Mortgage bankers admit to many more years of foreclosure pain ahead

The Mortgage Bankers Association issued a new report projecting foreclosures will take three or four years to work through the system.

Irvine Home Address … 36 CALAIS Irvine, CA 92602

Resale Home Price …… $798,000

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Black Eyed Peas — Let's Get It Started

The banks finally are getting serious about foreclosing on the delinquent mortgage squatters living in shadow inventory. Even though delinquencies are declining, they are still elevated well above historic norms, and they have been so high for so long that the banks have a huge backlog they must work through.

Fewer mortgages going bad but foreclosures expected to increase

The Mortgage Bankers Assn. says it could take three or four years to return to a normal pattern of delinquencies and foreclosures.

November 18, 2011 — By E. Scott Reckard, Los Angeles Times

Fewer home loans are in trouble these days, but despite some improvements, the nation is not even halfway through cleaning up the foreclosure mess, industry experts said.

It could take three or four years to return to a typical pattern of delinquencies and foreclosures, the Mortgage Bankers Assn. said in releasing its quarterly delinquency report Thursday.

A surprisingly candid and accurate assessment of the situation. Realistically, it will take much longer than four years as the foreclosure inventory will have a very long tail, but the bulk of the problems will be resolved in the next three to five years.

An economist for the trade group declined to estimate how many households had lost their homes since the mortgage meltdown four years ago, or how many more foreclosures were to come.

But the Center for Responsible Lending, a nonpartisan advocacy group that accurately predicted a foreclosure tidal wave in 2006, issued its own assessment Thursday: 2.7 million American households had lost their homes as of February, with an even greater number to come.

The advocacy group, which analyzed 27 million home loans made from 2004 through 2008, estimated that an additional 3.6 million mortgages were in foreclosure or likely to fail.

If we have already completed 2.7 million, and if we have 3.6 million to go, they are projecting a total 6.3 million foreclosures. That's a lot of houses.

“That means the nation is not yet midway through a foreclosure crisis that mires the economy,” the Durham, N.C., group said in releasing its study.

Lost Ground Exec Summary

The mortgage industry stopped funding high-interest subprime mortgages and other risky loans in 2007, when the meltdown made it impossible to sell them. But the backlog of soured mortgages from that era was enormous and has been compounded by lingering unemployment of about 9% nationally and about 12% in California.

Unemployment is clearly a problem, but the strategic default from the legions of underwater loan owners is the real problem.

Things are slowly improving, said Mike Fratantoni, the mortgage bankers' economist. The number of borrowers who had missed at least one payment but were not yet in foreclosure dropped below 8% for the first time since the fourth quarter of 2008. Just a year ago, it was 9.13%.

The percentage of home loans mired in the foreclosure process was up slightly from a year earlier at 4.43%, compared with the 1% that once had been considered normal, Fratantoni said.

The backlog remains high in part because lenders eased up on foreclosures for much of 2011 after revelations that they had mishandled legal paperwork and procedures when repossessing homes in the past.

The regulatory pressures on home lenders include a lengthy investigation by a task force of state and federal officials. California Atty. Gen. Kamala D. Harris is also pursuing a separate probe in hopes of forcing more write-downs of principal for troubled California borrowers.

Does she carry a gun while she robs the banks? If she is attempting to force lenders to write down principal, how is that not stealing?

Longtime industry observer Guy Cecala, publisher of Inside Mortgage Finance, said he believes it will take at least two more years to resolve the crisis.

“A lot depends on how fast banks … can clear out defaulted mortgages and foreclosed properties,” he said.

Fratantoni said that with the industry more confident that it has fixed its foreclosure procedures, “a couple of big servicers” he didn't identify had recently stepped up foreclosures. Many of those, he said, involved boom-era subprime loans that had been modified at least once but fell back into delinquency.

Reflecting this push, the percentage of loans on which foreclosure actions were started during the third quarter was 1.08%, up from 0.96% in the second quarter. California had the nation's fifth-highest rate of new foreclosures: nearly 1.5% in the latest quarter.

Banks are finally getting around to foreclosing on the squatters. This marks the beginning of the end of this crisis — assuming they complete what they start.

The statistics also reflected a much higher backlog of unresolved foreclosures in states where they are handled in the courts, compared with states like California that do not normally require court approval.

The rate of homes in foreclosure was highest in Eastern and Midwestern states that route all home repossessions through the courts, with Florida at more than 14% and New Jersey at 8%.

California, which for years had one of the highest rates of loans in foreclosure, fell to 19th on the list at a bit over 4%. Of states that handle foreclosures without court procedures, Nevada was the only one high on the total foreclosure-rate list, with nearly 8% of its mortgages in foreclosure.

In a separate report Thursday, mortgage finance giant Freddie Mac said the typical rate on a 30-year fixed-rate home loan this week was an even 4%, a statistically insignificant rise from 3.99% a week earlier. The 15-year fixed loan rates rose to 3.31% from 3.30%.

Expressing some optimism about the business, Frank Nothaft, a Freddie Mac economist, said the economy “is showing potential for further gains in the near term” as the near-record-low mortgage rates persist.

Retail sales rose for the fifth straight month in October, consumer confidence rose for the third straight month in early November, and home builder confidence rose this month to the strongest level since May 2010, Nothaft noted.

Is the economy getting any better?

I had lunch yesterday with a close friend who is a mergers and acquisitions attorney. He said the deal flow over the last several months has been almost non-existent. With all the debt problems around the world, and including the US, lenders are only willing to loan money to those who don't need it. There is plenty of capital available, but very few who qualify to get it. This lack of capital flows is causing ongoing weakness in our economy.

In my own industry, I have seen some signs of improvement as developers who are looking to deliver houses in 2015 are beginning to work on projects. Nobody is in a hurry, and few in the building industry are going back to work, but at least the phones are ringing, and proposals are going out the door.

Interestingly enough, my friend told me he believed part of the weakness in the mergers and acquisitions area is due to the low interest rates that are supposed to restart the economy. People who own companies who might want to sell out are hesitant to give up steady income for a large lump sum because they don't have any place to put it. There are few investments which can earn a decent return, and since the values of the businesses they would be selling are also depressed, most business owners are content to keep doing what they were doing.

Further, few businesses have much need to expand as there is so little demand. Unless the low interest rates cause the deployment of capital and increased production, the economy will continue to go nowhere. I have long maintained that housing will not lead us out of this recession as it will take a catalyst from another industry to set the economy in motion. So far, no other industry has stepped up, and my friend and I don't see the light at the end of the tunnel.

5 bedroom, 2,900 SF house from 2001 for $2,850 per month

I am always astonished when I see the impact 4% interest rates has on the cost of ownership. Today's featured property would rent for over $3,000 per month. This is one of the nicest properties I have seen trading at or below rental parity in Irvine.


This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707


Irvine House Address … 36 CALAIS Irvine, CA 92602

Resale House Price …… $798,000

Beds: 5

Baths: 2

Sq. Ft.: 2900


Property Type: Residential, Single Family

Style: Two Level, Traditional

Year Built: 2001

Community: West Irvine

County: Orange

MLS#: P803630

Source: CRMLS

Status: Active

On Redfin: 6 days


One of the distinguishing characteristics of this quality Fieldstone home is its vast open space downstairs. Graced with rich distressed walnut and diagonally-laid tile floors, other beautiful appointments include crown molding and heavy-guage baseboards, and easy-care plantation shutters. Perfectly set up for entertaining lots of friends, the huge family room opens into the kitchen with dining island, lustrous granite counters and walk-in pantry. There's a huge master bath with double sinks, walk-in closet and gleaming travertine floors, and dual air conditioning units help conserve energy throughout. Located in a superb school district, this elegant home with rose-lined entry is just a short walk to the association pool, spa, kiddy pool and public tennis courts, and close to Tustin Sportspark and the upscale Tustin Marketplace. VERY low association dues and low Mello-Roos make this newer home a great value!


Proprietary IHB commentary and analysis

Resale Home Price …… $798,000

House Purchase Price … $489,000

House Purchase Date …. 9/20/2001

Net Gain (Loss) ………. $261,120

Percent Change ………. 53.4%

Annual Appreciation … 4.8%

Cost of Home Ownership


$798,000 ………. Asking Price

$159,600 ………. 20% Down Conventional

4.02% …………… Mortgage Interest Rate

$638,400 ………. 30-Year Mortgage

$160,053 ………. Income Requirement

$3,055 ………. Monthly Mortgage Payment

$692 ………. Property Tax (@1.04%)

$167 ………. Special Taxes and Levies (Mello Roos)

$166 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$55 ………. Homeowners Association Fees


$4,135 ………. Monthly Cash Outlays

-$708 ………. Tax Savings (% of Interest and Property Tax)

-$917 ………. Equity Hidden in Payment (Amortization)

$223 ………. Lost Income to Down Payment (net of taxes)

$120 ………. Maintenance and Replacement Reserves


$2,854 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$7,980 ………. Furnishing and Move In @1%

$7,980 ………. Closing Costs @1%

$6,384 ………. Interest Points

$159,600 ………. Down Payment


$181,944 ………. Total Cash Costs

$43,700 ………… Emergency Cash Reserves


$225,644 ………. Total Savings Needed


35 thoughts on “Mortgage bankers admit to many more years of foreclosure pain ahead

  1. winstongator

    The argument for renting:
    Flexibility & excessive transaction costs.

    My sister-in-law may need to move after only 2 years of living in her home. She’s looking at a potential $54k loss from 10% price decline and realtor commissions. Her ‘cost of ownership’ is around $1900/mo. Her amortized loss over two years is $2250/mo. Taken to 3 years is still $1500/mo. She could have been renting something for $3400/mo over three years and been in the same position. That difference would get you a home with nearly twice the square footage, on a larger lot, closer to town.

    Rising prices covered up this calculation during the first half of the 2000-2010 decade. Short term ownership of homes was actually preferred because of the quick profits to be had. The potential losses if you need to move quickly will keep a large number of people from buying.

    1. SanJoseRenter

      > My sister-in-law may need to move after only 2 years of living in her home.

      Lots of Americans “need to move” … but they’re underwater loanowners.

      Too bad – that’s the downside of marking your X on an illiquid asset like real estate.

      Unless as noted last week, they work for Chick-fil-A or USPS. 🙂

    2. IrvineRenter

      “My sister-in-law may need to move after only 2 years of living in her home.”

      Shevy and I always warn people that if they think they may need to move in the next 3 to 5 years, they should continue renting because they will lose money on the sale. Of course, if they are below rental parity, they do have the option to rent the property, but many of these people need their down payment money back. Unfortunately, that money is lost if they need to sell.

      1. winstongator

        What is the typical cost to have an agency manage your rental home? Best case is to just do it yourself and have the renter pay on time, do no damage, & have the home have no problems.

        They would be moving out of town, and I could see her asking me to take care of basic things. I’d rather pay to have my own rental managed (if I had one), let alone hers.

        She might be able to break even with a rental, or a slow bleed. One problem with your cost-of-ownership calculator is that you include the paying down of the mortgage as a credit. Cash-flow wise, the full deficit each month would be $300 more.

        You are giving sound advice with the 3-5 yr time frame.

      2. Marc

        The other aspect you need to consider is someone with a significant amount of cash sitting on a bank account and being decimated by inflation year over year. Because of a 50% downpayment my monthly payment is now about 1/3 what it would cost to rent (I took an interest only loan), so the time to break even is much shorter than 5 years, even with another 10% drop in prices. I bought close to Irvine and I see prices stabilizing so I am hopeful to be able to sell for a small profit in 2-3 years, mostly because of the significant savings compared to renting. I am also hopeful (as a homeowner) that politicans will come up with more ideas to support/prop-up real estate prices before the elections.

        1. octal77

          …sitting on a bank account and being decimated by inflation year over year…

          Such a statement is true if and only if the goods and/or services purchased with such dollars are actually price inflating.

          Examples of inflation: food,gas,many services (ie medical care) and the like.

          Examples of deflation: Leveraged assets such as Real Estate.

          Thus, keeping cash in the bank (even at near-zero interest) makes great sense if those dollars are targeted to purchase deflating Real Estate.

          1. Marc

            I don’t see RE as a deflating asset. We are all guessing here but I think housing has become affordable enough for more and more people to purchase and politicians will do their best to support housing at almost any cost.

          2. octal77

            You will have a tough time convincing Case-Shiller.

            Case-Shiller index made made a new post bubble low today.


            S&P Case-Shiller 20-City Home Price Index (SPCS20RSA)

            House price index for the United States (USSTHPI)

            In particular, Case-Shiller Los Angeles/Orange County Index is off -40% from peak in 2006.

          3. Marc

            That’s an indicator focusing on the past, I am trying to figure out what will happen in 2012 and 2013.

  2. Casual Observer

    My guess is that anyone who bought 2008-2011 will eventually default. Probably most will be strategic defaults as whatever they bought during those years will loose value. This is a perpetual motion machine. “They” have been telling the world, 3-4 years and everything will be fine. “Fine” will be when the home you buy today is worth what you paid for it 3 years from now. Without adding any improvements you might like to make.

  3. HydroCabron

    Not buying this interval of 3-5 years to a substantial clean-up of the problem.

    Children are moving back in with their parents after college: with no job and high debt loads, they aren’t buying. Boomers are ending their careers, perhaps involuntarily, with little to retire on, so they’ll be selling or walking away. The sorts of salaried positions which pay for non-slum houses are diminishing in number and total compensation: this part of the middle class will be walking away or paying less.

    That’s three facts: two will shrink demand, and the third will grow supply.

    The only end, quick or slow, to this crisis, will occur at MUCH lower prices.

    As to Guy Cecala’s belief that it will take at least two more years to resolve this, I can only marvel at that lower limit. I don’t see how prices can fall that far in two years, but Guy’s technically right: 10 > 2, so it is genuinely “at least” two years.

    I left one thing out: Considering the numbers of suckers who are still willing to purchase for $350 per square foot in places where the median income lies well below $100K/yr., there is plenty of fresh supply in the foreclosure pipeline.

    Looks like the non-foreclosed will consist largely of those who purchased before 2000 and kept their hands outta the HELOC pie. How many such are out there? A lot, but are they even a majority of owners?

    1. SoOCOwner

      I can’t speak to the majority, but we are one of those who purchased a new home back in 1993 and never spent our equity. Our home will be paid for in about 6 years. Most of our neighbors seem to have the same philosophy as us. Buy and hold. There are still quite a few original owners on our street and none of the them have been foreclosed on (that I know of). The one foreclosure was a guy who purchased in 2006.

  4. BD

    What will happen to prices when rates rise / normalize or even reflect serious inflation? This same 785K house might loose another 30% in value if rates go to 8%….



    1. IrvineRenter

      Yes, if interest rates go up due to price inflation, and if there is no wage inflation to go with it, house prices will crater.

      1. Pete

        I disagree. Many professional and private investors will look at real estate as a safe harbor from inflation, which will drive up prices. This is exactly why RE prices in Germany are rising quickly, people are buying properties to protect their assets from the anticipated inflation that (similarly to the Fed) the ECB more and more promotes (at least compared to the very price-stability focused Bundesbank).

        1. octal77

          …will look at real estate as a safe harbor from inflation, which will drive up prices.

          Such an argument could hold a bit of water *if* such purchases are all 100% cash.

          In reality, R/E is highly leveraged with borrowed money.

          Why would a lender lend money to someone in an inflationary environment, particularly if lending rates are held below market?

          Are you saying that a lender will gladly accept repayment of his loan in inflated dollars?

          Doesn’t sound like a good deal for the lender.

          1. Pete

            Yes, lenders will accept these terms if they earn a real return, i.e. interest rate is above the rate of inflation (e.g. interest rate 5%, inflation 4%). Apart from that, we should not underestimate how much cash is sitting around (here and internationally) on company and private balance sheets (mostly the top 1%) waiting to be invested as soon as some confidence in the US economy returns. Most of these people won’t even need much (if any) financing. Also, many savers that did not buy property/lose money during the past few years continued to save and now have large downpayments. That plus government intervention make RE a good investment in 2012 (assuming you get a good deal).

          2. octal77

            …lenders will accept these terms if they earn a real return…

            Of course they will.

            But here is the problem. Prevailing high interest rates can only force prices lower still.

            With highly leverage assets such as Real Estate an inverse relationship exists between price and the cost of money.

            Further if lenders can command high interest rates *above* inflation, why would holders of cash invest in illiquid assets such as Real Estate when they can sell the same money into Private lending markets and preserve liquidity?

    2. octal77

      …same 785K house might loose another 30%…

      I believe it could be even worse.

      The problem is while rising interest rates price deflate highly leveraged assets (such as Real Estate), the cost of ownership (such as Property Taxes, HOA dues, insurance, maintenance, basic
      utilities, etc.) will most certainly continue to rise.

      Thus a typical homeowners monthly nut will increase while the underlying asset continues to fall in value.

      Not exactly the definition of a prudent purchase!

  5. irvine_home_owner

    “When” will those rates go to 8%?

    Does anyone want to bust out their magical crystal ball?

    1. wheresthebeef

      Good question, with all the manupulation going on nobody has the correct answer.

      Due to all this manipulation, one thing is 100% guaranteed and baked into the cake, homes will see NO appreciation for a LOOOOOOOOOOOOOONG time. I’m sure all the recent below rental parity buyers already know this though!

  6. BD

    I don’t know which scenario is more likely slowly rising rates and grinding of prices for a decade or a digital move in rates and hard hit to prices over the next 5 years.

    Lots of money being printed and handed out… QE 3 coming and helicopter ben dropping money on europe now! Seeds for serious inflation…in my .02


  7. Partyboy

    It’s interesting to hear all of the opinions regarding the time until the housing market bottoms out and/or stabilizes. Four years ago, as I was watching our regrettable house purchase start to plummet in value, I wondered why the banks were withholding their “shadow” inventory from the market. At that time, I thought it was because they thought the market would come back and they could sell their REOs at a minimal loss. Even back then I remember thinking that if one of the major banks was savvy and willing to buck the system, they would just list ALL of their REOs and beat the other banks to the market, thereby getting maximum return on thier assets (or minimal loss) while simultaneously crushing the value of their competitors assets.

    I have no formal education in finance or economics so bear with me, but how would the past three years have played out differently if say Chase listed all of their REOs in 2008, flooding the market with supply but getting a lot of inventory moved prior to the value drop of the past 1-2 years?

    1. IrvineRenter

      We are seeing a bit of that now with the GSEs. The government is foreclosing and selling the REO, and it is crushing prices are reducing the collateral value for the banks which are building shadow inventory. When the banks finally capitulate, they will likely regret their policy of building shadow inventory while the GSEs were liquidating at higher prices.

      1. HydroCabron

        Interesting that the government would not ensure that the GSEs stay in lock-step with the private bank cartel, and only dribble inventory back on to the market.

        Since anyone with power in Washington is determined to prop up prices, this must be an oversight. I hope this oversight remains uncorrected.

        1. IrvineRenter

          Yes, I find it odd too. If the government told the GSEs to start accumulating properties in shadow inventory or hold them as rentals, they could drag this crisis out for a decade or more.

          The GSEs are currently not accumulating any shadow inventory, and their sales are what’s driving down prices at the mid to low end of the market. Cities like Irvine haven’t seen this kind of activity because few of the loans were GSE loans here. Higher income communities are where the shadow inventory is concentrated.

    2. octal77

      …that if one of the major banks was savvy and willing to buck the system, they would just list ALL of their RE of their REOs and beat the other banks to the market..

      Really good question and I have wondered for many years about the same issue.

      I have talked with well placed bankers that I know about this very issue and have never received a straight answer.

      *But*, I have some theories…

      1] FASB rules allow non-performing assets to remain on the books at full value until sold. Thus, selling forces bank to book a loss.

      2] Bank executives base bonus pay on Quarter to Quarter performance. Thus, kicking the REO can down the road allows the bankers to receive bonus pay for a longer period of time.

      3] The large banks have conspired to move in lock step so none suffer large losses. In other words they all agree together *NOT* to buck the system.

      4] What really puzzles me is why *small* local banks who are not part of the cartel didn’t come to the same conclusion and sell early.

      I would be really interested to read opinions about 4].

      1. IrvineRenter

        The small local banks simply can’t absorb the losses, so amend-extend-pretend is the only thing keeping them alive.

      2. Perspective

        And speaking for small local credit unions, they don’t make exotic mortgages. They’ve always stuck to traditional lending standards with big downpayments.

        I know the lending manager of a large LA credit union, and they were making one to two mortgage loans per month during the bubble – not exactly a cash cow.

      3. SanJoseRenter


        You’re mostly right, though here’s some other items that we’ve discussed in this forum in the past couple of years:

        5) banks are getting 0% money from the Fed, so carrying non-performing loans costs them basically nothing

        6) until recently, banks did not have enough trained staff to enter the large-scale foreclosure business.

        My opinion is that your #2 is likely, but #3 is less likely, unless that’s being orchestrated from Washington.

        I think we have a relatively good understanding of what’s happening at this point, though I still have one question: why did financial regulatory appointees try to insert a clause for criminal immunity in their contracts in 2008?

        I still haven’t heard anybody nail down specifics for that, but I would guess that’s either related to the revolving door cycle of banking and banking regulation, or the diversion of trillions of dollars from the taxpayer to Wall St./banks in secrecy.

  8. SanJoseRenter


    I’ve been looking into the backstory for some of the economic events that never made sense to me, and found these, which provide some illumination:

    1) BofA was interested in doing the Countrywide and Merrill Lynch deals because BofA was legally too large to merge with retail deposit banks (the 10% merger cap), but could continue to grow into real estate and other services:

    Market Share Caps

    2) The proposed $5 account fee likely didn’t fail directly because of public sentiment, but because BofA is under an OCC consent order plus other supervision, and cannot afford any negative numbers, like losing a million accounts.

    Google for “bofa occ consent order”

    3) Gingrich keeps protesting that he’s a historian and not a lobbyist because:

    a) he never registered as a lobbyist, as legally required for his activities

    b) and registering as a lobbyist would likely end his career as a viable candidate for higher office, thus reducing his ability to charge lobbying fees. Newt Gingrich not technically a lobbyist, but…

    (On Washington Week, a speaker called Gingrich “the definition of a demagogue”, and not in a good way.)

  9. Marian

    IrvineRenter, you compared mortgages with put options.

    But bankers have their own put options too (for which they didn’t pay): taxpayer bailout.

    The chain of put options: buyers got put options from the banker, bankers got put options from the taxpayer, and the taxpayer got left holding the bag.

    1. SanJoseRenter

      You would think that a centenarian would have paid off their mortgage at some point.

      So, inquiring minds want to know …

      Did the bank really give a HELOC or refi to an applicant over 100 years old?

      I’d love to see the loan paperwork on this one. 🙂

Comments are closed.