NODs have a certain “normal” rate based on difficulties that arise in a person’s life. Bankruptcy, illness, medical problem, job loss, etc. leads to foreclosure. In the last few years, the normal amount of NODs was reduced because it was so super easy to just sell your house at the first whiff of problem with the mortgage.
NODs rise above their “normal” rate during periods of high unemployment. Therefore, the 3500 NODs/quarter level should be reached again if we have the same number of homes and the same level of unemployment as we did in the 90’s.
I’d need to go back through my unemployment projections from a prior post and compare it to unemployment in the 90’s to give an accurate forecast. For now, let’s assume unemployment is the same, so that would result in the same number of NODs.
Now let’s add the foreclosures from the people facing payment shock who cannot refinance. 68% of San Diego’s purchase and refi loans were ARMs, for a total of 306,000 loans *(see calcs below); let’s assume half cannot refinance and will foreclose, an assumption I think is conservative. That is 154,000 NODs in 2007 – 2010. If we spread that out over 3 years, that is 12,833 NODs/quarter, which is almost 4x the peak of the prior downturn.
If we assume that 95% of the payment shock loans will default, a figure that I personally think is more realistic, then we would have (306K/12) 25,500 loans in default every quarter from 2007 – 2010. If they are not evenly spaced, we could end up with 40,000 defaults in one quarter alone. Remember, that scenario assumes that half of all ARM loans have been refinanced. If that cannot occur, the defaults are higher still. If more than 10% of homeowners got ARMs, the figure is still higher. Is it crazy to suggset 95,000 NODs at the peak NOD quarter in 2010, the year that I think will be the worst?
* payment shock calcs
From very gross estimates, 306,000 San Diego loans are subject to payment shock.
(68% of 40,000 homes sold = 27,200 loans in 2004 and 2005 are ARMs; let’s assume 10% of homeowners refinanced in each of those years: 10% of 1.1 mill homeowners = 110K; 68% got ARMs = 74,800; 27.2K purchase + 74.8K refi = 102K total in each year; in 2 years = 204K loans subject to payment shock; add 102K for 2006 and 2001-2003, giving 306K loans)
