40 States Show Worsening Trend in Mortgage Delinquencies; $169 Billion and Counting; Taxpayers, the True Lender of Last Resort

For the first time in three years mortgage delinquencies on the rise.

Most of my readers would not be surprised by this, but analysts were. Please consider Mortgage Payments Show Surprising Rise in Delinquencies

The rate at which mortgage holders were late with their payments by 60 days or more rose in the June-to-September period for the first time since the last three months of 2009, according to TransUnion.

The credit reporting agency said 5.88% of homeowners missed two or more payments, an early sign of possible foreclosure. That was up from 5.82% in the second quarter.

The increase surprised TransUnion researchers, who had expected late payments, or delinquencies, to fall for the quarter.

"It's much different than we've been talking about the last few quarters," said Tim Martin, group vice president of U.S. Housing in TransUnion's financial services business unit.

The problems were widespread. Between the second and third quarters, all but 10 states and the District of Columbia saw delinquency rates increase.

"More and more homeowners are likely to struggle," Martin said. "I'm not sure this is a one-quarter blip."

That echoes predictions from other sources, like RealtyTrac.

"This isn't just about bad loans anymore," said Blomquist. "It's about a bad economy that's pushing people into foreclosure."

Question About Surprises

Why is a bad economy pushing people into foreclosure a surprise?

Month-after-month the jobs market is not keeping up with demographics. Moreover, stagnant-to-falling housing prices have given more people an incentive to walk away. Finally, real wages continue to drop.

The surprise is "why did this take so long?"

Reader Question on Mortgage Lender Losses

In response to my November 1, post LPS Mortgage Monitor: Over 4 Million Loans 90+ Days Delinquent or in Foreclosure, 72% in Foreclosure Not Made Payment for at Least 1 Year reader Bruce asks writes ...

Hi Mish,

What concerns me arises from the data you cite in the latest LPS data, but it's something I can not find anywhere.

If 2+ million are in foreclosure and 6+ million are non-current,

AND IF those payments on average & hypothetically have not been made for say 6 months,

AND let's just hypothetically assume the average payment not being made is $1,000 per month

then between 2 billion and 6 billion x 6 months = somewhere between 12-36 billion has not been paid to investors..... conservatively!

If the average FC case hasn't paid in 2 years, the total is 50 billion +/- lost just for the FC cases.

So my question is: how can the lender/investors take these kinds of losses and we don't hear them screaming in Congress?

How are they remaining solvent?

Where are these losses felt in the economy/absorbed/reflected on balance sheets, etc?

Thanks!

Hello Bruce.

Fannie Mae and Freddie Mac both went back to taxpayers this month to fund losses and the cumulative losses are huge.

Fannie, Freddie Have Cost Taxpayers $169 Billion

Please consider Fannie Mae taps $7.8 bln from Treasury, loss widens

Fannie Mae , the biggest source of money for U.S. home loans, on Tuesday said it needed a further $7.8 billion in federal aid to stay afloat as a shaky housing market widened its third-quarter loss to $5.1 billion.

Fannie Mae has now drawn $112.6 billion in bailout funds from the Treasury Department since being seized by the government in 2008 as mortgage losses mounted, and it has returned $17.2 billion to taxpayers in the form of dividends.

The government has pledged unlimited funds to keep the firms afloat through the end of 2012. Combined, they have cost taxpayers around $169 billion.

Other Related Losses

Bear in mind that is Fannie and Freddie losses alone total $169 billion. I asked Patrick Pulatie at LFI Analytics if he could shed any additional light on mortgage and servicing losses.

Pulatie writes ...

Good Morning Mish,

Under the Pooling and Servicing Agreement, a servicer must insure continued cash flow into the Trust for payments due, even if borrowers are not paying. This is called Credit Enhancement. Enhancements may be from:

Overcollateralization is present whereby more loans than are needed are placed into the Trust to ensure that needed cash flow payments are met.

Excess Spread is another manner. Interest Rates on the loans are greater than the interest being paid out.

Reserve accounts with funds placed into it to cover losses.

Subordination of Tranches whereby the higher risk tranches absorb the first losses, and the losses continue to work their way through the different tranches, wiping them out one at a time.

Third party insurance for losses.

Others exist as well.

Given that these enhancements are not enough to prevent losses, the Servicers also have their part. When a loan payment is missed, the Servicer must advance the payment from their own funds to the Trust to make up the difference. This continues each and every month, until such time that the Servicer decides that the money is "unrecoverable".

At that time, dependent upon the agreement, the Servicer might be able to immediately recover the advances, or the Servicer may have to wait until it forecloses to take the money right off the top of the foreclosure sale proceeds, or by modifying a loan, and collecting the advances through the "re-capitalization" of the loan, if the PSA permits.

Given all of this, it is still obvious that by now, the Trusts are losing money. So to the next part of your question.

Some investors are filing lawsuits to collect losses. CalPERS in California is one doing so. But there are many problems with regard to this strategy.

Most of the lawsuit allegations are based upon violations of Reps and Warranties. This is difficult to allege because the violations alleged will be falsified income, falsified employment, occupancy issues, or appraisal issues.

However, to allege this "with specificity", the investors need access to the loan files, which they do not have, and the lenders refuse to provide, unless directed to do so by courts in litigation.

Without the files, the allegations cannot be proven. (There are mechanisms in the Agreements whereby if from 25% to 50% of investors demand to see the files, the lenders must provide them, but to date, this tactic has been unsuccessful to achieve.)

If access is granted to the files, the investors will have even more problems. Each file will at a minimum contain over 500 pages of documents. A trust can have up to 8000 loans in place. Trying to evaluate this number of loans from a logistical perspective is going to be overwhelming.

For example:

I am involved in a similar type of lawsuit currently, a lender vs. mortgage banker action. There are over 50 loans total involved. The Discovery documents, both lender and mortgage banker, run from a low of perhaps 1200 per file, up to over 4000 pages on one file. The documents simply overwhelm the attorney's office.

To properly evaluate even one loan takes many hours. The loan files for both sides must be examined, compared, and verified. Results are then drawn up on each file, correlated, and then patterns of practice must be determined to exist. This is simply overwhelming in the process, if one is to do it properly.

Arguments from exam results will be made regarding Reps and Warranties, but at the same time, wording of the PSA must be considered. Stated Income verbiage in the PSA could work against the Falsified Income allegation. Then, one must consider how much due diligence the lender must practice, especially if they "bought" the loan from another party. And what if it was the broker or borrower who committed the fraud? Again, how much due diligence is required?

The costs of doing the exams will be extensive, as will the litigation costs. Who will fund the costs becomes another problem.

Yet another problem exists: who does one sue? Original lender, or the Sponsor, Depositor, or Trust? One lawsuit is being directed at Deutsche Bank as the Trustee for Fiduciary Duty violations, but that is questionable.

The Trustee is not going to begin lawsuits on behalf of the investor. The Trustees did their own loans and securitized them. Filing lawsuits against lenders by the Trustees would invite similar against them.

Most investors were institutional funds. They may chose to ignore the losses since an action against a lender could conceivably result in opening themselves up to shareholder lawsuits.

Lenders suing other lenders for "repurchases" is not likely to happen, except in unusual circumstances. That is because if a lender is successful in winning the repurchase lawsuit, they set the stage for others, including investors to use the same allegations.

What is amazing is that the FHFA is doing lawsuits on behalf of the GSE's, using Reps and Warranties. It is absolutely incredible that they are doing so since the GSE's knew what was going on and supported the process by ignoring it. I think that the lawsuit is "window dressing" to provide cover for the GSE's, and to try to avoid taxpayer bailouts. It could backfire however.

As to the other questions:

Solvent? Dependent upon the investor, there may be no solvency. This is a big part with pension funds like CalPers right now.

Go to Congress? Congress wants no part of this mess.

Where are the losses felt? They are felt through every part of the economy, from the balance sheets, pension funds, etc. Most important, the losses are felt in the Housing Market, through the drop in values, lack of desire to purchase MBS, artificially reduced interest rates by the Fed to attempt to spur on housing and the economy, lack of new housing construction, shadow inventories, foreclosures, etc. Just about every part of the economy has been affected by the losses.

Of course, the one section of the economy to benefit is the Stock Market. As the Fed buys new "refinanced" mortgages from the GSE's, the old MBS held by the investors are paid off. This money is not used to buy new MBS. Instead, it goes into the market.

After all, what MBS investor would buy the new crap today, knowing that home values will continue to fall, resulting in more defaults among even the new MBS? The risk is too great for a return of perhaps 3.25%.

As you can see, a seemingly simple question can have a complex set of answers, ending of course with taxpayers being the lender of last resort.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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