There are two primary drivers that will result in an increase in foreclosures in the first to second quarter of 2010.
The first is that the continued increase in unemployment will continue to cause an increasing number of residential mortgages to fall into default. The "real" unemployment rate is already far above the official numbers with some estimates as high as 18% to 20%. The economy needs to add between 100,000 and 200,000 new jobs per month to maintain a steady unemployment rate. We are nowhere near that type of job growth today. As a result, expect the real unemployment rate to continue to climb, regardless of what the official numbers indicate.
The second driver is the Obama administration's hope for homeowners programs (e.g., FNMA Homeowner Affordable Modification Program or HAMP). These programs are acting as dams against the tide of foreclosures and loan servicers (and banks) are treating the programs as profit centers instead of bona fide loan workouts. As a result, they are putting virtually all delinquent homeowners on a HAMP trial modification, regardless of whether they meet the requirements and are waiting to verify income until near the end of the trial period.
A major issue and a fundamental reason why HAMP is not a true loan workout is that HAMP only considers mortgage debt-to-income ratios instead of a consumer's total debt-to-income ratio (including installment and revolving debt). So loan servicers are not re-underwriting the debt in order to determine the maximum amount that a borrower can actually afford.
The effect of this shortcoming is that HAMP will only be a temporary fix for most homeowners. The evidence of this is clear when you consider that one particularly large bank found that 60% of delinquent mortgagees did not qualify for HAMP because their mortgage DTI was already under the 31% limit set by Fannie Mae indicating that the mortgage debt was not the primary issue, instead it was all the other consumer debt. Yet, servicers continue to put homeowners on the trial plans.
So what this means is that many of the loans currently being modified on a trial basis will again fall into delinquency and ultimately will either have to be short sold or taken into foreclosure. The result will be another more broad based spike in foreclosures and another decline in residential real estate prices. And it will happen quickly. If you are still skeptical, just take some time to dig into the data and I am sure you will come to a similar conclusion.
Then take a look at what is currently happening in the commercial real estate market and the scenario becomes truly frightening.
