Macro Economic Trends and Risks
Wachovia on Walkaways

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By RodgerRafter
April 15, 2008

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I read on the Calculated risk blog last week that Freddie Mac estimates it takes about 355 days on average nationally for the foreclosure process to complete itself, from last made payment, through default and foreclosure, to the time when the bank is able to start trying to sell REO.

From that good description it seemed to me that a lot of financially stressed homeowners might seek to live rent and payment free for 10 months as part of a walk-away strategy if their equity had dropped near zero.

Today the blog ran a long set of quotes from the Wachovia conference call suggesting that this was indeed becoming a large problem:

"I don't know where the tipping point is, but somewhere when a borrower crosses the 100% loan to value, somewhere north of that and they presumably run into some sort of cash flow bump, whether it's reduced income or kind of normal things in life that have created past dues before, their propensity to just default and stop paying their mortgage rises dramatically and I mean really accelerates up and it's almost regardless of how they scored, say, on FICO or other kinds of character, credit characteristics."

It's also nice to see them admitting to the big problem of accumulating REO in the marketplace.

"One thing that doesn't show on the chart is the level of cures between 90 days and further severities and defaults have been dropping. The severities in the market place when we take a house back, it takes a lower price to get homes sold and our outlook is -- and as I think everybody has been reading, there is an expectation that there's a broad accumulation of foreclosed properties that haven't hit the market yet and perhaps even some shadow foreclosures that haven't emerged as yet. So our concern, looking forward is that -- and again, what we're beginning to see more evidence of and sense more of in the first quarter is that conditions are going to continue to get tougher and there's an overhang of inventory out there that is going to be costly for the industry to work through."

Wachovia knows that we're still pretty far from a bottom, although I think they my be underestimating how far we really are:

"... the overarching assumption here is that we're about halfway through the decline in housing prices with the trough expected to occur sometime around the middle of 2009."

Lots of good data in the Wachovia presentation.pdf:

Just one quick piece before I head out:
The write-downs have gone from $1.22 billion to $1.50 billion to $1.97 billion over the last three quarters. Commercial mortgage has been a significant part of that, and this quarter had the largest contribution by leveraged finance and impairment charges.

Anyone remember the days when our financial leaders were saying this was all going to be contained to subprime?