The recent stabilization in delinquent mortgages is merely a cruel illusion, according to a prominent dealer in mortgage bonds, and a relentless deterioration in modified and underwater loans is helping put one in five borrowers in foreclosure peril.
Though the pace of relapse has eased lately, "re-performing" loans have continued to travel a quick circuit back into default. Combined with hopeless statistics for nonperforming mortgages and totals for underwater borrowers that are only a bit less grim, housing remains in unrelieved crisis, analysts at Amherst Securities Group LP argued in a report this month.
The proportion of mortgages more than 60 days past due has leveled off in recent months, up 14 basis points since March, to 9.02% of outstanding loans in July, based on Amherst's analysis of CoreLogic Inc. data covering a large sample of debt. But the pool of mortgages that were more than 60 days past due at some point but are now current or less than 60 days past due — a proxy for modifications — has been accumulating more rapidly, and no diminishing of growth in the combined group is perceptible (see chart below).
Amherst calculated that re-performing loans had backslid at an annual rate of 55.2% during the three most recent months for which data is available — reflecting high loan-to-value ratios and other risky characteristics. It reckoned that lifetime liquidations could reasonably total 70% of the pool.
The analysts pointed to increases in the proportion of loans late by 30 to 60 days as an indication of a cycle in which modifications fail and many mortgages are essentially transferred from the statistical column for late-stage delinquencies to that for early-stage ones. (According to the Mortgage Bankers Association, after steadily dropping during 2009, the seasonally adjusted share of loans in the 30-day bracket grew in first half of this year.)
Mortgages that have never been late by more than 60 days but exceed the market value of associated properties by more than 20% have also been going bad quickly — at an annual rate of 19.1%. Amherst estimated that half of these could ultimately be liquidated.
(If default or prepayment are the only two options, an annual default rate of 19.1% and an annual prepayment rate of 6.5% would indicate 74.7% of the loans would ultimately default — that is, the annual default rate divided by the sum of the annual default rate and the annual prepayment rate equals 74.7%, or about three-quarters of the possible outcomes each year. Expecting that performance will improve over time, Amherst set its assumption for lifetime defaults lower, at 50%.)
Assuming that 95% of nonperforming loans eventually are liquidated, along with 25% of modestly underwater mortgages that have never been late by more than 60 days, and 5% of such "always performing" mortgages with positive equity, Amherst concluded that nearly 12 million borrowers are at risk, or about one-fifth of mortgage holders nationwide.
"Politically, this cannot happen," the analysts wrote. "The government will attempt successive modification plans until something works."
They recommended a range of policies including more aggressive use of principal forgiveness for troubled borrowers and easier credit terms for investors to help sop up the inevitably growing supply of distressed properties.