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".