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Thread: weekend commentary - Barclays research on afteraffects of Zombie Mortgages

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    Default weekend commentary - Barclays research on afteraffects of Zombie Mortgages

    from

    (snip)"A new research piece from Barclays raises some far reaching implications.

    Many economic pundits forecast the housing market will bottom in 2012 and start recovering thereafter. I’d like to know exactly how that happens when the odds of a Eurobanking crisis is the next six months look high, and it’s bound to blow back to the US.

    But even the more realistic pundits (meaning those not in the employ of financial firms) may be unduly optimistic. For instance, Martin Wolf was one of the hosts of a Financial Times conference last week, and mentioned that he thought whoever would win in 2012 would look like a winner: the recovery will eventually take hold, and he believes, per Carmen Reinhart and Kenneth Rogoff, that the housing market will bottom in 2014 and a recovery will kick in then.

    The person sitting next to me leaned over and said, “Japan”. And he is more likely to be right, for two (at least) two reasons. The first is, as the Barclays report indicates, via American Banker, that there is a very large shadow inventory and that is not adequately reflected in most tallies of how many homes will need to clear, ex more radical action to stem foreclosures (I would not hold my breath on that one). Second is that the inability to foreclose and the resulting “zombie” mortgages are not due simply to servicer discretion but due to likely difficulties in foreclosing due to chain of title problems. Why have foreclosures slowed down dramatically in New York, for instance? Because it appears that the requirement that the foreclosing attorney certify the accuracy of documents submitted to the court has thrown a wrench in the process. Now mind you, this measure does not increase the liability an attorney faces, but it makes it easier for opposing counsel to challenge the validity of submissions to the court (and false submissions are sanctionable).

    Our Tom Adams has estimated that it would cost $20,000 to $40,000 more per foreclosure (no typo) to dispense with robosigning and prepare court documents properly in judicial foreclosure states. Think that might not have something to do with why foreclosures have slowed down a lot? Needless to say, I don’t buy the line that the government is leaning on banks to slow foreclosures, particularly when Fannie and Freddie have consistently pushed for faster foreclosures.

    From Kate Berry at American Banker via e-mail:

    Delinquencies on credit cards and auto loans have largely fallen back to levels seen before the recession, but debt-strapped consumers are still struggling with “zombie mortgages,” says Dean Maki, managing director and chief economist at Barclays Capital.

    Zombie mortgages are home loans that are worth more than the underlying collateral of the house, Maki says. The backlog of zombie mortgages is impeding a recovery in home sales, because many sellers are stuck with loans they cannot repay even if they sell their home. Meanwhile, that backlog is encouraging buyers to delay purchases of new homes in the hopes that housing prices will drop even further.

    “What we have is an overhang of zombie mortgages,” Maki said in an interview Wednesday. “It’s a housing market problem rather than an overall household indebtedness problem. Unlike the zombies that stagger around in the movies, these contracts will not remain forever undead.”

    About 20 million borrowers are trapped in these zombie or “underwater” mortgages, in which they owe more than their home is worth. When those loans become delinquent, they are often referred to as limbo loans, because the government has urged mortgage servicers to hold off on foreclosures.

    But the longer a borrower fails to make mortgage payments, the higher the likelihood that the loan will eventually go into foreclosure. And it will take years for many of them to go through the foreclosure process or for the loans to be restructured through modifications, further prolonging the glut of properties on the market and depressing housing prices.

    Banks and mortgage servicers are trying to avoid exacerbating the situation by not putting all of their real-estate owned properties on the market at once.

    “There’s a lot of inventory but it will come through methodically over three to four years, which will prohibit any price appreciation,” says Evan Gentry, the CEO of G8 Capital LLC, a Ladera Ranch, Calif., buyer of distressed properties.

    More than 2.1 million homes are in the process of foreclosure and another 1.8 million homeowners were 90 days or more past due on their mortgage at the end of August, according to Lender Processing Services Inc.

    Maki says that any policy initiatives that delay or threaten the resolution of “zombie mortgages” should be viewed as bad news, since such policies could ultimately delay a broad economic recovery.

    He argues that investors should pay more attention to the foreclosure process and any local upturn in residential construction than to overall household debt levels.

    If homebuilders continue to hold off on construction, an eventual rebound “could be quite strong,” Maki says. “We see the potential for a stronger cyclical recovery once the ‘zombie mortgages’ and the associated foreclosure pipeline are relegated to the history books.”


    There are some interesting assumptions in the article. The first (and this is in all analyses of the housing market) is to assume that household formations continue in line with historical patterns. But we’ve seen a rise in people having to move in with relatives in this downturn. If unemployment continues to be high, we may not only see a persistent shift in attitudes towards renting versus owning, but towards nuclear v. extended families. It also seems to ignore how important second homes were in the last cycle, and it isn’t clear that we’ll see as strong a vacation home market as we once had. Second is that it ignores the looming and still unresolved chain of title issues. No one has come up with a way to cut the Gordian knot of mortgages that were not properly conveyed to securitization trusts. There are a lot of homes that cannot be foreclosed upon (legally, anyhow) until this issue is resolved.

    But regardless of the particularly, the general focus is correct: the US has never had an economic recovery without housing playing a large role, and there is no good reason to think that pattern will change. (snip)


    The obvious take-away from this new Barclay analysis is that the real estate market 'really IS different this time'. The obvious implication is that no real US economic recovery is likely to begin until the overhang of US housing can actually be reduced. Thus Barclays is prognostigating that no real US economic recovery can begin before 2014.

    The not quite so obvious take-away from the author's comments re the Barclay analysis is that the real estate market 'really IS different this time' ... but for other reasons. Those reasons involve a 'forced migration' of housing requirements away from the past 'one nuclear family per house' paradigm toward a new paradigm where high persistent US unemployment, stagnant or lower net US paychecks for most of those who are employed, higher prices for 'necessities', higher down payment and creditworthiness requirements for new mortgage financing, forced de-leveraging of existing consumer debt etc., combine forces toward more ( extended ) family members must reside in one house.

    If the author is correct, the new paradigm of 'extended families in the same house' will cause a permanent reduction in demand for stand-alone housing. And conversely, a greatly increased demand for rental housing / apartment housing will arise to service the demand from younger Americans who have no chance of affording a down payment or obtaining affordable mortgage financing, as well as demand from older Americans who already have, or who soon will, experience foreclosure / eviction / potential bankruptcy.

    I would also point out that the latter is a potentially 'investable' trend.
    Last edited by Melonie; 10-15-2011 at 07:52 AM.

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    Default Re: weekend commentary - Barclays research on afteraffects of Zombie Mortgages

    Extend and pretend has worked well no?

    Hard to find a real bottom when the money creators and pols keep artificially trying to intervene and keep the housing market from finding it's natural bottom.

    Now having said this..... I still think locking in your cost of shelter at a low fixed interest rate is a good thing.

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    Default Re: weekend commentary - Barclays research on afteraffects of Zombie Mortgages

    I still think locking in your cost of shelter at a low fixed interest rate is a good thing.
    Actually, so do I ! But this issue centers on one's definition of 'low' ! Even a 4% mortgage interest rate on a property that is probably going to decline another 10-20-30% in value is still a huge 'loser'.


    Hard to find a real bottom when the money creators and pols keep artificially trying to intervene
    ... they're not 'trying' to intervene, they ARE intervening ! Although their arguable reason for artificially supporting housing prices and arguably suppressing long term interest rates probably has more to do with wanting to forestall a huge second round of bank failures than any 'altruism' towards would-be US homeowners. But as long as said intervention continues, buying a house still represents a significant risk of future loss of property value. And that provides yet another reason to think that demand for rental units will continue to increase.

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