What Recovery?

Buying a house is a lot like buying a car. If you don't look under the hood, you could wind up with a lemon. Only with housing, it's not as simple as checking the dipstick or looking for oil under the rear axle. No, smart home buyers check the data to see what's really going on. That's the best way to cut through the hype and separate the fact from the fiction.

Lately, interest rates have been inching higher while prices have been rising. The combination of the two has put the kibosh on sales leading to a more generalized slowdown. But sluggish sales and higher rates don't tell the whole story. For that, we need to take a peek under the hood and see what the cheerleaders in the media have been hiding from view. And what they've been hiding is nearly 5 million homeowners who've stopped paying their mortgages altogether. That's no small matter. Here's the story from DS News:

"Lender Processing Services provided the media with a 'first look' at the company's mortgage performance statistics for the month of September...LPS counts a total of 3,266,000 mortgages nationwide that are 30 or more days past due but not yet in foreclosure. That tally represents 6.46 percent of all outstanding mortgages...

"Of the more than 3 million delinquent loans, LPS says 1,331,000 have missed at least three payments but haven't started the foreclosure process. Another 1,328,000 mortgages are currently winding their way through foreclosure pipelines, according to LPS' data...

"All-in-all, there are 4,594,000 mortgages going unpaid in the United States." ("Number of U.S. Mortgages Going Unpaid = 4,594,000," DS News)

Yikes. Now, that doesn't necessarily mean that it's a bad time to buy a house, but one should at least be aware of the fact that there's a gargantuan stockpile of back-logged homes just waiting to flood the market once the banks get their act together. Of course, maybe that day will never come, right? After all, we're already five years into this thing and the banks are actually dragging the process out longer today than ever before. Maybe you don't believe that. Maybe you think that there's actually a shortage of supply which is why prices have been going up for the last year or so. Okay, but why not withhold judgment until you check this out. This is from an article at Housingwire titled "Prolonged liquidation timelines shake up home prices":

"Timelines on distressed inventory continue to drag on, while elevated mortgage loss severities continue to offset positive gains on home prices...

"Liquidations increased 32.2 months for the third quarter, up from 31.1 months for the second quarter, and also up from 28.3 months a year ago. In aggregate, timelines have increased every quarter since the fourth quarter of 2008 and remain at historical highs...

"Nonetheless, the most seasoned inventory continues to prove difficult to liquidate, skewing aggregate timelines higher.

"'The percentage of distressed mortgages that are five or more years delinquent has tripled just in the last year,' Nelson said." ("Prolonged liquidation timelines shake up home prices," Housingwire)

Read that last line over a couple times and let it sink in: "The percentage of distressed mortgages that are five or more years delinquent has tripled just in the last year."

That doesn't sound like the "Happy days are here again" refrain we've been hearing in the media, does it? It sounds like the banks still haven't even dumped the subprimes they've had on their books for five long years. In fact, the article alludes to that very fact. Here's the money-quote: "Subprime loss severities have remained flat with timelines in excess of 34 months and home price gains lower than the national average."

The banks are still writing down the losses on subprime mortgages? What a farce.

Now, I know the article was written in opaque business-journal-type gibberish that makes it hard to understand, but just consider what the author is saying: "Liquidations increased 32.2 months for the third quarter... up from 28.3 months a year ago." So the banks are actually taking LONGER to process the gunk on their books than even last year. Why would they do that? Why would they drag out the process longer than they had to?

Three reasons:

1-- Because they don't have the money to cover the losses.