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GSEs’ Foreclosure Pipelines Will Grow Well into 2011: S&P
Posted By Carrie Bay On August 23, 2010 @ 5:30 pm In Foreclosure,Government,Loss Mitigation,Market Studies,REO | No Comments
Despite the continued efforts of mortgage giants ""Fannie Mae"":http://www.fanniemae.com and ""Freddie Mac"":http://www.freddiemac.com to find sustainable workouts for delinquent borrowers Ã¢â‚¬" and the fact that their loan[IMAGE]
modification activity has indeed increased significantly this year Ã¢â‚¬" the analysts at ""Standard & Poor's"":http://www.standardandpoors.com (S&P) expect the GSEs' foreclosure inventories to continue to swell.
The two companies have each already completed about 40 percent more workout volume during the first half of 2010 than they did in all of 2009 by S&P's estimates. Still, the ratings agency says annualized loan workout activity (as a percentage of existing delinquent loans) remains less than half at both institutions.
In addition, S&P reports that foreclosure alternatives, such as short sales and deeds-in-lieu, have declined to about 15 percent of the workouts, compared with the low 20-percentile range of 2009.
""We believe that the slow and arduous single loan-by-loan workout process, persistently weak national economic conditions, and high unemployment will likely lead to higher foreclosures, resulting in a foreclosure pipeline that we believe will continue to grow well into 2011,"" S&P said in report issued last week.
S&P adds that timelines for delinquency and default are being lengthened by policies currently in place and the GSEs' mandate to prevent avoidable foreclosures. The growing workout pipelines will ""result in actual realization of embedded credit losses during the next three to five years,"" the agency's analysts said.[COLUMN_BREAK]
S&P is holding to its downbeat outlook when it comes to the GSEs' foreclosure numbers even though the ratings agency says credit quality is stabilizing for Fannie and Freddie.
The firm's analysts concede that better underwriting is likely to support stronger performance of the more recent 2009 and 2010 vintage mortgages, but both Fannie Mae and Freddie Mac are expected ""to continue to record significant credit losses"" from their 2005-2008 loans.
On a combined basis, the companies have a $4.7 trillion single-family guarantee portfolio, of which 23 percent is from the most problematic 2006 and 2007 vintages, S&P points out. These vintages have significantly higher delinquency rates, and also generated about two-thirds of the 2010 total credit losses (year to-date) at each company.
The GSEs have already recorded significant losses as they work out their large inventories of defaulted loans, and S&P says the deficiencies will likely keep on coming, as evidenced by the fact that both companies continue to carry ""a sizable reserve for embedded losses in pre-2009 portfolio vintages.""
According to S&P, Fannie Mae recorded $120 billion in credit-related expenses (loan-loss provisions plus foreclosure expenses) between the beginning of 2008 and the second quarter of 2010. Freddie Mac recorded $57.9 billion in credit-related expenses during the same period.
S&P did note, however, that each of Fannie and Freddie's second-quarter losses narrowed and credit showed some signs of stabilization through slightly lower serious delinquency rates. Fannie Mae's seriously delinquent rate was 4.99 percent in Q2. Freddie Mac's came in at 3.96 percent.
But S&P says, ""Despite one quarter of stabilization in the seriously delinquent rate, foreclosure pipelines are large and continue to grow, and modifications have not been very successful to date.""
For every one foreclosed property Fannie disposed of in Q2, S&P says the GSE repossessed 1.39 homes. Freddie's ratio was one disposition to 1.32 new REOs.
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