Foreclosure datapoint of the day

By Felix Salmon
August 27, 2010
latest report from Lender Processing Services:

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HAMP might not have helped lots of homeowners stay in their houses over the long term, but it did push back the point at which they got foreclosed on. To now. Here’s a graph from the latest report from Lender Processing Services:


What you’re seeing here isn’t subprime dreck: it’s sensibly-underwritten conforming loans which were bought by Fannie and Freddie. Through 2009 and the first half of 2010, the rate at which those loans entered foreclosure proceedings was pretty steady. But as we enter the second half of 2010, there’s a huge spike, especially in the loans which have been delinquent for more than six months.

That spike is loans which entered the HAMP modification process, but then got kicked out, for reasons good or bad. Without a successful permanent HAMP modification, foreclosure comes soon enough.

As homes move out of HAMP and into foreclosure, the amount of distressed real-estate sales will rise, and home prices will of course fall in the effected areas, pushing ever more homeowners into the negative-equity status which is very highly correlated with default risk. And so the vicious cycle continues.

We should break that cycle, by forcing loan servicers to allow homeowners to stay in their houses at a market rent. HAMP did its job in terms of pushing off foreclosures for 2009. But now it’s causing more harm than good. And pretty soon, if they continue to rise at this rate, foreclosures are going to be a big political issue again. Some inventive replacement is desperately needed. Ideally one which isn’t cruel and bound to fail.


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Just as HAMP’s temporary improvement of the foreclosure rate has now gone into reverse, soon the HAMP improvement of delinquencies will go into reverse.

Currently, a large number of trial modifications are still being converted to “permanent”. As that happens, the loans, which remain marked delinquent during the trial mod, are designated as current (with the missed payments added to the principal). However the active trial modifications have already dropped from around 800,000 to around 200,000, and in another couple months almost all will have either been converted or canceled. At that point the positive effect on delinquencies will also go into reverse.

For a graph see id=investment:commentary:2010:08:20-hamp _putters_on_a_little_longer.

Posted by JimFickett | Report as abusive

I am not a Hoover liquidationist, but the idea of keeping people in underwater homes simply seems counterproductive, and fails to clear existing and growing housing inventories.

I would prefer to see a wave of foreclosures, rather than artificially trying to prop up a real estate bubble. The FIRE economy should be allowed to die, and government should step in to build a real economy, rather than subsidizing finance, insurance and real estate.

And one other point–foreclosed owners are not “homeless”, they are now just “renters”. I have rented for the past 8 years, and I resent throwing money to underwater homeowners–to me it is just a giveaway to banks that does nothing to help the struggling homeowner.

Posted by TaxLawyer | Report as abusive

How does forcing loan servicers to allow homeowners to stay in their houses at market rent break the cycle? Assuming the market rent is significantly less than the owners are paying for their mortgage, won’t doing so force the lenders to right down the loan to the amount implied by that market rent? This will still force housing down to its actual value, and defeat the governments attempt to prop up housing at an artificially high level. Unless you see a path by which underwater homeowners get to pay less than their current payments, while the lenders get to pretend that they aren’t losing any money?

Posted by MattJ | Report as abusive

Please try to knock some holes in the following logic:

The goverment substantially inflates home values through the tax code, (interest diduction.) And now even more directly through other means like the tax credit for purchace, and by using the GSE’s to depress morgage rates.

These goverment subsidies flow mostly to the upper and middle classes.

These subsidies flow ENTIRELY from the upper and middle class as they are the only groups who pay net taxes to the goverment.

The working poor and non-working poor are as a group net recipiants of goverment transfers, (as they should be!)

The goverment has historically favored the working class owning homes rather than renting homes. Simply put the goverment is (rightly) afraid of people who have nothing to lose.

Prior to the massive massive massive spike in morgage equity withdrawal , or MEU, people tended to build equity over the course of their working lives with most seniors ending up owning their homes outright about the time they retired. Even now this is still the case. Nearly 40% of homes have no debt attached to them at all.

For those who propose reducing (or god forbid eliminating) the goverments preferential treatment of homeowners what other program do you propose to force/incent/subsidize a lifelong savings program?

If you want to level the playing field for renters and homeowners… that’s fine do that. Just plan on the percentage of Americans who reach their “golden years” with virtually no assets to increase more than it has already.

I advocate forced tax advantaged savings in a 401k style plan at 10% of wages. This could be introduced gradually to avoid the total distruction of the consumer discressionaly sector.

Posted by y2kurtus | Report as abusive