The 2018 Summer Foreclosure Heatwave
The 2018 Summer Foreclosure Heatwave
Foreclosure starts increased in 44% of markets in July of 2018, according to the ATTOM Data Solutions July 2018 U.S. Foreclosure Market Report. For the past 36 months, going back to 2015, foreclosure starts nationally decreased every month. This marks the first uptick in national foreclosure activity during that period. In a survey of homeowners by ValueInsured, 58% of U.S. homeowners expect a housing market correction in the next two years, and industry experts are even more aligned in their belief that an imminent correction is on the horizon.
“The increase in foreclosure starts is not just a one-month anomaly in many local markets given that July represented the third consecutive month with a year-over-year increase in 33 metro areas, including Los Angeles, Miami, Houston, Detroit, San Diego and Austin,” said Daren Blomquist, senior vice president with ATTOM Data Solutions.
“Gradually loosening lending standards over the past few years have introduced a modicum of risk back into the housing market, and that additional risk is resulting in rising foreclosure starts in a diverse set of markets across the country. Most susceptible to rising foreclosure starts are affordability-challenged markets where homebuyers are more financially stretched and markets with some type of trigger event such as a natural disaster or large-scale layoffs.” For instance, in our area, foreclosures have begun to spike up in Atlantic City, New Jersey. Foreclosure starts in Philadelphia, Pennsylvania are also up over 10%. As discussed below, “Non Bank Lenders” are now leading the charge when it comes to subprime and predatory lending. These loans may be the catalyst for another housing crash, making up the quest of the wave of new foreclosures starting this year.
Cause of the Next Housing Crash: Flat Income and High Household Debt
Jorge Newberry of Forbes summed it up nicely in an article entitled, “Are We Headed for Another Foreclosure Crisis?” There, he wrote:
“The economy has technically been improving since 2009, the official end of the Great Recession, but this “recovery” has failed to impact the lives of millions of Americans in meaningful ways. Many of the jobs that have been created are low-wage service sector or part-time jobs, health insurance costs have skyrocketed and more than half of Americans have less than $1,000 saved for an emergency.”
Household debt in the U.S. has reached all-time highs, exceeding 2007 levels. With lower incomes and higher household costs, these debt levels are simply impossible to manage for the vast majority of U.S. households. Add in household expenses that are not “necessary” like a child’s education, unexpected healthcare emergencies, etc. and you can see why the majority of the country is broke and bordering on insolvency, with about 60% of Americans living paycheck-to-paycheck and having less than $1,000 saved.
Aside from the general trend, there are a number of scary statistics that show how bad it has gotten for U.S. households:
--Student Loan Debt Has More than Doubled: In 2008, total student loan debt was $611 billion. Not only has none of that been paid down, but today total student loan debt is now at $1.52 trillion and is increasing in parabolic fashion. By comparison, total U.S. credit card debt is only $1.03 trillion in 2018. Total U.S. medical debt was $1.130 trillion in 2018. Student loan debt has eclipsed all other forms of debt and is about 17% of total U.S. Mortgage debt. This will continue to increase exponentially as student loan debt with high interest rates increases in many cases at a greater rate than it can be paid off – negatively amortizing – just as subprime mortgages did.
Lawyers and doctors are hit particularly hard. Lawyers and doctors make up 10% of all student loan debt and have an average of about $150,000 of total student loan debt. MBAs do much better, with average student loan debt loads of only $40,000.
In 2008, total student loan debt made up about 23% of nonhousing debt, and now stands at 36%. Student loan defaults are up 14% in the last year and were up 14% the year before. Putting that in perspective, default rates of about 8% in housing led to the Great Recession.
Less than one half of student loans are being repaid or about $611 billion. At least 325 billion are in default, forbearance or some other nonpayment category. And about $200 billion of student loans are held by students currently in school. Over 25% of those in the workforce have student loan debt.
Many of the statistics are misleading. How many people ever repay their student loan debt? Very few. 68% of senior citizens over age 67 are still paying off student loan debt. The average 2018 graduate owes $40,000 in student loan debt.
Student Loan Statistics: Overview
Total Student Loan Debt: $1.52 trillion
Total U.S. Borrowers With Student Loan Debt: 44.2 million
Student Loan Delinquency Or Default Rate: 10.7% (90+ days delinquent)
Total Increase In Student Loan Debt In Most Recent Quarter: $29 billion
New Delinquent Balances (30+ days): $32.6 billion
New Delinquent Balances - Seriously Delinquent (90+ days): $31 billion
(Source: As of 1Q 2018, Federal Reserve & New York Federal Reserve)
--Auto Loans Have Shot Up: Auto loan debt rose a whopping 47% from $809 trillion to $1.19 trillion over the last several quarters. It seems like everyone is buying a car and financing it. This is probably because people have not made a new car/used car purchase in years and their vehicles are aging, and they’ve been waiting until they felt comfortable to make a purchase. Large numbers of individuals spending a little pool of saved money is a big leading indicator that a recession is coming. People’s optimism about the market is misplaced and they are “buying at the height of the market.” So, defaults are assured when the market hits the skids. With the wave of new auto loans and the push to sell cars, delinquencies have already shot up.
--Rents Have Risen to “Dizzying Heights”: Fewer homeowners = more renters. And rents are through the roof. Rents prerecession averaged about $1,000 per month, but are now $1,400 per month today, while wages, stagnant since the 1970s, have begun to decline.
--Default Rates Are Up Across All Credit/Asset Classes: Consistently, delinquencies are up across all asset classes as the price of “everything” has gone up, while wages have stayed the same and are now decreasing.
Home Prices and Home Affordability
Home prices should generally rise in line with inflation. According to Robert J. Shiller and other economists, housing price increases beyond the general inflation rate are not sustainable in the long term.
If home prices rise more rapidly than inflation, homes become increasingly unaffordable. People are paying more of their income for housing, leaving less available for something else they are already paying. Something has to give. If home prices rise significantly more rapidly than inflation, a bubble is created.
In 2005, national median home prices had risen to 35% above rates of inflation. Today, national median home prices are 32% above rates of inflation, signaling that homes are dramatically overpriced. How is today’s overpricing compared with 2007? Much more dramatic. In Denver and Dallas, for instance, prices are about 40% higher than their prerecession peaks. Given that the underlying fundamentals of the economy are significantly worse, prices that are so far above the peaks from that era are particularly troubling.
Real estate appraiser Jonathan Miller said the fact that foreclosure auctions are up even after ramping up regulations should give some pause. “The housing cost pressures can inevitably lead to additional distressed activity,” he said. “I don’t think we can take that lightly.”
The higher-end market in New York is in shock that buyers aren’t willing to pay even what they purchased their luxury homes for—not even close. And it may be many years or as much as a decade before these unlucky buyers can recoup their investments. “I’m meeting with a lot of sellers right now who are like, ‘Look, I paid X amount, how can you tell me that it’s worth less?’” said Douglas Elliman broker Frances Katzen. “Are [the luxury sellers] going to be homeless? Probably not,” Katzen said. “Is it going to hurt? Absolutely.”
Increase in Subprime Mortgages: “What is a subprime mortgage, anyway?”
A subprime mortgage is a loan made to a less creditworthy borrower with a higher risk of default. Most banks consider borrowers with credit scores below 640 to be in the “subprime” category. Borrowers may also be included in the subprime category because they are making a smaller downpayment. Adding insult to injury, many subprime mortgages require higher closing costs/fees and higher interest rates. While the loans are more risky, they are also more profitable. A subprime mortgage is also categorized by a borrower having a high debt-to-income ratio.
Terms like “stated applications,” “no money down,” “adjustable rate mortgage,” “option ARM,” “interest only,” and “negative amortization” are synonymous with subprime mortgages. Today, these types of programs are disguised by banks and referred to with less toxic titles like “alternative mortgage programs.”
What About “Affordable Housing”?
The number of affordable housing units has dramatically decreased. In 2010, 11 percent of rental units across the country were affordable for low income households. Today, the figure is below 3%.
Government Subsidies Won’t Save the Day
William Poole, a senior fellow at the Cato Institute warned in March that 35% of Fannie Mae’s loans required mortgage insurance. This is an insane figure. This percentage of loans have not been “subprime” or requiring mortgage insurance since late 2006 in the prerecession period.
Today’s loans are actually far worse than those being made in 2004-2007, because today’s loans themselves may not be as “exotic” but the borrowers are far less creditworthy and have higher debt-to-income ratios before housing debt is factored in, which are the true tests for ability to repay. Whereas in the housing crisis, a lot of loans were made to those with credit scores in the 660 credit score range, today Fannie and Freddie have lowered their definition of subprime from 660 to 620. By changing the standards and lowering the quality of loans that are classified in the riskiest categories, the percentage of those loans unlikely to be repaid ticks up.
Mortgage-backed securities and derivatives or CDO’s are not prominently featured in the coming housing crash, but rather a dramatically more challenging household financial picture.
The New York Foreclosure Picture and the Rise of the Non-Bank Lender
The NYU Furman Center’s latest State of New York City’s Housing and Neighborhoods report determined that 44% of owner-occupied households with a mortgage were “housing cost burdened” under federal guidelines, meaning that 30% or more of household income was spent on housing costs. 22.7% of households with mortgages were “severely housing cost burdened.”
Even as early as 2017, new foreclosures were shooting up leading up to the present spike, New York City foreclosures had already risen 58% from 2016-2016, showing that while the floodgates have opened, the trend has been developing for some time. For instance, consider how the needle moved in Brooklyn: first-time auctions rose drastically from 898 in 2016 to 1,260 in 2017, with Canarsie and East New York logging the highest number of foreclosures within the borough.
Staten Island is having an even harder time of it between 2016-2017. Staten Island had the most dramatic year-over-year increase and was up a staggering 134 percent from 2016. There were 428 first-time foreclosures scheduled in 2017, compared with just 183 in 2016.
According to ATTOM data solutions, the 1st quarter of 2018 showed a serious uptick in foreclosures compared to prior years. During that three-month period, 920 homes were scheduled for foreclosure for the first time — a 31 percent year-over-year increase (from already spiking 2017 rates), according to PropertyShark. New foreclosures on Staten Island jumped 226 percent to 189, compared to 58 in the first quarter of 2017, according to the report. Brooklyn experienced a 64 percent year-over-year increase with 275. The Bronx followed with 117 scheduled foreclosures — a 33 percent increase — and Queens had 303, representing a 13 percent decrease year over year. Manhattan only logged 38.
The number of new foreclosures initiated by the filing of a lis pendens dropped 4 percent last year to 12,072, according to PropertyShark. But the number of preforeclosure filings, the first step in the foreclosure process, rose 28.7 percent year over year to 49,494 in the same period, per the Furman Center’s report.
Queens and Brooklyn saw the greatest number of prefilings in 2017: 19,223 and 14,730, respectively. As a result, there will be a huge wave of new foreclosures in 2018-2019.
Banks have been the subject of government fines and penalties and are chastened and more risk averse when it comes to lending to those with credit scores below 640 or when making otherwise questionable loans. New “Non-Bank Lenders” are filling the void and are unafraid of the added risk. Quicken Loans — which originated $715 million in loans New York City in 2017 and was the third largest home loan originator in the city last year, according to ATTOM —is one of several private firms that have started to take over this sector of the mortgage market. Quicken, in particular, has been accused of recklessly issuing Federal Housing Administration-secured loans and cashing in when borrowers default. This is exactly what Deutsche Bank was accused of above with the loans it made through MortgageIT. We can expect to hear Quicken Loans as one of the names responsible for causing the next mortgage crisis.
The New Jersey Foreclosure Landscape
In early 2017, New Jersey was still leading the country with the highest foreclosure rate in the nation – with just under 1% of all NJ homes being in foreclosure. That works out to about 1 out of every 100 homes. By the close of the year, about 1.61%, creeping steadily toward 2 out of every 100 homes. 2018 figures are not in yet, but foreclosure rates are rising. In Atlantic City the rates of foreclosure lead the nation with 2.72% of all homes in foreclosure.
Still today, 50% of all loans actively in foreclosure originated between 2004-2008. New York has 25, 886 active foreclosures and New Jersey is a close second with 20,172 active foreclosures.
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