Editorial: Worse than it Seems?
Judging by recent earnings reports and economic reports, the depth and duration of the housing downturn may be more severe than most people in the industry have anticipated.
In July, that theme came into sharp focus. Countrywide CEO Angelo Mozilo, one of the industry's most successful entrepreneurs, advised investors that housing and mortgage performance may not rebound until 2009. He also said that in some markets, the drop in home values is worse than anything seen since the Great Depression.
He wasn't alone in recalibrating his assessment of market conditions. Just about everyone has tightened underwriting of subprime loans, especially in the broker origination channel. Option-payment ARMs, low downpayment products, and hybrid ARMs are performing more poorly than anticipated, and many expect the problem to get worse. Econmist Mark Zandi, of Moody's Economy.com, predicts that delinquency rates will continue to rise, putting some $1.4 trillion in outstanding Jumbo interest-only, alt-A and subprime credit quality home loans at "serious risk" of default and producing $459 billion of defaults this year and next.
In July, IndyMac announced more layoffs and said the industry faces a difficult transition period. Europe's largest bank, HSBC, which has significant subprime mortgage exposure in the U.S., also warned that it may have to raise loss reserves due to loans expected to adjust to higher payment levels later this year, potentially forcing more borrowers into default.
While we don't want to sound like a broken record, given the news in recent weeks, we at MSN think it's appropriate to again suggest that the industry needs to reevaluate its default management capabilities. The workload is likely to increase, perhaps substantially, before a recovery takes hold. And increasing foreclosures means increasing scrutiny from the media, attorneys, regulators and politicians. All will be eager to condemn lenders seen as rushing to foreclosure. Years ago, foreclosure work was all about timeline management. The quicker you repossessed the home, the lower the losses. Today, loss mitigation is the new timeline management. Servicers are being encouraged, even by investors, to keep as many borrowers in their homes as possible. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.bondbuyer.com/ http://www.sourcemedia.com/