In a really good mystery, the author can spin a set of circumstances to look like one thing has happened, and then unravel them to reveal a completely different - but equally plausible - sequence of events. I find myself asking if that’s what’s going on in the current mortgage-delinquency market.
Simply put, there are two disturbing trends - the number of mortgages that are entering the phase known as delinquency is rising, and the amount of those mortgages is rising. That is, a greater number of owners in more-expensive homes are falling behind on their payments.
Just for context, let me walk you through the process. A mortgage becomes delinquent when the owners are 30 days late with a payment. At this point, the lender traditionally sends a notice of delinquency. From this point forward, which is required under law if it wants to proceed with the foreclosure process, the lender files a notice of default. This notice must be served to the owners or posted on the property, and informs the owners that they have 90 days to make up all past-due payments and late fees to stop the process.
After this 90 day period, they have just 30 days to pay the entire loan balance in full, plus charges, penalties, and anything else the lender can legally throw in. If you’re keeping track, we’re up to five months here.
At the height of the housing crisis, lenders were so bogged down in defaults and foreclosures that it could be months before some owners received a notice of default. They could live in the house for a year or more without making payments.
Back to the explanation of what’s happening. One possibility is that wealthier people with more-expensive houses had more resources to fall back on. Those who were hit first may have been reaching to get into the housing market, and over-extended themselves. Wealthier people who were laid off from high-paying jobs still had home-equity lines, credit cards, stocks (though not as valuable as they once had been) to see them through. But the economy isn’t improving fast enough. These people may have been expecting that new job to come through, but it hasn’t, and now they’ve burned through those resources. They are now facing the same kind of stomach-churning fear that poorer people have been feeling. Hence, an increase in delinquencies for high-end properties.
Or is there a different explanation? It’s also possible that the lenders finally worked through their backlog and started the potentially four to five-month-long process earlier? Do they finally have the resources to start sending notices of delinquency and default earlier? It’s a mystery.
Either way, I find myself torn. This rising delinquency rate is bad for homeowners, but good for DBNR. When we started this business a year ago, most of what was on the market was substandard. We originally bought 33 houses for an average of $6,200 each. Now, we’re beginning to see more high-end property worth significantly more. That gives us a bigger pool of potential buyers, people looking for bargains in nicer neighborhoods. That’s capitalism - a system designed to help those with capital, as well as healthy chunks of luck and patience. But as a devotee of idealism as well as capitalism, I still feel for those caught up in these difficult times.