June 3rd, 2011
Econintersect: Keith Jurow, author of the MVP Housing Market Report, has detailed analysis indicating that residential real estate prices in New York City are far above levels needed to bring supply and demand into balance. The basis for Jurow's gloomy forecast in GEI Investing is that mortgage delinquency rates have skyrocketed while foreclosure auctions have declined. From early 2008 to early 2010 mortgage delinquencies in Queens increased by more than 180%. From late 2008 to late 2010 the foreclosure auctions in Queens declined by more 50%. These numbers indicate a huge flood of foreclosures has been held back by lender inaction. Follow up:
Follow up:Jurow points out that New York leads the nation in average days delinquent for loans in foreclosure. It takes an astounding 644 days in New York after mortgage payments stop before a NOD. NOD is a notice of default, the first legal step of the foreclosure process. It can take many more months (up to more than one year) after the NOD before a foreclosure process is completed and lender repossession of the property is completed.
Nationally, the average for delay between delinquency and NOD is in excess of 450 days. According to Foreclosure Radar the national average for delay from NOD to completion of foreclosure is 294 days This number represent averages so half of the defaulting population is occupying residences rent-free for somewhere in excess of two years.
Just using a very approximate rate of 1 million foreclosures per year, the two year plus rent-free window for half of them implies 1 million families not paying rent each year. (Note: The other half is not paying rent for time period shorter than 2+ years, but they will be ignored in this estimate.) If we assume an average mortgage payment rate of $10,000 per year (probably on the low side), the amount not paid to lenders each year is approximately $10 billion per year. Presumably most of the money is diverted into the rest of the consumer economy, even if some is simply spent to eat and to pay higher energy costs.
Note: The above estimate is deliberately on the conservative side. Losses will probably be higher each year for at least 2011 and 2012.
This $10 billion per year in forgone payments are part of the losses that will be written off by the lenders. Additional losses are in reduced principal recovery (most defaulted homes are underwater) and in REO processing costs. The total of these losses have been estimated by Dick Bove (in Free Republic) to total $32 billion over the next three years for BAC (Bank of America) alone.
Presumably other banks will also have outsized losses. According to TheStreet.com, the five banks with the largest exposures to mortgage losses are (ranked from fifth to first):
5. PNC (PNC Financial Services)
4. BBT (BB&T Bank)
3. RF (Regions Financial)
2. STI (Sun Trust Banks)
1. WFC (Wells Fargo)
BAC doesn't even make the above list. The implication is that mortage losses for the banks in the coming years will be in the hundreds of billion dollars.
Michael David White has a graph at Housing Story that shows how far behind home prices the outstanding mortage balances have fallen:
And don't forget that the Fed has taken more than $1 trillion in MBS (mortgage backed securities) onto their books. Also hundreds of billions dollars of suspect mortgage securities have been put on the books of Fannie and Freddie, so the taxpayer will also be assuming some of these losses. Presumably some of the GSE losses will be put back to the banks that originated the MBS involved, but probbaly not all. John R. Talbott has called this a form of bailout and has labelled it a "trillion dollar fraud." (See GEI Analysis.)