Here is an interesting new paper on homeowners with negative equity walking away: a href=”http://www.financialtrustindex.org/images/Guiso_Sapienza_Zingales_StrategicDefault.pdf”Moral and Social Constraints to Strategic Default on Mortgages/a by Guiso, Sapienza and Zingales. (ht Bob_in_MA)br /br /The WSJ Real Time Economics has a summary: a href=”http://blogs.wsj.com/economics/2009/06/26/when-is-it-cheaper-to-ditch-a-home-than-pay/”When Is It Cheaper to Ditch a Home Than Pay?/a blockquoteThe researchers found that homeowners start to default once their negative equity passes 10% of the home’s value. After that, they “walk away massively” after decreases of 15%. About 17% of households would default — even if they could pay the mortgage — when the equity shortfall hits 50% of the house’s value, they found.br /…br /“Our research showed there is a multiplication effect, where the social pressure not to default is weakened when homeowners live in areas of high frequency of foreclosures or know others who defaulted strategically,” Zingales said. “The predisposition to default increases with the number of foreclosures in the same ZIP code.”/blockquoteWalking away (what the researchers call a “strategic default” and the mortgage industry call a “ruthless default”) is when the borrower decides to stop paying a mortgage even though they can still afford the payment. This has always been difficult to quantify. Whenever a lender calls a delinquent homeowner - if they can reach the homeowner - the homeowner always tells the lender some sob story about why they can’t pay their mortgage (lost job, medical, rate reset, etc.). As the researchers note: blockquoteIt is difficult to study the strategic default decision, because it is de facto an unobservable event. While we do observe defaults, we cannot observe whether a default is strategic. strongStrategic defaulters have all the incentives to disguise themselves as people who cannot afford to pay and so they will appear as non strategic defaulters in all the data/strong.br /span style=”font-size:78%;”emphasis added/span/blockquoteSo the researchers conducted a survey to attempt to quantify the percent of strategic defaults. This has drawbacks - the questions are hypothetical and there are no actual monetary consequences - but the results seem somewhat reasonable.br /br /emNote: the researchers use Zillow for negative equity numbers, and I think those are a href=”http://www.calculatedriskblog.com/2009/05/homeowners-underwater.html”overstated/a. I prefer the research of Mark Zandi at economy.com or a href=”http://www.loanperformance.com/loanperformance_hpi.aspx#NegEqReport”estimates/a from First American CoreLogic./embr /br /I think one of the key points in the research are changing social norms - the more people a homeowner knows that he believes “walked away” the more open the homeowner will be to mailing in their keys. This is what I a href=”http://www.calculatedriskblog.com/2007/12/bofa-attitudes-changing-towards-default.html”wrote/a in 2007: blockquoteOne of the greatest fears for lenders (and investors in mortgage backed securities) is that it will become socially acceptable for upside down middle class Americans to walk away from their homes./blockquoteThis research suggests that this is happening in significant numbers.br /br /This has led many people to suggest principle reductions (as opposed to payment modifications) is the only solution. Tom Petruno at the LA Times has more on this: a href=”http://www.latimes.com/business/la-fi-petruno27-2009jun27,0,2308676.column”Is it time for underwater homeowners to be given a get-out-of-debt-free card?/a blockquoteGovernment and private-lender attempts to stem the home foreclosure crisis so far have mostly focused on loan modifications or refinancing — giving borrowers a temporary or permanent reduction in their monthly payments.br /br /But some housing experts say the next wave of help will have to address the core problem for many homeowners: negative equity.br /br /This camp believes that there is no alternative but outright forgiveness of a substantial chunk of mortgage debt for many people who are underwater in their homes and at risk of foreclosure./blockquoteAnd a final note, the researchers also touch on the recourse vs. non-recourse issue: blockquoteWhile only few states have mandatory non-recourse mortgages (i.e., do not allow creditors to pursue borrowers who walk away from their mortgages for the difference between the amount of the mortgage and the resale value of the house), the cost of legal procedures is sufficiently high that most lenders are unwilling to sue a defaulted borrower unless he has significant wealth besides the home./blockquoteAnd that fits with an email Tanta sent me in 2007 on recourse loans: blockquoteBack in my day working for a servicer, we never went after a borrower unless we thought the borrower defrauded us, willfully junked the property, or something like that. If it was just a nasty RE downturn, it rarely even made economic sense to do judicial FCs just to get a judgment the borrower was unlikely to able to pay. You could save so much time and money doing a non-judicial FC (if the state allowed it) that it was worth skipping the deficiency./blockquotediv class=”blogger-post-footer”img width=’1′ height=’1′ src=’https://blogger.googleusercontent.com/tracker/10004977-7692730768394635565?l=www.calculatedriskblog.com’//div
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The FDIC has been very busy issuing Cease and Desist orders this year. Through May, the FDIC has issued 104 Cease and Desist orders and this does not include any orders by the OCC or OTS. (ht Terry) br /br /Most of these oreders are very similar - here is an excerpt: blockquoteIT IS HEREBY ORDERED, that the Bank, its institution-affiliated parties, as that term is defined in section 3(u) of the Act, 12 U.S.C. § 1813(u), and its successors and assigns, cease and desist from the following unsafe and unsound banking practices, as more fully set forth in the FDIC’s Report of Visitation …:br /br /a) operating with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits;br /(b) operating with a board of directors which has failed to provide adequate supervision over and direction to the active management of the Bank;br /(c) strongoperating with a large volume of poor quality loans/strong;br /(d) engaging in unsatisfactory lending and collection practices;br /(e) operating in such a manner as to produce operating losses; andbr /(f) operating with inadequate provisions for liquidity.br /span style=”font-size:78%;”emphasis added/span/blockquoteAll of these institutions are ordered to make changes - and some do, and then the cease and desist order is terminated (15 orders have been teriminated). The remaining are BFF candidates.br /br /Here are the FDIC press releases this year:br /a href=”http://www.fdic.gov/news/news/press/2009/pr09099.html”May Cease and Desist Orders/a (23)br /br /a href=”http://www.fdic.gov/news/news/press/2009/pr09079.html”April Cease and Desist Orders/a (24)br /br /a href=”http://www.fdic.gov/news/news/press/2009/pr09056.html”March Cease and Desist Orders/a (23)br /br /a href=”http://www.fdic.gov/news/news/press/2009/pr09049.html”February Cease and Desist Orders/a (21)br /br /a href=”http://www.fdic.gov/news/news/press/2009/pr09029.html”January Cease and Desist Orders/a (13)div class=”blogger-post-footer”img width=’1′ height=’1′ src=’https://blogger.googleusercontent.com/tracker/10004977-3390559662098312794?l=www.calculatedriskblog.com’//div
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A few stories too … a major auto supplier is near bankruptcy …br /br /From Dow Jones: a href=”http://online.wsj.com/article/BT-CO-20090625-713177.html”Lear Corp. Working On Prepackaged Bankruptcy - Sources/a blockquoteLear Corp. (LEA), a maker of automotive seats and interior electronics, is working on a pre-packaged bankruptcy five days before it must make a $38 million interest payment on two of its bonds … If the prepackaged bankruptcy deal falls apart, Lear could file for a traditonal-style bankruptcy next week … The company has also lined up debtor-in-possession financing with its lenders …/blockquoteFrom MarketWatch: a href=”http://www.marketwatch.com/story/fitch-downgrades-california-to-a-minus”Fitch downgrades California to A-minus/a blockquoteFitch Ratings downgraded the California’s general obligation credit rating on Thursday to A-minus from A, based on the magnitude of the state’s financial challenges and persistent weakening economy./blockquotea onclick=”window.open(this.href, ‘_blank’, ‘width=950,height=700,scrollbars=yes,resizable=yes,toolbar=no,directories=no,location=no,menubar=no,status=no,left=0,top=0′); return false” href=”http://dshort.com/charts/bears/four-bears-large.gif”img style=”BORDER-BOTTOM: #000000 1px solid; BORDER-LEFT: #000000 1px solid; MARGIN: 10px; FLOAT: right; BORDER-TOP: #000000 1px solid; BORDER-RIGHT: #000000 1px solid” border=”0″ alt=”Stock Market Crashes” src=”http://dshort.com/charts/bears/four-bears-tn.gif” //a span style=”font-size:85%;”ibClick on graph for larger image in new window./b/ibr //spanbr /This graph is from Doug Short of a href=”http://dshort.com/”dshort.com/a (financial planner): “Four Bad Bears”.br /br /Note that the Great Depression crash is based on the DOW; the three others are for the Samp;P 500.br /br /And Jillayne Schlicke (of a href=”http://www.ceforward.com”CEForward.com/a) brings us a few sample questions provided by the National Mortgage Licensing System for the new national loan originator exam: a href=”http://www.raincityguide.com/2009/06/24/will-the-new-national-loan-originator-exam-be-too-easy/”Will the New National Loan Originator Exam be Too Easy?/a. Here are the first two of six questions she posted: blockquoteIf an applicant works 40 hours every week and is paid $13.52 per hour, what is the applicant’s monthly income?br /(A) $2,163.20br /(B) $2,343.47br /(C) $2,379.52br /(D) $2,487.68br /br /The requirement for private mortgage insurance is generally discounted when the loan-to-value ratio falls below:br /(A) 20%br /(B) 50%br /(C) 80%br /(D) 90%/blockquote Take the test.div class=”blogger-post-footer”img width=’1′ height=’1′ src=’https://blogger.googleusercontent.com/tracker/10004977-398829885201578904?l=www.calculatedriskblog.com’//div
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The DOL reports on weekly a href=”http://www.workforcesecurity.doleta.gov/press/2009/062509.asp”unemployment insurance claims/a: blockquoteIn the week ending June 20, the advance figure for seasonally adjusted initial claims was 627,000, an increase of 15,000 from the previous week’s revised figure of 612,000. The 4-week moving average was 617,250, an increase of 500 from the previous week’s revised average of 616,750. br /…br /The advance number for seasonally adjusted insured unemployment during the week ending June 13 was 6,738,000, an increase of 29,000 from the preceding week’s revised level of 6,709,000. The 4-week moving average was 6,759,750, a decrease of 3,250 from the preceding week’s revised average of 6,763,000./blockquote a onclick=”window.open(this.href, ‘_blank’, ‘width=1130,height=740,scrollbars=yes,resizable=yes,toolbar=no,directories=no,location=no,menubar=no,status=no,left=0,top=0′); return false” href=”http://3.bp.blogspot.com/_pMscxxELHEg/SkNv85te37I/AAAAAAAAFp4/ukIxscITXIA/s1600-h/WeeklyClaimsJune25.jpg”img style=”BORDER-RIGHT: #000000 1px solid; BORDER-TOP: #000000 1px solid; FLOAT: left; MARGIN: 10px; BORDER-LEFT: #000000 1px solid; BORDER-BOTTOM: #000000 1px solid” alt=”Weekly Unemployment Claims” src=”http://3.bp.blogspot.com/_pMscxxELHEg/SkNv85te37I/AAAAAAAAFp4/ukIxscITXIA/s320/WeeklyClaimsJune25.jpg” border=”0″ //a ibspan style=”font-size:85%;”Click on graph for larger image in new window./span/b/ibr /br /This graph shows weekly claims and continued claims since 1971.br /br /Continued claims decreased to 6.74 million. This is 5.0% of covered employment. br /br /strongNote:/strong continued claims peaked at 5.4% of covered employment in 1982 and 7.0% in 1975. br /br /The four-week average of weekly unemployment claims increased this week by 500, and is now 41,500 below the peak of 10 weeks ago. There is a reasonable chance that claims have peaked for this cycle.br /br /However the level of initial claims (over 627 thousand) is still very high, indicating significant weakness in the job market. br /br /There was plenty of discussion about the decline in continuing claims last week. A few comments:br /br /li My view is the most useful number in the weekly claims report is the number of seasonally adjusted initial claims (with a 4-week moving average because it is so noisy). This has declined from the peak of 10 weeks ago, but is still very high. This suggests that the peak of job losses might be behind us, but also that there are still significant job losses occurring. We will probably see monthly job losses reported by the BLS until the weekly initial claims numbers declines close to 400 thousand.br /br /li The continuing claims number can decline for several reasons: 1) some pickup in hiring, 2) standard unemployment benefits may be expiring, and 3) the estimate might be revised. The continued claims estimate for last week was revised up some - so that explains part of it. Also, as people move off the standard 26 week unemployment benefits, they are no longer included in continued claims (for the most part). These people are still receiving extended benefits, but that is tracked elsewhere.br /br /If we look back 26 weeks from last week, there was a huge jump in NSA initial claims (from 536 thousand to 760 thousand) or 224 thousand in one week back in December. Any of those people who are still unemployed (and many probably are) were moving off the standard unemployment benefits to extended benefits and are no longer counted in the continued claims. That probably counts for most of the decline last week. But it is also important to remember they are still receiving unemployment benefits (extended benefits).br /br /When looking at this report, I’d focus on the 4-week moving average of initial claims, not continued claims.div class=”blogger-post-footer”img width=’1′ height=’1′ src=’https://blogger.googleusercontent.com/tracker/10004977-864841541253754956?l=www.calculatedriskblog.com’//div
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From the WaPo: a href=”http://www.washingtonpost.com/wp-dyn/content/article/2009/06/23/AR2009062303500.html”Not Paying the Mortgage, Yet Stuck With the Keys/a (ht Bob_in_MA) blockquoteA growing number of American homeowners are falling into financial limbo: They’re badly behind on payments, but their banks have not yet foreclosed. br /br /The backlog of seriously delinquent mortgages, which so far affects about 1 million borrowers, is a shadow over hopes for a rebound in the nation’s housing markets. It masks the full extent of the foreclosure crisis …br / br /”I have even begged them for a foreclosure,” delinquent mortgage-holder Charlotte Jensen said. When she realized she couldn’t save her Glen Allen home last year, she filed for bankruptcy, packed up her family and moved out. Nearly a year later, Bank of America has yet to take back the home. br /…br /Some of the backlog reflects the inability of lenders to keep up with the swelling rolls of delinquent properties. br /br /… some of the backlog also reflects an intentional slowdown in the pace of foreclosures as government and industry step up efforts to help borrowers who want to save their homes. Fannie Mae and Freddie Mac, the government-run mortgage financing companies, put a temporary moratorium on foreclosures late last year and many of the country’s largest lenders followed suit. br /…br /”What we’re seeing more and more right now are cases of a lender threatening foreclosure and the foreclosure sale is canceled at the last minute,” said Jeanne Hovenden, a Richmond bankruptcy attorney, who handled Jensen’s case. “It’s more like the lenders don’t want to own any more real estate and are using foreclosures as a pressure tactic.” br /…br /Jensen visits her home weekly to ensure it hasn’t been vandalized or taken over by squatters. She pays landscapers to keep the lawn mowed. br /…br /For the Jensens, the delay has extended a painful period. “There was a sense of responsibility that until someone says we no longer own that property, we wanted to make sure it’s handed off correctly,” Jensen said. “We could have walked away like everyone else and said, ‘We don’t care.’ But we loved our neighbors and our neighborhood. We hold ourselves responsible.” /blockquote There is much more in the article.div class=”blogger-post-footer”img width=’1′ height=’1′ src=’https://blogger.googleusercontent.com/tracker/10004977-5201193160747387097?l=www.calculatedriskblog.com’//div
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From MarketWatch: a href=”http://www.marketwatch.com/story/sp-downgrades-prime-jumbo-mbs”SP downgrades prime jumbo mortgage securities/a blockquoteSP said it lowered ratings on 102 classes from 33 U.S. prime jumbo residential mortgage-backed securities that were issued from 1998 to 2004. The rating agency also affirmed ratings on 669 classes from 32 of the downgraded deals, as well as 34 other deals. br /br /”The downgrades reflect our opinion that projected credit support for the affected classes is insufficient to maintain the previous ratings, given our current projected losses,” SP said in a statement. /blockquote From 1998?div class=”blogger-post-footer”img width=’1′ height=’1′ src=’https://blogger.googleusercontent.com/tracker/10004977-3469242687754988751?l=www.calculatedriskblog.com’//div
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Just so you know … I used to make fun of the Harvard reports.br /br /Here is the Harvard a href=”http://www.jchs.harvard.edu/publications/markets/son2005/son2005_executive_summary.pdf”State of the Nation’s Housing 2005/a report (ht curious) blockquoteThe unprecedented length and strength of the boom has, however, fanned fears that the rate of construction far exceeds long run demand. Although averaging more than 1.9 million units annually since 2000, stronghousing starts and manufactured home placements appear to be roughly in line with household demand/strong. As evidence, the inventory of new homes for sale relative to the pace of home sales is near its lowest level ever. Given this small backlog, strongnew home sales would have to retreat by more than a third—and stay there for a year or more—to create anywhere near a buyer’s market/strong.br /br /Moreover, the US mortgage finance system is now well integrated into global capital markets and offers an ever-growing array of products. strongThis gives borrowers more flexibility to shift to loans tied to lower adjustable rates in the event of an interest-rate rise./strong Although adjustable loans do increase the risk of payment shock at the end of the fixed-rate period, borrowers are increasingly choosing hybrid loans that allow them to lock in favorable rates for several years.br /br /With homes appreciating so rapidly over the last few years, there is concern that house price bubbles have formed in many markets. Clearly, ratios of house prices to median household incomes are up sharply and now stand at a 25-year high in more than half of evaluated metro areas. br /…br /Whether the hottest housing markets are now headed for a sharp correction is another question. The current economic recovery may give house prices in these locations the room to cool down rather than crash if higher interest rates slow the sizzling pacebr /of house price appreciation. Moreover, in several metropolitan areas where house prices have appreciated the fastest, strongnatural or regulatory-driven supply constraints may have resulted in permanently higher prices/strong.br /…br /For now, though, stronghouse prices should keep rising/strong as long as job and income growth continue to offset the recent jump in short term interest rates. House prices would come under greater pressure, however, if the economy stumbles and jobs are lost./blockquote There were plenty of warnings and caveats in the 2005 report (covers through 2004), but for the most part they missed the housing bubble and the coming crash. br /br /And from the a href=”http://www.jchs.harvard.edu/publications/markets/son2006/son2006_executive_summary.pdf”2006 report/a (covers 2005): blockquote[T]he housing sector continues to benefit from solid job and household growth, recovering rental markets, and strong home price appreciation. As long as these positive forces remain in place, strongthe current slowdown should be moderate/strong.br /br /Over the longer term, household growth is expected to accelerate from about 12.6 million over the past ten years to 14.6 million over the next ten. When combined with projected income gains and a rising tide of wealth, strengthening strongdemand should lift housing production and investment to new highs/strong.br /…br /strongFortunately, most homeowners have sizable equity stakes to protect them from selling at a loss even if they find themselves unable to make their mortgage payments./strong As measured in 2004—before the latest house price surge—only three percent of owners had equity of less than five percent, and fully 87 percent had a cushion of at least 20 percent.br /…br /The greatest threat to housing markets is a precipitous drop in house prices. Fortunately, sharp price declines of five percent or more seldom occur in the absence of severe overbuilding, dramatic employment losses, or a combination of the two. The fact that these conditions did not exist and that interest rates were so low explains why the housing boom was able to continue without interruption when the recession hit in 2001. strongWith building levels still in check and the economy expanding, large house price declines appear unlikely for now./strongbr /…br /Despite the current cool-down, the long-term outlook for housing is bright. New Joint Center for Housing Studies projections—reflecting more realistic, although arguably still conservative, estimates about future immigration—put household growth in the next decade fully 2.0 million above the 12.6 million of the past decade. strongOn the strength of this growth alone, housing production should set new records./strong/blockquotediv class=”blogger-post-footer”img width=’1′ height=’1′ src=’https://blogger.googleusercontent.com/tracker/10004977-6222525486479486531?l=www.calculatedriskblog.com’//div
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HT John. Enjoy …br /br /centerembed src=”http://www.theonion.com/content/themes/common/assets/onn_embed/embedded_player.swf”type=”application/x-shockwave-flash” allowScriptAccess=”always” allowFullScreen=”true” wmode=”transparent” width=”480″ height=”430″flashvars=”image=http%3A%2F%2Fwww.theonion.com%2Fcontent%2Ffiles%2Fimages%2FCASH4GOLD_article.jpgvideoid=95829title=US%20To%20Trade%20Gold%20Reserves%20For%20Cash%20Through%20Cash4Gold.com”/embed/centerdiv class=”blogger-post-footer”img width=’1′ height=’1′ src=’https://blogger.googleusercontent.com/tracker/10004977-4603788061680367269?l=www.calculatedriskblog.com’//div
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NOTE: These graphs were correct, but the data was incorrect. The State added a zero to the HELOC data - I’ll post corrected charts tomorrow. (ht Armin)br /br /best to alldiv class=”blogger-post-footer”img width=’1′ height=’1′ src=’https://blogger.googleusercontent.com/tracker/10004977-4949583167353155485?l=www.calculatedriskblog.com’//div
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This is the first same month year-over-year increase in miles driven (April 2009 compared to the April 2008) since November 2007.br /br /Of course gasoline prices have increased sharply since April. The EIA a href=”http://tonto.eia.doe.gov/dnav/pet/hist/mg_tt_usw.htm”reports/a that gasoline prices have increased from about $2.10 per gallon in April, to $2.70 per gallon in June - and that will probably impact miles driven.br /br /The Dept of Transportation reports on U.S. a href=”http://www.fhwa.dot.gov/ohim/tvtw/09aprtvt/09aprtvt.pdf”Traffic Volume Trends/a: blockquoteTravel on all roads and streets changed by +0.6% (1.4 billion vehicle miles) for April 2009 as compared with April 2008. Travel for the month is estimated to be 249.5 billion vehicle miles.br /br /Cumulative Travel for 2009 changed by -1.1% (-10.0 billion vehicle miles)./blockquotea onclick=”window.open(this.href, ‘_blank’, ‘width=1130,height=790,scrollbars=yes,resizable=yes,toolbar=no,directories=no,location=no,menubar=no,status=no,left=0,top=0′); return false” href=”http://1.bp.blogspot.com/_pMscxxELHEg/SjqbeQ_vEwI/AAAAAAAAFj4/S3IMlApXwIo/s1600-h/MilesDrivenApril2009Rolling.jpg”img style=”BORDER-RIGHT: #000000 1px solid; BORDER-TOP: #000000 1px solid; FLOAT: right; MARGIN: 10px; BORDER-LEFT: #000000 1px solid; BORDER-BOTTOM: #000000 1px solid” alt=”Vehicle Miles Driven” src=”http://1.bp.blogspot.com/_pMscxxELHEg/SjqbeQ_vEwI/AAAAAAAAFj4/S3IMlApXwIo/s320/MilesDrivenApril2009Rolling.jpg” border=”0″ //aibspan style=”font-size:85%;”Click on graph for larger image in new window./span/b/ibr /br /The first graph shows the annual change in the emrolling 12 month average/em of U.S. vehicles miles driven. Note: the rolling 12 month average is used to remove noise and seasonality.br /br /By this measure, vehicle miles driven are off 3.1% Year-over-year (YoY); the decline in miles driven was worse than during the early ’70s and 1979-1980 oil crisis. br /br /Note that rolling miles driven has a built in lag, and miles driven was larger in April 2009 than April 2008.br /br /a onclick=”window.open(this.href, ‘_blank’, ‘width=1130,height=790,scrollbars=yes,resizable=yes,toolbar=no,directories=no,location=no,menubar=no,status=no,left=0,top=0′); return false” href=”http://1.bp.blogspot.com/_pMscxxELHEg/Sjqbtnuq5UI/AAAAAAAAFkA/cbmmlG5Forc/s1600-h/MilesDrivenAprilYoY.jpg”img style=”BORDER-RIGHT: #000000 1px solid; BORDER-TOP: #000000 1px solid; FLOAT: right; MARGIN: 10px; BORDER-LEFT: #000000 1px solid; BORDER-BOTTOM: #000000 1px solid” alt=”Vehicle Miles YoY” src=”http://1.bp.blogspot.com/_pMscxxELHEg/Sjqbtnuq5UI/AAAAAAAAFkA/cbmmlG5Forc/s320/MilesDrivenAprilYoY.jpg” border=”0″ //aThe second graph shows the comparison of month to the same month in the previous year as reported by the DOT. br /br /As the DOT noted, miles driven in April 2009 were 0.6% greater than in April 2008.br /br /This is the first same month year-over-year increase since November 2007.br /br /Year-over-year miles driven started to decline in December 2007, and really fell off a cliff in March 2008. This makes for an easier comparison for April 2009.div class=”blogger-post-footer”img width=’1′ height=’1′ src=’https://blogger.googleusercontent.com/tracker/10004977-6846135298017973638?l=www.calculatedriskblog.com’//div
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