According to the Center for Responsible Lending (CRL), we’ve moved through a frighteningly small percentage of coming foreclosures.
To date, 1.5 million subprime mortgages have gone bad. A further 2 million subprime home are currently in default, and 2009 will see a total of approximately 2.4 million foreclosures.
However, the CRL sees foreclosures tripling over the next four years – to around 8.1 million. They get this number by combining foreclosure starts with state-by-state delinquency rates.
The CRL’s methodology has proven sound before. In September 2007, the CRL warned Congress of the coming housing collapse – actually underestimating the severity of it. Still, as one of the few voices predicting the bust, we should listen closely now that the organization sees a greater disaster ahead.
One of the biggest problems isn’t the foreclosure rate – but the lack of loan modifications. The CRL sees a pace of 1 out of every 10 at-risk loans being modified, with mortgages that qualify for loan modification being turned down.
NPR reporter Chris Arnold actually witnesses a Bank of America officer refusing to modify a loan for a qualifying mortgage (starting just before 6:50).
At first, this appears surprising. One would assume a bank would prefer a paid modified loan to a foreclosure or short sale.
The problem is one of balance sheets. John P. Hussman, of Hussman Funds, writes, “The rules encourage banks to neither reset loans nor foreclose, both which would trigger a restatement of value on the mortgage asset.”
Hussman goes on to conclude,
… If you talk to people who oversee these assets, including people who work for the FDIC, you’ll hear that there is an inventory of unrecognized losses being built up, in hopes that the underlying mortgages will turn around without the need for loss reporting. In view of the CRL foreclosure projections, all we can think is – fat chance.
In other words, the record profits being reported by banks this quarter appear to be all smoke and mirrors. Real estate losses are still mounting – they are just hidden. Hussman again: “My impression of the U.S. banking system is that it is quietly going insolvent, in a manner that will become evident only when the slack for “significant judgment”… is taken up so tightly that the rope snaps.”
The CRL, in response to this looming crisis, is calling for more stringent loan modification rules to be passed down by the government. Citi (C:NYSE), in a counterpoint, argues that the current Home Affordable Modification Program has already caused delinquency rates to rise, and makes managing balance sheets more difficult.
Citi’s report states, “Loans in the trial modification period under the HAMP continue to remain delinquent even if the reduced payments agreed to under the program are made by the borrower.”
While it appears unlikely that reduced payments would cause a rise in delinquency, it’s quite possible that the problem is too great to be solved in this manner. And it is certain that, once a loan is modified, banks will have to eat the loss now, instead of putting it off to a day of later reckoning.
Whether that is good, bad or indifferent remains to be seen.
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