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20% of Mortgages Will Default: 11 Million to Lose Their Homes

Posted: 06 Oct 2010 03:29 AM PDT

A new report from Amherst Securities projects that 20% of all mortgages will default and 11 million people will lose their homes. 


Irvine Home Address ... 5151 DOANOKE Ave Irvine, CA 92604
Resale Home Price ...... $549,000

I was thinking of a series of dreams
Where nothing comes up to the top.
Everything stays down where it's wounded
And comes to a permanent stop.
Wasn't thinking of anything specific,
Like in a dream, when someone wakes up and screams.

Bob Dylan -- Series of Dreams

Is it possible for the housing market to stay wounded permanently? Will prices in Las Vegas fall forever? Will prices reach zero? Will Orange County prices stay high forever? Perhaps if lenders give away homes to the squatters the inventory will never hit the market and prices will not crash.

What does a delinquent squatter do if they want to sell? Oh, wait... since they don't have any equity, there really isn't anything to sell. They really don't own anything other than a big loan and dreams of future equity during the next housing bubble.

A Mammoth One in Five Borrowers Will Default

October 3, 2010 by Michael David White

A leading mortgage analyst predicts over 11 million homeowners will default and lose their home if the government fails to take more radical intervention.

Amherst Securities Group LP, one of the most respected names in mortgage research, has trumpeted an ambitious call-to-government arms in its October mortgage report.

“The death spiral of lower home prices, more borrowers underwater, higher transition rates (to default), more distressed sales and lower home prices must be arrested.”

Must the decline be arrested? I suppose it depends on the market. If the decline is stopped to early, you end up with inflated markets like Orange County. If the decline is not stopped and the market is cleared through capitulation, prices get pounded back to the early 90s like they are in Las Vegas. I proposed a method to stop the decline in Should Government Mortgage Subsidies Be Offered to Cashflow Investors?, and anyone who reads the comments can see how well that idea went over.

The authors dismiss recent talk of mortgage performance improvement as statistical sleight-of-hand magically conjured by modifications.


“This ‘improvement’ (in mortgage performance) simply reflects large scale modification activity having served to artificially lower the delinquency rate” (Please see the chart above of mortgage balances delinquent and re-performing. All charts in this post are from “Amherst Mortgage Insight” dated October 1, 2010.).

It's refreshing to see an analysis that goes beyond the headlines and takes a hard look at the effectiveness of these programs and the redefault rate. It's obvious that the loan modification programs have been a complete failure, and the statistical blips these programs create merely foster false hope that the problems in housing will somehow cure themselves.

The report offers an astounding forecast of the fate of severe negative-equity properties. Nineteen percent of properties with a loan-to-value (LTV) of 120% or greater are defaulting every year. A death-defying 75% of mortgages on 120% LTV properties will eventually go bad (19% + 19% + 19%, …).


The current crop of mortgages is already “impaired” at the one-of-five level. Nine of 100 are seriously delinquent. Six of 100 are “dirty current” (made current by modification). Five of 100 are seriously underwater (LTV greater than 120%) (Please see the chart above categorizing the forecast of 11 million defaults.).

The authors, who describe current conditions as leading to “an impossible number” of defaults and one that is “politically unfeasible”, unveil a major arms race of measures to counteract the default tide.

Brace yourself: if you didn't like my idea to stabilize prices, wait until you read through this list....

The solutions include

  1. mandatory principal reductions,
  2. looser underwriting of new mortgage loans,
  3. leveraged capital pools for investors, and
  4. penalties for defaulting homeowners.

Amherst reports that a family who defaults can live rent-free for 20 months on average. They propose that missed mortgage payments, including property taxes and insurance, be counted as W2 income.

I love that idea! Tax the squatters!

They make note of recent new signs of distress including two record-low readings of existing home sales in the last two reports. Another block is that underwriting standards have grown much stricter at Fannie and Freddie. Only 2% of Freddie purchases are now bad-credit borrowers where they represented about 20% of borrowers in 2006. FHA purchase mortgages, however, which have by definition much more lenient lending guidelines, have exploded upwards from roughly 10% of their lending in 2006 to more than 50% today.

The buyer pool is also compromised by the fact that 17% of borrowers now have a seriously compromised credit history. After mortgage default a typical wait-time to qualify again is anywhere from 3 to 7 years. One of the more desperate measures suggested by the authors seeks a new mortgage for those who are now behind or in danger of failing. “This (default) can be fixed by re-qualifying borrowers who are in a home they can’t afford into one they can afford.”

The dilemma of a deflating bubble is that supply grows while demand shrinks largely due to tigher credit standards and increasing borrower delinquency. There is no easy solution. The process must move forward to completion. There is no magic wand the government can wave and make everything better. 


Risk is so high in today’s real estate market that private money has largely left the mortgage category. The retreat is most easily seen in the jumbo mortgage market. Total jumbo mortgage origination has fallen from a high of $650 billion in 2003 to $92 billion in 2009 (see the chart above). Government loans account for 90% of current originations.

“If government policy does not change, over 11.5 million borrowers are in danger of losing their homes (1 borrower out of every 5),”‘ the report said, which estimates the total of homes with a first mortgage at 55 million. “Politically, this cannot happen.”

I have heard this bogeyman thrown out before. What does it mean to say this politically cannot happen? What if it does? I doubt we will see rioting in the streets or the collapse of government. What you would see is a lot of renters who used to be owners saving a lot of money on their housing costs. 

Don't loan HELOC abusers money

Every once in a while, I see a private party loan get recorded in the property records. These usually come at the end of a long series of refinances and represent a personal loan from a friend or family member. These are almost always a bad idea. Whatever relationship these two people had is now ruined because the loan will likely never be repaid.

  • This property was purchased for $265,000 on 6/23/1999. The owner used a $212,000 first mortgage and a $53,000 down payment.
  • On 5/22/2002 he obtained a stand-alone second for $50,000.
  • On 5/27/2003 he refinanced with a $304,500 first mortgage.
  • On 11/13/2003 he obtained a stand-alone second for $120,000.
  • On 2/7/2005 he refinanced with a $455,000 first mortgage.
  • On 5/3/2006 he got a stand-alone second for $150,000. 
  • On 4/22/2008 he borrowed $20,000 from a private individual.
  • Total property debt is $625,000.
  • Total mortgage equity withdrawal is $413,000.

He hasn't been served a default notice yet, but I image this owner is part of the non-paying shadow inventory. People who put their houses up for short-sale rarely make payments during the process. Why would they? 


Irvine Home Address ... 5151 DOANOKE Ave Irvine, CA 92604

Resale Home Price ... $549,000

Home Purchase Price … $265,000
Home Purchase Date .... 6/23/1999

Net Gain (Loss) .......... $251,060
Percent Change .......... 94.7%
Annual Appreciation … 6.3%

Cost of Ownership
$549,000 .......... Asking Price
$109,800 .......... 20% Down Conventional
4.74% ............... Mortgage Interest Rate
$439,200 .......... 30-Year Mortgage
$110,335 .......... Income Requirement

$2,288 .......... Monthly Mortgage Payment

$476 .......... Property Tax
$0 .......... Special Taxes and Levies (Mello Roos)
$46 .......... Homeowners Insurance
$0 .......... Homeowners Association Fees
$2,810 .......... Monthly Cash Outlays

-$387 .......... Tax Savings (% of Interest and Property Tax)
-$554 .......... Equity Hidden in Payment
$198 .......... Lost Income to Down Payment (net of taxes)
$69 .......... Maintenance and Replacement Reserves
$2,136 .......... Monthly Cost of Ownership

Cash Acquisition Demands
$5,490 .......... Furnishing and Move In @1%
$5,490 .......... Closing Costs @1%
$4,392 ............ Interest Points @1% of Loan
$109,800 .......... Down Payment
$125,172 .......... Total Cash Costs
$32,700 ............ Emergency Cash Reserves
$157,872 .......... Total Savings Needed

Property Details for 5151 DOANOKE Ave Irvine, CA 92604
Beds: 4
Baths: 2 full 1 part baths
Home size: 1,976 sq ft
($278 / sq ft)
Lot Size: 5,543 sq ft
Year Built: 1970
Days on Market: 18
Listing Updated: 40437
MLS Number: P752184
Property Type: Single Family, Residential
Community: El Camino Real
Tract: Ch
According to the listing agent, this listing may be a pre-foreclosure or short sale.


I can tell you why the co-listing agent is involved with this transaction, but that might give away too much....

real estate home sales


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