Thursday, November 1, 2007

October Survey of Downey Financial Defaults and Trustee's Sales

Today I updated my Downey Financial (DSL) survey of defaults and trustee's sales for September and October 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. (1)

Survey indicates that Downey borrowers continue to default and go to trustee's sales at a high rate.

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.

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.

Key point: all of these borrowers in default were almost certainly in default prior to the credit market crunch in August. That means that, beginning next month, we will see the effect of the drastically worse post-August credit, mortgage lending, and real estate markets.

The following chart extrapolates results for Q4 based on data collected in October.

At current rates, 4th Quarter 2007 will be the worst quarter. However, I expect the rate of default to increase and be worse than this linear projection. Now that housing inventory in CA has swelled and mortgage lending has tightened, it will be even more difficult for problem borrowers to refinance or sell their homes.

Also, 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 and 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.

Disclosure: Own DSL Puts.

1 comment:

Anonymous said...

Downey's 10-Q came out today. Here is an excerpt about the option ARM portfolio held for investment:

Included within loans held for investment at quarter end were $8.255 billion of single family adjustable rate mortgages subject to negative amortization, down $659
million from June 30, 2007. These loans comprised 74% of the single family residential loan portfolio held for investment at quarter end, compared to 87% a year ago. The amount of negative amortization included in loan balances increased $11 million during the current quarter to $388 million or 4.70% of loans subject to negative amortization. During the current quarter, approximately 26% of loan interest income represented negative amortization, down from 29% in the second quarter of 2007 and down from 28% in the year-ago third quarter.