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posted on 23 June 2017

The Hidden Mortgage Delinquency Crisis

Written by , Capital Preservation Real Estate Report

The Ugly Truth About Mortgage Delinquencies

With the Mortgage Bankers Association’s (MBA) monthly report continuing to show a decline in the delinquency rate, pundits are more convinced than ever that the mortgage crisis is over.

Since I have written extensively about the growing delinquency problem in the New York City metro for more than six years, let me explain my skepticism and how the truth has been hidden from the public.

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Pre-foreclosure Notices

In 2009, the New York State legislature passed a statute compelling all mortgage servicers to send out a pre-foreclosure notice to all delinquent owner-occupants in the state. The notice warned them that they were in danger of foreclosure and explained how they could get help. Servicers were required to regularly send statistics back to the state’s Department of Financial Services for all notices sent out. The department published two reports in 2010 with a compilation of these numbers. That was the last time these statistics were officially reported. I strongly suspect that the numbers were a little too scary.

Undeterred, I was able to obtain the unpublished figures from the person in charge of compiling the pre-foreclosure notice filing statistics at the department. For six years, I have received quarterly updates from him and have published several articles using them. The actual numbers are mind-boggling and hard to believe. I speak to my contact regularly about them and I am convinced that they are complete and extremely accurate.

The latest update shows cumulative figures through the first quarter of 2017. It covers the five counties of New York City as well as Nassau and Suffolk Counties on Long Island. (Totals for the entire state are also included.) Here is a brief summary of what the data reveals:

Since February 2010, mortgage servicers have sent out a cumulative total of 1,034,876 pre-foreclosure notices to delinquent owner-occupants in New York City and Long Island. That’s right - more than one million. This does not include delinquent investor-owners because that was not required under the 2009 law. Approximately 85% of these notices were for delinquent first liens and the remainder were for second liens.

Numerous phone conversations with my contact have made it clear that roughly 40% were second or third notices sent to the same property. These are not duplicate notices. The servicers have been sending repeat notices to owners who have not taken action to cure their delinquency for more than a year and have not yet been foreclosed.

Default Notices

This is confirmed by related figures published monthly in the Long Island Real Estate Report. For the last 18 months, nearly half of the formal notices of default filed in Suffolk County have been repeat notices. Why? In New York State, a default notice (known as a lis pendens) is only good for three years after which it expires. Hence lenders have had to file a new default notice for borrowers who have been delinquent for more than three years.

The Suffolk County statistics reveal how terrible the serious delinquency situation has become in the New York metro area. Although 297,000 cumulative pre-foreclosure notices have been sent to deadbeat borrowers in Suffolk County, less than 1,000 formal default notices have been filed each month on these properties since late 2009.

Discretionary Extend and Pretend

How is that possible? The answer is simple. Mortgage servicers have been compelled by statute to send out pre-foreclosure notices to all delinquent owner-occupants, but it is entirely up to the discretion of the mortgage servicer whether or not they file a formal default notice on the delinquent property to begin foreclosure proceedings. For almost seven years, the servicers have chosen not to foreclose.

Some of you may argue that these shocking pre-foreclosure notice numbers don’t reveal very much because many of these delinquencies must have been either (1) brought current by the borrower or (2) foreclosed by the servicing bank. That is a reasonable objection. But you would be wrong.

As for foreclosures, I have reliable figures from Property Shark that an average of only 1,548 properties were foreclosed annually in New York City between 2012 and 2016. From its 2015 State of New York City’s Housing and Neighborhoods Report, we learn from the well-respected Furman Center for Real Estate at New York University that an average of only 300 properties were foreclosed and re-possessed each year by the lenders annually from 2011 to 2014. This was in a city where more than 531,000 pre-foreclosure notices have been sent to deadbeats since early 2010. The Furman Center report also showed that an annual average of only 12,800 formal default notices were filed on delinquent NYC properties between 2011 and 2015.

What about the idea that many of these delinquent property owners have probably brought their loans current after receiving a pre-foreclosure notice? Remember what I explained earlier - roughly 40% of these pre-foreclosure notices are second or third notices sent to borrowers because they have not paid the arrears owed.

Live for Free for Many Years

Furthermore, I published an article last November with figures from Fitch Ratings showing that 53% of all delinquent non-agency securitized loans in the entire state of New York had not made a payment for more than five years as of August 2016. New York City alone had roughly 225,000 of these non-agency loans outstanding. As of February 2016, 37% of them were seriously delinquent. That is the worst delinquency rate for any major metro in the nation. This percentage has climbed steadily for the last five years. The notion that many delinquent owners in the NYC metro have cured their delinquency just will not hold up.

Conclusion

Even if my analysis is rock solid, a legitimate question remains. Does it have implications for the delinquency situation of any other major metros? This is important.

No other metro in the nation has delinquency statistics as comprehensive and reliable as those for NYC. I would go so far as to assert that we are really in the dark when it comes to any of the other two dozen metros where the housing collapse was focused.

I would like to suggest two premises for you to think carefully about:

  • One is that the delinquency statistics you read from the MBA’s monthly delinquency report are inaccurate, incomplete and quite useless. To rely on them in order to assess the state of mortgage markets is not a good idea.

  • My other premise is that the delinquency rate for most of the other major metros which had major housing collapses is much higher than you think. All data firms that claim to have solid delinquency figures are totally dependent on the numbers they obtain from mortgage servicers who are their clients. I have learned from seven years of digging deep for reliable data that numbers from the servicers are notoriously inaccurate, incomplete and often just made up.

If you dismiss these premises out of hand, you risk having your real estate portfolios decimated when the housing crash resumes.

Another version of this article appeared 19 June 2017 on KCS Blog.

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