Earlier this year, while attending a mortgage industry technology gathering in California, I decided to attend a press conference put on by Lender Processing Services Inc.
While most consumers have never heard of LPS, this Jacksonville, Fla.-based technology firm probably has heard of you. That’s because its technology platform, in one form or another, is used by the 50 largest banks in the country.
Not only does LPS service loans, but its in-house economists have begun to extrapolate pertinent data points. And that caught my interest.
"We have 40 million first loans and 5 million home equity loans and lines of credit in our repository and we see a lot of things from a trend perspective," Grace Brasington, LPS’ executive vice president of strategic consulting services, told me after the press conference.
I got a strong hint of what LPS was seeing, but it all sounded so out of joint with other prognostications that I decided to do a follow-up call to Steve Berg, managing director at LPS’ applied analytics unit.
At the press conference, Berg’s partner in the analytics department noted prime loan total delinquencies were escalating, which was somewhat disturbing since other sources were reporting the housing market to be stabilizing.
In February, the Standard & Poor’s/Case-Shiller Home Price Index was reporting seven straight months of price gains. This good news was accompanied by numerous economists babbling that the price increases were "further evidence that conditions in the house markets continue to stabilize" and "people are realizing the bottom is creeping away."
Berg and his analytics partner thought those sentiments were a bunch of crap. According to Berg, there is a huge inventory of prime loans in delinquency and heading for the wrong side of the market.
"We like to look at rates of change or velocity of deterioration," says Berg. "If you look at a grouping of loans as prime, subprime, option ARM and FHA, you expect the prime group to have the lowest delinquencies, which is still the case, although prime loans reached 6.7 percent of total delinquency in the first quarter."
While that looks good for prime, one of the important things to take into consideration is total deterioration of the group. Using January 2005 (a month of relative market stability) as a base, prime loans have deteriorated 305 percent relative to total delinquency rates at the beginning of 2005. The surprise is that deterioration vastly outpaces subprime, which vaulted 230 percent, and FHA, which has been flat in terms of total delinquency.
"This is an interesting way of predicting where the pockets of problems will be coming from," says Berg. "If you look at the small "jumbo," just over the conforming limit of $417,000, that bucket is 8.3 percent delinquent, up 1,500 percent from January 2005. There is no liquidity in that bucket now unless you got significant amounts of cash to put down."
If one injects these data points into geographic-area surveys, serious problems being to emerge.
Berg uses Los Angeles County, home to a significant number of very high-priced residences, as an example. Looking at the data at the end of last year, the number of "dirty sales," either short sale or REO, as a percentage of all total sales in the $250,000-and-below bracket, reached as high as 78 percent. However, the number of homes in that bracket that were in default or foreclosure was relatively modest, meaning the pipeline was shrinking.
In the lower-price home bracket where short sales and REOs had been concentrated, prices are not going to drop much more because it is already totally saturated with REOs and short sales — and the damage has been done.
As a comparison, in the highest price band, $750,000 and greater, only 16 percent of transactions were dirty sales. But, the number of properties in default and foreclosure are now higher than in the low-priced bracket and that, says Berg, "is going to whipsaw the home-sale market."
Just below the high-price band, the jumbo-mortgage bracket of homes ranging from $500,000 to $699,000 is exhibiting similar ascending behavior. Dirty sales as of December 2009 were just 29 percent of total sales, the second-lowest percentage to the high-end band, but there were almost 40,000 jumbo loans already in default and foreclosure and those will eventually roll into the dirty sales category.
The band of prime loans for houses costing $350,000 to $499,999 performed moderately well with 41 percent of the total transactions as dirty sales. Unfortunately, the band had the highest concentration of defaults and foreclosures as of December 2009, more than 42,000 mortgages that would be sliding into dirty sales.
When dirty sales increase, home prices decrease.
Fitch Ratings took a look at mortgage delinquencies in U.S. prime residential mortgage-backed securities and noticed through February 2010, they had risen for 33 consecutive months.
Since delinquencies began to rise in second-quarter 2007, prime jumbo loan delinquencies nearly tripled in 2009 and were up through the first two months of the year by 69 basis points, Fitch Ratings reported. And, overall, prime jumbo RMBS 60-plus-days delinquencies rose to 9.9 percent in February, up from 9.6 percent the month before.
The five states with highest volume of prime jumbo loans outstanding were California, New York, Florida, Virginia and New Jersey. Together those five states represent about two-thirds of total delinquencies.
A friend who lives in Orange County, Calif., recently e-mailed me a PDF of a Los Angeles Times article that reported the median prices for homes sold in Southern California counties have risen substantially through mid-February. The newspaper interpreted that as great news, but what I wondered was, if you peeled away the data, the rise could be due to the fact that more higher-priced homes were going through the dirty sales process than ever before, thus inflating the median. And, really, that’s nothing to cheer about.
"The number of homes of $500,000 or more in value that are in danger of foreclosure and default are so much higher than we have seen in the past, it could flood the REO market," Berg observes. "I don’t think a lot of people are thinking in this context. From a house-value perspective, the problem is migrating up the economic ladder to higher-priced property bands."
Steve Bergsman is a freelance writer in Arizona and author of several books, including "After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade."
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