Borrowers With Modified Mortgages Re-Default As Homes Re-Enter Shadow
Sober Look | Nov 20, 2012 02:16AM ET
According to the Fed, banks had a visible increase in resi mortgage charge-offs in the third quarter.
This could be a cause for concern. However, banks have some leeway in when they actually take charge-offs during the year, so it is worth taking a look at a more up to date delinquency data. JPMorgan recently published the October delinquency results. Indeed there was an increase in delinquencies, mostly in October (there seems to be some delay in reporting delinquencies that the Fed picked up in Q3, particularly by Bank of America).
But delinquencies seem to the heaviest in sub-prime mortgages. Is this another wave of subprime defaults? Is Kyle Bass going to feel the pain from this increase by having half his book in sub-prime (see see discussion - "mods" in the pie-chart). And now some of these homes are moving into the "shadow" once again.
JPMorgan: It appears that mod re-defaults drove the increase. The number of re-defaults jumped 24% from the previous month.... We have argued that the sharp decrease in shadow inventory over the past two years was to some extent the result of aggressive modification activity. We think we are now seeing a wave of re-defaults from the modifications over the last two years that failed. This wave should last through 2013, and a greater share of current-to-30 rolls will come from re-defaults going forward.
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