"Reluctant Banks" Let Defaulted Borrowers Stay in Homes

by: Barry Ritholtz April 04, 2008    
Barry Ritholtz

Barry Ritholtz

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Earlier, we discussed Lender-Abandoned, Non-REO Foreclosures.

That started a robust discussion, leading to a follow-up piece by Bob Ivry of Bloomberg: Lenders Buried By Foreclosures Let Late Borrowers Stay in Homes.

According to Ivry:

"Banks are so overwhelmed by the U.S. housing crisis they've started to look the other way when homeowners stop paying their mortgages.

The number of borrowers at least 90 days late on their home loans rose to 3.6 percent at the end of December, the highest in at least five years, according to the Mortgage Bankers Association in Washington. That figure, for the first time, is almost double the 2 percent who have been foreclosed on.

Lenders who allow owners to stay in their homes are distorting the record foreclosure rate and delaying the worst of the housing decline, said Mark Zandi, chief economist at Moody's Economy.com, a unit of New York-based Moody's Corp. These borrowers will eventually push the number of delinquencies even higher and send more homes onto an already glutted market. "We don't have a sense of the magnitude of what's really going on because the whole process is being delayed,'' Zandi said in an interview. "Looking at the data, we see the problems, but they are probably measurably greater than we think.''

That's quite astonishing: Conditions are actually worse, not better, than the already miserable numbers we hear being reported each month. And, the trend is accelerating downwards.

Some specific data from the Bloomie piece:

- Lenders took an average of 61 days to foreclose on a property last year, up from 37 days in the year (RealtyTrac)

- Sales of foreclosed homes rose 4.4% in 2007 (LoanPerformance First American CoreLogic)

- Inventory of foreclosed homes more than doubled last year (LoanPerformance First American CoreLogic)

Given those numbers, its no surprise that the number of "Reluctant Banks" are also increasing.

What are "reluctant banks?"

Some banks are letting people stay in their houses through foreclosure and beyond. One distressed mortgage buyer said people have been staying in their home "Until someone comes to kick them out . . . Sometimes no one comes to kick them out.''

Also of interest: The surge in foreclosures is completely overwhelming much of the legal system. Courthouses cannot keep up with the new foreclosure applications. And, mortgage servicers are weeks if not months behind in starting the foreclosure process.

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This article has 29 comments:

  •  
    Apr 04 04:39 PM
    More good news. Fantastic. The home builders are up only about 100% from their lows so there is still time to buy. Don't worry about all the housing news or the horrible labor numbers. All this is really great news and should be worth much more than the 1000 points the Dow is up from its low. All the talking heads on CNBC have confirmed the bottom is in. Stop paying attention to statistics and news, listen to the perma bulls that have run this market up in the last three weeks.

    Maybe if we are lucky the government can pass the housing bill and send the home builders a free multi billion dollar loan in the form of tax rebates.

    Nothing is going to help this market other than time.
    Reply | Link to Comment
  •  
    Apr 04 05:52 PM
    I read where something like 18% of the sub prime borrowers never made their first payment! (Someone correct me on the percentage if I am wrong).

    So, we should all go out, buy the highest price foreclosed home we can afford (there will be fewer people then coming to kick us out) and just never make any payments. Probably live rent free for at least 3 years. If you're not going to buy another car or home for awhile, what do you need credit for anyway? Plus, when the government sends the $7000 tax rebate along for buying the foreclosure we can all meet in Hawaii for drinks. I'm buying!

    Its a great country, with "free" health care on the way. ;-)
    Reply | Link to Comment
  •  
    Apr 04 06:05 PM
    That headline is awful -- I didn't write it.
    Reply | Link to Comment
  •  
    Apr 04 06:55 PM
    Between the housing debacle and our ludicrous energy policy, I'm at a loss for words. Go get 'em Barry - maybe you can light a fire under these idiots.
    Reply | Link to Comment
  •  
    Apr 04 08:12 PM
    The question is what will be the real and virtual impact of the coming mortgage bailout both on housing prices and the market.

    An interesting Bill Gross interview from today (cut and past link into your browser window)

    plus.cnbc.com/results/...@cnbc.com%26key%3DZJJQ...
    Reply | Link to Comment
  •  
    Apr 04 09:15 PM
    So, are you upset that your oil and gold positions are losing?
    Reply | Link to Comment
  •  
    Apr 04 10:55 PM
    Well, I think foreclosed houses are still expensive to own. If you are paying more than 2003 home price then you are a loser! Actually the current home buyers are in trouble becouse they paid inflated price or refinance thinking home value always go up.
    On bright side, inflated home price brought temporary economic prosperity of last three year!
    Reply | Link to Comment
  •  
    Apr 05 01:27 AM
    Bottom line, houses are worth no more than 60% of last year's market price. Neither the banks nor the sellers have digested that yet. Until they do, it's all Fed-watching and politics. No, thanks. A floor under prices near today's levels? Not even the Treasury can borrow that much. They'd simply have to steal it.
    Reply | Link to Comment
  •  
    Apr 05 03:05 AM
    By ignoring foreclosures, banks are giving homeowners incentives to not pay their bills. By hampering the foreclosure process, courts are giving homeowners incentives to not pay their bills. Under normal circumstances, this should mean that financials are good short candidates here. However, due to the Fed's resolve to save banks and brokerages, this process is going to get dragged out, prolonging economic stagnation and possibly the recession.

    Moral hazard rules the day. I suppose that even those who can afford to make their payments will no longer do so, now. It's almost like the circumstances and the law are telling us that housing is free. I guess we have a socialized housing system now. Yipes.
    Reply | Link to Comment
  •  
    Apr 05 05:27 AM
    My friend has a 450 sq ft condo here in Seattle. It's worth probably $150,000. Countrywide let him borrow $280,000 on it. He has excellent credit, but he will inevitably give it back to Countrywide, once this market "bottoms" - he'll buy a better property that has depreciated in a few more years and sacrifice his credit rating in an obvious business decision by giving the $150,000 condo back.

    This mess will last years until the smart "prime" borrowers have bought better, cheaper houses and deleveraged their crappy positions by leaving the banks holding their own bag.
    Reply | Link to Comment
  •  
    Apr 05 05:44 AM
    Im surprised no one has talked about the track of the olympic torch and the potential market problems when it reaches london and san fran. The public in china are getting pretty pissed and i can see a boycott of western goods coming if something major happens during the relay
    Reply | Link to Comment
  •  
    Apr 05 08:56 AM
    I continue to argue it is not a "subprime mess" or "housing mess" at all. Rather it is rampant inflation running 10x the Govt announced rates that has most people in the middle class running out of money to pay their bills. In the last 8 years the Govt CPI has totalled about 25% (and this is what Social security recipients received). In that time Heating oil is up 250% , gas over 200% , medical insurance for a family up 300%, most food items, stable for years are now at record levels with Milk going up 30% in a few months alone. Electricity nearby rose 74% in one year. Taxes in my town up 86% over 10 years. Before the housing problems started, the national savings rate turned negative in 2006, for the first time since the Great Depression. Bottom line is most of the news is Bull.

    In the past inflationary period of the late 70s to early 80s , the CPI was 75% and that is what social security recipients received. People were getting raises of 6-9% per year. When the inflation ended they used their new higher salaries to pay down their mostly fixed debts. Now due to outsourcing and technology there is a lid on wage inflation. People are going backwards in income while their expenses soar. Make no mistake, the prosperity of the last 6-8 years has been on credit cards, home equity loans and bogus profits built on both. I see this first hand as a CPA in the northeast.

    Having seen this downturn coming for over 2 years, I now see small signs of bottoming. It would be nice to see money spent on infrastructure, technology (alternative energies, renewed space programs , high speed transportation systems and such) as things turn since this country has not invested in itself in many years. This would aid the turnaround and put things on a firm foundation.
    Marty
    Reply | Link to Comment
  •  
    Apr 05 08:57 AM
    Smart bankers have always tried to "let" delinquent borrowers stay in their houses and try to work thinigs out. As one says, "If I can keep em in the house 18 months, without falling too far behind, they usually get caught up. Even if they don't we're no worse off. Banks pull the trigger too fast--and when they do, they go down the tube too." So this may be a smartening up--not just dumb banks.
    Reply | Link to Comment
  •  
    Apr 05 10:59 AM
    Marty has got it right - Infrastructure jobs in the US will also create jobs here rather than in China. Instead our politicians will pay back the lobbyists through giveaways to home builders. Absolutely nuts!
    Reply | Link to Comment
  •  
    Apr 05 11:57 AM
    The mortgage brokers aren't to blame...well not completely. I'm sure there were more than a few dishonest brokers in the bunch, but the Federal Reserve encourages such behavior by discouraging savings through fractional reserve banking and inflating or manipulating the money supply.
    Reply | Link to Comment
  •  
    Apr 05 12:34 PM
    i have a relative that has not made a payment on his mortgage in three years! i guess the bank can hang on to his note, or maybe they already bundled it up and sold it, who knows? his house won't go on the market, so he is helping his neighbors and the bank that probably has more properties in the area.

    their property values remain inflated, so they get to pay more in taxes, too. that way, the government has enough money to send us checks. everybody wins!

    look, if our dollar is worth less, why shouldn't our homes be worth more? the only real problems in housing appear to be in areas that bought houses and condos like they were not making any more. can you say, california, florida, new york and boston?

    the rest of america had reasonable increases over the years, probably less than comparable to the dollar's decrease, percentage wise. i'm betting on an orderly decline. here's why: homeowners that do not need to sell are hanging on to their imaginary gains. they like thinking they are still rich, the same way bankers like to imagine their loans are still good. that slows the process down; there is no rush to escape housing for most of us. heck, even the people who cannot pay, do not want to leave if they don't have to go.

    there are already funds being created to purchase foreclosures too. so, the speculators will hang onto them for an eventual increase or maybe blackrock will create new instruments to carve up the risk. we are still the country of disneyland, hollywood and high finance. we are hundreds of years old, but barnum knows when we were born.
    Reply | Link to Comment
  •  
    Apr 05 01:37 PM
    The accountants are the ones who know the real numbers. But they seem to slide, as they did with Enron. Why aren't they being targeted?
    Reply | Link to Comment
  •  
    Apr 05 03:21 PM
    we must all agree, indeed, wounderful world. We have the finest government on the face of the earth. soon we will all have free medical care from the cradle to the grave. And the big O i am sure will soon promise us all men women and children a few thousand dollars per year. even old conservative is giving us all 600 dollars each if we make just three thousand last year. Bush could give us all more if he wanted to badly enough. I look foward to the day when the government takes some of this wealth from people that have too much and divide it with us all--no one needs to work past 40 years of age. life is too short to have to work too much. I am sure the big O is our only hope for president. i really believe he will come through for us--he seems to not be just another politican,,--- bluedogg
    Reply | Link to Comment
  •  
    Apr 05 05:13 PM
    After things settle down with the empty houses, the banks will
    have another problem before they can sell the houses again.
    Many families are totally destroying the interior of the house
    before they leave -- punching holes in walls, pouring paint
    on the carpets, etc. These houses will be worth much less for
    a long time before the banks spend $1000's more cleaning,
    fixing them up before they're on the market again. This
    problem will go long into 2009 -10 before it becomes anywhere
    decent. FED will lower the rate .75-1.00 in next meeting.
    Reply | Link to Comment
  •  
    Apr 05 06:03 PM
    I came across this 20 minute interview of Soros on Bloomberg- he talks quite a bit about real estate -

    mms://media2.bloomberg...
    Reply | Link to Comment
  •  
    Apr 05 06:14 PM
    The home builders won't stop building more houses (gotta get that market share). If they stopped, the backlog would clear out a heck of a lot faster. Oh well.
    Reply | Link to Comment
  •  
    Apr 05 09:59 PM
    The banks had every opportunity to freeze these rates (Dec. 07) until they could assess what the problem was but they refused to do so. Many took the equity out of the homes for those that just left when their mortgage doubled. Those people were the ones who really lost their equity if they had any as well as their credit rating. Along with their home.

    When it became too much to handle now the banks are saying stay in your home until we get to you and figure out what we can do. Well now you have homeowners who will defraud the banks and stay and not pay.

    And do you blame them they were given a loan they did not understand and/ or were lied about what would happen when their rate would go up or get stuck not being able to refinance. NO one can afford a double on their mortgage when most people go out to 50% of their income just to buy a home.

    And then we have the speculators who bought mulitple homes with cheap money who have saturated the market. So until demand meets up with supply we will have continued price decreases.

    The banks need to get the fraud out of these loans and reduce these fees along with mortgages rates at a fair stable rate. So buyers can come back into this market.

    With so much fraud in these loans why would any one want to buy an assest that is depreciating.
    Reply | Link to Comment
  •  
    Apr 05 10:01 PM
    i am voting for the person who promises me the most freebies as long as someone else pays for it. why should i have to work?
    Reply | Link to Comment
  •  
    Apr 05 11:52 PM
    Rocco - your a true American!
    Reply | Link to Comment
  •  
    Apr 06 11:40 AM
    Sorry, the US is out of control. Mad men are in every branch of government. No one has the courage, except I guess Ron Paul and Dennis Kucinich to tell the truth and give real solutions, like shutting down 180 overseas bases, stopping wars of aggression, living within a balanced budget and making people responsible for themselves, rather than the government baby-sitting everyone.
    Reply | Link to Comment
  •  
    Apr 06 02:21 PM
    A CHALLENGE TO THE BIG GUYS!

    What a great piece, Barry. The discussion is certainly interesting and engaging.

    As a country, we had better reconstruct our infrastructure....or we will collapse under our own pompous rhetoric about patriotism.

    Of late, patriotism du jour: despise the French, subjugate the Cubans, ignore conversation with the Iranians, alienate South and Latin America by refusing to recognize that they want a break from colonial exploitation, that they have known for centuries, by receiving a fair share of the profits from their natural resources so that they can prosper too. Are we better off because of the recent eight years of this patriotic fervor?

    In 2008, let's elect someone astute enough to recognize that we need to attend to our own housecleaning before we pontificate to the other 6 billion people who inhabit this world on how to create utopia. Our own track record is not entirely impeccable.

    Also I challenge all the PATRIOTS who have done very well for themselves during the prosperous times of the past two-plus decades to set up an independent not-for-profit organization(s) with their windfalls to regenerate the infrastructure of this country. Certainly such NGOs could receive some remuneration from the use of the revitalized infrastructure to create self-sustaining, well-endowed partnerships for continued redevelopment of our neglected homeland for decades to come. Of course this would require a dedicated, non greed-driven philosophy...something akin to the TIAA-CREF organization that Andrew Carnegie set up to support important components of the country's labor force who devote themselves to the benefit of society, rather than simply the creation of wealth.

    How many CEOs, CFOs and other such talented executives and economically-privilege... patriots, who have recently received multi-hundred-million dollar "care packages" would now be willing to give of their expertise and some of their wealth in support of their country? If anything, these experienced leaders know well how to create a fiscally-efficient organization that will be accountable for the best interest of all in America. I dare say that they should be most capable of limiting the fraudulent misuse of their funds, much better than tax dollars sent to Washington, DC and other government bureaucracies.

    I challenge the big name members of the "Golden Parachute Club" to GIVE BACK something to the society and culture that allowed them to accumulate their fortunes. Not only would this allow each of you to diminish your tax burden but also to give you the satisfaction of making a difference in the reconstruction of this country. Let's face it; you know better how to achieve corporate success better than any politician in government; so please help us redesign this country for the better....and please, soon. Would you not like to be fondly remembered like Carnegie, or Gates, for your targeted philanthropy by future generations?
    Reply | Link to Comment
  •  
    Apr 06 04:39 PM
    Having been an auditor for much of my adult life curious how you or anyone defines "real" numbers. Much of the subprime mess can be summed up in one word: FEAR.

    The issue is creditability or lack of it. Nobody and I mean nobody knows what value the hundreds of billions of dollars worth of mortgage backed paper is really worth.

    The stock prices of many banks and mortgage companies is absurdly low because of markdowns in value of subprime and related paper they're carying. NOT because the entire holdings are bad, rather SOME of it will in time be written off as a bad loan.

    Take NCC which has been in the news lately and has susposedly put itself up for sale. By most reports National City Bank has roughly $140 billion in assets. It has at apx. $25 billion in "bad" subprime and related paper. According to reports 4.6% of ALL the subprime paper it holds is currently non performing. While bad, that is a far, far way from the disaster some try desperately to make it out to be.

    Because of fear many are now assuming huge portions or nearly all subprime paper will end up being marked down as worthless. That is absurd to the point of insanity.

    Two things will happen...take it to the bank.

    #1 At some point house prices will stop falling. When that happens the smart money will swoop in and grab up the lion's share very fast.

    #2 At some point the smart money will also start buying up the so-called "worthless" subprime paper because oh gosh, it isn't worthless at all, only a small fraction of it is. Over time this paper will return HUGE profits for those smart enough to grab it at fire sale prices. As usual Joe Average will mumble to himself how he missed making a killing... again. Bank on it. <snicker>
    Reply | Link to Comment
  •  
    Apr 06 05:19 PM
    A reply to jpham 1020 (4/5/08) I agree fully with his comments. But help can only come for us poor people if we line up behind the big O. We need to raise the income tax 25 per cent at least on the fat cats making $100,00 more per year as a family. Then the government can send us all under $100,000 per year a big check to go with our health care from cradle to grave. Hillary and john would not give us a dime if elected president. The big O is our only hope if we want to work less and enjoy the american dream-we deserve better and the fat cats as well as get ready to get pocket books out and help us. bluegogg
    Reply | Link to Comment
  •  
    Apr 11 06:25 AM
    Silly liberals, finance is for capitalists.
    Reply | Link to Comment
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