What causes foreclosure? Countrywide's claims

http://latimesblogs.latimes.com/laland/2007/09/what-causes-for.html#comments ^ | September 19, 2007 | Peter Viles

[dennisw]

Countrywide, in its presentation yesterday in San Francisco, made some fascinating arguments about what's causing the foreclosure crisis. Countrywide CEO Angelo Mozilo "criticized media coverage of the mortgage meltdown several times Tuesday, saying reporters incorrectly blamed 'aggressive lending and exotic reset products' for rising foreclosures."

What's driving foreclosures? Countrywide's breakdown -- based on information from its servicing portfolio -- when "cause of foreclosure" is known (80.3%), the breakdown is as follows: --Curtailment of income: 58.3% --Illness/Medical: 13.2% --Divorce: 8.4% --Investment Prop./Unable to sell: 6.1% --Low regard for property ownership: 5.5% --Death: 3.6% --Payment adjustment: 1.4% --Other: 3.5%

We find this fascinating on several levels, and inconsistent with most analysis we've seen. To start, we should point out, there is probably no institution in America -- including the media and the government -- that knows more about the current crisis than Countrywide. The government doesn't collect timely data on foreclosures; Countrywide does. If this is Countrywide's best, most honest assessment of the true causes of foreclosure, it's shocking: it indicates foreclosures are spiking due to economic weakness -- "curtailment of income" -- that is so faint it barely shows up in economic statistics. If this is what happens in a fairly strong job market and a growing economy, what happens in a real recession, when unemployment rises significantly?

And if "payment adjustments" are not a problem -- as Countrywide argues -- what good would it do to refinance these loans?

There is one plausible explanation: borrowers were so aggressive -- and so hopeful -- that they essentially planned for economic perfection, and the slightest negative deviation from that plan -- say, an unexpected drop in overtime earnings for hourly workers -- is sending them into default and foreclosure.

But here is an equally plausible explanation: That the "research" is really spin

[dennisw]

56 comments for this entry---- http://latimesblogs.latimes.com/laland/2007/09/what-causes-for.html#comments

[dennisw]

56 comments for this entry—— http://latimesblogs.latimes.com/laland/2007/09/what-causes-for.html#comments

[Always Right]

They are only partially correct. All that stuff happened before and foreclosure rates were not this high. The biggest trigger for the increase in foreclosures is declining property valuea. If people had equity in their house they would work a lot harder to make sure it did not go into foreclosure. But I agree that interest rate reset is not tje huge driver of this problem.

[Loyal Buckeye]

I would like to see how 'curtailment of income' is defined before drawing any conclusions.

I do, however, agree with Countrywide's assessment that the media is making things a whole lot worse than they should be. Buyers are staying out of the market and, thus, sellers do not have the opportunity to sell rather than face foreclosure.

[freeangel]

Mmmm—”curtailment of income”? Would that mean income not rising as fast as the usary mortgage rates these idiot homebuyers have signed on for? What a spinning way to say it.

[Diana in Wisconsin]

Countrywide forgot the #1 reason for this problem:

“It’s Bush’s Fault!”

Well, someone had to say it. ;)

[Lynne]

I’m out of the market now (retired), but I wonder whether the number of Chapter 13 bankruptcies has increased.

[bert]

.....biggest trigger for the increase in foreclosures is declining property value.......

How can that be true? If you make your monthly mortgage payment, there can be no forclosure. It doesn’t matter how much the current market value fluctuates, if you pay on time ther can be no forclosure.

If you are unable to raise the cash for an adjustable mortgage, you will be forclosed.

Note also, the numbers reflect Countrywide experience. If they don’t have a lot of adjustable rate mortgages, they will have normal frclosure experience.

[cgbg]

biggest trigger for the increase in foreclosures is declining property value....... How can that be true? If you make your monthly mortgage payment, there can be no forclosure. It doesn't matter how much the current market value fluctuates, if you pay on time ther can be no forclosure.

Here is the scenario.

Your California couple that bought in 2005 stretched themselves to the limit to make the down payment and the monthly payments.

The ARM resets and they are living off credit cards but still paying the mortgage.

Now one of them gets laid off and they can't pay the mortgage.

If this had happened a couple of years ago with the high-flying CA real estate market they could have sold the house for a substantial profit, paid off the mortgage, and moved to an apartment until their finances improved.

Today if they sold the house there wouldn't be enough proceeds to pay back the mortgage.

[Uncle Chip]

They forgot to mention the shortage of “greater fools” in the real estate market.

[DogBarkTree]

“would like to see how ‘curtailment of income’ is defined before drawing any conclusions.”

My job’s “compensation plan” was “restructred” last year. Meaning my take home pay went down about 8%. This is happening many places. My property tax went up $1,800.00 and food and gas prices I dont even want to talk about. Does that help you “define” curtailment of income?

[Thermalseeker]

If people had equity in their house they would work a lot harder to make sure it did not go into foreclosure.

That's what happens when you loan 110% of a property's value to a bunch of deadbeats. They essentially have nothing to loose.....

[bert]

I understand what you wrote, but the proximate cause is not coming up with the cash, not the decline in realestate value.

As a matter of fact, you said there was a job loss...... exactly what Countrywide stated as the most common problem.

[toldyou]

Just last night my daughter was talking about where she and her boyfriend would buy a home if they got married. (They’re in separate apartments now.) They’re wise enough to realize that if they have children, their combined income would drop almost $100,000 when she quits work and stays home with a child. I suppose that would be considered “curtailment of income.”

[JimRed]

Would that mean income not rising as fast as the usary mortgage rates these idiot homebuyers have signed on for?

Anything under 8-9% is hardly a "usary" rate. The day I started working in real estate in 1985, fresh out of training, a fixed rate 30 year mortgage cost 14.75% with three points. It had come down from the 17% range over the prior two years.

The foreclosure rate, while double what it was a few years ago, is still a minor factor in the overall mortgage market. If there was a DemocRAT president in office it would not be considered newsworthy. The enemy is trying desparately to talk down the economy to help achieve that.

Just like the homeless who suddenly disappeared during the Clintoons...

[right wing]

If there was a DemocRAT president in office it would not be considered newsworthy. The enemy is trying desparately to talk down the economy to help achieve that.

Just like the homeless who suddenly disappeared during the Clintoons...

Bingo, you hit the bullseye.

[Kay Ludlow]

I see two factors that could account for ‘curtailment of income”:
One - minimum wage increases reduce the number of low level jobs. Not that people on minimum wage are the people who’ve been buying houses, but there are many couples where one works a good job and the other works retail or hospitality services (fields which depend on minimum/near minimum wage workers). If their hours are cut, as I’ve know some people to have happen, that does curtail income - going from 39 hours/week to 20 hours/week for example.

two - maybe they were making these high-risk mortgages to those ‘undocumented’ workers in the construction industry. There’s no questions that home construction has dropped off dramatically, and there’s no question that in a puzzling was the employment in the home construction trades hasn’t really fallen at all (according to the Dept of Labor). If ‘undocumented workers’ were making ‘undocumented wages’ in a field that then suffers massive layoffs, would they show up in the economic numbers? Or would they just have their income curtailed, be unable to make their mortgage payments, and unable to collect unemployment from the employer that didn’t document their employment?

[texaslil]

“Curtailment of inccome.”

It’s “the rainy day that comes to us all,” according to my grandparents. They are long gone now, but I believed them. Never borrowed a dime to build our house. When our “imcome was curtailed” on occasion, it just meant we couldn’t get a truck load of lumber that week and had to twiddle our thumbs for entertainment the following weekend instead of getting to pound nails. A bonus: we saved a couple of thousand a year by not having to carry insurance.(another scam)

[PUGACHEV]

Curtailment of income, the easy availability of mortgage money, and property values are very closely related. Relaxed mortgage acceptance standards brought a large number of people into the market as first-time buyers, and encouraged others to by second homes as an investment. This created increased demand for housing that pushed up existing home values, and prompted an increase in new home construction. This, in turn, provided employment and increased income for any number of people, realtors, loan brokers, speculators, and also those in trades even indirectly linked to the real estate market, cable installers, plumbers, carpenters, carpet installers, tile setters, roofers, and the like. That increased income seeped upward through the economy as those wage earners bought other things, like appliances, cars, cruises, or whatever.

The market equalized when the supply of new homes met or exceeded the demand; suddenly all those income streams were curtailed, and some of the new home buyers were unable to continue making their mortgage payments. The problem was compounded when mortgages with low initial rates adjusted upward, typically three years after they began, and when stagnant (or falling) real estate values prevented those mortgagors from refinancing.

[oldbill]

Bingo! Kay wins the prize!

two - maybe they were making these high-risk mortgages to those ‘undocumented’ workers in the construction industry.

It's a little more complicated than that, but that is the essence. A lot of these homes are dorm homes for illegals. The landlord relied on the rents from illegals stacked 10-20 per house at $200-$400 a month to pay off mortgages on $400,000-$700,000 and make a nice profit in the mix.

Now, for a combination of reasons - loss of jobs by dorm workers, mortgage balloons on ARMs coming due, depreciating home values making mortgages go upside down - and the house of cards is collapsing.

Ponzi would have been proud. Too bad he didn't have a Congress like now to bail him and his investors out.