Why the Housing Market Collapse is Set to Resume

Analysts continue to be baffled by the weakness of the housing recovery. Mortgage rates have remained exceptionally low for several years. Yet new home sales are still at one-third the level of the bubble years. Existing home sales have never come close to peak year levels.

Last week, the Case-Shiller home price index for March 2015 was released. Although the 20-city composite index showed a year-over-year gain of 5%, this was down substantially from the 13% increase reported at the end of 2013.

For nearly five years, I have shown why this housing recovery has never been anything but an illusion – a mirage that disappears on closer examination. Had those analysts considered even a few of the key factors I have focused on, they would not be so perplexed.

Let me explain why the housing collapse is ready to resume in earnest.

Deception of mortgage delinquency data

Housing optimists always point to the consistent decline in the percentage of first liens that are seriously delinquent. The latest foreclosure report from CoreLogic showed that the national delinquency rate had declined to a mere 3.9%, down from the record 8.6% in early 2010.

How could this not be a good sign for the housing market?

Let’s tackle this question head on by taking a look at the first-lien mortgage portfolio of the too-big-to-fail banks – Wells Fargo, JPMorgan Chase and Bank of America. Together they own nearly $600 billion first mortgages on their balance sheet.

In their latest call reports filed with the FDIC, these three banks show the following mortgage delinquencies:

Wells Fargo – 13.8%
JPMorgan Chase – 13.3%
Bank of America – 12.9%

How could the delinquency rate of these huge banks be more than three times the CoreLogic figure? Let me explain.

First, the delinquency rate for these banks is based on the total outstanding balance of their mortgage portfolio. So 13.7% of the outstanding mortgage balance of Wells Fargo’s portfolio is delinquent. The same is true for the other two banks.

The CoreLogic data is completely different. Their delinquency rate of 3.9% is based on the number of loans. So 3.9% of the outstanding loans in CoreLogic’s massive database were delinquent as of March 2015. It has nothing to do with outstanding balance.

Why is this important? The vast majority of outstanding mortgage loans are relatively small loans originated in smaller towns, cities or metros that never experienced a housing bubble. You can see this in the size of the average loan guaranteed by Fannie Mae – $159,000.

The housing bubble was not nationwide. It was highly concentrated in roughly 25 larger metros in California, Florida, Arizona, Nevada, and the Northeast. It is in these metros where speculation was rampant, prices skyrocketed in 2004-2006 and the bulk of jumbo mortgages were originated.

For more than four years, I have shown that mortgage servicers have been reluctant to foreclose on the large loans that were shoveled out in these bubble metros. But they have had no problem foreclosing on smaller loans.

Large bubble-era jumbo loans make up the bulk of the delinquent inventory of the too-big-to-fail banks. The latest data we have for securitized jumbo loans not guaranteed by the GSEs – from March 2013 – shows delinquency rates of 17-19%. That is why the delinquency rate for the first-lien portfolio of these huge banks is so high.

Here is further proof that the delinquency problem is much worse than the CoreLogic data would have you believe. CoreLogic’s data comes from the database of its subsidiary – Loan Performance. Its database includes roughly 97% of all the non-Agency (i.e., not guaranteed) securitized mortgages outstanding today.

The firm BlackBox Logic has sophisticated tools to analyze this non-Agency database. They have provided me with up-to-date details on the delinquency rate of these non-guaranteed mortgages in major metros. The numbers are truly shocking.

Non-Agency Securitized Mortgages
Worst Delinquency Rate for Major Metros

Name of CBSA

Total Delinquency Rate

NY – LI – NJ - PA

39.06%

Miami – Ft Lauderdale

37.59%

Tampa – St. Petersburg

36.81%

Las Vegas

29.74%

Chicago - Naperville - Joliet

28.25%

Source: BlackBox Logic; graphics by AJ Kaps Group


The delinquency percentage includes all distressed properties – those delinquent anywhere from 30 days to more than 90 days, in foreclosure with a notice of default (NOD), repossessed by the lender (REO) or where the borrower has filed for bankruptcy.

What stands out immediately is that the highest figure belongs to the huge New York City metro area – covering three states with roughly 19 million residents. How could nearly 40% of all first liens be delinquent or already foreclosed?

For four years, I have written in-depth articles explaining what has been happening in the New York City metro. The speculative bubble was enormous there and mortgages were offered to just about anyone who applied. Many were jumbo loans too large to qualify for Fannie/Freddie guarantees.