Over the past year, more and more of the housing pundits, circa 2006, have resurfaced on Bloomberg and CNBC. Many claim the bottom in housing is in as the US recovery continues due to low interest rates and a healing consumer. Like any story, the devil is in the details so let’s parse the facts and make our own diagnosis.
Beginning in 2009 the new administration, assisted by the new wards of the state Fannie Mae and Freddie Mac (thank you Hank Paulson), began a series of mortgage moratoriums -aka “mortgage modifications.” Essentially, the government would entertain a variety of mortgage defaults/delinquency cases with the intention of keeping bodies in their homes. Can’t let the home ownership (or should I say “lease”) program go to waste now. Since then we note the following facts provided by housing analyst Mark Hanson:
– Mods are greater in number by 50% than legacy Sub prime loans in 2006. And they are worse in structure.
– There have been 9.953 MILLION loans “tampered with” through trials, mods and workouts based on OTS data through Q4 2012.
– Bank “proprietary” Alt-A, high-risk mods outnumber HAMP (Home affordable modification program) mods by over 200%. Banks have had a field day re-leveraging millions of bad loans into structures that would make Angelo Mozillo blush.
– Mods are why banks brought back $10s of billions in loan loss reserves as revenue. And why they will have to add back reserves.
– Mods are where all that housing “supply” went.
– Mods are why foreclosures are at pre-crisis lows.
– Mods turn people into underwater, over-levered renters of their own house.
– Mods prevent the deleveraging process needed for housing to achieve a “durable” recovery with “escape velocity”.
– Mods compete fiercely with all those new-era buy and rent “investors” (Blackrock, Och-Ziff, Tom Barrack) whose top demand theme when raising opportunity capital a couple of years ago was all of the “millions of homeowners displaced through foreclosure who will need a place to rent until they can buy again”.
If you look at mods structurally — sky-high DTI, LTV, CLTV and low credit score — they make legacy Subprime loans look sane. People say “banks aren’t lending”. I say ‘go look at their loan mods volume’. Loan mods are nothing more than low rate, exotic refi’s for people who can’t do a traditional refi. But they are so exotic they make Pay Option ARMs look structurally sound.
To put this in context there were only about 4 million legacy Sub-prime loans in existence in 2007 when the wheels came off the sector spurred by the ‘Sub-prime Implosion”.
– Four million Sub-prime loans ignited the mortgage meltdown. So, six million or more ‘worse-than-Sub-prime’ loans hanging over housings’, banks’, and MBS investors’ heads probably isn’t a great thing.
-HAMP mod redefaults are surging…but banks and servicers have been making much more risky “proprietary” mods than HAMP in much larger volume. Thus, expect redefaults across ALL loan mods to increase significantly over the next year. Obviously, this means more distressed supply and for many banks this could mean higher loan loss reserves, etc. See picture below:
My Comment: So one should ask the question “How long can the government continue to hide inventory from the public”? Or as importantly, since the public bailed out the banks shouldn’t they be entitled to purchase homes at reasonable price levels, not the artificially inflated kind?