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.

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4 comments:

Seamus McCauley said...

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.

Or, looked at another way, borrowers were allowed to use other people's money take a speculative and highly leveraged gamble that the property market would go up and interest rates stay flat, which they had no hope of repaying except in the event that their bet came off. Their main downside risk was to live in a nicer house that they could really afford while they waited to see whether they'd bet the right way.

It's rather odd that the banks should think it a good idea to lend money on this basis, but if they've been irresponsible it's to their shareholders. All they did to their customers was act with wild and unwarranted generosity.

Paul Sweeney said...

Excellent way of putting it. However, as a two way relationship the bank, in this instance, also wrecked the sub prime customers ability to EVER get more credit. And from a fund of funds point of view, the sub prime market was just a high risk high reward variant in their overall portfolio of risk. In a way I think that this market might be re-shapable if 2.o is brought to it. What if an entire extended family could officially share your risk in order to bring your risk profile down and your credit rating up? That way, more people get affordable mortgages, and banks get to spread the risk. WIth Geni, and LinkedIn, and Facebook, and Proper, Monk, IoweYou and other services, surely this is possible?

Seamus McCauley said...

the bank, in this instance, also wrecked the sub prime customers ability to EVER get more credit

Not really - the credit scoring system can be used by the banks however they like, as amply demonstrated by their willingness in this instance to lend to people whose scores screamed "don't do it".

What if an entire extended family could officially share your risk in order to bring your risk profile down and your credit rating up?

People can already get their parents to guarantee a mortgage, so this seems a simple enough next step. And in Japan they have generational mortgages with a redemption term of 70 or so years.

Risk sharing might be one of those things that only works if it doesn't really catch on though - if everyone's individual risk profiles are diluted amongst everyone else's the numbers become meaningless averages.

Paul Sweeney said...

Ok. Look at it this way. The parents are the only ones bearing the risk at the moment. What if it could be spread out to ALL the family. Yes parents put some of their risk out there, but others do not, and each part of risk the portion out can be scored differently, n'est pas? So as you put it in the comment above its just the capability of individuation. I believe that the credit companies can parse risk on the basis of your past history, the street you live on etc. So it goes back to a point you raised on your own blog: why can't I trade credit values in ways that allow me to gain value, and not solely the institution? If there is a mechanism to do this, and the cost of reaching and co-ordinating this market is low, then there is a business?

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