Shedlock (Mish) is convinced that mortgage delinquencies are rising, despite
finding this chart in a recent Freddie Mac report:
That’s Mish circling the footnote: he’s convinced that the explanation for
the drop can be found in the footnotes.
Essentially Footnote # 12 says that if Freddie Mac renegotiates the terms
of the loan with someone who is delinquent then "voila" that person
is no longer delinquent. It seems to me that since about June of 2006 Freddie
Mac is struggling to keep this ponzi scheme afloat.
Does Mish have any evidence that Freddie’s renegotiation rate is increasing?
No. And in fact, if renegotiation rates were increasing, that would
be great news for the subprime mortgage market. A lot of the subprime
crunch can be explained by the fact that up until recently, underwriting
standards were getting ever looser, which meant that borrowers in trouble could
always renegotiate rather than default. But if Mish is right – and he
cites a WSJ article by Ruth
Simon in support of his thesis – then in fact many subprime borrowers
might well be able to refinance their way out of trouble, rather than falling
into default and foreclosure.
The Simon article also notes an increase in "short sales":
The rise in bad loans also is leading to a pick up in so-called short sales,
in which a lender allows the property to be sold for less than the total amount
due and often forgives the remaining debt. For the lender, the process can
be shorter and less costly than foreclosing, especially in a declining market.
For borrowers, it is a way to avoid having a foreclosure on their credit report.
If such things are allowed, they’re much better than foreclosure for both borrower
and lender; it’s good news that these things are increasing despite the boom
in mortgage-backed securitizations (which you’d expect might make short sales
more difficult).
It seems to me that the market is actually doing a very good job, so far, of
coping with developments in the mortgage sector. MBS prices for 2006-vintage
subprime loans are down, and underwriting standards are getting tighter, as
you’d hope and expect – but at the same time, overall delinquencies are
falling, not rising, and lenders are being constructive when it comes to relations
with distressed borrowers. A massive credit crunch is by no means a foregone
conclusion.
“It seems to me that the market is actually doing a very good job, so far, of coping with developments in the mortgage sector.”
You got to be kidding, right?