Monday, June 18, 2007
Mortgage Payment Defaulting
The Irish Independent reports that late payments and bad debt rates are rising in the sub prime mortgage lending sector in the US. The Mortgage Bankers' Association, in its quarterly snapshot of the mortgage market released yesterday, reported that the percentage of payments that were 30 or more days past due for "sub-prime" adjustable-rate home mortgages jumped to 15.75pc in the January-to-March quarter. The percentage of sub-prime adjustable-rate mortgages that started the foreclosure process in the first quarter of this year climbed to 3.23pc.That was up from 2.70pc in the final quarter of 2006 and was the highest on record. The first quarter's increase in foreclosures was mostly driven by problems in California, Florida, Nevada and Arizona, said Duncan. Wow. I'm guessing (sic) that some of those people that are 30 days late, are about 25% likely to default on their mortgage. Wow. Many of the people that are caught in this trap were mis-sold from the get go. They were given the go ahead to buy properties they could never afford and teaser introductory rates. Given that the Irish paper also reports a doubling in the number of 100% Mortgages in the UK in an effort to bring first time buyers into the net, the underlying issue of affordability of the stock comes to the fore. Should you sell these products if the customer can't afford them? Who is doing the sanity & credit check here? This is a systems problem: sales executives were incentivised to sell to anybody. They were bad sales, and the companies were addicted to "bad profits". Poor credit management had its roots in poor sales processes, and bad marketing. Lenders are going to have to evolve the relationship with the at-risk-customer, re-invent the offer, and help them get to financial stability. If they do not, then the prices of the property will fall, speculators will have stood back as rental incomes fell in tandom, and the lender will be forced to sell the property for less than it was bought for. Some would say cut and cauterize. Why not get in front of the at-risk customer, and make an offer to pro-actively manage the problem, before the customer is labelled a defaulter, and the bank has bad debt on its books. Given that some people can now trade their good credit rating, (see Virtual Economics) why can't family and friends share their good credit rating to help out the one member of their Tribe that is trouble. Even getting a dig out on payments for the period that it takes to sell the house without before the sales process is "distressed", would deliver value. Sounds like an opportunity to me.