Foreclosures & Credit Card Debt

Credit Cards

Paul S. Calem, Julapa Jagtiani and William W. Lang have posted Foreclosure Delay and Consumer Credit Performance to SSRN. Effectively, it argues that long foreclosure delays may have reduced the credit card default rate because homeowners in default were able to pay down their credit card debt while living for free in their homes. The abstract reads,

The deep housing market recession from 2008 through 2010 was characterized by a steep rise in the number of foreclosures and lengthening foreclosure timelines. The average length of time from the onset of delinquency through the end of the foreclosure process also expanded significantly, averaging up to three years in some states. Most individuals undergoing foreclosure were experiencing serious financial stress. However, the extended foreclosure timelines enabled mortgage defaulters to live in their homes without making mortgage payments until the end of the foreclosure process, thus providing temporary income and liquidity benefits from lower housing costs. This paper investigates the impact of extended foreclosure timelines on borrower performance with credit card debt. Our results indicate that a longer period of nonpayment of mortgage expenses results in higher cure rates on delinquent credit cards and reduced credit card balances. Foreclosure process delays may have mitigated the impact of the economic downturn on credit card default.

The authors conclude,

our findings indicate that households do not consume all the benefits from temporary relief from housing expenses; instead, they use that temporary relief to cure delinquent credit card debt and reduce their credit card balances. Interestingly, we find that payment relief from loan modifications has a similar impact to payment relief from longer foreclosure timelines; both are associated with curing card delinquency and reducing card balances.

These households, however, are likely to become delinquent on their credit cards again within six quarters following the end of the foreclosure process. Thus, the results suggest that there may be added risk for nonmortgage lenders when foreclosures are completed and households must incur the transaction costs of moving and incur significant housing expenses once again. This implies an additional dimension of risk to credit card lenders that has not been observed previously. (23)

I am not sure what to make of these findings for borrowers, regulators, credit card lenders or mortgage lenders. Would a utility-maximizing borrower run up their credit card debt while in foreclosure? Should states seek to change foreclosure timelines to change consumer or lender behavior? Should profit-maximizing credit card lenders seek to further limit borrowing upon a mortgage default?  What should profit-maximizing mortgage lenders do? I have lots of questions but no good answers yet.

The State of the Nation’s Sustainable Housing

Harvard University Widener Library

The Joint Center for Housing Studies of Harvard University released its The State of the Nation’s Housing 2015 report. I typically focus on the discussion of the mortgage market in this excellent annual report.  Here are some of the mortgage highlights:

  • mortgage delinquency rates nationwide have fallen by half since the foreclosure crisis peaked. But the remaining loans that are seriously delinquent (90 or more days past due or in foreclosure) are concentrated in relatively few neighborhoods; (6)
  • According to CoreLogic, 10.8 percent of homeowners with mortgages were still underwater on their loans in the fourth quarter of 2014; (8)
  • Despite rising prices, homebuying in most parts of the country remained more affordable in 2014 than at any time in the previous two decades except right after the housing crash. In 110 of the 113 largest metros for which at least 20 years of price data are available, payment-to-income ratios for the median-priced home were still below long-run averages. And in nearly a third of these metros, ratios were 20 percent or more below those averages. (22)

The Joint Center believes that “Looser mortgage lending criteria would help. Given that a substantial majority of US households desire to own homes, the challenge is not whether they have the will to become homeowners but whether they will have the means.” (6) I am not sure what to make of that statement.  It seems to me that the right question is whether looser mortgage lending criteria would result in long-term housing tenure for new homeowners. In other words, looser mortgage lending criteria that result in future defaults and foreclosures are of no benefit to potential homebuyers. Too few commentators tie mortgage availability to mortgage sustainability. The Joint Center should take a lead role in making that connection.

One last comment, a repetition from my past discussions of Joint Center reports. The State of the Nation’s Housing acknowledges sources of funding for the report but does not directly identify the members of its Policy Advisory Board, which provides “principal funding” for it along with the Ford Foundation. (front matter) The Board includes companies such as Fannie Mae and Freddie Mac which are directly discussed in the report. In the spirit of transparency, the Joint Center should identify all of its funders in the State of the Nation’s Housing report itself. Mainstream journalists would undoubtedly do this. I see no reason why an academic center should not.

Frannie Conservatorships: What A Long, Strange Trip It’s Been

The Federal Housing Finance Agency Office of Inspector General has posted a White Paper, FHFA’s Conservatorships of Fannie Mae and Freddie Mac: A Long and Complicated Journey. This White Paper on conservatorships updates a first one that OIG published in 2012. This one notes that over the past six years,

FHFA has administered two conservatorships of unprecedented scope and simultaneously served as the regulator for these large, complex companies that dominate the secondary mortgage market and the mortgage securitization sector of the U.S. housing finance industry. Congress granted FHFA sweeping conservatorship authority over the Enterprises. For example, as conservator, FHFA can exercise decision-making authority over the Enterprises’ multi-trillion dollar books of business; it can direct the Enterprises to increase the fees they charge to guarantee mortgage-backed securities; it can mandate changes to the Enterprises’ credit underwriting and servicing standards for single-family and multifamily mortgage products; and it can set policy governing the disposition of the Enterprises’ inventory of approximately 121,000 real estate owned properties. (2)

I was particularly interested by the foreward looking statements contained in this White Paper:

Director Watt has repeatedly asserted that conservatorship “cannot and should not be a permanent state” for the Enterprises. Director Watt has indicated that under his stewardship FHFA will continue the conservatorships and build a bridge to a new housing finance system, whenever that system is put into place by Congress. In this phase of the conservatorships, FHFA seeks to place more decision-making in the hands of the Enterprises. (3)

Those who have been hoping that the FHFA will act decisively in the face of Congressional inaction should let that dream go. And given that just about nobody believes (I still hope though) that there will be Congressional reform of Fannie and Freddie during the remainder of the Obama Administration, we must face the reality that we are stuck with the conservatorships and all of the risks that they foster for the foreseeable future. Today’s risks include historically high rates of mortgage delinquencies and exposure to defaults by counterparties like private mortgage insurers. As I have said before, the risks that Fannie and Freddie are nothing to laugh at. Let’s hope that the FHFA is up to managing them until Congress finally acts.

Mortgage Market Trending in the Right Direction, but . . .

The Office of the Comptroller of the Currency (OCC) released its OCC Mortgage Metrics Report, First Quarter 2014. the report is a “Disclosure of National Bank and Federal Savings Association Mortgage Loan Data,” and it “presents data on first-lien residential mortgages serviced by seven national banks and a federal savings association with the largest mortgage-servicing portfolios. The data represent 48 percent of all first-lien residential mortgages outstanding in the country and focus on credit performance, loss mitigation efforts, and foreclosures.” (8, footnote omitted) As a result, this data set is not representative of all mortgages, but it does cover nearly half the market.

The report found that

93.1 percent of mortgages serviced by the reporting servicers were current and performing, compared with 91.8 percent at the end of the previous quarter and 90.2 percent a year earlier. The percentage of mortgages that were 30 to 59 days past due decreased 20.9 percent from the previous quarter to 2.1 percent of the portfolio, a 19.8 percent decrease from a year earlier and the lowest since the OCC began reporting mortgage performance data in the first quarter of 2008. The percentage of mortgages included in this report that were seriously delinquent—60 or more days past due or held by bankrupt borrowers whose payments were 30 or more days past due — decreased to 3.1 percent of the portfolio compared with 3.5 percent at the end of the previous quarter and 4.0 percent a year earlier. The percentage of mortgages that were seriously delinquent has decreased 22.4 percent from a year earlier and is at its lowest level since the end of June 2008.

At the end of the first quarter of 2014, the number of mortgages in the process of foreclosure fell to 432,832, a decrease of 52.3 percent from a year earlier. The percentage of mortgages that were in the process of foreclosure at the end of the first quarter of 2014 was 1.8 percent, the lowest level since September 2008. During the quarter, servicers initiated 90,852 new foreclosures — a decrease of 49.1 percent from a year earlier. Factors contributing to the decline include improved economic conditions, aggressive foreclosure prevention assistance, and the transfer of loans to servicers outside the reporting banks and thrift. The number of completed foreclosures decreased to 56,185, a decrease of 7.5 percent from the previous quarter and 33.9 percent from a year earlier. (4)

These trends are all very good of course, but it is worth remembering how far we have to go to get back to historical averages, particularly for prime mortgages.  Pre-Financial Crisis prime mortgages typically have done much better than these numbers, with delinquency rates in the very low single digits.

State of the Nation’s Housing Finance

The Joint Center for Housing Studies of Harvard University has released the 2014 edition of The State of the Nation’s Housing. As to the nation’s housing finance system, the report finds that

The government still had an outsized footprint in the mortgage market in 2013, purchasing or guaranteeing 80.3 percent of all mortgages originated. The FHA/VA share of first liens, at 19.7 percent, was well above the average 6.1 percent share in 2002–03, let alone the 3.2 percent share at the market peak in 2005–06. Origination shares of Fannie Mae and Freddie Mac were also higher than before the mortgage market crisis, but less so than that of FHA. According to the Urban Institute’s Housing Finance Policy Center, the GSEs purchased or guaranteed 61 percent of originations in 2012 and 2013, up from 49 percent in 2002 and 2003.

Portfolio lending, however, has begun to bounce back, rising 8 percentage points from post-crisis lows and accounting for 19 percent of originations last year. While improving, this share is far from the nearly 30 percent a decade earlier. In contrast, private-label securitizations have been stuck below 1 percent of originations since 2008. Continued healing in the housing market and further clarity in the regulatory environment should set the stage for further increases in private market activity. (11)

As usual, this report is chock full of good information about the single-family and multi-family sectors. I did find that some of its characterizations of the housing market were lacking. For instance, the report states

Many factors have played a role in the sluggish recovery of the home purchase loan market in recent years, including falling household incomes and uncertainty about the direction of the economy and home prices. But the limited availability of mortgage credit for borrowers with less than stellar credit has also contributed. According to information from CoreLogic, home purchase lending to borrowers with credit scores below 620 all but ended after 2009. Since then, access to credit among borrowers with scores in the 620–659 range has become increasingly constrained, with their share of loans falling by 6 percentage points. At the same time, the share of home purchase loans to borrowers with scores above 740 rose by 8 percentage points.

Meanwhile, the government sponsored enterprises (GSEs) have also concentrated both their purchase and refinancing activity on applicants with higher credit scores. At Fannie Mae, only 15 percent of loans acquired in 2013 were to borrowers with credit scores below 700—a dramatic drop from the 35 percent share averaged in 2001–04. Moreover, just 2 percent of originations were to borrowers with credit scores below 620. The percentage of Freddie Mac lending to this group has remained negligible.

Yet another drag on the mortgage market recovery is the high cost of credit. For borrowers who are able to access credit, loan costs have increased steadily. To start, interest rates climbed from 3.35 percent at the end of 2012 to 4.46 percent at the end of 2013. This increase was tempered somewhat by a slight retreat in early 2014. In addition, the GSEs and FHA raised the fees required to insure their loans after the mortgage market meltdown, and many of these charges remain in place or have risen. The average guarantee fee charged by Fannie Mae and Freddie Mac jumped from 22 basis points in 2009 to 38 basis points in 2012. In 2008, the GSEs also introduced loan level price adjustments (LLPAs) or additional upfront fees paid by lenders based on loan-to-value (LTV) ratios, credit scores, and other risk factors. LLPAs total up to 3.25 percent of the loan value for riskier borrowers and are paid for through higher interest rates on their loans. (20)

Implicit in this analysis is the view that lending should return in some way to its pre-bust levels. But, in fact, much of the boom lending was unsustainable for many borrowers. The analysis fails to identify the importance of promoting sustainable homeownership and instead relies on one dimensional metrics like credit denials for those with low credit scores. Until we are confident that borrowers with those scores can sustain homeownership in large numbers, we should not be so quick to bemoan credit constraints for people with a history of losing their homes to foreclosure.

The Center’s analysis also takes a simplistic view about guarantee fees.  The relevant metric is not the absolute size of the g-fee. Rather, the issue should be whether the g-fee level achieves its goals. At a minimum, those goals include appropriately measuring the risk of having to make good on the guarantee.

Finally, the Center demonstrates symptoms of historical amnesia when it characterizes an interest rate of 4.46% as “high.” This is an incredibly low rate of interest and one would expect that rates would rise as we exit from the bust years.

I have made the point before that the Center’s work seems to reflect the views of its funders. The funders of this report (not identified in the report by the way) include the National Association of Home Builders; National Association of Realtors; National Housing Conference; National Multifamily Housing Council; and a whole host of lenders, builders and companies in related fields that make up the Center’s Policy Advisory Board. These organizations benefit from a growing housing sector. This report seems to reflect an unthinking pro-growth perspective. It would have benefited from a parallel focus on sustainable homeownership.

Reiss on Paying off Underwater Mortgages

MainStreet.com quoted me in What Bills Should You Pay First? It reads in part,

Consumers started prioritizing their mortgage payments ahead of their credit card payments as of September 2013, according to a new TransUnion study.

This reverses a trend that began in September 2008 when the mortgage crisis drove consumers to pay their credit cards bills ahead of mortgages. Consumers have placed an emphasis on paying their auto loans before their mortgages and credit card payments by a wide margin – since at least 2003, TransUnion said. The study obtained anonymous consumer information from December 2002 through December 2012, and each monthly sample included about 2.5 million consumers.

*     *     *

Many consumers were faced with devaluing home prices and chose to preserve their credit line, said David Reiss, professor of law at Brooklyn Law School in New York.

“The underwater mortgage may have seemed like a sinkhole when prices were dropping and putting limited funds into it might have seemed like throwing good money after bad,” he said. “When a household’s income can’t cover all of its expenses, it has to prioritize its payments. If the mortgage is underwater, it may make sense to use those limited funds to protect assets that are integral to daily living and wage earning like an auto or to focus on tools like credit cards that may have some use going forward, if there is still any available credit left.”

Homeowners have reversed that logic with the rebound of housing prices, Reiss said.”If homeowners have equity in their home from those rising prices, prioritizing the mortgage protects that equity and keeps the household in the house to boot,” he said. “Not everyone makes such a calculation, but many do.”

The State of the Foreclosure Crisis

Rob Pitingolo of the Urban Institute issued State of the Foreclosure Crisis: Past the Peak but Not Recovered. It opens,

Much attention has been given to statistics that show new foreclosure activity nationally has slowed over the past few years. When it comes to metropolitan area markets, however, some have gotten worse, while others have stagnated. It is not simple enough to declare an end to the foreclosure and delinquency crisis when there are as many as a quarter (25%) of metro areas that have not yet begun their recovery. (1)

It continues,

the rate of 90 day or more delinquency steadily fell in 2010 and 2011, ending at 3.1% in September 2013. In contrast, the foreclosure inventory only turned the corner in mid -2012, and is still higher than the March 2009 level at 4.5%, around seven times the pre-crisis level. Historically, a foreclosure inventory under 1% is what we would expect in “normal” market conditions.” (1, footnote omitted)

It concludes, “attention must be paid to individual metropolitan housing markets. Some are in much better shape than others; and some have made great strides since the peak of serious delinquency in December 2009. However, it may be premature to declare the problem is “ending” until all metro area markets show signs of recovery.” (2) The report identifies the starkest differences in metro areas:

Three geographic regions were hard hit at the beginning of the foreclosure crisis: California metros, Florida metros, and “Rust Belt” metros (those in Midwest states like Ohio, Michigan and Indiana). All three of those regions have seen solid improvements since December 2009.

On the other hand, the Northeast has generally performed poorly in the past several years. Serious delinquency rates in major metropolitan markets like New York City, Philadelphia and Baltimore have all worsened since December 2009. Other metro areas in New York like Buffalo, Rochester and Syracuse have similarly struggled, as have metro areas surrounding New York like New Jersey and Connecticut. (5)

The report concludes with a call for a nuanced response to the current state of the foreclosure crisis:  “communities need strong examples to build upon, rigorous data and analysis, and a commitment to evidence-based policymaking that strives toward the best fit between policy solutions and policy problems.” (6) This seems like the right call and the appropriate response to headlines that report the national trend without mentioning the variations among metro areas.