Mortgage stress surging

South African mortgage distress jumped to a record high in the first half of the year as falling home prices battered homeowners. According to results released from Alliance Group’s Distressed Asset Index, which tracks various distressed asset classes, the residential property market is still in a recession and despite increased sales activity and lower interest rates, property distress is growing.

According to Alliance Group Chief Executive, Rael Levitt, the residential property market is now in the fourth quarter of a technical recession and whilst the slide in house prices is slowing, distress has a 12 month lag and is still increasing. "In fact, there has been a sharp increase in liquidations and insolvencies of high end properties and average auction values have jumped by 23 percent in the last quarter", says Levitt, who continues that "despite these poor set of results, the reality of the housing market is that sales activity has rapidly accelerated as investors climb into distressed real estate like never before."

Distressed auctions surged 112 percent

Distressed rates were the highest last month in Gauteng and the Western Cape, where some home prices have fallen as much as 20 percent. Insolvency, liquidation and sales in execution are increasing the supply of unsold homes. Furthermore, distress rates in "all provinces remained substantially above last year's levels", said Levitt in a statement. In June, Alliance Group’s distressed auctions surged 112 percent from a year ago. The Cape Town, Johannesburg, Pretoria and Durban metro areas accounted for 70 percent of the national total in June.

"We're running much further ahead of what we had anticipated in terms of year-over-year," said Levitt and adds that, "historically, our figures up to 2008 reflect that 40 percent of properties entering three months of default make it as far as auction, with half of those going back to banks and the other half to investors. Now with banks coming to the aid of debtors we are seeing quicker auctions and a far lower percentage of properties in possessions whilst investors pile in."

Bondholders can't keep up

Lenders typically begin default proceedings against homeowners after mortgage payments are 90 days late. The foreclosure process varies by bank with most banks over the last 12 months having introduced products to assist their defaulting debtors. The increase in distress has been fuelled by a lag effect in distress and a jump in unemployment figures, whereby bondholders can no longer keep up with their monthly commitments despite the lower interest rates assisting their monthly contributions.

As bad debts spiral, banks are becoming more and more creative in assisting their defaulting clients and these various initiatives will reveal themselves later in the year as the effects filter into the market. South African house price deflation has continued and this is also reflected in the increase in negative housing equity, where many mortgagees are in the position where their outstanding finance is above their house’s current market value. These people are still sadly trapped in a home worth less than the loan they took out to pay for it. Their only solution is to look to their bank or face legal process.

The Alliance Group Distressed Asset Index tracks mortgage stress which it has defined as mortgage holders being in arrears for two months or less. Mortgage stress has increased from 55 000 in the second quarter of 2008 to 155 000 in the second quarter of 2009. Severe mortgage stress, where bondholders are over four months in arrears, has almost doubled in a year and increased sharply in June to over 72 000 home owners from 55 000 in the first quarter.

More sales in execution than ever before

Despite the lower interest rates there are more sales in execution than ever before. Currently there are approximately 4500 houses per month which are being sold forcibly through legal channels which includes sales in execution, insolvency sales and bank’s voluntary distressed sales channels. This shows that lower interest rates and banks themselves are assisting those in arrears to quickly rehabilitate themselves.

In the USA there are almost 100 000 foreclosures every month. One must look at South African distress in global terms before local statistics get too depressing. One of the most positive indicators that the residential property market is gaining traction is that buying activity of distressed houses has surged. "Distressed auction floors across the country are burgeoning and there are hordes of opportunistic buyers looking to pick up properties at lower prices," explains Levitt.

Court foreclosure processes have been hit with a flood of activity and these constraints cause huge delays in processes. Courts and sheriffs simply cannot keep up with the levels of sales in execution and this causes a lag effect on legal auctions. "We will still see some negative data in distressed sales even when the market eventually starts picking up," concludes Levitt.

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