New figures on US home foreclosures were recently released and for some, it might even induce some feeling of optimism. So the worst is behind us ? Not yet, and certainly not as far as the FED is concerned. But let’s first take a look at some basic stats.
And now for the bad news. Though completed foreclosures have come down by almost 25% on a yearly basis, it doesn’t really mean the situation has dramatically changed :
Given the number of loans either seriously delinquent or in the process of foreclosure at the beginning of the year, the number of completed foreclosure sales in 2011 is almost absurdly low, reflecting the complete screw-up of the mortgage servicing industry, and the resulting dramatic slowdown in foreclosure resolutions. As of the end of October, 2011 LPS estimated that there were 1.759 million seriously delinquent loans with the average number of days delinquent at 388 (compared to 192 days in January 2008), and there were 2.210 million loans in the foreclosure process that had been on average delinquent for 631 days. While there are no data that I know of that break out the number of seriously delinquent loans or loans in the foreclosure process backed by properties that are vacant (or rented out by owners not paying on the mortgage), at least one industry consultant who has looked at some (unfortunately confidential) data told me that the % of loans in the foreclosure process that are not occupied by the owner of the property is “shockingly” large (calculated risk 27/12/11).
And it seems that the FED is taking this message to heart. More and more FOMC members have lately given open vocal support to QE3 which will be an extension to QE1 (Asset Backed Securities /Residential Mortgage Backed Securities’ purchases).
And looking at the charts above, the FED has backstopped the pain but the result since 2009 – start of 1,4 bio USD QE purchases – is disappointing : the value of US housing stock has fallen slightly further and is still 32% down from its 2006 (bubble) peak. Good news is that prices have almost returned to normal, bad news is that the fall out on consumer confidence is still there. In addition, despite historically low mortgage rates (4% 30y), the effect on refinancing is on “the margin” according to Cleveland FED president Pinalto. Which basically means tougher lending standards at banks compensating for lower rates (higher profit margins for banks and credit rationing).
So what will the FED do ? First of all – and as a result of QE2 decisions nov 2010 – the FED will continue to keep its balance sheet unchanged. That implies 200 bio USD of new RMBS purchases replacing old ones coming at final maturity. Market consensus is that the extra effort on RMBS purchases might well amount 500 to 750 bio USD.
But Bernanke needs the help from the regulator as well, specified in a recent testimony for Congre…