bubbleinfo.com

It looks like servicers are coasting into the HAFA/short-sale era, which officially begins April 5th. Here are the foreclosure stats from the last 12 weeks:

My guess?  The HAFA package will encourage borrowers to pick a lane – either loan modification or short-sale.  But there are probably enough strategic defaulters to keep it busy down at the court house steps, but so far there have been very few quality properties at attractive opening bids.  I’m checking the list everyday, and I haven’t gone down to the ’steps once this year!

From NMN:

A Rumson, N.J., company is giving underwater borrowers a reason not to walk away from their homes, a move that could help prevent further deterioration in the value of a sizable chunk of the problem loans and properties still bogging down the market.

The company, Loan Value Group, has an incentive-based patent-pending concept and automation that could help address a problem posed by what studies show are roughly more than 10 million homes in the United States that have substantial negative equity. This affects almost $2 trillion of mortgage debt, according to LVG.

Data on the percentage of all defaults overall that have been “strategic” vary from about 18% to 25%, depending on the study. However, “this number changes amount according to the LTV of the loan,” said Alex Edmans, an assistant professor of finance at Wharton and an academic advisor to Loan Value Group. He cites one study by European University Institute professor Luigi Guiso, Northwestern University professor Paola Sapienza and University of Chicago professor Luigi Zingales that indicates mortgages with loan-to-value ratios around 120% start to become more prone to strategic default. Mr. Edmans also noted that a Federal Reserve study found a 50% likelihood of default when LTVs were as high as 150%.

LVG may have a “snapshot” of data on how effective its program is within a month, according to Frank Pallotta, executive vice president and managing partner at LVG. It may also release the name of the client testing it, which is said to be a major multibillion-dollar mortgage market participant.

Customers can private-label the program, which would be used in situations where high LTVs made it compelling for certain borrowers to stop making payments and walk away from their homes even though those borrowers might have the funds available to pay. The Responsible Homeowner Reward program is designed to realign borrower incentives so that such borrowers will be encouraged to pay off their loans instead.

Through RHR, a certain amount of incentive funds are set aside separate from the unchanged existing loan. These funds accumulate every month a borrower makes a scheduled payment for a period such as five years, regardless of home price direction. The borrowers would lose all funds and accrued value if they were 30 days late on a payment in any 12-month period. Homeowners that meet the program’s requirements for timely payments receive the funds when the loan is paid off. Some other options for the incentive funds have been discussed such as using them to pay down the outstanding balance of a refinance loan.

Mortgage risk holders ultimately decide the size of the payment to the borrower but can base it on a behavioral model LVG offers. The model provides a range based on factors that include negative equity, income and geography, Mr. Pallotta said. The company offers as part of the service other additional information about borrowers on a regular basis that may be helpful to clients, Mr. Pallotta said. Servicers, who are already largely overburdened and have their roles constrained by contracts, don’t have to take on responsibility for the RHR program, which LVG and its operational partner take care of. They may benefit from it, though, Mr. Pallotta said.

RHR also can be used in conjunction with other programs that address “affordability” default, where the borrower does not have the funds to pay an existing loan and may need a modification.

The distinction between affordability and strategic defaults is key when sizing up how big the “strategic default” issue is, according to Alan Paylor, president and chief executive officer of REO Leasing Solutions LLC, Houston. When default is strategic, or “voluntary,” then “incentives start to matter,” Mr. Edmans said.

Mr. Pallotta said he believes mortgage risk holders need to focus more on default that is “strategic” rather than due to affordability concerns, something Mr. Edmans indicates represents a departure from traditional thinking for the industry.

“They’re using an affordability platform to address a negative equity crisis,” Mr. Pallotta said. “If there’s too much negative equity borrowers are going to default, regardless of income and mortgage assets. I don’t think the owners of mortgage risk have their eye enough on the ball as far as negative equity.”

RHR may allow lenders and other parties to avoid other types of more costly loan remediation efforts such as reduction of principal in cases where strategic default is the real concern, he said.

Because RHR offers incentive payments to the borrower that are totally separate from the loan, it does not affect, for example, second liens or accounting for the mortgages. It aims to better align the incentives for the parties with a stake in the loans. Owners of mortgage risk can split what Mr. Pallotta said is a relatively low cost for the service. He said the ongoing cost for administering RHR is roughly less than 5 basis points of coupon annually. The present value cost to the provider for the incentive itself could be as little as 3-6 points of principal on a $200,000 mortgage with a 135%-145% LTV.

Kelly at the Voice of SD reviews the current market conditions in the San Diego real estate market at this link, here’s an excerpt:

There were 9,243 active homes and condos for sale on the Multiple Listing Service on Tuesday, according to Klinge. That number pales next to the number of distressed properties that have yet to be repossessed: 7,260 homes that have received at least one default notice and 10,221 that are headed for auction, according to Klinge. None of those nearly 17,500 properties have gone back to the bank yet.

But the threat of a flood of distressed properties hitting the market and driving prices down in one fell swoop has been just that — a threat — for years now. Klinge’s been monitoring the homes that hit the courthouse steps, and nearly as many auctions have been cancelled as have actually gone forward.

Here is Rich Toscano’s take on it, link here.

Bottom line?  We’ve been knocking on a lot of doors, and it appears that the servicers are keeping the loan modders on the foreclosure rolls for now, and cancelling the trustee sale once the borrowers are well into permanent-mod status.

Julie brought up the mark-to-market accounting requirement for banks.

I don’t think the banks worry much about marking to market.  Of the 43 Countrywide/B of A listings I’ve sold, I can’t think of one of the foreclosed mortgages that was actually owned by them.  CFC was selling their paper on Wall Street as private-label MBS, and those owners may have some requirement – but B of A is just the servicer on the majority of CFC paper.

Without the accounting requirements, the servicers might keep kicking down the road forever the 17,247 San Diego County properties in default.

Here is another example of can-kicking.  The FDIC just agreed to sell two portfolios of loans with a combined unpaid balance of $3.05 billion to Lennar Corporation.

MIAMI, Feb. 10 /PRNewswire-FirstCall/ — Lennar Corporation, one of the nation’s largest homebuilders, today announced the closing of two structured transactions with the Federal Deposit Insurance Corporation (”FDIC”).

The transactions represent the purchase of two portfolios of loans with a combined unpaid balance of $3.05 billion.  A subsidiary of Lennar, Rialto Capital Advisors, will conduct the day-to-day management and workout of the portfolios. Lennar acquired indirectly 40% managing member interests in the limited liability companies created to hold the loans for approximately $243 million (net of working capital and transaction costs), including up to $5 million to be contributed by the Rialto management team.  The FDIC is retaining the remaining 60% equity interest and is providing $627 million of non-recourse financing at 0% interest for 7 years. The transactions include approximately 5,500 distressed residential and commercial real estate loans from 22 failed bank receiverships.

My point is that here are another 5,500 loans that should be foreclosed on, but instead they are being shuffled off for additional processing.

For those of us who are seeking more REO inventory, it appears that we may be in for a long wait.

San Diego County defaulted properties (thanks foreclosureradar!):

Yesterday Sean saw these NSDCC January numbers posted here:

REO resales on MLS: 21
Short sales on MLS: 14
Trustee sales, REO: 32
Trustee sales, bought by 3rd party: 18
Trustee sales, cancelled: 56

and he asked about the cancelled trustee sales – how do they break down? 

I ran each of the addresses through the MLS and foreclosureradar, and was surprised to see that NONE of the 56 have re-started the foreclosure process, at least not yet.

Here is the breakdown:

MLS short sales:  19

MLS sale, not short:  1

MLS active listing:  2

Cured for now:  34

Total: 56

The short sales closed over the last three months, that’s why the 14 and 19 don’t jive – the servicers are slow to mark them cancelled.

I think we can assume that the ’cured for now’ category, those cancelled defaulters who were never on the MLS, are the loan modifications.  Some folks may be bringing in money to cure their default, but I’d guess those amount to less than 10% of the total.

If the real estate machine is handling 56 defaulters per month, and 50 trustee sales happen successfully per month, we’ll be treading water for the next decade or two.  There are 389 SFRs on the NOD list, and 532 on the auction list.

Bank of America and Wachovia are both rolling out their new and improved short-sale processing packages, and it looks like they are hoping to close short sales within 60 days.  We’ll have more on them as they develop.

With the HAFA plan directing servicers to pre-approve short sales, we might see improved timing, but nowhere do I see anyone stopping the graft and corruption that dominates the SS process.  There are no rules, regualtions, or laws to guide listing agents on how to handle a short-sale listing, and when left to their own devices, they seem to have great difficulty with handling them honestly and ethically.

It’ll be another frustrating year!

From bloomberg.com, hat tip PH!

Homeowners with mortgages of more than $1 million are defaulting at almost twice the U.S. rate and some are turning to so-called short sales to unload properties as stock-market losses and pay cuts squeeze wealthy borrowers.

“The rich aren’t as rich as they used to be,” said Alex Rodriguez, a Miami real estate agent with JM Group USA Inc., whose listings include a $2.9 million property marketed as a short sale because the price is less than the mortgage, leaving the bank with a loss. “People have reached the point where they can’t afford the carrying expenses of a $2 million home.”

Payments on about 12% of mortgages exceeding $1 million were 90 days or more overdue in September, compared with 6.3% on loans less than $250,000 and 7.4% on all U.S. mortgages, according to data from First American CoreLogic Inc., a Santa Ana, California-based research firm. The rate for mortgages above $1 million was 4.7% a year earlier.

 As defaults on the biggest mortgages rise, borrowers such as Steve Holzknecht, 53, are turning to short sales to exit loans that now are larger than the market value of the house. Last month he cut the asking price for his 7,280-square-foot home in Kirkland, Washington, by $550,000 to $1.25 million, lower than the balances of his two mortgages.  Holzknecht, the former owner of Four Suns Inc., a Seattle luxury homebuilder that went out of business two months ago, constructed the Craftsman-style home in 2000. He declined to identify his lenders or the amount he owes.

Read the rest of this entry »

Seen on CR, this summary on Bloomberg discusses the recent developments with short sales, DILs, and loan modifications. 

The article’s ending:

Short sales benefit a neighborhood because they clear out stagnant properties that may have an adverse effect on values, said Sean Shallis, a senior real estate strategist (ed. note: he’s a realtor) with Weichert Realtors in Hoboken, New Jersey. Shallis has one home with bank approval for a short sale and three others waiting approval on the same street in Jersey City with views of the Manhattan skyline.

“In every case we had multiple offers from people who had plenty of money to put down,” Shallis said. “Americans are out there still buying homes and trying to move it along.”

Short sales also help the bank, because foreclosed properties lose more value when they are vacant or a homeowner vandalizes a house on the way out, Sunlin said.

“We typically expect a 10 to 15 percent decrease of loss severity with a short sale,” Sunlin said.

Losses on prime loans going through the foreclosure process averaged 49 percent versus 34 percent for a short sale as of Oct. 1, according to a Nov. 10 report by Laurie S. Goodman, senior managing director of Amherst Securities Group LP. For subprime loans, losses averaged 73 percent for a foreclosure compared with 59 percent for a short sale.

“The loss severity of short sales is lower but it’s not low,” Goodman said.

For a borrower’s credit history, a short sale is typically reported as “settled” and considered as severe as a foreclosure, said Maxine Sweet, vice president of public education for Experian PLC, the world’s largest credit-reporting company. The impact of a short sale on a credit score is similar to that of a foreclosure. It may drop a credit score of 780 to 620, according to Minneapolis-based FICO Corp.

For sellers like Drew Schlosser, who bought 10 properties in Florida as investments during the housing bubble, getting a short sale was a relief even if the process was difficult.

Schlosser said he had to provide Wells Fargo a hardship letter, demonstrating that his financial situation merited a short sale. He also had to provide pay stubs, bank account information and past tax returns. To avoid fraud, the bank also required evidence that the transaction was an arms-length sale and not to one of his relatives, he said.

“They don’t agree to do it because you’re upside down,” Schlosser said. “If they think you can pay for it they’re not going to let you out of it.”

****************************************************

The article also has a link to the government’s assistance package, which includes $1,500 moving incentive to the borrower, $1,000 to the servicer, and $1,000 to the lender for every short sale or deed-in-lieu processed successfully.

The most shocking requirement? The government is hoping to get borrowers off the hook:

With either the HAFA short sale or DIL, the servicer may not require a cash contribution or promissory note from the borrower and must forfeit the ability to pursue a deficiency judgment against the borrower.

Will lenders/servicers agree to forfeit deficiency judgements for a measy $1,000 per loan?

from NMN:

Residential servicers, a sector that is grappling with a potential tidal wave of loan modifications, are beginning to hire “like crazy” according to Mary Coffin, a senior servicing executive with Wells Fargo Home Mortgage.  Ms. Coffin, speaking at SourceMedia’s Loan Modifications Conference in Dallas, noted that new servicing employees working on modifications are receiving four to five weeks of training in order to deal with the volumes they are facing.

“When you think about the number of people being added, and this is one of the most painful subjects for me, our history had always been to train early and often to make sure we were ahead of the default, delinquency and foreclosure forecast,” said the EVP in charge of loan servicing and post-closing for the nation’s second largest player in mortgages.  “We would hire people, bring them in and maybe start them in collections, easier calls, and over tenure let them encounter workout situations. We no longer have that advantage in this environment. We are hiring people by the thousands and thousands. It is very painful. The borrower has high anxiety and a lot of fear, complex documents to sign and return to us, and you are hiring people that get four and five weeks of training.”

She said servicers are going much deeper in collecting financial information from the borrower. Ms. Coffin described a transformation of servicers and what has evolved as the foreclosure crisis began and where the company sits today.

“In the old way of doing business, when the borrower first went delinquent, we would start with a repayment program. They don’t work to the point to where we have almost tried to get rid of them. It is a circular process that ultimately ends up with a different solution that needs to be found,” she told conference attendees.

“Today, we’re underwriting the financial condition of the borrower in order to pick the right solution that is sustainable. That is the first big change that has happened for servicers.”

The Wells executive noted there has been confusion regarding documentation under the government’s Home Affordable Modification Program, including re-requesting documents from borrowers and instances of losing documents.

“We are still dealing with pulling documents. We have gone back to the administration and I’d like to thank them. They already streamlined the documentation requirements for the HAMP. If we receive what are called the ‘critical documents’ then we are able to do the underwriting and the decisioning that we don’t turn the customer down if every paper is not signed perfectly. That’s a real plus,” said Ms. Coffin.

“We still have work cut out for us. We have customers where the administration has extended it four to five payments. We have a few borrowers sitting in that situation. We have heavy, heavy lifting to do in the next couple months to pull these customers through.”

Wells is trying to be as innovative as possible, working with external third-party providers, using phone calls, mail, door-knockers, branches, its sales teams, everything possible to help these borrowers get these documents in and finalized.

Wells is seeing short-term modifications as another solution for people who are able to regain employment immediately or who require only a short-term mod. It is taking an aggressive approach to the option ARMs from Wachovia. It is the one area where Ms. Coffin says they are doing principal forgiveness.

“We have lower redefault rates. Our key to these pay-option ARMs, if a customer is able to make a payment, we have to find a way to continue to allow that payment to be able to be made. What we are doing is restructuring the loan looking at net present value. It’s been very effective. Many of these customers need to be bridged from a negative amortization to an interest only. If you took them to a fully amortized product, there’s no way they are going to be able to make it. Over time, they will from an IO, step up, so there’s no payment shock.”

Early on, after analyzing its portfolio, Wells quickly saw that yes, HAMP was going to be a great tool and valuable to use, but it was not going to save 100% of their problems.

“Thirty percent to 40% of our portfolio who would be eligible for HAMP was coming to us for solutions. The remainder did not meet the criteria for eligibility. The biggest one was they were coming to us with DTIs below 31%. So, we also went to work on our in-house modification programs.”

This included the payment-reduction mod and the implementation of a full-quality review so no loan can go to a foreclosure before it actually goes through a quality review test to make sure all opportunities have been reviewed.

“These loans are going through multiple looks before they ever go to the foreclosure sale,” she said.

After the creation of the HAMP program, the volume for Wells jumped to over 40% of borrowers who were current on their mortgage that tried to get modifications.

“I knew from talking to investors, their biggest concern was the moral hazard of this program and people going delinquent to get a mod. The guidelines were not provided on default definitions. We worked to provide consistency.”

Because of all the attention on modifications “we went from a day when borrowers who were truly in need called to say, ‘What can I do?’ and we know what to do. Now we are sorting through hundreds of calls from borrowers who have been educated to some extent. We are still educating them on what you truly have to look like before you can get a modification,” she said.

From sddt.com:

A new report concludes the level of commercial loan defaults accelerating, but whether that means a surge of commercial foreclosures in San Diego depends on who is assessing the data.  Nationally, the Deutsche Bank report noted more than $2 trillion worth of commercial paper is set to mature between now and 2013, and as much as $450 billion would not qualify for refinancing under current criteria.

“This downturn may well exceed 2001-2003 when cumulative default rates reached nearly 25 percent,” Deutsche Bank stated.

The bank said the national commercial delinquency rate reached 4.1 percent as of the end of June. While year-to-year figures weren’t immediately available, that rate was some 3.5 times higher than December.

The bank identified some 2,158 delinquent commercial mortgages representing $27.9 billion in instruments nationally as of the end of June.

The commercial foreclosure activity has been robust enough here that Del Mar Heights-based Trigild, a receiver and distressed property specialist, has expanded its headquarters to accommodate more project management and accounting personnel.

Bill Hoffman, Trigild president and CEO, said in a prepared statement that his company’s portfolio of properties has grown significantly over the last year, and now represents more than $2 billion in defaulted commercial loans. These include the hospitality, commercial office and retail, multifamily and unfinished development sectors.

Hoffman doesn’t expect the distressed commercial property business to slow down.

“Tight credit markets will continue to hinder investors’ ability to pay off loans, and as a result, the rate of commercial defaults is soon expected to top 5 percent,” he said. “With this in mind, we are anticipating a dramatic influx of business in the coming months, and are growing our firm and service to accommodate new clients and employees.”

Jamie Dick, a Newmark Realty Capital Inc. senior vice president, suggests that while commercial foreclosures, particularly when they involve payment defaults, are inevitable in many cases, commercial lenders who are faced with loan maturity defaults — a big balloon payment at the end _ are likely to be more accommodating.

“If the lender forecloses, what are they going to do with it?” Dick said. “There’s a saying going around. It’s called ‘extend and pretend.’ They extend hoping that things will be better when the loan matures again. We are seeing a lot of banks work with borrowers.”

However, Dick said there is a shrinking pool of lenders willing to refinance, meaning some will foreclose rather than attempt a workout.  With the commercial mortgage backed securities market effectively dead, finding lenders who will loan at all has become increasingly problematic.

“I’d say that 2007 was the last normal year as far as the CMBS market goes. If you looked at a pie chart you’d see that up until then, CMBS was 65 percent of the market, so you can imagine all of that disappearing,” Dick said.

Dick said that CMBS was a $19 billion market in 1999, but reached $230 billion by 2007. 

“And wait until 2017 when all the loans from 2007 will be coming due.”

Some loans are still available. Dick noted that lenders have shown a willingness to provide as much as $5 million, but with very few exceptions, getting access to more capital than that has been extremely difficult.  When asked when capital will begin to flow more easily, Dick said it could be years from now.

“I think it’s like an icicle. It will melt, but it will be one drop at a time,” Dick said.

While there are pockets of overbuilding such as the Carlsbad and Interstate 15 office markets and the Otay Mesa industrial market, Dick said San Diego generally doesn’t have the surplus of space, currently the case in markets such as Phoenix and Las Vegas.

“Mainly, we just ran out of places to build. For example, we didn’t have all that land to build shopping centers,” he said.  Dick said although some centers are hurting with the loss of some major tenants such as Circuit City, the retail vacancy is 6 percent at most – still a very healthy figure.

“San Diego will recover very quickly,” Dick said.