A large and aging pool of nonperforming mortgages continues to hang over the housing market despite loan modifications that have kept the serious delinquency rate from ballooning. However, the pace of loan restructurings has slowed by nearly 40% since last year and there are new fears that loans that have already been modified may default.
From January to August servicers modified just 715,000 loans, compared to a record 1.8 million units in 2010.
Meanwhile, foreclosures are expected to increase as major servicers reform their processing of defaulting borrowers and reach settlements with state and federal authorities.
According to analysts at Amherst Securities Group, these developments will put “renewed” downward pressure on home prices. Not only has the pace of modifications slowed, the analysts warn, but many previously modified loans are going to redefault.
“We believe that over the next few months, the nonperforming bucket could start to expand once more, as redefaults outpace modifications,” ASG analysts write in a new report.
Citigroup chief financial officer John Gerspach recently noted that modifications have slowed at his shop due to a smaller pool of eligible delinquent loans serviced by the giant bank.
“At the same time, our early-bucket delinquencies are beginning to increase—reflecting redefaults in previously modified mortgages,” he said, discussing Citi’s third-quarter financial results.
ASG analysts say there are 3.2 million loans where the borrower has either not made a payment in more than one year, the property is in foreclosure, or listed as REO.
Meanwhile, REO is being sold at a rate of 90,000 to 100,000 units per month. As the pace of REO sales quicken, it will put “more pressure on home prices,” ASG believes.
IHS Global economist Patrick Newport is forecasting further declines in home values. “Our view is that foreclosures, excess supply and weak demand will drive prices down another 5% to 10%,” he said. If the economy slips into recession, it would lead to an “even larger drop in home prices,” Newport said last week.
The Hope Now servicer alliance estimates that 2.8 million loans are 60 days or more past due. “My concern is they have been aging. We know the average time to go to foreclosure is over 600 days,” said Hope Now executive director Faith Schwartz.
Servicers have reviewed many such loans for a HAMP or a proprietary restructuring, but many mortgagors did not qualify. “I think we are in for a rough road ahead before we get through the existing pipeline,” Schwartz said at a George Washington University housing finance symposium.
The Hope Now executive director said she does not make predictions or forecasts, but stressed the performance of modified loans today has improved significantly over the past few years—mainly due to the emphasis on reducing the borrower’s monthly mortgage payments to affordable levels.
“If for some reason we see higher redefaults, it would be economy related,” tied to a job loss or reduction in income, she told National Mortgage News.
Meanwhile, Amherst Securities Group is urging the Obama administration to move forward with its plan to sell excess REO in bulk to investors who would turn single-family homes into rentals. These bulk sales are needed to absorb the new supply of REO, relieving the pressure on house prices, according to the Wall Street firm.
“This demand cannot be generated from creditworthy borrowers who plan to occupy the home as owner occupants; it must come from an investor bid,” the ASG report says. (ASG hopes to bid on REO pools as an investor.)
In September, Amherst Securities Group senior managing director Laurie Goodman told a Senate panel that her firm bid on, and won, a first block of homes (with tenants in place) auctioned by Fannie Mae. She recommended that Fannie and Freddie bundle at least 200 REO properties in a given metropolitan area into a single pool to attract bids by large investors.
Such a pool would be more attractive if the former owners or tenants are still living in the house.
“The bidder is often willing to pay more if the home is sold with a ready-made renter—as it saves time, effort and the cost of finding a renter,” Goodman testified.