RealtyTrac, which tracks housing foreclosures in America reports that in calendar 2007, foreclosure filings totalled 2,203,295. Foreclosures included default notices, auction sale notices and bank repossessions. The actual number of houses and apartments involved were 1,285,873, up 79 per cent over the 2006 level.The data shows that more than 1 per cent of all US households were in some stage of foreclosure during the year, up from 0.58 per cent in 2006. Nevada is the worst affected state, with 3.4 per cent of households in 2007, that is one of every 33 homes, in some stage of foreclosure during the year- more than three times the national average. The state documented the highest monthly foreclosure rate in all 12 months of the year.
In order of foreclosure notices, Florida, Michigan, California, Colorado made up the next four worst affected areas.
Making life more difficult, housing prices continue to deteriorate with the Standard and Poor’s/Case-Shiller 20-city city home price index showing a fall of 7.7 per cent in November from the same month in 2007, the biggest decline since the index was created in 2000. The North American economist for Merrill Lynch David Rosenberg, goes further, suggesting the probability for another 25 per cent to 30 per cent downside over the next two years.
On the same theme, Chris Flanagan, head of research in JP Morgan Chase asset-backed securities unit predicts “prices will fall about 25 per cent, bottoming in 2010. Business Week’s hot property blog quotes Deutsche Bank’s dumping one of its repossessed homes in Virginia selling in December 2007 for $150,000, less than half its last sale price in the March quarter 2005.
The worsening housing outlook has now led Moody’s Investors Service, the world’s largest rating agency to expect total losses on subprime mortgages taken out in 2006 to be between 14 per cent and 18 per cent. Some bundles of subprime loans that were used to back securities could see losses as high as 35 per cent.
The rating agency Standard & Poor’s had earlier in mid-January revised its loss expectations for 2006 subprime loans to 19 per cent. S&P’s estimate implies that a $1 billion pool of subprime loans now has only $810 million left after the loans are either paid off or defaulted.
The Wall Street Journal’s Serena Ng and David Reilly (January 31 2008) reports that at the end of January S&P downgraded or threatened to downgrade mortgage-related investments originally worth $534 billion. This included 47 per cent of US subprime mortgage bonds rated in 2006, and the first half of 2007. It included $264 billion in portfolios of dicey collaterized debt obligations (CDO), which represented 35 per cent of CDOs sold world-wide in that period.
Delinquency rates among 2006 subprime loans are already as high as 27 per cent in some cases. On average, around 17 per cent of subprime loans made in 2006 are over 60 days delinquent, in foreclosure or have been foreclosed upon, according to Moody’s.
The scary reality, as reported by both the rating agency Fitch and the Financial Times’s Krishna Guha and Gillian Tett (January 31 2008), is that the initial failure of the rating agencies to anticipate the sheer volume of defaults now happening, is due to a fundamental shift in the way householders under mortgage stress have been reacting in the last two years. The mathematical models used to predict future default rates, based on historical patterns of losses, now need urgent revision.
In the past, when American households have faced hard times causing people to fall behind, they tended to default on unsecured loans, such as credit cards and car loans first, and only stopped paying their mortgage as a last resort. Now the default process is reversing.
Malcolm Knight, general manager of the Bank for International Settlements (BIS), known as the central banks’ bank explains the new trend of householders walking away from their homes. “What seems to be happening is that people who have outstanding mortgages that are greater that the value of their home, or have negative amortisation mortgages, keep paying off their credit card balances, but hand in the keys to their house. …These reactions to financial stress are not taken into account in the credit scoring models that are used to value residential mortgage-backed securities.”
As the perceptive Krishna Guha and Gillian Tett say, the conclusion seems to be as house prices stop rising and then start to fall, delinquencies on mortgages start to rise. “Overstretched householders with unsuitable loans (are) no longer able to refinance their way out of trouble, when house prices stop rising.”
This is Behavioural Economics 101, 2008 style.
