The housing overhang, according to Amherst Securities Group (ASG) analysts in a report released today, is not only caused by the number of nonperforming loans currently in the market.
They said that the problem also involves the high rates at which re-performing loans are re-defaulting, aside from the relatively high rates at which deeply underwater mortgages that have never been delinquent are going two payments behind for the first time.
The ASG analysts examined each loan in the non-agency universe a year ago, and looked at each's current status. According to ASG, many analysts and investors in the market now think that the sole problem with the housing sector lies in the large number of nonperforming loans that are currently causing an overhang or shadow inventory.
The feeling is that once those are resolved that the market will heal, the analysts said.
They agreed that nonperforming borrowers have a low probability of eventually curing. However, the ASG analysts said that the housing market problem runs much deeper.
In a previous article, they had argued that without any further governmental action, 11.5 million borrowers were in danger of losing their homes. This number includes not only nonperforming borrowers, but also a large number of performing borrowers that have compromised pay history mainly of modification programs.
It is notable, they said, that re-performing borrowers are re-defaulting at a rapid rate and will continue to do so. Furthermore, borrowers with good pay histories who are considerably underwater have shown that they, too, have a reasonable probability of transitioning to default or going 60+ days delinquent.
However, ASG researchers said that many bond investors, and a number of housing analysts, are still focusing only on nonperforming loans. These buyers and analysts have ignored the existence of re-performing loans and seriously underwater borrowers. In other words, ASG researchers said that the market is underestimating the housing problem as well as the potential losses to bondholders if further policy actions are not taken.
ASG analysts looked into these areas in the newly issued report, using as a test case today’s non-agency market versus where it was one year ago. They examined the fate of loans in each of the nonperforming, re-performing, and always performing buckets. The analysts looked up where each loan was a year ago and then tracked where it is now.