Bankers, their crystal balls, future mortgage volume

Bank risk professionals expect more of the same for mortgage delinquencies over the next six months, according to the Professional Risk Managers’ International Association (PRMIA).

Most bankers surveyed believe:

• the level of mortgage delinquencies will stay the same or increase slightly over the next six months;
• 2012 will see a gradual improvement in the housing market;
• the supply of credit will fall short of demand over the next six months; and
• American homeowners no longer consider their mortgage to be their most important credit obligation.

The quarterly report stresses the optimism of those surveyed, even if by “most” they actually mean “just over half.”

first tuesday take

The boss is the risk manager if a company is to be successful.  Out sourcing risk management to others, like consultants, even a discussion about it, is a sign of a weak business model. No surprise there when considering what is left of the mortgage banking business.

Then, not unexpectedly, this report offers the opinions of risk management professionals, most of whom seem to disagree – it does not reflect an actual consensus among bankers based on any tangible data. first tuesday has its own predictions – backed up with California-specific data.

first tuesday’s predictions for the California housing industry are:

• the level of mortgage delinquencies will continue in a bumpy plateau period over the next two or three years. They will then begin decreasing at about the same pace as employment levels rise to recover the 1,200,000 in jobs still remaining lost in California since the peak in December 2007;
• 2012 through 2015 will see little change in any aspect of the housing market, most housing construction occurring in urban centers;
• the supply of mortgage money for lending will exceed homebuyer demand well into 2015, not the reverse as wished by the lenders; and
• homeowners will continue to consider their mortgage to be their most important credit obligation, if they have a job and no financial surprises, in spite of what lenders want to believe.

Mortgage delinquencies have been slowly dropping since the fourth quarter of 2010, decreasing in California from 9% one year ago to fewer than 7% today, according to CoreLogic. It is still too early to herald the coming recovery, as the delinquency rate has only recently (in the past year) shown a sustained drop.

It’s unlikely the delinquency rate will rise this year, although it is in a bumpy plateau period, reflected in California foreclosure rates which will be with the lenders through 2016 (except to the extent shifted to shortsales, an alternative). It takes years after a recession is over and the recovery has been underway before foreclosures and bankruptcies peak. It wasn’t until 1996 following the 1991 recession that they and bankruptcies peaked, and today’s recovery in California is only as far along as 1992 was, just one year after that recession ended.

Related article:

REO resales in CA

California has another four years before it emerges from the bumpy plateau of home sales and prices into the 2016-2017 volume-price recovery. In the meanwhile, foreclosure rates and home prices will vary from quarter to quarter without forming a sustained trend.

Simply put, what we have in California is a lack of homebuyer demand. The pace of home sales volume is half of the pace during the past boom, prices are half of the prices for that period, and just under half of the current weak sales are to non-users – flippers, rather than owner-occupants—a very, very bad thing.

Demand is not made by speculators; they merely step into the shoes of the seller in assuming the risk the seller had to locate a buyer. They must then locate a buyer at a huge jump in price to take the reward for assuming that risk.  Sandwich owners, these speculators are.

Gen Y has not yet fully come of age (or suitable employment) to take their place as California homeowners, demanding a home as a user for the first time. Consider also that California’s homeownership rate is well below the national average, at 55% (and dropping in a sustained manner at 1 percentage point annually), compared to 66% nationwide. In the aftermath of the Great Recession and global financial crisis, potential buyers will approach homeownership cautiously.

Related article:

Rentals: the future of real estate in California?

Finally, the bankers are dead wrong about home mortgage debt no longer being the homeowner’s most important credit obligation. In the fourth quarter of 2011, there were just over 2 million underwater homeowners in California, meaning 30% of homeowners owe more on their mortgage than their home is worth, according to CoreLogic. If mortgage debt was truly not important to these homeowners, our state would be seeing strategic defaults at a rate closer to 30% plus, not the current 7%.

Re:US Consumer Credit Risk Trends and Expectations from the Professional Risk Managers’ International Association