What causes foreclosure? Countrywide's claims

Countrywide, in its presentation yesterday in San Francisco, made some fascinating arguments about what's causing the foreclosure crisis.  Countrywide CEO Angelo Mozilo "criticized media coverage of the mortgage meltdown several times Tuesday, saying reporters incorrectly blamed 'aggressive lending and exotic reset products' for rising foreclosures."

So what's driving foreclosures? Here is Countrywide's breakdown -- based on information from its servicing portfolio -- when "cause of foreclosure" is known (80.3%), the breakdown is as follows:
--Curtailment of income: 58.3%
--Illness/Medical: 13.2%
--Divorce: 8.4%
--Investment Prop./Unable to sell: 6.1%
--Low regard for property ownership: 5.5%
--Death: 3.6%
--Payment adjustment: 1.4%
--Other: 3.5%

We find this fascinating on several levels, and inconsistent with most analysis we've seen. To start, we should point out, there is probably no institution in America -- including the media and the government -- that knows more about the current crisis than Countrywide. The government doesn't collect timely data on foreclosures; Countrywide does. If this is Countrywide's best, most honest assessment of the true causes of foreclosure, it's shocking: it indicates foreclosures are spiking due to economic weakness -- "curtailment of income" -- that is so faint it barely shows up in economic statistics. If this is what happens in a fairly strong job market and a growing economy, what happens in a real recession, when unemployment rises significantly?

And if "payment adjustments" are not a problem -- as Countrywide argues -- what good would it do to refinance these loans?

There is one plausible explanation: borrowers were so aggressive -- and so hopeful -- that they essentially planned for economic perfection, and the slightest negative deviation from that plan -- say, an unexpected drop in overtime earnings for hourly workers -- is sending them into default and foreclosure.

But here is an equally plausible explanation: That the "research" is really spin -- Countrywide is eager to answer critics and argue that its own underwriting was not a factor in the foreclosure spike -- that it was entirely unforseen and driven by economic events out of the company's control.

We'd love to hear your thoughts on this. Email story tips to lalandblog@yahoo.com
Photo Credit: AP

Comments

[Hula Girl]

Fox. Meet Hen house.

[xyz]

Well, I guess "curtailment of income" could be blamed Mysteriously, people now aren't making as much as it says on their mortgage application.

[AnnS]

"what happens in a fairly strong job market and a growing economy"

Ummm... better check some data before you say that.

Job market for what? Fastest growing sector of jobs are retail clerks, home health aides, and service staff (do you want fries with that?) Check of the Bureau of Labor Statistics.

Growing ecomony for whom? The real increase of the median US income was an enormous $800+/- between 200 and 2006. (Data just came out.)

Between 1979 and 2005, the real median income ( at the 50th percentile (adjusted for inflation) increased 13%. That is about 1/2 a percent a year.

Between 1979 and 2005, the income of the top .1% households increased 256%. That is 9.85% a year - or 19.69 times more than the median household.

[GM]

The question is how do they obtain this data. Do the borrowers provide the reason for foreclosure?
The reason could be that the borrowers overstated their income while applying for loans( including over the top bonus, overtime) and when it came to foreclosure they would simply claim that they did not get as much bonus as they expected.
Eventhough the borrowers lied, countrywide is guilty of lax underwriting rules and oversight.

[Cary]

Countrywide: "Excuse me sir. Your loan application stated that you make $150,000 per year, but you are defaulting on your $4000/month mortgage. Why is that?"

Borrower: "I actually only make $30,000/year."

Countrywide: "Oh I see. I'll mark it as Curtailment of Income."

[AnnS]

Curtailment of income: 58.3%
--Illness/Medical: 13.2%
--Divorce: 8.4%
--Investment Prop./Unable to sell: 6.1% - read have to sell because can’t afford reset payment s
--Low regard for property ownership: 5.5% - can’t afford reset payments and walked away
--Death: 3.6%
--Payment adjustment: 1.4% - call a few what they are
--Other: 3.5% - can’t afford reset payments but didn’t tell them specifically & gave additional reasons
--Unknown: 19.7% - can’t afford reset payments but didn’t say anything about reason for default

6.1 + 5.5 + 1.4 + 3.5 + 19.7 = 36.2%

I can guarantee that the $900,000 property in my county that just landed back in Countrywide’s lap was not due to ‘curtailment of income’. It was a 2nd home, the buyers had planned on refing once the 2/28 expired , the ARM reset (plus the one on their primary home that they refied for the down payment on the 2nd home. they couldn’t refi it because of tightening standards and dropping and values, and, oh well, let it go…….

And that is just one 2nd home here that Countrywide is holding - they have about another 7-10 in this county for exactly the same reason. (And that is a lot of 2nd homes when there are 5000 2nd homes in the county and the foreclosures on 2nd homes also include Argent, New Century, WaMu…….)

[150 multiple choice questions]

This is about as accurate as "yes, this is a natural tan". Isn't it great these guys are getting exactly what they deserve? I mean, once they go bankrupt and to jail, of course. It's amazing they are still trying to spin like this. Who wants to bet this "analysis" shows up in court docs?

[Evil Landlord]

If I estimated that my income would be $20,000 a month to get the loan and then mysteriously found myself only able to earn $4,000 a month, I would consider that a "curtailment of income"

[Jax]

Since "Curtailment of income: 58.3%" was #1 on his list ..........it made a lot of sense for Countrywide to fire over 10,000 or their employees and farm the new jobs off to India, didn't it? Looks like he caused his own bogus statistics to spike.
The main reason that people foreclose is because they couldn't afford the home in the first place and they (and their mortgage broker) lied about their incomes on their applications. Angelo, that is the biggest load to come out of your mouth in a while. Shame on you (again).

[MyLessThanPrimeBeef]

Curtailment of income: 58.3%
--Illness/Medical: 13.2%
--Divorce: 8.4%
--Investment Prop./Unable to sell: 6.1%
--Low regard for property ownership: 5.5%
--Death: 3.6%
--Payment adjustment: 1.4%
--Other: 3.5%
--Unknown: 19.7%

-----

It is my belief that the 5.5% 'low regard for property ownership' is related to the inability to handle the shock of payment adjustment.

I also think that the 8.4% divorce is related to the stress caused by payment adjustment.

Guess what? The 13.2% medical, in my opinion, is again caused by worrying about payment adjustment.

3.6% death? Again, payment adjustment at the bottom of it.

19.7% unknown? The crack Indian staff has been told to take it slow on that. Most likely cause - that's right, payment adjustment.

[MyLessThanPrimeBeef]

Sorry, forgot to address the Curtailment of Income.

That, I believe, is due to the lack of income from flipping.

[East Coast Reader]

When Countrywide talks about "curtailment of income," do they mean their borrowers' real income is not the income they put on their mortgage application forms? How many of Countrywide's loans in foreclosure were no-doc or stated income loans?

[Judy Graff]

I'm a Realtor and I think that's total spin! While I'm sure that many people have experienced reverses in their employment status and health, I think many more were encouraged to be "irrationally exuberant" about their ability to make high payments.

[MyLessThanPrimeBeef]

XYZ, you nailed it.

[Bill Jones]

Peter-

I get more than 100% for all of the reasons for foreclosure. Is there a typo somewhere, or are the geniuses at Countrywide trying to make some complex philosophical/logical point - that the number of reasons why people lose homes due to foreclosures is larger than the number of foreclosures themselves?

I question a study where the fundamental logic 2+2=4 has been replaced by some other logic.

Get the Countrywide folks to look at the numbers. On the other hand, maybe they laid-off the only person there who can do basic arithmetic.

Also, ask the Countrywide CEO when he plans to start buying stock in his own company again. He's been a major seller over the past 18 months. It's time for him to show how much he believes in the future of his firm.

[MyLessThanPrimeBeef]

Beautiful, Cary.

[Pete Viles]

Bill Jones wrote, "Peter- I get more than 100% for all of the reasons for foreclosure. Is there a typo somewhere..."

Thanks, Bill, no typo, but my initial post was misleading. Countrywide divides the "foreclosure cause" results into two groups: a known cause (80.3%), and an unknown cause (19.7%). The numbers in the post break down that 80.3% into subgroups -- curtailment of income, etc -- which add up to 100% of the subgroup of 80.3%. Countrywide's numbers add up nicely; the way I originally presented them added up to 119.3%, which of course is wrong, so I updated the post in response to your comment. Thanks.

[windshift]

I can't believe your not talking about the Fed give away to the same wall street pigs that gamed the housing market in the first place. Rather than promote something constructive, like changing the deduction to twice the interest paid, or to a credit for that matter, and then forcing the financial institutions to apply the same to the principal, they decided to simply throw more cheap money at the idiots who are the cause of the whole stinking mess!

[Armadillo by morning (up from San Antone)]

Countrywide should study what they have charged O. J. with.
Mozilo meet O. J.
"ARM"ed robbery (O. J. with a gun; Mozilo with a pencil).
from 30 year mortgage to 30 years to life.
Not so strange bedfellows/cellmates.
Hey Mozilo; meet Bubba...your new girlfriend.

[Todd in WeHo]

In the "Other: 3.5%" category you can add "Homeowners devastated by Hurricanes Katrina and Rita accusing Countrywide of recanting on its promise to suspend their mortgage payments in the immediate aftermath of the hurricanes."

Go to http://blogs.abcnews.com/theblotter/2007/09/a-deal-too-good.html

[Martin]

There are two words to describe Countrywide's spin on the foreclosure crisis. The first word is "bull." You know what the second word is.

Countrywide gives passing the buck -- figuratively and literally -- new meaning.

[Jeff]

The rate cut on Tuesday will have no impact on the foreclosure cycle. Period. Actually it could make things worse long term.

What's the cost of the interest rate cut to you?
http://thegreatloanblog.blogspot.com

LA Times Blog Maniacs make some comments. Freedom of Speech is still in force on my blog.

[Toby]

I don't know, feeling that they're not telling the truth...or maybe it's a half truth. It's fishy.

[Martin]

Rather than dispute these numbers, lets accept them per se.

Let us then ask "Could there be a lurking variable to better explain these numbers?"

If payment adjustment is not a significant cause of foreclosure then it stands to reason that the rate standard loans (prime, fixed) fall into foreclosure, closely resembles the rate that non standard loans (sub prime, ARM, neg am) fall into foreclosure.

The same should be the case for the doc type. Full doc loans would be defaulting at a rate similar to no doc, NINA, SISA, etc.

If Countrywide shared this data I think we would see that non standard loans, and non standard document types have MUCH higher rate of default, and that the reasons that the mortgage holders give to customer service are not reliable as hard data.

btw - I once worked for New Century and BNC mortgage, I am now working out of state . . . . .

[Enlightenment]

I didn't see the check box for "Lied about my real income, never could afford it, was gambling that I could sell it and get rich".

[tew]

We should think a little deeper about what is being said. We are talking about cause and effect. The effect is "foreclosure". Now regarding Mr. Mozilo's "causes":
1) If home prices were not lower than the purchase or refi price then none of the stated proximate causes would result in foreclosure. Thus, "lower prices" is a root or contributing cause in all cases.
1a) Thus, one must look at the causes of lower prices to determine root causes. Inverting this inquiry to investigate the causes of prices that were historically high reveals root causes known by most people by now: lax underwriting, credit bubble, perverse incentives, speculation - typical bubble factors.
2) How does "Divorce" *cause* foreclosure? A friend who bought in the Bay Area in 2000 got divorced this year. He's middle management and she's a school teacher. No foreclosure for them.
3) "Divorce" and "Death" or even "Illness" may be triggering events, but they DO NOT CAUSE foreclosure.

Summary: It's the combination of a) lower home prices AND b) an increase in the household's expense/income ratio AND c) lack of savings that results in foreclosure. Factor (b) can occur due to lower earnings (job loss, lower OT, illness), mortgage resets, unexpected new bills (illness again - a double whammy).

[Armadillo by morning (up from San Antone)]

Why are we all aghast when home prices fall but we cheer when gas prices fall? Question from an oilman's position.

[investorguy]

Armadillo: Who is "we all?"

[Michael Snyder]

What a crock of crap!!! This meltdown is a direct result of Angelo Mozilo's unbridled greed. If he'd EVER held his own stock in Countrywide for longer than required by the SEC; if he didn't sell off millions of dollars in Countrywide Stock just before this meltdown; if he didn't foster lending practices that would land any legitimate banker in prison, I still wouldn't trust this silk suited con-man for as far as I can chuck his wardrobe. This man needs to be in jail for the misery he's caused, not just to anyone who has a loan held by Countrywide, but to everyone who ever dreamed of home ownership. It will take years for the market to recover form Mozilo's scheme to inflate his stock value. The bottom like is simple & sad. Because of sociopaths like Mozilo, all lenders need to be regulated in the same manner as legitimate banks. Does anyone out there remember Lincoln Savings??? If regulator's do, then why are we going through this again???

[Rob]

Sounds like prep (fluff) work for the Senate hearings coming soon. Start building your defense case now, and hopefully they will go a little easier on you.

"Yes Mr. Senator, Income IS a factor for loan approval. We always factor this into the aproval proccess. However...blah, blah, blah"

[investorguy]

Reuters is reporting that Countrywide has lined up another $12 billion in financing.

[Tim K.]

Armadillo - Bad assumption. I (and most people here) cheer when gas prices fall AND when home prices fall. Because both are a needed consumable, and we're all better off if we spend less of our income on needed consumables.

[butterflysoup]

Monthly payment consumer plans are bound to fail when dependent on two earners subject to job loss or illness.

[Bob B]

I believe is is a curtailment of income - RENTAL income. When is someone going to do a study that shows how many of these are owner-occupied? And you can't trust the lenders since there is so it is so easy to lie on the mortgage application and say you are going to live in the place. My ex-slumlord owned 5 owner-occupied homes in my subdividsion alone - over 70 homes in SoCal.

[Armadillo by morning (up from San Antone)]

Dear investor guy:
being from Texas, "we all" is just part of our American language; (people in England speak English). yes, I should have been consistent and used
"we all" cheer when gas prices fall. (I forgot I was west of the Pecos.
My oversight. Sorry, "you all." Same problem with people from
New Jersey not using the "g" in strength. And, there is no "r" in Washington; or an "a" in think. Of course, people from Buffalo (NY) not Buffalo, Texas, do not have this "problem;" people from Buffalo (NY) sound as if they are from nowhere. But, if you want to hear real English, just have a conversation with someone who was graduated from the Jamaica (as in Caribbean) school system. I didn't.
People live where they can afford to live--not where they wish to live.

[Anne]

There's plenty of blame to go around; Countrywide is keeping the PR department busy denying their share.

I'm an accountant who until a few months ago worked for a small now-defunct mortgage company bought at fire sale by Countrywide (yes, even with their much-publicized problems, they're forcing small competitors into BK and then buying them). I've stayed in touch with several former co-workers, including a couple of underwriters who landed at Countrywide.

According to them, Countrywide is STILL pressuring underwriters to approve loans against their better judgment. They are compensated in part on how many loans they approve; weekly staff meetings are in the form of "how can we turn this resounding NO into a yes"; and having too many declines reflects poorly on the underwriter rather than on the broker/originator who found the unqualified customer in the first place. One of my friends tells me that he initially denied a loan and was strongly pressured into changing his recommendation. When that loan defaulted a mere six months later, he was called on the carpet for his "poor decision making" in underwriting that loan (fortunately he had proof that he had been forced by the same supervisor who was now chastising him).

Folks, good underwriting is designed to protect the borrower from himself. The borrower may think that he can afford to pay 2/3 of his take-home for housing; it's the underwriter's job to point out that this is a recipe for disaster. Countrywide has pressured their underwriters to ignore this reality; now it's biting them in the backside.

P.S. Accounting is a portable skill; I'm no longer in the mortgage industry.

[Raughle]

--Buyers' irrational exuberance: 50%
--Fed accommodation: 10%
--Mortgage broker greed: 10%
--Wall street securitization magic: 10%
--CDO investor ignorance: 10%
--Ratings agency complicity: 5%
--National Association of Realtors hype: 2%
--Media doom-and-gloom: 1%
--"New Paradigm" comment in Todd's last post: .0001%
--Your Mom: 1%

[Armadillo by morning (up from San Antone)]

The Learning Channel on subscriber television is still airing the programs about house flipping; these shows were produced (in Canada) three years ago;
it is a flash back to all the people eagerly boarding the Titanic.
(Remember The Ark was built by amateurs; the Titanic was built by professionals). These shows should now be on The History Channel.
Lemmings act as lemmings.

[Armadillo by morning (up from San Antone)]

Let's go back to Luchenbach, Texas, with Waylon, Willie and the Boys.

[Cal]

Countrywide isnt saying that default rates are the same for Full Doc versus Stated Income.. what they are saying is when they look at the Full Doc data that the reasons (broken down in percent) for defaulting are the same as Stated Income.

Its a fine point, easily confused, which is probably why Mozilo used it. Because it makes stated income sound not so bad. Countrywide desperately wants stated income back, its cheaper to underwrite and makes it more likely a borrower wont be turned away.

[investorguy]

Armadillo: my point is that you were making a sweeping -- and inaccurate-- generalization.

[Guido]

A lot this problem is caused by servicer fraud. Like refusing to accept that we have our own homeowners policy no matter how many times we and the insurance agentv fax the paid up policy to them. And then they force place a 1200 dollar FIRE insurance policy when our HO policy only cost 425.

How about adjusting the escrow and not telling us? So when the now short on time payments come in they are unapplied and sublect to late fees and other bogus fees.

Or when they pay the tax bill from escrow 4 months early. Then ask for an addition to the escrow of 300 per month to make up for it.

Problem 1 took an attorney. Problem 2 took countless hours on the phone. Problem 3 caused us to revoke our escrow with them and pay the taxes ourselves.

Anyone who did not pay attention could easily have gone into forclosure or have thousands in fees they did not owe and could not pay.

[Mark Sharf]

Compared to the incomes many have written on their loan applications, actual incomes must seem quite "curtailed."

[Willie]

The successful life we're living has us feuding like the Hatfields and McCoys.

[jaded]

Q: >

A: because I'm not living on an oil field as an investment.

[Pete Viles]

We've been so busy keepin' up with the Jones

Four car garage and we're still building on

[investorguy]

Got to have a Jones for this Jones for that
This running with the Joneses boy
Just ain't where it's at...
You gonna come back around
To the sad, sad truth, the dirty lowdown

...for the Boz fans in the house 8-)

[AnnS]

2) How does "Divorce" *cause* foreclosure? A friend who bought in the Bay Area in 2000 got divorced this year. He's middle management and she's a school teacher. No foreclosure for them.
3) "Divorce" and "Death" or even "Illness" may be triggering events, but they DO NOT CAUSE foreclosure.

Posted by: tew |

What planet do you live on?????

(1) Divorce: For many households it takes the income of BOTH spouses to make the mortgage payment and still be able to afford food and keep the lights on. There is a divorce and either (a) they sell the house and split the proceeds or (b) one person gets the house and hopes to be able to make the payments plus they have to find the money to pay off the ex-spouse and get them released from the mortgage. Scenario (a) is far less frequent than Scenario (b). They usually go with (b) so 'the children can stay in their home' . With one trying to pay the bills that it took 2 to pay, they invariably get behind and the house is an albatross.

Divorce is the triggering event for the default and then foreclosure.

(2) Illness is a double whammy. First it causes medical bills - and those are not insignificant any more. Even with insurance, the deductibles and copays can be killers. In over 37% of bankruptcies, the bankruptcy was triggered by medical bills even though they had insurance. Over 50% of all bankruptcies are caused by medical bills.

Then illness also kills income. Get sick, can't work, no money to pay the bills. The fastest way to become poor in this country is to become disabled.

(3) Death. Of course it can cause the financial collapse that results in foreclosure for the survivors. The iincome of the one who died stops - and if it was needed to pay the bills, they are in the dumper financially.

Foeclsoure is the result of financial problems and these are all causes of financial problems.

[Armadillo by morning (up from San Antone)]

"Trailers for sale or rent; rooms to let 50 cents"

[Faded Love]

What does it mean when two homes owned by real estate agents on your block have "for sale" signs in their front yards?

[Faded Love]

When you leave Amarillo, turn out the lights.
Its over anyway. Big balls in cowtown.
The photo of the guy in the real estate ad on the bus bench
looks a lot like the guy that's the new night manager at the In N Out Burger.

[yours truly, Johnny Dollar]

Dear Faded Love, that should read: "Big ball's in Cowtown."
translation: "The Big Dance is in Fort Worth."
I was in a group bicycle ride yesterday afternoon into the night
(with beer stops) from Marina del Rey to Palos Verde Peninsula
to Marina del Rey (43 miles by the time I got back to the barn); somewhere along The Strand in Hermosa Beach, I spied two "flip dudes" all dressed
up in their Gucci shoes/ties animating to each other as they observed
the state of unfinished remodeling work on the three story condo that
6-months ago, they thought they were going to make a killing on. I'm
sure that these two "flip dudes" scenario is being repeated by the
thousands all over Southern California. At the next "watering hole"
stop, I drank up fast before these two guys arrived wanting to
cry in my beer.

[Faded Love]

62-21; Land Rush in Oklahoma.

[nicky]

I am a Registered Nurse and my husband is a custodian. We earn about 5,000 per month. We provided checks stubs for both of us. I have to admit that I did not see what the income was placed on the income line until a few days later. Countrywide placed that my husband and I made over 9,000 per month. We were told that are 1st morgage would cost $2600.00 per month and our second note would cost $400.00. Now, our first is up to $2800 per month. Our second (home equity loan) is $1,087.00 per month. But, after the loan funded, we have been told the first is going up to $2900.00 beginning in November. I feel stupid signing those documents without truly understanding them. I don't know what to do. They charged about $30,000 to do the loan. We can not aford this new loan. By the way, they said there was an additional cost of $13,000 more. We are screwed. Does anyone have any advice for me before we foreclose on our home? (The manager of countrywide is supposed to be getting back to me on Tuesday, 10/2/07. Also, I did not go stated. I fully disclosed my and my husband's income.

[Jane Doe]

Curtailment, so you are blaming foreclosures on the limitation of one's income? Interesting.