Why the housing and mortgage crisis is far from over
With major data providers reporting that mortgage delinquencies continue to decline, Wall Street and the pundits are more convinced than ever that the mortgage crisis is dead and buried.
The enormous delinquency problem in the New York City metro area shows why I’m convinced that the U.S. housing and mortgage crisis is far from over, and reveals an ugly truth about mortgage deadbeats. Moreover, New York City is not the only city in this weakened position.
Here’s what’s happening in New York that is likely occurring in other major U.S. real estate markets. In 2009, the New York State legislature passed a statute requiring all mortgage servicers to send a pre-foreclosure notice to all delinquent owner-occupants in the state. The notice warned them that they were in danger of foreclosure and explained how they could get help. Servicers were required to regularly send statistics back to the state’s Department of Financial Services for all notices sent out. The department published two reports in 2010 with a compilation of these numbers. That was the last time these statistics were officially reported.
I have obtained the unpublished figures from a person involved with compiling the pre-foreclosure notice filings for the department. The latest update shows cumulative figures through the third quarter of 2018, covering New York City as well as Nassau and Suffolk counties on Long Island. Totals for the entire state are also included.
Here is a brief summary of what the data show.
Since February 2010, mortgage servicers have sent out a total of 1,242,490 pre-foreclosure notices to delinquent owner-occupants in New York City and Long Island. This does not include delinquent investor-owners because that was not required under the 2009 law. About 85% of these notices were for delinquent first liens and the remainder were for second liens.
From the data and my contact, it’s likely that roughly 40% of these were second or third notices sent to the same property. Why? The servicers have been sending repeat notices to owners who have not taken action to cure their delinquency for more than a year, and have not yet been foreclosed. My contact recently informed me that close to 20% of the total are duplicates sent out mistakenly by the servicers.
That most of these delinquent owners have not paid for years is confirmed by related figures published monthly in the Long Island Real Estate Report. Since early 2016, almost half of the formal notices of default filed in Suffolk County have been repeat notices. Why? In New York State, a default notice (known as a lis pendens) is only active for three years after which it expires. Hence lenders have had to file a new default notice for borrowers whose default notice has been active for three years.
The Suffolk County statistics reveal how outrageous the serious delinquency situation has become in the New York metro area. Although 359,362 cumulative pre-foreclosure notices have been sent to deadbeat borrowers in Suffolk County alone, fewer than 1,000 formal default notices have been filed each month on these properties since mid-2008.
How is that possible? Mortgage servicers have been compelled by the 2009 statute to send out pre-foreclosure notices to all delinquent owner-occupants. Yet it is entirely up to the discretion of the mortgage servicer whether or not to file a formal default notice on the delinquent property before beginning foreclosure proceedings. For more than eight years, the servicers have chosen not to foreclose or even begin the process for the vast majority of delinquent owners.
Why deadbeats don’t worry about losing their property
Some may contend that pre-foreclosure notice numbers don’t reveal much because many of these delinquencies must have been either (1) foreclosed by the servicing bank or (2) brought current by the borrower.
Let’s tackle these objections one at a time. Concerning foreclosures, I have reliable figures from Property Shark that an average of 1,548 properties were foreclosed annually in New York City between 2012 and 2016. Furthermore, their latest data show that just 1,312 foreclosed properties are now owned by the banks (REOs) and a mere 630 were scheduled for foreclosure auction as of November 2018.
The Furman Center for Real Estate at New York University publishes an annual State of New York City’s Housing and Neighborhoods Report. Its 2015 report shows that an average of only 300 properties were foreclosed and re-possessed each year in New York City by the lender from 2011 to 2014. This in a city where 635,359 pre-foreclosure notices have been sent to deadbeats since early 2010. Its latest report for 2017 showed that the annual number of default notices filed in NYC has been declining every year since 2013 to just 10,000 in 2017.
The inescapable truth is that for eight years, mortgage servicers have foreclosed on exceptionally few long-term delinquent homeowners in New York City and Long Island.
What about the claim that many of these delinquent property owners have probably brought their loans current after receiving a pre-foreclosure notice? Remember that roughly 40% of these pre-foreclosure notices are second- or third notices sent to borrowers because they have not paid the arrears owed.
My article in February 2017 with figures from Fitch Ratings showing that 53% of all delinquent non-agency (i.e., not guaranteed by Fannie Mae or Freddie Mac) securitized loans in the state of New York had not made a payment for more than five years as of August 2016. The New York City metro alone had roughly 225,000 of these loans outstanding. In February 2016, 37% of them were seriously delinquent. That is the worst delinquency rate for any major metro in the nation. The notion that many owners in the New York City metro have cured their delinquency is ludicrous.
Does this have implications for the delinquency situation of other major metro areas? Clearly. Because of New York State’s pre-foreclosure notice requirement, the New York City metro data provide the most comprehensive and reliable delinquency statistics in the nation. Unfortunately, to a great extent we are in the dark when it comes to the two dozen other major metros where the housing collapse of a decade ago was centered.
The trouble is that all data providers which claim to have delinquency figures are dependent on the numbers they obtain from the mortgage servicers — which are their clients. Seven years of digging for reliable data have taught me that numbers from the servicers are extremely inaccurate and often incomplete.
It is evident that in early 2016, 10 major metros that had deadbeat problems with their non-agency securitized loans all had serious delinquency rates of 23% or higher. I am confident that the delinquency rate for those major metros that suffered significant housing collapses is almost certainly much higher than widely believed.
Keith Jurow is a real estate analyst who covers the bubble-era lending debacle and its aftermath. Contact him at www.keithjurow.com.