bubbleinfo.com

Four posts back was the article about principal reductions – below is the response from Irvine Renter, or click here to his blog:

To give the hopeless a reason not to strategically default, several banks have singled out a few deeply underwater loan owners for principal forgiveness. By spreading news of their magnanimous deeds, they hope the remainder will keep paying.

Banks have a problem, a riddle they must solve. Twenty-five percent of their borrowers are underwater, and when you factor in second mortgages and sales commissions, more than half can’t sell their homes without writing a check for the shortfall. And house prices are still going down. When homeowners have no equity, they are no longer homeowners, they are loan owners. If a loan owner’s payments are less than the cost of a comparable rental, they have an incentive to stay and pay, but when the payment exceeds a comparable rental — and the huge mortgage balances of the bubble make this common — loan owners have an incentive to keep their money and strategically default on their mortgage.

Underwater loan owners have their names on title, and if they keep making payments long enough, amortization may catch them up, and prices may come back, so they may have equity again someday. The more their payments exceed the cost of rental, the further a loan owner is underwater, and the longer they perceive they will have to wait to have equity again, the more likely they are to give up and strategically default. If a loan owner strategically defaults, the lender is forced to make a choice; foreclose on the property when the resale value is worth less than the loan, or allow the loan owner to squat in the property.

Neither choice is palatable to the lender.

Lenders have responded to these circumstances — conditions the lenders created through irresponsible lending which inflated the housing bubble — by using both a carrot and a stick to keep borrowers paying when it is in the best interest of the borrower to strategically default. The stick is the threat of foreclosure, debt collection, reduced access to credit in the future, and an appeal to morality. The specter of consequences to borrowers has been wildly exaggerated, and these circumstances are lessening by the day.

The appeal to morality has been steadily eroding, as borrowers are coming to realize they have a greater moral responsibility to their families, than they have to their lenders.

Lenders’ threats of foreclosure have been neutralized by reports of delinquent mortgage squatters obtaining years of free rent. In fact, instead of being a deterrent to strategic default, the long foreclosure timelines have actually become an inducement. Lenders combat this perception with the use of terrorist tactics. Each month, lenders will randomly select a small number of fresh delinquencies to push through the system as quickly as possible. If some of the herd are executed quickly while others are allowed to squat indefinitely, it creates uncertainty. This uncertainty keeps some paying rather than play Russian roulette.

The carrot lenders dangle in front of loan owners comes through rumors of principal reduction windfalls. Like the random executions of freshly delinquent borrowers, a very small number of principal reductions given to loan owners who are doing what lenders want — making all payments — provides the lottery-style false hope to motivate the masses. Today’s featured article is part of the public relations campaign lenders use to get the word out concerning the principal reduction lottery windfall ostensibly available to loan owners who dutifully make their payments.

If someone somewhere got a principal reduction, it could happen to anyone. I hope nobody is holding their breath.

From HW:

The trend of borrowers choosing to default on their mortgage when they otherwise might have been able to afford payments is on the decline, JPMorgan Chase analysts said Monday.

Definitions for what qualifies as a strategic default varies. But analysts took a deeper look in the report. One widely held requirement for strategic default is that the borrower stops making payments when the property loses equity, meaning the mortgage is worth more than the underlying home.

JPMorgan analysts used Standard & Poor’s/Case-Shiller indices and tracked prices against original loan amounts on a metro level. Then, analysts collected counts for all defaulted loans since 2007 and tracked those that started missing payments once the loan went underwater.

They found 60% of all defaults were strategic by the middle of 2009, more than double the percentage in January 2008. But analysts wanted to get more specific.

Using data from Equifax, the JPMorgan analysts looked at which borrowers did not experience a monthly payment increase before defaulting. Then, they added in which borrowers were still making payments on other debts after missing their first mortgage payment.

The final definition of strategic default used was the “percentage of defaults from underwater borrowers who started missing payments once underwater, continued paying their other debt, and had no payment increase on their mortgage.”

While the analysts admit they might still be overestimating the amount of strategic defaults when accounting even for all these variables, they noted the trend is going down.

Across the private-label mortgage-backed securities market, the analysts found 10,000 strategic defaults fit their definition, down from nearly 20,000 one year ago.

“Overall, strategic defaults have stabilized as home prices flattened, and initial jobless claims declined,” analysts said. “A trend worth watching, no doubt, but we can comfortably say that strategic defaults are less than 30% of all defaults, and the pipeline of borrowers [delinquent more than 90 days] has even lesser strategic delinquencies.”

But there is still the possibility of the trend heading upward. The latest offer from the 50 state attorneys general in the foreclosure investigation includes provisions that allow for some borrowers to receive principal reduction. In March, at least four of the AGs sent a letter to the others, warning that such requirements may only attract more borrowers into strategic default.

Currently, 42% of underwater borrowers remain current on their mortgage, according to the JPMorgan Chase analysts. And they also warned of the risk these borrowers pose.

“Of course, the moral hazard of potential strategic defaults in the future is still present. Even though these borrowers have not been defaulting in large numbers, the event risk remains that they could,” analysts said.

From the FT.com:

It’s all over the news - the housing double dip is here.

They say that the DD is caused by an overload of foreclosures dragging down prices – but they are talking about the overall national market. 

Are the recent trustee sales building a backlog of REOs around San Diego?

It looks like more of the same around here – just when the servicers get some momentum, they turn off the spigot. There have only been 14 successful trustee sales in NSDCC over the last two weeks, so we’re back to the 1+ foreclosure per day.

The threat of future foreclosures is always lingering – could the worst be yet to come?  With the banks and servicers controlling the flow, there doesn’t seem to be much reason to expect a flood coming anytime soon – or ever.

How many REOs are floating around in the shadows?

Here are the San Diego County properties owned by each lender, the number of SFRs they own in North San Diego County Coastal, and the count of how many of those aren’t listed yet:

In the depressed areas where REOs are abundant, there’s no surprise to see some can-kicking, but around North County Coastal it’s been quiet. A few of the shadows have just been foreclosed, so you know there is some lag for evictions, repairs, and processing.  Others are involved in litigation too, so it doesn’t appear that they are purposely delaying the process much around North SD County Coastal.

The buyers around NSDCC will welcome the 25 well-priced SFR REOs when they hit the open market over the next couple of months – expect bidding wars!

From Diana Olick at cnbc.com:

Home prices fell 6.7 percent in February year over year, according to a new report from CoreLogic. That numbers includes distressed sales, that is, sales of foreclosed properties or short sales, where the bank agrees to let the homeowner sell for less than the value of the mortgage. If you take those sales out, however, home prices were basically flat.

“When you remove distressed properties from the equation, we’re seeing a significantly reduced pace of depreciation and greater stability in many markets,” notes CoreLogic’s chief economist Mark Flemming. “Price declines are increasingly isolated to the distressed segment of the market, mostly in the form of REO sales, as the stock of foreclosures is slowly cleared.”

Distressed sales, though, still make up more than a third of all home sales, according to the National Association of Realtors, and that number is likely to rise at least in the near future. The banks have slowed the process of foreclosure, and that has reduced the number of bank owned properties hitting the market lately, but it’s a whole different story with short sales.

“Absolutely we can see on the ground, it’s just happening,” says Robert Cruz, a real estate broker just south of San Francisco who deals primarily in short sales. “The banks are asking us to go out and engage the borrower, find the borrowers who have defaulted or re-defaulted and list the properties before they have to foreclose.”

Short sales used to be a long, tedious process with a very low success rate. “Short sales used to be a waste of time,” Cruz remembers. “Now it’s totally changed.”

Much of that is due to banks streamlining the process and a new government incentive program, but much of it is coming from the banks themselves. Cruz says in the first quarter of this year his firm’s short sale closings were up at least 60 percent, thanks to the banks and servicers being far more aggressive in pursuing them; not only are they pursuing them, but they are paying for them.

While the government’s Home Affordable Foreclosure Alternative Program offers borrowers $3000 in “relocation assistance” after successful short sales, Cruz says some of the banks are paying borrowers up to $25,000. He says the banks know the sellers are more savvy today and know they can live rent free for at least a year before a bank takes possession of the home in foreclosure. $3000 isn’t much incentive to move quickly; $25,000 is.

“It’s a sea change,” adds Cruz.

So why am I telling you all this? Because if short sales continue to increase at this rate, even just this year, that’s going to push the home price numbers down even further. Sure, if you take out the short sales, the numbers will look better, but those big headline numbers generally include short sales, and that will further erode confidence. More short sales will also force organic sellers and home builders to try to compete with lower prices. Short sales may be better for the banks and better for borrowers’ credit scores, but they will take their toll on the greater market.

It happens about once a week that we see an out-of-town realtor input a new listing in their hometown MLS, thinking that it somehow magically transports in our San Diego MLS here.  But it is probably due to their assumption that just because the rest of SoCal is on one MLS system, San Diego must be too - but Sandicor is holding out. 

As a result, these listings don’t get exposed to SD realtors, but Redfin picks them up because they search by area, not MLS system.  We are monitoring Redfin now, but hat tip to Genius, who sent this over.  It is a short sale, the seller owes over $1,000,000, according to foreclosureradar:

633 Rushville, La Jolla

3 br/2 ba 1,214sf

4,099sf lot

$659,000

MLS Remarks:

Wow! What an opportunity to live in La Jolla at this price. This lovely traditional craftsman home is only a couple of blocks from the beach. Home is in good condition on the inside. Tax roll says 2 bedroom but actually 3 with over 1200 sqft of living space. Hardwood floors throughout with a fireplace in living room. Great for moving in or an investment property!

From the REChannel:

It didn’t make the headlines when it was first announced in November 2010 and it didn’t make the headlines this week.

But if President Barack Obama’s proposed 2012 Federal budget cuts involving the sale or disposition of 69,000 government-owned buildings located across the U.S. is passed by Congress, it would be the largest real estate deal of its kind in this country’s 236-year-old history, according to several almanacs and real estate industry sources which track such deals.

Instead of an outright sale, some of the properties could possibly be transferred to other agencies in need of space; or donated to colleges, parks and hospitals, according to Obama’s previous memos to federal agencies.

Peter R. Orszag, former director of the Office of Management and Budget, said in a June 2010 blog post the federal government has 14,000 excess buildings and structures and another 55,000 that are under-used or completely unused.

According to the GOP’s Oct. 6, 2010 White Paper, members of the Transportation and Infrastructure Committee claimed the sale of the buildings would save the government $250 billion in maintenance, insurance and other related costs over the next 10 years.

Committee Ranking Minority Member John Mica, R-Fla., noted in October the federal government, as the nation’s largest asset holder, manages 896,000 buildings and structures with a total area of 3.29 billion square feet and more than 41 million acres of land.

The GOP committee’s report was particularly critical of the General Services Administration.

It noted the government’s landlord owns “large numbers of vacant or underutilized federal buildings” and yet “struggles to dispose of its surplus property in a timely fashion and for reasonable rates of return despite its enhanced property disposal authorities.”

The report criticizes GSA’s real property management for its “apparent inability to maximize market opportunities to house federal employees at the lowest long-term cost to taxpayers.”

Beyond GSA, the report cites potential savings by selling off or reconfiguring assets controlled by the Transportation Department, Coast Guard, Federal Emergency Management Agency, Amtrak and the Army Corps of Engineers.

For example:

• The government would save $2 billion by selling 20 percent of “nonperforming” real estate assets.

• It would save $1 billion by “reducing or eliminating spending on unneeded courthouses and excessive courthouse space.”

• It would save up to $180 billion by “encouraging additional investment in infrastructure from the private sector by providing a better definition of public-private partnerships for undertaking highway, transit, port, rail, airport and other infrastructure projects.”

The Obama administration has agreed the federal government has surplus property.

From cnbc.com: http://www.cnbc.com/id/39873678/

A new survey by Pew Research says 36 percent of Americans believe walking away from their mortgage is perfectly acceptable. We want to know if you would ever simply leave your mortgage and your home behind.

Tell us what you think. Share your opinion:

Total Votes: 2267

From Diana at cnbc.com:

(S)everal speakers at the forum said several scary things about housing and foreclosures. Mark Zandi of Moody’s Economy.com is looking for a hybrid version of Fannie and Freddie, or a mortgage market more privatized but with government backing. He said that if the mortgage market were fully privatized, mortgage rates would go up at least one percentage point and home prices would drop ten percent.

Laurie Goodman of Amherst Mortgage Securities put up some truly scary charts about non-performing loans and, with a flurry of numbers I couldn’t follow, said that without government intervention about 11 million more borrowers could lose their homes.

“Equity is the single most important determinant of default, not unemployment,” declared Goodman. This as a new report from CoreLogic this morning showed home prices dipping over 5 percent nationally in December, year-over-year.

“The key thing for investors to look at right now is what’s going to open up for them, what part of the playing field is going to open up where they can actually step in and be part of the mortgage market again,” said Armando Falcon, chairman and CEO of Falcon Capital Advisors, on a bit of a brighter note. “And that’s clearly going to be for the jumbo prime mortgage sector.”

From HW:

Whether they like it or not, the nation’s banks control most of the country’s shadow inventory, according to a report Friday from Morgan Stanley.

Even more, properties in imminent default are typically cheaper homes with prime mortgages. The analyst adds that their findings buck conventional wisdom that these homes are either concentrated in the slums of Detroit, or prevalent amongst cardboard cutter McMansion neighborhoods.

The shadow inventory, they say, is the biggest problem for average Americans living in the nation’s major cities.

And, what’s more, the homes are more and more being controlled by the banks, as opposed to Fannie Mae, Freddie Mac or private securitization trusts.

“While agencies certainly maintain control over a large portion of the shadow inventory at just over a third, we can see that the majority of the control over delinquencies is in the hands of the banks, and their share has increased over the past year,” reported Oliver Chang, James Egan and Vishwanath Tirupattur (see chart below):

“This may be because borrowers are becoming delinquent at a faster rate for bank-held loans, but checking transition rates for each controlling party, we do not see a significantly larger change in transitions into delinquency for bank-held loans,” they added.

Of the shadow inventory, 75% are valued below $250,000, showing that McMansions have a small share of delinquencies (see below chart):

Further, the shadow inventory is growing across all of the United States. The analyst expect that more than 8 million liquidations are in order over the next five years before housing stabilizes.

“While hard-hit cities represent a more than fair share of shadow inventory, its distribution broadly encompasses all corners of the country,” said the analysts.

The liquidation of subprime early on in the recession is now being replaced by later delinquencies in prime collateral. The shift in collateral is making the supply imbalance worse for the best part of the credit spectrum.

CoreLogic said in September that based on the shear number of prime mortgages in the market, that foreclosure and delinquency rates would steadily tick upward. Compared to the less than 3.5 million subprime, there are about 40 million prime loans in the marketplace, 6.2% of which were 60 days delinquent in June 2010 and 3% of which were 90 days delinquent.

“We do see a slowdown in liquidation rates of bankheld loans, suggesting that the increasing share of shadow inventory is due to banks holding onto their delinquent loans longer than agencies or private securitization trusts,” they said.