Peter Pays Paul

BusinessWeek is reporting that California’s Foreclosure Notices Soar.

Lenders filed a record number of mortgage default notices against California homeowners during the first three months of this year, according to the research firm MDA DataQuick.

The company blamed the recession and of lenders playing catch-up after a temporary lull in foreclosure activity. A total of 135,431 default notices were sent out during the January-to-March period, an all time high in the  company’s database which goes back to 1992. That was up 80.0 percent from 75,230 for the prior quarter and up 19.0 percent from 113,809 in first quarter 2008, according.

According to the DQNews.com article Golden State Mortgage Defaults Jump to Record High:

The median origination month for last quarter’s defaulted loans was July 2006. That’s only four months later than the median origination month for defaulted loans a year ago, in first quarter 2008. That suggests a period where underwriting criteria were particularly lax.

Of the 3.7 million home loans made in 2004, less than 1 percent have since resulted in a lender filing a default notice. Of the 3.7 million loans originated in 2005, 4.9 percent have triggered a default notice so far. Of the 3 million in 2006, 8.5 percent have so far resulted in default. A particularly toxic period appears to have been August through November 2006 which had more than a 9 percent default rate. Of the 2.1 million loans made in 2007, it’s 4.6 percent – a percentage that’s likely to rise significantly during the rest of this year.

The lending institutions with the highest default rates for loans originated in August to November 2006 include ResMAE Mortgage (69.9 percent of loans resulting in a default notice), Master Financial (64.6 percent) and Ownit Mortgage Solutions (63.6 percent). Of the major lenders, IndyMac has a default rate on those loans of 18.9 percent, World Savings 8.0 percent, Countrywide 7.7 percent, Washington Mutual 6.3 percent and Wells Fargo 3.4 percent. Less than 1 percent of the home loans originated in late 2006 by Citibank and Bank of America have since gone into default.

The DQNews.com article also reported:

Foreclosure resales have emerged as a significant market factor, accounting for 58.1 percent of all California resale activity last quarter. A year ago it was 33.1 percent. Foreclosure resales varied significantly by area, from 13.0 percent in San Francisco County to 80.8 percent in Merced County.

Real estate values have not settled in California. This new “wave” of foreclosure notices is going to cause uncertainty in the markets for a while. This combined with the “shadow inventory” of as many as 80,000 homes reported by SFGate.com will keep prices depressed and may drive them lower.

Bloomberg.com published an article yesterday about the decline of MetLife stock and linked it to the potential for commercial mortgages to fail. However, either the stock purchasers are unable to do simple algebra or the reporter linked the decline to something incidental.

MetLife Drops as Commercial Mortgage Defaults Loom

MetLife Inc. and Prudential Financial Inc., the largest U.S. life insurers, declined in New York trading on concern that losses on commercial mortgages will surge as the recession deepens.

No. 1 MetLife dropped $4.53, or 12 percent, to $32.88 at 4:02 p.m. in New York Stock Exchange composite trading….

MetLife’s commercial mortgage portfolio totals about $36 billion and accounts for about 12 percent of invested assets….

The portfolio’s average loan-to-value ratio is 57 percent, and as of Sept. 30 less than $2 million of the loans were delinquent, Kandarian said.

MetLife Drops as Commercial Mortgage Defaults Loom.

Notice the following items:

1. MetLife’s stock fell 12% and the total value of MetLife’s commercial mortgage portfolio is about 12% of invested assets. Mathematically this means that MetLife investors must have thought that the entire commercial mortgage portfolio was going to fail in order to generate this type of fall.
2. The average loan-to-value ratio is 57%. Meaning that on average each property would have to lose about 43% of value before MetLife would lose money. Possible? Yes. Likely? No.
3. Currently, $2 million of $36 billion (yes with a ‘B’) in commercial loans were delinquent. That is less than 1/100th of 1%. Even if this number tripled it would only equal a 0.0167% delinquency rate. Multiply this by 12% and you have the true impact on the MetLife portfolio caused by commercial mortgages.

If the stock price truly fell because of the expected defaults on commercial mortgages, this is not based on the mathematical fundamentals. Any fall in stock price would be due to irrationality in the market. Market foolishness.

However, it could be that the market is not foolish and that MetLife did fall in value for a legitimate reason. However, this reason is not related to any expected delinquencies in commercial mortgages. Then we have an improperly linked cause and effect. Foolish reporting.