BLOG VIEW: What’s In A Ratio?

Yesterday, two headlines in's News section featured the same ratio, 3:1. One item was from HOPE NOW, which used 3:1 (technically, ‘more than 3 to 1’) to describe the seemingly favorable imbalance of workouts to foreclosures this year.

The other 3:1 was found in Lender Processing Services' (LPS) monthly mortgage report for November. Only, in that case, the 3:1 was in regard to loan deterioration, meaning that for every loan that improves, three loans get worse.

So what does this mean? Assuming both groups' calculations are correct, the data confirm what everybody suspects: More loans are becoming delinquent, but servicers are not foreclosing. The list of reasons for why servicers aren't foreclosing is long and well documented and not in need of repeating here. Some of these loans will cure. Many of them will result in foreclosures.

In a Servicing Management article about REO disposition last November, RealtyTrac's Rick Sharga commented, "If you're looking for a visual representation of REO inventory, think of a boa constrictor that's just swallowed a large warthog."

Apply that metaphor to loans that are in servicing purgatory – nonperforming but not foreclosed – and the warthog becomes an elephant.

What remains to be seen is how much of this pent-up inventory will move through to the market and how the inflow will affect the prices of nondistressed properties. Will a flood of foreclosure sales and REOs kill the moderate housing rebound?

The recent foreclosure-sale lull has resulted in price gains, Mark Zandi, chief economist for Moody's, told Reuters this week, but ‘foreclosure sales will increase, and home prices will resume their decline by early 2010 as mortgage servicers figure out who will not qualify for a modification.’

"The housing crash is not over," he added.

The heads of the U.S.' two largest lenders disagree. Speaking at a Charlotte Chamber of Commerce-sponsored event this week, outgoing Bank of America CEO Kenneth Lewis and Wells Fargo CEO John G. Stumpf both implied the worst for the housing market is behind us, according to a Bloomberg report. Of course, in the same report, Lewis was quoted as saying BofA has been "optimistic to a fault" in the past three years.

– John Clapp, editor, Servicing Management


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