Written by Jim the Realtor

August 27, 2009

We’ve followed the same four REO listing agents since 2007, looking for clues about the flow of REO inventories.  Here is a comparison of late-August numbers:

August 21, 2007 – 382 Actives/111 Pendings = 3.44

August 21, 2008 – 121 Actives/147 Pendings = 0.82

August 27, 2009 – 44 Actives/135 Pendings = 0.33

On foreclosureradar there are 4,274 bank-owned properties, for these REO specialists to only have 179 properties on the market today indicates a major blockage.

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Maybe they are just closing them quickly? Here are their year-to-date numbers, through 8/15:

Year # of SOLDS $$/sf DOM
2007
430
$299 65
2008
997
$216 81
2009
865
$165 66

They are closing fewer than last year?

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Maybe the moratoriums bogged them down, and they are rolling now? Here are their July’s stats:

Year # of SOLDS $$/sf DOM
7/07
78
$298 63
7/08
160
$201 74
7/09
81
$169 60

Even though the powers that be have choked off the flow of REOs, it doesn’t seem to have stopped REO pricing from plummeting 44% in the last two years.

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August is almost over, has there at least been an overall increase in REOs listed this month, compared to July, 2009?

Month Total New REO Listings
7/09
1,022
8/09
677

True, this month isn’t over, but even with a three day blitz we’re not going to come close to last month’s new REO listings.

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The 8,000 lb. gorilla in the room are the 20,672 defaulted properties in San Diego County. Can they get a loan modification or short sale completed, or are they destined for the court house steps too?

The servicers are getting aggressive about closing short sales quicker. One in process got an unexpected incentive yesterday – if we can close by the end of September we get a 7% commission, instead of 6%. But it’s not the taxpayers taking the hit, it’s the private mortgage insurance company.

Another month gone by, and what do we have? Servicers racking up more fees, deadbeats enjoying more free rent, and buyers waiting anxiously to steal one from the bank. We need an REO enema!

22 Comments

  1. Mozart

    I can only imagine that the main distortion is because a borrower must receive a notice of default in order to pursue better terms for their existing loans. They are effectively told to do so by their servicer.

    The question is how many are gaming the system by choice, and, how many are in foreclosure because the system demands they do so?

  2. Sam

    My home went to auction on July 9th and didnt sell. This is now the end of August and the deed transfer is still in process. The county clerks office is behind on processing and so are the mortgage servicers. In a call to my mortgage company yesterday, I was told it could take several more months for the deed transfer to take place. Too bad I moved out!

  3. calhousebear

    While I think Mozart has a point, I doubt even the majority of the 20k backlog are just gaming the system. Also I know from personal experience (our LL is in default) that once someone is in default and gets the notices, the stigma of not getting whole seems to evaporate and instead the mind set becomes if the bank won’t forgive my principal, I am going to walk regardless of how low they may set my interest rate.

    On another note, if a person had such a blockage, one would suspect cancer — so to me if this blockage doesn’t get fixed, we will only have a growing cancer on our hands.

    Eventually the pension funds holding these loans will run low in cash flow and while they may still be able to pretend the loans they hold are valuable, they won’t be able to send the full pension check to their retirees. When that happens, watch out because the AARP is much more powerful than the NAR. I think sometime next spring / summer we may start to see these effects.

  4. daveg

    I have noticed a more stuff coming on line lately.

    Next week I have eight candidate properties, where for the last six weeks I have been lucky to see one per week.

    Could be a fluke, but maybe not.

  5. Keep.I.F

    I know someone that is strategically defaulting. The person has not made a mortgage payment since March 2008. The person tried a short sale but it failed, then there was the Cal postponement, then the Obama postponement, and they still live in the place. The person is actually now considering jingle mail because even though the free rent is nice the person wants to start rebuilding their credit. That is what is in the pipeline.

  6. Chuck Ponzi

    Mozart,

    you may have missed that a delinquency (while it may help you renegotiate your note) is catastrophic to your credit score.

    I have my doubts about whether someone is willing to sacrifice their credit score (which can affect things like employment) just to get a mod. Not to mention the unlikelihood of actually getting a loan mod.

    Strategic default is like playing russian roulette. Your chances of winning are about as good as losing, but if you don’t have to why play at all? The reward for winning in no way is comparable to the punishment for losing.

    Chuck Ponzi

  7. Mozart

    Chuck – I think it’s a crazy gamble too. I know people going this route for their investment properties after being essentially encouraged to do so by their servicer.

  8. Jack

    Jim,
    Any idea if Chase is in that group of servicers that are trying to get aggressive? We’ve had an offer out on one of their short sales since October 2008.

    Any prior experiences dealing with Chase on short sales? Do they take this long on all their shorts?

  9. NateTG

    “The person is actually now considering jingle mail because even though the free rent is nice the person wants to start rebuilding their credit.”

    Can a borrower actually force the bank to take posession? That makes about as much sense to me as the whole non-recourse no money down lending the banks were doing.

  10. Chuck Ponzi

    Mozart,

    I have to say that if someone is willing to strategically default for a property that isn’t even their own personal property, they’ve got to be pretty stupid. People like that should not be allowed to have investment properties.

    In my experience, mods are almost impossible to get for 2nd homes or investment properties.

    If they were genuinely encouraged to do so by their servicer, that’s neglecting their fiduciary duty. The conflict of interest on the part of the servicer is transparent to the courts, and they could get into a lot of legal tangles with their real boss (the note holder). I wouldn’t trust a servicer who told someone to strategically default; that person is either not smart enough to consult on financial matters, or is a legal wreck waiting to happen.

    I’ll expand the analogy thus: strategically defaulting to get a loan mod on an investment property is like playing russian roulette with 5 out of 6 chambers loaded.

    Chuck

  11. pepsi

    Talking about blockage ! Last month, JtR was talking about court house step auction, and see how many of them (in CV) actually get to the court house ?
    Zero !

    I track 92126 to 92131 and there are only a handful of them going to court house steps.
    And only 2 (or 3) of them going bac to bene. Others (6 or 7) of them are sold to 3rd party.

    90% of these NOTs have last many months and will keep floating around foreclosureradar.com

  12. Maggie Knowles

    “We need an REO enema!”
    ~~~~~~~~~~~~~~~~~
    I about fell out of my chair laughing! 🙂 So true!

  13. osidebuyer

    gross

  14. doughboy

    This one definitely could use an enema or 2!

    http://www.sdlookup.com/MLS-090003958-1361_Shorebird_Carlsbad_CA_92011

    Went by this house on a run today, yard is toast, Looks trashed inside, doesn’t resemble the photos posted in the listing at all.

    Nice buy in a great hood for 900’s if the bank could wake up!

  15. 3clicks from da beach

    Doughboy, I think Jim featured that house on a video more than a few months back. If not, then the floor plan, location and dual garage are pretty much the same.

  16. 3clicks from da beach

    I’m just that much closer to those Charger tickets 🙂

  17. MJ

    Theres something very wrong with this whole scenario.

    If its just a workload problem, it should be stable. The banks arent hiring less people to process these. If there is a huge backlog, REO numbers should not continue to decline like this – instead there should be a steady state X per month every month, not X-1, X-2, X-3…

    Same thing if it was just a game to achieve price stability. Again we have that – prices are stable. As such, if there is a huge backlog, REO numbers should not continue to delcine like this.

    I am beginning to think, maybe, the whole backlog may not exist (or at least not be growing). Between the modifications, rent-back programs, bulk purchases by investors, REDC type auctions, etc. etc. etc. is it possible that this huge backlog simply doesnt exist?

  18. 3clicks from da beach

    I said this three years ago. The bubble doesn’t have to burst because the air will be let out slowly.

  19. propertysearch

    I think it is a combination of several things.
    First, the property tax issue. One house I want has been held up at the county for property taxes for months.
    Second I have no proof, but having banked for years…I am sure the banks are unorganized.
    And third there is a lot of investor activity. I have seen several homes that were in the pipeline show up on the MLS with a new yard, new paint and listed $50,000 to $150,000 more than their short sale neighbors. I am starting to see that investors are buying these homes and turning around and selling them.
    Put all three together and it is the perfect storm.

  20. doughboy

    3 clicks,

    Same plan, same neighborhood, same story, different house. Round 2 in Bella Lago/Aviara REO! This one is not as beat up inside and out, but falling apart quickly!

  21. Kelja

    Doughboy ————

    The property you show, the 1mil house, has a major flaw (in my opinion). I’ve walked that trail near the Lagoon, nice walk – lots of trees, birds and fish jumping – but noisy. The noise from Rt 5 is deafening.

    Maybe they should market the house to the senior, very hard-of-hearing demographic!

  22. Maggie Knowles

    Good article from AmericanBanker.com on why the banks won’t foreclose (you have to register to get the article):
    http://www.americanbanker.com/issues/174_164/postponing_the_day_of_reckoning-1001358-1.html

    “Deferring foreclosures could have bottom-line benefits, experts say. With fewer foreclosed properties hitting the market, housing prices have rebounded slightly. Moreover, properties might recover more of their value later on, so by waiting, banks may be able to cut their ultimate losses.”

    But in a note to clients, economists at Morgan Stanley wrote, “we do not believe that prices are actually improving for any part of the housing market, except possibly certain foreclosure markets due to a shortage of foreclosed inventory from the recent drop-off in liquidations. … This drop-off has nothing to do with fewer people becoming delinquent. … Instead, it has to do with banks and servicers reducing the rate at which they take back the properties.”

    Data released last week by the Mortgage Bankers Association showed delinquent loans growing at a brisk pace. In the second quarter, roughly 4.2 million borrowers were 90 days or more delinquent on their mortgages (a delinquency rate of 9.24%, up from 6.41% a year earlier), the trade group said. By contrast, foreclosures were initiated on just 612,000 homes (a foreclosure start rate of 1.36%, up from 1.08% a year earlier).

    Michael Brauneis, the director of regulatory risk consulting at Protiviti Inc., a unit of Robert Half International Inc. in Menlo Park, Calif., said that, despite the high redefault rate on modified loans, banks now see an advantage in modifying instead of foreclosing “because it cures the delinquency and they may get par value out of the loan, if property values are stable. Even if they get [only] a few payments, if property values go up, they could do a bit better once they take out the borrower.”

    The flip side is: “The more foreclosures there are, the worse the losses become down the road,” he said.

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Jim Klinge
Klinge Realty Group

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