Friday, November 28th, 2008 at 10:02 AM
Back on the Horse
Welcome to the day after Thanksgiving!
A reader sent in this report from Goldman Sachs – it refers primarily to the subprime loans issued in 2006 ($600 billion):
ABX Performance Update
· Delinquencies and losses – delinquencies increase again this month for all ABX indices, although there are further signs of moderation for the 06 indices. Losses continue to rise, due to liquidations from the bulging foreclosure and REO pipelines.
Recent Trends in the Non-Agency Mortgage Market*
· Loan modifications on the rise
· Modification activity is steadily on the rise at about $5B per month, $4B of which are subprime loans. So far, about $35B subprime loans have been modified, accounting for 6% of the outstanding balance.
1 To date most modifications have taken the form of a rate reduction. While only 27bps of outstanding subprime mortgages have received principal reduction, it is often very significant, typically providing 20-30% equity relief to the borrowers.
2 Principal modifications appear more effective than rate reductions in keeping borrowers perform.
3 Modifications are least effective for subprime borrowers, 70% of whom relapse into delinquency within 12 months after modification. Alt-A and Option ARM borrowers perform relatively stable, with a 20% delinquency rate (D30+ ) after modification.
· Liquidation trends – how much discount do you get from distressed home sales?
· REO properties offer roughly a 25% discount below the market prices implied by the Case-Shiller HPI index, while short sales prices are only about 8% lower.
1 Liquidation discounts vary greatly by states. Distressed sale in Ohio is about 50% lower than market price. For California, the discount is less than 20%.
*: all based on Loan Performance data, for non-agency securitized mortgages only.
My thoughts:
When they say 27bps, they mean 0.27% of the $600 billion, or about $1.62 billion in loans that have had a principal reduction. That’s about 4,000 loans at an average of $400,000 each. These are national stats, yet 4,000 loans probably doesn’t even cover the amount of subprime loans funded in SD County in 2006, let alone the nation. Yet in their #2 they note that the principal reductions appear to be more effective in keeping borrowers paying. In their #3 they note that 70% of those subprime borrowers who only get a rate reduction end up non-performing within 12 months. Which really means a lot less than 12 months, because they have to be counting loan mods completed in 2008.
End Result? The principal reductions are the only effective way to modify a subprime loan, and for the mortgage industry to fully engage, the government is going to be under pressure to share the pain. Hence, the $600 billion gift issued by the Fed right before the holiday.
REOs vs. Short Sales – They assert that REOs are selling at 25% discounts, and with a short sale you only get 8% off. I think that in 2009 we’re going to see more agents listing their short sales with the dramatic way-below-market list price. With the agonizing long wait to complete a short sale, the ultra-low list price is becoming the trend to entice buyers to hang around, but over that time there are more offers that keep coming in to thwart any potential “below-market” sales price. I’d expect that from now buyers are going to want to have less and less to do with short sales, which could lower their eventual sales prices.
Posted on Friday, November 28th, 2008 at 10:02 AM in Uncategorized | 13 Comments » | 
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seems to me, that as soon as the banks start letting the Realtors, instead of ass-et managers, handle the desicion in selling real estate, the quicker they move their inventory for more money, and the better deals for buyers, and the sooner we get through this. I say dont take short sale listings and dont show buyer short sales. Let the banks finally figure out that they are not the experts here. Realtors are!
big wave dave | November 28th, 2008 at 10:17 amI was ready to pull the trigger on a purchase, but all of this honestly has me confused. There are 10k houses about to REO, which should push prices down and provide a lot more selection. At the same time, these loan mod programs are freezing inventory.
Will this uncertainty clear after Christmas? How long can the banks keep this quantity of bad money on the books? I was hoping for end of year deals!
Chris | November 28th, 2008 at 2:05 pmOnce again I am wondering why my hard-earned money is being spent trying to keep underwater speculators in houses they obviously couldn’t afford when they “purchased” them trying to get rich the quick and easy way, while I am stuck living within my means while they money I worked hard to save is being made worthless by unprecedented government waste and bailout spending. It’s a crazy country we live in, I guess; and I’ll think twice before trying to avoid gambling all my money on the next speculative bubble, knowing that our government will ensure you get screwed if you try to be responsible, so you might as well go for broke.
As for short sales, I think it’s nice that Redfin recently added an exclusion filter for short sales; it makes it easy to ignore properties which are only for sale at “fake” prices, until they inevitably become REO’s. I think it’s probably only a matter of time before everyone else comes to a similar conclusion, and short sales become another obsolete relic of failed RE pseudo-scams.
Nick | November 28th, 2008 at 2:20 pmObviously there is always an amount of money you can spend to make any borrower perform, guaranteed. The real question is whether or not it’s better to foreclose than to hand out such money. For example, if you have to give a borrower $200,000 in order to get them to pay you the other $200,000 they owe you, you might be better off taking the collateral.
When was the last time you had to pay someone to get them to return the rest of the money they borrowed from you? And if the borrower still defaults, the bank is hit twice..unless they can convinced the Fed to share in the new loss.
BDiego | November 28th, 2008 at 3:41 pmEnd Result? The principal reductions are the only effective way to modify a subprime loan, and for the mortgage industry to fully engage, the government is going to be under pressure to share the pain. Hence, the $600 billion gift issued by the Fed right before the holiday.
——————–
And this is where I have a problem…principal reductions are fantastic, but taxpayers should NEVER have to pay for them. They are a result of the lenders’ lack of due dilligence, and only the lenders should take the hit.
Personally, I’d like to see a principal reduction program which results in one, full-recourse loan (the primary) adjusted to whatever the borrower can afford, and the “written-down” amount would become a non-recourse second which could be sold off in the private market. The borrower should not be allowed to cash-out refi or get another second (third) until both mortgages (refinanced first and “balloon” second) are paid off.
The second only becomes due upon sale of the house, or when the borrower cash-out refis or HELOCs, as that would assume the price is above the original loan amount (the first, pre-reduction sale).
The original sale should be re-recorded at the lower, “written-down” amount, and that should be used as a legitimate comp, since the original sale was never a true sale (the borrower never had any intention of paying it off, so it was a false bid).
CA renter | November 28th, 2008 at 4:31 pmA couple of overpriced properties I have been watching turned out owing to more than one lender–so not until they REO’d and the secondaries finally “accepted” their losses, did these homes finally geet in the current market range (at the courthouse steps).
Still waiting to see how the banks wil market them, but two, I know, were BofA firsts (apparently meaning now, Countrywide REOs), so I am not holding my breath on seeing them marketed till the “March madness” of their loan mods is over.
shoppingaround | November 28th, 2008 at 4:31 pmI was looking at condo recently and the monthly HOA dues are $217/per month; however $57.10 of this amount goes into a long term reverse account each month. This was the information contained in the HOA rules and regulations that I was reading. Do most HOA’s set aside funds in a long term reverse account and if so does this seem like too much money or not enough.
The entire complex was just remodeled in 2006 when they started selling the condo’s to the public. The complex consist of 84 units and it’s been open two years so they now have over $100K in the long term reverse account according to the budget I reviewed.
Nathan | November 28th, 2008 at 7:51 pmChris,
here’s some bedtime reading for you…
http://realestate.yahoo.com/promo/home-prices-in-record-decline.html
The bottom line of the article is that the Case-Shilller numbers are record bad and will get worse in the months to come.
Simone | November 28th, 2008 at 8:17 pmBefore I would put in a bid on a short sale I would recommend finding out about the financial situation of the seller. If the seller just purchased a luxury car in the last year the bank might be reluctant to approve the deal or require considerable loss sharing in the form of a promissory note.
I fully endorse this. There is a lot of complaints about the pace of short sale approval (especially from the NAR) but the purpose of the bank is too mitigate losses not make life more convenient for someone living beyond their means or failing in speculation. It is also not to increase commission sales for NAR members.
LV Renter | November 29th, 2008 at 12:17 pmJim
I have a question on why REO listings seem to appear and disappear and then appear again. Why does this happen? Do they get pulled from brokers? Do they find out after they list they are not allowed to sell yet?
LV Renter | November 29th, 2008 at 12:19 pmI haven’t seen too many get pulled and given to other agents, in fact, I can’t think of any.
They send them to auction though, and if they don’t sell they’ll come back on the MLS, usually at a different price. The one on Barsby was listed for $179,000 as the opening bid for auction, it was bid up to $245,000, but not good enough – the bank didn’t take it, and instead re-listed it for $299,000. This for a house that needs a septic re-build, not too many people want to pay retail for those.
A lot of listings are falling out of escrow in the early stages (during the inspection period). There was one in CV this week that fell out after about a week, and the REO listing agent remarked that if you were going to offer FHA, you had to prove to him that the complex was FHA-approved. Back in the day the listing agent would verify that as a service to the seller to make the unit more marketable – more Robot Realty!
I think if you were to track those that are bouncing on and off the market, the robot realtors would be seen repeatedly.
Jim the Realtor | November 29th, 2008 at 12:35 pmThanks for the link Simone – that was excellent.
Chris | November 29th, 2008 at 7:47 pmThanks for the info. The reason I asked was two foreclosed units in a DT condo were listed for 20% more than another foreclosed unit in the same building. The floor was different by the sq ft was the same. Then both units were removed last week. Lets just say not very efficient.
LV Renter | November 30th, 2008 at 12:04 pm