Mortgage delinquency rates increased in the first quarter, up 59 basis points from the fourth quarter and 94 basis points above the year-ago-level. But the rate at which lenders are initiating foreclosure actions declined by 14 basis points (2 percent) year-over-year. So is the delinquency/foreclosure picture getting better or worse? Good question, with statistical evidence to support either conclusion.
The problem, or part of it, is distinguishing between the seasonally adjusted and non-adjusted data reported by the Mortgage Bankers Association and interpreting the differences. The seasonally adjusted delinquency rate increased both month-over-month and year-over year, but the non-adjusted rate declined in both comparisons.
“Delinquency rates traditionally peak in the fourth quarter and fall in the first quarter, and we saw that first quarter drop in the data,” Jay Brinkmann, the MBA’s chief economist explained in the press release accompanying the delinquency report. “The question is whether the drop represents…a normal seasonal decline [or] a more fundamental improvement….The seasonal models say it is not a fundamental improvement and that the seasonal drop should have been larger to represent a true improvement….Yet there is reason to believe the seasonally adjusted numbers could be too high, {which means] that fundamental market factors may be having a greater influence on the delinquency rates than is normally the case.”
All clear now? Probably not. So take a look at some of the raw numbers: 10 percent of all homeowners missed at least one payment in the first quarter and one in every 387 households received a foreclosure notice in March. “Any way you look at it, an extraordinary number of people are having trouble paying their mortgage,” a New York Times article on the MBA delinquency report, noted.
The MBA’s Brinkmann apparently agrees. “If mortgage delinquencies are not yet clearly improving, it also appears they are not getting worse,” he noted. “However, a bad situation that is not getting worse is still bad.”
LITTLE PROGRESS
Speaking of foreclosures -- and when haven’t we been in recent memory -- the Congressional Oversight Panel (COP) monitoring the Home Affordable Mortgage Program (HAMP) continues to find fault with the Obama Administration’s efforts to help struggling homeowners avoid foreclosure. In its most recent report, the panel finds that while lenders have increased the rate at which they are modifying mortgages, the pace “continues to lag well behind the pace of the crisis.” For every borrower who avoided foreclosure through HAMP last year, the report notes, another 10 homeowners lost their homes. Although the Administration has announced several revisions designed to improve the results, the report says, “it now seems clear that Treasury’s programs, even when they are fully operational, will not reach the overwhelming majority of homeowners in trouble.”
Many of the homeowners who have received HAMP assistance are still struggling, according to the report. Homeowners who obtained 5-year loan modifications remained under water, with negative equity averaging 43 percent, leaving them worse off than before the modifications, when negative equity averaged 35 percent. And those statistics understate the extent of the problem, the report notes, because they include primary mortgages only. If second loans are added to the mix, “The percentage would be significantly higher. The continuing deep level of negative equity for many HAMAP permanent modification recipients makes the modification’s sustainability questionable,” the report warns. “Even with more affordable payments, deeply underwater borrowers may remain tempted to strategically default or may be compelled to because core life events…necessitate a move.”
Repeating a conclusion in prior reports, the panel contends that successful modifications must include principal reductions are essential. “Lack of principal forgiveness means that homeowners will continue to be underwater; it means that more of each payment will be going to interest rather than paying down principal; and it may mean that some borrowers have to pay for a longer period of time. All of these factors increase the re-default risk on modified mortgages, and to the extent that a permanent modification is not sustainable,” the report warns, “it merely delays a foreclosure and the stabilization of the housing market.”
NO END IN SIGHT
Critics of Fannie Mae and Freddie Mac wanted a commitment to end the government conservatorship under which the two Government Sponsored Enterprises are operating within two years, and phase out the federal support for the companies over a five-year period. W hat they got was a Congressional study to recommend how to restructure the GSEs and the nation’s housing finance system.
The demand to end the government conservatorship imposed 18 months ago, when the companies were facing financial disaster, came in the form of an amendment to the pending financial reform legislation, proposed by Republican Senators John McCain (AZ), Judd Gregg (NH) and Richard Shelby (AL).
“Fannie Mae and Freddie Mac are synonymous with mismanagement and waste and have become the face of ‘too big to fail,’” the senators said in a joint press statement. “The time has come to end [their] taxpayer-backed slush fund and require them to operate on a level playing field,” the senators added.
Adding a (no doubt unintended) exclamation point to their statement, Freddie Mac requested another $10.6 billion in federal aid to offset an $8 billion first quarter loss. Fannie Mae is seeking another $8.4 billion after reporting an $11.5 billion loss for the quarter.
Arguing against establishing an end-date for the GSE conservatorship, Sen. Chris Dodd (D-CT), chairman of the Senate Finance Committee and chief architect of the Senate’s financial reform legislation, said the GSE questions should be addressed separately. Lawmakers agreed, defeating the amendment (narrowly) by a vote of 56-43 before approving Dodd’s proposal to study the GSE restructuring 63-36.
Republicans have been pressuring Obama Administration officials to produce the GSE restructuring plan they had said they would unveil last year. But as Fannie and Freddie have assumed a central role in bolstering the housing market, that timetable has been delayed. Treasury Secretary Geithner said recently that he did not anticipate addressing the GSE restructuring issue before next r year.
“We want to take a careful look at the entire government agencies that act in the housing market and the set of policies that helped contribute to this terrible crisis,” he said at a recent Congressional hearing. “We are going to need fundamental reform in the housing market, not just Fannie and Freddie,” he added.
Some industry analysts suggest that the odds of separating Fannie and Freddie from government support have moved from “highly likely” before the financial crisis to “slim to none” today. “As far as the eye can see, we’re relying on Fannie and Freddie as load-bearing support for the housing market,” Howard Glaser, a housing consultant and former official in the Department of Housing and Urban Development, told American Banker, adding, “We can’t live without them.”
FUNDAMENTAL CHANGES
In past recessions, consumers who had tightened their belts have loosened them quickly when the economy began to recover, creating the robust rebounds we have come to expect. This downturn may be different, however. A report commissioned by the Mortgage Bankers Association predicts that the severity of this downturn, and the persistent high unemployment it has produced for younger workers could permanently depress earnings for a large segment of the population and reshape attitudes toward finances and social policies.
The study, by Joe Peek, an economics professor at the University of Kentucky, analyzes the likely impact of this downturn on consumer spending, savings rates and attitudes. His conclusion: Don’t expect this recovery to look much like past ones.
“While Americans and the American economy are noted for their resilience, the current financial crisis and recession exceeded the devastation created by other post-World War II recessions,” Peek noted. And the impacts in some areas will be long-term and possibly permanent changes in behavior rather than the temporary adjustments of the past. Among the study’s conclusions:
Mortgage delinquency and foreclosure rates are unlikely to decline “meaningfully” because unemployment rates will remain elevated and home prices depressed “for an extended period.”
The “underemployment” rate is much higher than the reported unemployment rate and periods of unemployment are getting longer. At the same time, many workers are delaying their retirement plans, to rebuild decimated retirement nest eggs, reducing openings for unemployed workers and for younger workers entering the labor force.
People entering the work force during recessions have lower lifetime incomes. Absent a rapid and strong rebound in the labor market, at this point an unlikely scenario,” the study warns, “we risk creating a ‘lost generation’ that may never catch up.”
With strong headwinds depressing recovery prospects, the study sees a growing risk of being caught in “a vicious circle,” with continuing reductions in consumer and business spending slowing the recovery, discouraging employers from adding jobs, causing further spending reductions and deepening the downturn. “The longer the malaise in economic activity continues, the more likely that diminished spending persists, adversely affecting future economic growth and the standard of living,” the study concludes. “Such headwinds to a strong economic recovery are likely to have lasting impacts on the values and behavior of the current generation, much as the Great Depression had on its generation.”
CHECKING IT TWICE
Who knew? The most important employee in a law firm may be a proofreader --an insight one New York law firm has gained the hard way. Buyers who committed to purchase units in a newly constructed Manhattan condominium development say a typographical error in the offering documents entitles them to rescind their offers and recoup their deposits. New York Attorney General Andrew Cuomo agrees, and has ordered the developers -- Carlyle Realty Partners and Extell Development --to refund a total of $16 million to the buyers. The developers, in turn, have sued Cuomo, insisting that the error was meaningless and did not justify the rescission of the buyers’ offers.
The error, as described by The Am Law Daily Blog on AmericanLawyer.com, occurred in the 732 offering document for the 41-unit development, in a clause specifying that buyers could demand the return of their deposits if the first closing did not occur by September 2008. Right month, wrong year; it was supposed to be 2009.
The first closing actually took place in February 2009 – before the intended deadline but after the erroneous one, and, notably, in the middle of a severe real estate downturn. Some buyers now want to withdraw because their financial circumstances have changed; others want to negotiate a lower price, reflecting market changes since they agreed to buy. Either way, the buyers contend, while the erroneous date may be insignificant to the developer, it is significant to them and enforceable; the contract, they argue, means what it says, not what the developers now claim they intended it to say. That question is now before a New York federal court, where the developers are arguing that Cuomo’s refund order should be overturned.
