Sunday, April 3, 2011

Opt-ARM Foreclosure Rate Now Exceeds Subprime, Average Time To Foreclose Takes A Record 537 Days, $50 Billion Per Year Free Money for Squatters

The housing bubble saga continues, and the banks continue their extend and pretend / kick the can down the road strategy. Lender Processing Services announced last week that the average delinquency period has reached a record 537 days, and 30% of delinquent loans have not made a payment in over 2 years. Banks are happy to avoid foreclosure for two significant reasons:

1.) When banks foreclose and return the house to the free market, they must realize a loss. As long as the mortgage is kept in limbo, they can continue to mark the asset to model (as opposed to marking it to market), lie about their solvency, and pay themselves handsome bankster bonuses.

2.) The legal mess with MERS has clearly turned into much more than a "paperwork" issue. Millions of deeds/titles were never recorded legally at the county level when the mortgage was sold, and re-sold, and re-re-sold in the ponzi scheme of mortgage backed securities.

Also in the LPS release, it is now abundantly clear that the Alt-A / Option-ARM time bomb will usher in the second major leg down in housing prices over the next few years:

"February’s data also showed a 23 percent increase in Option ARM foreclosures over the last six months, far more than any other product type. In terms of absolute numbers, Option ARM foreclosures stand at 18.8 percent, a higher level than Subprime foreclosures ever reached.

In addition, deterioration continues in the Non-Agency Prime segment. Both Jumbo and Conforming Non-Agency Prime loans showed increases in foreclosures and were the only product areas with increases in delinquencies."

Oregon and Portland has a healthy dose of Alt-A/Opt-ARM loans that were originated near the peak of our bubble in 2006 and 2007. The majority of these loans have a five year reset/recast schedule. This sets the stage for a major wave of defaults in 2011-2012, and the inevitable price declines from 2012-2014 (foreclosure and auction sales will continue to stretch out beyond 537 days from the initial default).

Lastly, a letter from JP Morgan's Michael Feroli on squatters in foreclosure and the annual size of their average 537 day personal bailout via living mortgage/rent free:

"first he debunks all myths that "rental income" is surging, as was reported in glaring headlines in a variety of propaganda media outlets following Monday's personal income report was released. This is patently false. As Feroli explains: "This rise has little to do with landlords getting more from their tenants. In fact, it has very little to do with what speakers of the English language would normally consider "rent."

Instead, it mostly reflects mortgage payments of the household sector coming down, in part because of the aggregate decline in household mortgage debt due to net cancellation of mortgages associated with foreclosures

In other words, surging rental income is nothing more than "squatter's rent" saved by not paying one's mortgage. As to quantifying this amount - per Ferroli until recently it was $60 billion a year! This is a stunning 0.5% of GDP. Luckily there is good news: this unethical and artificial "boost" to the economy is finally declining... and is now only $50 billion on an annualized basis."


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