I wrote regularly during the years after the Lehman-era financial crisis about the massive level of nonperforming residential mortgages being held by banks. They were concentrated in the four money centers: Bank of America (BAC), Wells Fargo (WFC), JPMorgan Chase (JPM) and Citigroup (C).
I last addressed the issue specifically more than a year ago in the column, "Reviewing Nonperforming Mortgages." About six months later I reviewed the status of the related issue of loan modification programs in the July 31 column, "Report Turns Up the Heat on Banks."
The essence of the issue since subprime defaults began rising in 2006 has been that the money centers have been very slow to resolve the nonperforming mortgages that have accumulated on their books.
More than seven years after Lehman failed and more than nine years since subprime mortgage defaults began to spike, only about half of the total dollar value of defaulted loans that occurred during this period have been resolved.
As a percentage of residential mortgages held, defaulted mortgages have declined to 7% from about 24% at JPMorgan, to 7% at Bank of America from about 17%, to 8% at Wells Fargo from about 21%, and to 5% at Citi from about 14%.
Throughout the banking system, the decline has been to about 5% from about 10%. On a continuing basis, that level should be below 1%.
At the current rate, the completion of the resolution of legacy issues from the last housing crisis would take another decade. That is assuming there isn't another housing crisis before then.
There is one big reason for the lengthened time period to resolve nonperforming mortgages. The process of applying for a loan modification required by the government to be afforded to mortgagors is being terminated.
The omnibus appropriations bill passed by Congress a few weeks ago terminates the Home Affordable Modification Program (HAMP) at the end of 2016; as stated on page 1983.
The HAMP was the broadest of the 11 government-structured loan modification programs offered in the past seven years. It failed terribly, however, as I wrote about in the column last July.
Rather than extending the program, altering its application and increasing its funding, in order to increase the success rate of loan modifications, the president has chosen to terminate the program.
The loan modification process provided a temporary reprieve on dealing with financial matters concerning mortgage payments for all involved parties. It allowed defaulted mortgagors the opportunity to stay in homes, and perhaps save money to be able to afford to move at a later date.
It allowed mortgagees the opportunity not to foreclose and to actualize losses for which most did not have loan loss reserves. It allowed bank regulators the opportunity not to pursue action against banks for low loan-loss reserves, high levels of nonperforming mortgages and slow resolution times.
The options for all of these now end in a year. That means that 2016 is now the year of legacy resolution for everyone.
The banks will have to increase the rate of resolution dramatically, That means foreclosure rates also will increase dramatically, and the number of existing properties available for resale will increase dramatically. The banks will have to increase the funding of loan-loss reserves, which logically will have a negative impact on earnings.
The increase in the number of existing homes for sale should have a negative impact on housing prices, although it may stimulate buying activity in some areas. That is especially true in the areas where the inventory increase will be greatest: Southern California, Florida and Nevada.
This will be compounded by increases in bank repossessions in the states with a judicial foreclosure process that has resulted in large numbers of properties having gone through much of the legal foreclosure process. Those properties are now awaiting the conclusion of the mortgagor's loan modification request.
The states that should experience the largest increase in the number of properties available as a result of this action are Maryland, New Jersey and Illinois.
All of this should also prove to be negative for new home sales and the stocks of homebuilders.
Although I haven't addressed the homebuilders since last August, in the column, "Like I Said, Stay Away From Homebuilders," I've been negative on their prospects for the last few years. I am even more negative now.
