By DIANA GOLOBAY
September 24, 2009 10:34 AM CST
Recent analysis by the Amherst Securities Group indicates the housing industry will not only worsen as a delayed pipeline of foreclosed loans begins to liquidate, but that the Administration’s Making Home Affordable Modification Program (HAMP) will have no lasting effect on keeping delinquent loans current.
The early signs of stabilization seen among housing industry observers may soon recede as an overhang of the shadow inventory of foreclosures waits to enter the market.
The general outlook that the housing market has bottomed is “premature” optimism, according to analysis this week from Amherst.
“The single largest impediment to a recovery in the housing market is the large number of loans that are either in delinquent status or in foreclosure that are destined to liquidate,” analyst Laurie Goodman said in an insight report Wednesday.
Amherst estimates this “shadow inventory” at around 7m housing units, or 135% of a full year of existing home sales, compared with 1.27m units in this bucket in early 2005. The backlog is due to high transition rates, low cure rates and a longer timeline for loan liquidation — in other words, loans continue to transition into the delinquency/foreclosure pipeline at a rapid pace, but are moving out at a very slow pace.
The loans, however, are “destined to liquidate” and will impact the signs of recovery seen in recent months by pulling down house prices through distressed sales.
“We are concerned that, in light of this housing overhang, the stabilization we have seen in home prices the last few months is temporary,” Goodman added.
Despite positive signs of house price stabilization and rising new and existing home sales, existing loans continue to deteriorate in performance, as Amherst noted a “staggering” 13.5% delinquency/foreclosure rate in a Q209 survey by the Mortgage Bankers Association (MBA).
Cure rates for these distressed loans remain low. Amherst noted a near 0% cure rate of all loans in foreclosure, 0.8% for 90 plus days delinquent, 4.4% for 60 days delinquent and 26.5% for 30-day delinquencies. All told, Amherst expects 12.42% of units (from the 13.54% of properties delinquent and in foreclosure) to eventually liquidate.
Despite efforts by servicers and the Administration to prevent delinquent loans from foreclosing, the federally-funded HAMP modifications will likely disappoint in the long-term, Amherst said. HAMP, which allocates capped incentive amounts to servicers that pursue loan modifications, includes a three-month trial period to ensure borrowers can meet payments on the modified loan.
But it may take much longer than three months to determine the ultimate performance of HAMP modifications, Amherst said, noting the historic 12-month recidivism — or re-default — rate on modified loans sits at about 70%.
“We have argued that HAMP modifications are unlikely to be successful in the long run as it does not address negative equity, the single most important determinant of default,” analysts wrote. “And the borrower will still face payment shock as the payments begins to ramp up after the 5-year period in which the payments are fixed.”
Even should HAMP outperform historic modifications, Amherst does not expect much of the overhanging inventory to cure. Assuming an 85% qualification rate for the 7m units seen in the overhang, analysts pointed out a 50% borrower outreach success rate — meaning servicers will statistically contact only 50% of the qualifying borrowers. Of these borrowers eventually reached, analysts said only 50% will submit the necessary documentation and only 75% of those modifications will succeed.
“[I]t suggests that 16% of the overhang or just over 1m units would be eliminated,” analysts wrote. “And many of these borrowers would default later, if they remain in a negative equity position.”