Thursday, September 6, 2007

Survey Indicates Downey Foreclosures are Skyrocketing

Today I updated my Downey Real Estate Owned (REO) survey for July and August 2007. It's based on a sample of San Diego, San Joaquin, and Solano counties only. See the footnote for more on how this data is collected.

Survey indicates that Downey borrower defaults and foreclosures are up sharply so far this quarter, and are increasing at an accelerating pace.

A "Default Notice" is the first step in the foreclosure process. It is a formal notice to a borrower that they are in default. Lenders typically send them after a couple months of missed payments. That means that this month's jump in Default Notices comes from borrowers who stopped making payments in the spring.

Once the lender sends the default notice, the foreclosure clock starts ticking. In California, the borrower has 90 days from the Default Notice to become current on the mortgage. If not, the borrower receives a Sale Notice and shortly thereafter (unless the borrower pays up) the property is sold at auction/foreclosed. Then the trustee's deed transfers title to whoever buys it at auction (usually the lender takes it back as Real Estate Owned). This is coded as a "TTEE Deed" in most of the California recorded document systems, and on the chart below.

So, on this chart, the blue portion indicates borrowers who are in arrears, and the red is borrowers whose foreclosure is imminent or has already happened.

So far this year, the survey of these counties has been highly correlated with Downey's reported results, making the survey a great leading indicator. So, I expect that for third quarter, Downey will report non-performing loan statistics that are a multiple of the numbers in these charts.

The following chart extrapolates results for Q3 based on data collected in July and August.

There were 73 properties listed on Downey's website on May 14, 2007. Today there are 113.

Because Downey is an option-ARM lender, many of their borrowers are making artificially low, negatively amortizing payments. This may be temporarily allowing people to avoid defaulting. I expect Downey's default numbers to worsen as borrowers hit loan interest resets and/or max out their negative amortization caps.

(1) Not all counties make this data easily available online (especially in California). Los Angeles does not provide online access, and many of the counties that do have extremely cumbersome interfaces. My surveying method is to count all of the default notices and all of the notices of trustee's sale/trustee deeds during the time period. I do not make any adjustments for notices of rescission of default. I have found this data to be an excellent leading indicator, but no warranty is made as to its accuracy.
(2) I have covered my NCT short. There is relatively little public information about their portfolio and it's possible that the market has overreacted.

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