September 01, 2009
Andrew Butter
How Many More to Come?
The issue is whether slowing down foreclosures is simply delaying the inevitable, or really helping to mitigate the long-term damage.
It’s perhaps worth remarking that when an "originate-to-hold" mortgage goes bad (I estimate those account for about 30% of mortgages that are at risk), the lender (directly) loses the difference between the amount outstanding on the loan and whatever is recovered from foreclosure. Theoretically they also lose the prospect of future income from interest payments, but that’s theoretical, that is not a loss that they have to write down.
For an RMBS a foreclosure is more damaging; obviously the damage is initially concentrated on the lower tranches; but a significant part of the "face" value of an RMBS is the capitalization of future income streams.
That’s why the analysts were always so concerned about the "deadbeats" who might pay their mortgages back in full, in advance; although that’s not something many people are staying up all night worrying about these days.
The rate of foreclosure thus hits owners of RMBS (toxic assets) a lot harder than "originate-to-hold"; it is perhaps significant (and alarming) that the Stress Tests did not explicitly model foreclosure rates, because that’s the real driver of losses.
What is clear now is (a) there is a backlog, (
it is likely to spill over, and © there is a clear link between the drivers of foreclosure and negative equity, and although there is "hope" that prices may rise, it is highly likely that once the moratorium gets lifted, final foreclosures will rise, and that will drive house prices down more.More…
http://seekingalpha.com/article/159368-six...-2?source=email