The picture painted for subprime mortgages by Clayton is anything but pretty, but shows the lengths to which servicers appear to be going in an effort to work with delinquent subprime borrowers. Let’s start with the first key fact: collateral performance is getting worse on subprime securitized mortgages again, after three months of tapering off.
More than a few analysts had popped off in recent months about tapering delinquencies in subprime mortgages as the raison d’être for why losses on the securities backed by such mortgages would be less than estimated — so the recent worsening trend bears mention.
Clayton’s analysts found that while subprime delinquencies held steady in June, a distinct rise was observed beginning in July and continuing into August, for both 30 and 60-day subprime delinquencies as a percent of active balance; a trend clearly linked to a worsening economy.
The U.S. average for serious delinquencies — loans greater than 90 days delinquent, in foreclosure, or in REO — in Clayton’s subprime securitizations universe equaled 23.63 percent of all active loans at the end of August, the firm said. That’s up five percent in the past three months, and 12 percent over the course of the past six months.
DQs aren’t hitting foreclosure rolls, however
What’s perhaps most interesting in Clayton’s data, however, is a look at where the roll rates are: in particular, rolls for 30, 60, and 90 day delinquencies are rising, while rolls for foreclosure and REO are not. (Roll rates refer to the percentage of loans moving from one loan-level status to the next; i.e., performing to delinquent, 30 days delinquent to 60 days delinquent, etc.)
The drop in foreclosure and REO rolls doesn’t signal a drop in delinquencies, as some have recently mistaken it for, Clayton researchers noted. Instead, the drop reflected servicers actively removing loans from foreclosure status, for one reason or another.
“In most cases, when a servicer begins working with a borrower to complete a loan modification or a short sale, that loan is recorded as 90+ days delinquent rather than in foreclosure,” the report reads.
But all real estate is local; and in Florida, the trend is a reversal from more general trends towards build up in foreclosure rolls — so bad, in fact, that Clayton notes that nearly one in three active subprime loans in the state is categorized as “in foreclosure.” Court delays are largely to blame here, as the legal system simply cannot process the number of foreclosures in the pipeline. But even in Florida, 90+ day delinquencies are increasing, signaling that servicers are trying to work with borrowers.
They’re also likely dealing with local legislation that serves to stall the foreclosure process. In California, for example, SB 1137 has added 45 days to the borrower notice period prior to filing a notice of default, a new regulation that has caused foreclosure starts to decline although overall delinquencies continue to increase. And increase. And increase. Alt-A loans, for example, saw delinquencies rise 202 percent year-over-year by the end of August, Clayton researchers said.
Such a slowdown in foreclosure filings is likely to be temporary, if past experience is any indicator. Massachusetts provides a good case study, after a new law took effect in May requiring lenders to give homeowners a 90-day right to cure notice before initiating foreclosure. After being much lower than normal in June, July and August, initial foreclosure filings in Massachusetts soared 465 percent between August to September.
All of which means that the subprime ghost has yet to really shoot the coop, despite clear wear-out on the subject from those within the industry — although servicers are now clearly focusing their best efforts on working with troubled subprime borrowers this time around.