outstanding in 2007 for single family homes---it would have been $7.4 Trillion of mortgage debt outstanding for single family homes---That is a 34% difference!

Said another way---cheap mortgage debt thrown at millions of Americans households during the last decade likely has inflated home values by at least a third (as of 2007).

A Century of Home Ownership Rates 1900 to 2008

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According to the US Census the home ownership rate ended 2008 at 67.5%... This rate had steadily increased since WWII and significantly higher than the 40% - 50% home ownership rate seen in the first half of the twentieth century.

Given the current credit crunch and the disappearance of sub-prime mortgages and the shadow banking providing easy mortgage financing in addition to banks and credit unions, it's safe to say that the home ownership statistics will be declining in the next few years.

I also think that it's important to note that compared to the depression, far more people are home-owners---And with the drastic drop in home prices experienced in the last year, coupled with drops of almost all asset values, household spending is definitely going to be crimped for several years to come due to the 'wealth-effect'