The truth about US mortgage default rates

I have seen a lot of articles over the past few months about rising delinquencies.

This article from December 2006 is typical: "Families Feel the Pressure as Mortgage Delinquency Rates Rise":

"America's middle class is already burdened by a trifecta of economic pressures: the labor market is slowing, household debt burdens are reaching new record highs, and interest rates have been creeping higher for most of this year. Now comes a distressing new report from the Mortgage Bankers Association, which reported yesterday that delinquencies on mortgages rose sharply in the third quarter of 2006.

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"Delinquency and default rates on loans and personal bankruptcy rates are still at comparatively low levels - only 4.7% of all loans in the third quarter - but they have been rising rapidly over the course of this year. Other measures of financial distress are also pointing one way for American families -- up. With all pieces of the trifecta staying in place, rising delinquency rates on mortgages may be the beginning of a trend toward more middle-class financial insecurity

"The data on bankruptcy rates also show a worrisome trend over the course of 2006. Bankruptcy rates dropped precipitously in 2006 in the wake of large filings in 2005 just before the new bankruptcy law went into effect. However, from the first quarter of 2006 to the second quarter, the annualized personal bankruptcy rate, measured as bankruptcy cases relative to the U.S. population, grew from 1.2 in 1,000 to 2.0 in 1,000 - an increase of 33.7%. The bankruptcy rate in the third quarter stood at 2.2 in 1,000, an additional increase of 9.6% in that quarter alone.

"Middle-class families are caught between low income growth, a high debt burden, and rising interest rates - and for the moment, these ingredients are here to stay. The most recent third-quarter delinquency, default, and bankruptcy figures show that the dangers to middle-class economic security are not theoretical concepts. They are a harsh reality for a growing share of middle-class families."

I am having a hard time finding fourth-quarter stats, but I do see that "Mortgage Delinquencies Jump: Foreclosures Inch Higher in 3Q":

"U.S. homeowners had a harder time keeping up with their mortgage payments in the third quarter, the Mortgage Bankers Association said Wednesday, with the delinquency rate rising to 4.67% from 4.39% in the second quarter. A year ago, 4.44% of mortgage holders were 90 days or more past due on their loans.

"The foreclosure rate inched higher in the third quarter, with 1.05% of mortgages in the foreclosure process, versus 0.99% in the second quarter, the MBA said. While delinquency rates on all types of loans rose in the third quarter, it was the subprime category - loans made to less creditworthy borrowers, that shot up the most, to 12.56%, from 10.76% a year ago.

"As we expected, in the third-quarter, delinquency rates increased across the board. However, increases were noticeably larger for subprime loans, particularly for subprime ARMs,' said Doug Duncan, chief economist for the MBA.

"This is not surprising given that subprime borrowers are more likely to be susceptible to the cumulative increases in rates we've experienced and the slowing of home price appreciation that has resulted,' Duncan said."

US mortgage defaults: Freddie Mac Delinquencies

While doing some research on delinquencies, I just happened to stumble across a recent release from Freddie Mac on delinquencies.

Following is a chart from the above link, and it shows that delinquencies at Freddie Mac are falling dramatically:

That is pretty stunning. Freddie Mac says delinquencies are dropping, but everything else I can find shows delinquencies are rising dramatically. OK, Mish, what gives?

"Single-family delinquencies are based on the number of mortgages 90 days or more delinquent or in foreclosure while multifamily delinquencies are based on net carrying value of mortgages 60 days or more delinquent or in foreclosure. Includes delinquencies on mortgage loans where the lender or third party retains the largest portion of the default risk as well as Structured Securities backed by alternative collateral deals. Excludes mortgage loans whose original contractual terms have been modified under an agreement with the borrower as long as the borrower complies with the modified contractual terms.

"Previously reported delinquency data [are] subject to change to reflect currently available information. For example, delinquency data reported for some Structured Securities may be omitted or subsequently revised by servicers of the underlying loans, which may require revision to previously reported numbers. For periods presented in this report, revisions to previously reported delinquency rates have not been significant nor have they significantly affected the overall trend of our Single-Family Credit Enhanced' and All Loans' delinquency rates. Delinquencies on mortgage loans underlying alternative collateral deals may be categorized as delinquent on a different schedule than other mortgage loans due to variances in industry practice."

US mortgage defaults: it page to read the footnotes

Essentially, Footnote No. 12 says that if Freddie Mac renegotiates the terms of the loan with someone who is delinquent, then, voila, that person is no longer delinquent. It seems to me that since about June of 2006, Freddie Mac is struggling to keep this Ponzi scheme afloat.

Fannie Mae has its own guidance on delinquencies:

"First and foremost, Fannie Mae tries to avoid foreclosure. There are no winners when a home mortgage is foreclosed. It is the least desirable way to resolve a problem loan, and a terrible ordeal for the homeowner. It also is costly for Fannie Mae, as the investor, and for the loan servicer.

"Homeowners who are having difficulties making their mortgage payments should immediately contact their mortgage loan servicer (the company to which they send their monthly payments) to discuss options.

"Fannie Mae has instructed its lenders and servicers to avoid foreclosure whenever possible by offering borrowers who get behind in their mortgage payments various alternatives, including temporary forbearance, loan modification, and preforeclosure sales."

Mish Translation: Keep this stuff off the books as long as you can. Cross your fingers and toes with David Lereah and hope the bottom is in.

US mortgage defaults: how banks are hiding the problem

A more recent article from Jan. 30, 2007, entitled "U.S. Banks Move Earlier to Curb Foreclosures," shows just what is being done to hide the problem:

"As the number of borrowers falling behind on their mortgage payments climbs to the highest level in five years, the mortgage industry is trying new strategies to help bail them out.

"Much of the attention is on homeowners who in recent years took out adjustable-rate mortgages, a popular way to finance a home when interest rates were low. Now, with rates having moved up, many of these borrowers have recently seen, or soon will see, their mortgage rates adjust higher for the first time.

"To head off problems, mortgage companies are reaching out to borrowers earlier. Bank of America Corp. is allowing some borrowers with ARMs to refinance into a different loan at no cost. Citigroup Inc.'s CitiMortgage unit is focusing extra attention on parts of California, Florida, and New York where home prices have moved up sharply. It is also contacting delinquent borrowers within days after a missed payment, if it doesn't fit their normal bill-paying habits.

"For some borrowers, efforts to work out bad loans can be complicated by the fact that many mortgages no longer are held by the banks that made the loans. Instead, roughly two-thirds of mortgages are packaged into mortgage-backed securities and sold to investors. How much leeway a borrower is given can vary, depending in part on the rules spelled out at the time the securities are created. Some agreements, for instance, don't permit loan modifications or limit the circumstances under which a loan can be modified. Others put a cap on how many loans can be restructured

"The increase in bad loans is broad-based, with delinquencies rising in the past year in roughly 80% of the 250 local areas analyzed by Moody's Economy.com. Some of the biggest increases have come in California, where high prices have made it hard to afford a home, and in other once-hot markets such as Las Vegas and Port St. Lucie, Fla. Among the handful of major metropolitan areas where delinquencies have fallen: Salt Lake City, San Antonio, and Albuquerque, N.M.

"The rise in delinquencies is unusual because it comes at a time when the economy is relatively strong. Even though job growth remains healthy, the total mortgage delinquency rate is the highest that it's been since the depths of the (2001) recession,' says Mark Zandi, chief economist at Moody's Economy.com. He attributes the increase in part to the weaker housing market and the widespread use of adjustable-rate mortgages, many of which now are resetting at higher rates."

US mortgage defaults: who is bailing?

I guess you gotta love it. Delinquencies are soaring, but Freddie Mac shows they have been reduced by 24.6% on all loans over an 11-month period. Foreclosures are soaring, but new strategies are invoked to 'bail them out.' Hmm who is 'them'? I suggest 'they' are the lenders hoping with fingers and toes crossed that the bottom is in.

In case you missed it, here are the two key sentences from the above article:

"For some borrowers, efforts to work out bad loans can be complicated by the fact that many mortgages no longer are held by the banks that made the loans. Instead, roughly two-thirds of mortgages are packaged into mortgage-backed securities and sold to investors."

There are numerous Ponzi finance schemes ready to implode. It will be spectacular to watch once it starts unfolding. The longer this progresses, the worse it will get.

By Mike Shedlock for Whiskey and Gunpowder

Whiskey & Gunpowder is a free, twice-per-week, e-mail service for more from the team, go to https://www.whiskeyandgunpowder.com