CR is covering the news better than ever, but for those who may have missed this week’s latest reports on the so-called ‘shadow inventory’, here are two articles (hat tip to MM for sending both!)
http://online.wsj.com/article/SB125366552480532521.html
http://www.bloomberg.com/apps/news?pid=20601087&sid=aw6_gqc0EKKg
An excerpt from Bloomberg’s:
“The crash in U.S. home prices will probably resume because about 7 million properties that are likely to be seized by lenders have yet to hit the market, Amherst Securities Group LP analysts said.”
Talking about a flood of foreclosures may sell a few newspapers, but will it ever happen?
Here are the number of new REO listings inputted onto the MLS the last seven weeks:
211, 198, 191, 208, 196, 177, 208
We could say they increased 18% in the latest week, but hardly a tsunami. We’d need to see hundreds more per week to believe the flood is for real. Until then, the drip method will remain the servicers’ preferred choice of liquidation.Â
Who knows if they could flood the market if they wanted to?
I heard a good one yesterday though from an insider – Chase is “sitting on” roughly 450,000 properties, mostly from the WaMu portfolio, which I speculated means they have a lot of defaulters, not REOs. Unless they are hiring thousands of new staff people to push those through, it’ll take them years to resolve that mess.
Expect the trickle to continue, at least for now.
Let’s take a poll:
Do you think we’ll ever see a flood, or will the-powers-that-be keep trickling us forever?
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That is a tough one. I really think it is to the banks advantage to dribble them out. …. multiple offers, bidding wars, hiding the loss on the books until the actual sale takes place. I vote that they will continue to slowly release them but they will need to move somewhat faster if they really have that much of a backlog. It will be 2012 at that rate before they get done.
There will be no flood.We seem to like a trickle down economy.
I’ll vote trickle (at taxpayer expense.) This administration has shown serious reluctance to do anything that might “panic the herd.” They will backstop the bank’s losses as long as they have to to keep panic at bay.
Now that we’re down to the Big 3 plus Fannie/Freddie, would anyone put it past them to conspire to trickle? After what we’ve been through, it seems likely.
I’d be careful with all those tinfoil hats so near those power lines.
This is an easy one; the trickle will continue. The banks prefer it this way, and the government will let it continue.
I vote trickle for a few reasons.
– If they don’t foreclose they don’t have to own/claim/mark the loss in value of the underwater mortgage.
– Since the banks don’t directly own most of the mortgages, they have to get approval from the mortgage owners – fannie/freddie etc… Since those entities are backstopped by the treasury and fed – they have no incentive to approve forclosures – it would just make them mark their loss and would be politcally unpalatable.
So… for now… it’s a trickle.
I vote trickle for the reasons stated by the other posters plus this one: the loan servicers can collect additional fees on loans in default, but once a loan is foreclosed all their income from that loan ceases. Therefore they have an incentive to drag out the period between NOD and foreclosure.
I don’t think trickle will be anything that can be viewed as a tin-hat “conspiracy.” It will be the official if not public policy of the government to prevent a flood and the banks will be all to happy to go along.
Funny things about floods (if you’ve ever been in one, you know what I mean).
I grew up in Iowa, and we got major flooding in Des Moines where the Des Moines river would flow through, so I speak from some experience.
Floods did not come from downpours. They came during normal rains that lasted for a few days. More importantly, it didn’t really need to rain there a whole lot. It was upstream where the flood began. At first, the rivers would just swell and swell. They would stay within their banks and nobody thought much about it. They could even forecast how much they would rise and how fast. Funny thing, though, once it spilled out over the banks, people were falling all over themselves like they had never seen water before. Then it came in torrents, water seeping up through the ground. There were no rivers near some flooded areas, but the ground had become so saturated that the water table was above the ground in several areas. And, it was always the lower-lying areas that were affected.
So, I believe it will be true to the analogy. Except that this is no flood. We will still have falling prices, but not like last year. They will eventually settle in where they should be all along, eventually we will get there. But, as is proven many times, the market can remain irrational longer than you can remain solvent. This oft-used phrase has been used too many times to explain 2 phenomenon: 1. Markets are truly irrational, and 2. Everyone is irrational, regardless of what they think.
Indeed, incredible investors have been stumped for decades when trades wouldn’t go their way. But, these incredible investors only get that way because they know when to exit and stay out.
The option-arm/Alt-A “tsunami” will turn out to be more of a flood, and intentional defaults are being stemmed by efforts to reduce them. Once everyone agrees that the national economy is back again in the black, they’ll forget all about California’s problem and let us sort it out ourselves. It’ll remain a slow and painful decline over another 2 or 3 years, but we’ll get back to affordability, with 7% rates or not.
If you think otherwise, just remember what BofA said yesterday:
Don’t believe me, believe the people who know their business… unless of course you argue that they don’t really know what they’re doing (at which point, I’m inclined to agree with you).
trickle for sure. flood the market -> spike in non-performing loans -> bad for balance sheets and worse for bank executives.
That’s why Wells and Citi aren’t staffing up to handle the glut of defaults- the longer those properties sit vacant, the longer the lender can pretend they’re still worth 2006 prices. And since everyone knows that we won’t see 2006 prices again for 10 years, the banks have no incentive to speed up the process. Once the lenders admit the property they hold isn’t worth the loan they approved it’s FDIC seizures all around.
Dicks, trickling.
Trickle.
There is no other politically feasible alternative.
I have to go with Tsunami. Only because trickle is SOOOOO obvious. Everything I see right now points to trickle, even my gut says trickle but I’m gonna take the other side.
I also predicted inventory would be at 20,000 by now. It is at 8,000.
Somebody said the water always recedes before the Tsunami. It’s receded, bring it on.
I’d say Ponzi’s correct. The rain will continue, turning the trickle into a stream and then a river, flooding everything eventually.
The ground saturation will have a pronounced effect, i.e., sales will *slow* even as REOs increase. That’s the bitch of deflation expectations; everyone puts off purchases today for a better deal tomorrow.
FNM, FRE & FHA are 90% of the mortgage market, the Fed is buying 80% of new MBS, and defaults are still climbing. Anyone care to wonder how long that game continues? How many houses get sold when there’s no financing to be had??
p.s.: Maybe if we rename everything Carmel Valley we can save the world. 😉
It’s late and I’m tired, so I’ll put 100 on “What Chuck said” with a side bet on tj and the bear. 😉
-Erica
I with Art Ecletic, 90% chance of “Trickle at Taxpayer Expense” and a 10% chance that some unintended consequence of price fixing back stopping fed/treasury results in chain of events leading to flood.
Blood will run through the streets. All of this market manipulation will have backlash somewhere.
Back in 07 I posted no recovery until 2013 so as long as the gov’t doesn’t prop up the market. Well, the gov’t is throwing everything it can (including the kitchen sink) to stem the tide. I don’t get nearly as upset about what is going on as I use to. What’s done is done and there are better things to do – like go on a vacation.
They’ve been trickling, and will continue to do so until they can’t.
It’s just a rumor, but I heard from someone who works in bulk sales that the govt already told the banks to sit on the foreclosures. Supposedly, this happened last November/December. Based on what we’ve been seeing, I have every reason to believe it.
An eventual flood. An appraiser who does a lot of BofA work came to my rental yesterday (LL is in default, pending short sale) and he said BofA voluntarily complied with the moratorium that ended last week. So as long as the politicians don’t put forth any more moratoriums, flood. And he said BofA is getting ready to dump at least 400 homes in his local area.
And I think come the audit season (think reported financials, SEC requirements) the auditors will employ FASB 157e (the revised fair market accounting) which per my read says yes you can ignore market pricing for all those loans you hold, but you have to value based on projected cash flows and last time I checked properties in default don’t have any projected cash flow.
So we will see another round of write downs on the balance sheets of those holding these asses Q1 of 2010 and then the flood will pick up steam.
Q: Do you think we’ll ever see a flood, or will the-powers-that-be keep trickling us forever?
A: Unfortunately yes, banks will hide properties on the books as long as possible. We saw this in the early nineties with the S&L junkbonds. Prices only fell when banks failed and government auctioned off properties at 10%-20% of it’s booked value. While the housing heads might see this as a good thing. Keep in mind that when the government auctioning starting occurring house values fell like a rock. This is what scares me most about buying right now. MBS’s which are in essence Junk Bonds are being purchased by the government at a record pace. Eventually government will need to start selling these purchased assets. When they do nobody is going to pay book value for them.
BTW, The trickle effect is a direct result of government mailing out banks.
Trickle so long as the relaxed MTM rules remain in effect (likely 2-5 years). Prices will continue to stagnate as inflation pushes up the fundamentals back to something close to the current prices, much to the dismay of myself and others rooting for a continued crash.
Trickle. With a trickle congress doesn’t get involved. In a Flood people will demand answers… (won’t get them but would want them)
Looks like that flood model. Maybe the plan is to keep putting along and hope inflation makes everything catch up. Voila! Housing prices don’t drop! At least it’ll almost be worth while to keep money in the bank when interest rates go up.
Prices will continue to stagnate as inflation pushes up the fundamentals
Um, deflation is currently pushing down the fundamentals — wages and rents are decreasing.
Trickle.
The thing is, the trickle is so slight now that they could double or maybe even triple the amount of properties they foreclose and sell as REOs and existing demand would easily soak them up with little to no upward pressure on prices. That is, for it to be a flood that actually pushes prices lower, it would really have to be a huge flood, and I don’t think they will do that. There’s surely no evidence so far that they will.
I’d love to think Chuck’s right. His flood analogy is beautiful, but I have to go with Geoptf, here. Even with a torrent, prices will do nothing, unless the ground really is saturated, of which we haven’t seen any signs as of now.
Drip for now, but should the market start south again then I think fear will cause some of them to break rank and run for the exits.
Like the run-for-the-exit thought, and break into a sprint if buyers start heading the other way.
If you were a buyer, and saw 200 REOs per week lead to 300-400 per week, and they were getting snapped up regularly, would you back off if it hit 500+?? There is a point where the flood would swamp the decks
Trickle because everything the Great One has done for Goldman says “Yes We Can” to Wall Street and “No” to the people who elected him in.
Also depends on how long the stock mkt can continue to levitate on hot air and Treasury can continue selling bonds to foreigners at such low rates.
The whole mirage could collapse pretty quickly though once stimulus money runs out next year and if rates rise.
Months ago I was one of the very few saying that the much anticipated tsunami of foreclosures would not materialize.
It just wasn’t in the interest of the banks and overall economy to do so.
One more thought; the bottom tier is cleared out of inexpensive inventory here in San Diego. Single family homes for $190K or even in the $200’s are nearly non-existent with cash buyers scooping everything up. And, the first time homebuyers, now realizing they missed the bottom, are now stuck with buying fixed-up flipper houses in the low $400’s, soon $500’s will seem reasonable as unemployment eventually eases.
The banks will do much better by waiting, depriving the market of supply. I’m all for it because this also helps existing homeowners like me.
Mozart,
You’d make a great Communist
Totally agree – trickle and price stagnation for years to come. Bad part is prices wont fall much further.
Good part is they wont rise for years and years to come as the fundamentals slowly improve to “support” the inflated prices.
“Um, deflation is currently pushing down the fundamentals”
You sure about that???
http://1.bp.blogspot.com/_P6hcLu1z9Nw/Sox5IUwFGfI/AAAAAAAAAm4/F6mamndMoe0/s1600-h/infll.gif
Many good thoughts, and the self interest of banks and FSB ruling seems to dictate a trickle. But again, the analogy Ponzi uses has some more subtle inferences and outcomes. The funny thing about markets as was stated is they are irrational. And it could take only one bank, say BofA to start the sell off, for the rest to say WOHA, if we don’t get ours out there, we’ll be screwed, and the snowball starts growing.
Look back to Q4 last year and the total market sell of of equities. Was that rational? Maybe. It certainly was emotional. Look at the rally presently with 30 year record unemployment. Is that rational? There is NO fundamental earnings growth for 20% EPS multiples, yet it grows. Irrational?
Today, the only paper available is govn’t underwritten, conforming, mostly 20% down loans. You have tax incentives for first time home buyers, and relaxed interest rates for jumbo amounts. This has supported the bottom level market. Mid to expensive homes, say $640+ in SD county are stagnant. You must now qualify with income, and have cash to get in. I’m in the 90% in earnings, and I can’t qualify for a loan more then $570. That loan, would stretch me. Point is that market isn’t moving, but it will, via discounts. Just yesterday, I saw a home listed at $1.1 for nearly 200 days, drop to $699. Once that tier adjusts, all bets are off. Couple that with the “trickle,” and it could result in panic.
Irrationality will always rule when it comes to money.
PS i have NO credit card debt, on only one car payment. i have over 750 credit scores. point is, money is hard to come by for even the best candidates. good luck on sell those homes about $650K
OK, for those who don’t know, I studied economics some in my undergrad and grad work. I also did work with Robert Fogel, Nobel Laurate in Economics.
So, I only say that because there are some fundamental flaws in thinking here (that seem to be widely held) that are accounted for in modern game theory. I hope that lends some credence to what I say. Basically, the general thought process is that banks will “slowly trickle out properties” because it is in their best interest. Unfortunately, this is an exact description of the “prisoner’s dilemma”. You can read more about it here:
http://en.wikipedia.org/wiki/Game_theory
The Nash Equilibrium states that this cannot continue if the participants perceive that they will be better of by taking equilibrium or first-mover advantage. I believe we have yet to establish Nash Equilibrium and, regulatory efforts have been the primary force in tilting the table to that point. However, once the “banking crisis” is behind us (and trust me, the world is tiring of seeing “Recession Over!” and “Housing’s Improving!” along with “Banks still need billions in bailouts!” together) banks will resume their foreclosures as quickly as possible. At the present time, banks internally believe that “there but by the grace of (government) go I” and as long as the bailouts continue, they choose the non-equilibrium choice. Foreclosure is more efficient and offers banks better returns than modifications, despite what the media has led you to believe. As soon as they can resume normal liquidation proceedings without invoking the wrath of the financial services committee, they will.
In the meantime, the ground is quickly getting saturated. It get “saturated” several ways:
1. Lowered prices means substantial numbers of undefaulted are underwater unless we return to 2005 pricing, something I have a hard time believing. General perception among homeowners is that we’ll be back to 2005 in a year or two. Once reality sets in, we’ll see more rational defaults.
2. Many investors have blown their load too early in the game. Only flippers remain nimble enough, but they absorb net 0% inventory. While it is still significantly cheaper to rent than own, no significant conversion of renter to owner will happen.
3. The widely held perceptions in #1 along with the tax credits (up to $18000 in Cali) went a long way to saturate the ground by pulling demand forward.
4. Most people with money are buying now, afraid of missing out. We are having a lot of bidding wars, but they often involve many of the same players. I don’t believe the demand exists in the level that people here believe it does. At least not at the current prices in higher-priced areas.
At this point, I believe the water table is nearer the surface than it was 1 year ago. We had a california flash flood last year that picked up a lot of debris, but quickly receeded. Real floods take a long time to go away.
I may be all wrong, but I’m trying to translate technical evidence into a narrative and there are always factors that I cannot see and do not factor into my model. Some possible unforseen events could prevent the water table from overflowing:
1. If the economy markedly improves. GDP growth of +8% p.a. would permanently forestall this, although the attendant inflation would probably make it untenable (+10% p.a.)
2. Widespread amnesty and open border policy, especially greencard-for-homeowners policies mentioned before, although this would have some negative societal consequences that would probably drive me out of California, so I wouldn’t care either way.
3. Expanding homeowner credit, or “New Flipper Credit”. Doubling it would allow us to pull quite a bit of demand forward, especially in normally non-rational purchasers. Incentives matter!
4. New moratoriums, or nationalization of the banking system (although this could admittedly go both ways, as the length of the asset deflation is marked more by the time required to liquidate non-self-liquidating debt. We still have a substantial debt overhang).
I hope everyone luck in this upcoming year, as it is a real test of where we go for the next 3 years.
Chuck ponzi
Sorry, a better write-up of Prisoner’s dilemma is here:
http://en.wikipedia.org/wiki/Prisoner%27s_dilemma
If you read it, I believe you’ll see nearly an exact correlation of banking players vis-a-vis modifications vs. foreclosure.
There’s a reason foreclosure is so common, it’s most often the most effective method of liquidating non-performing debt.
Chuck
Chuck;
i believe you’ve described my concern, the “snowball” effect via your game theory and Nash Equilibrium. This is exactly what I anticipate. First out, best value/price…then the all come out.
Chuck;
i believe you’ve described my concern, the “snowball” effect via your game theory and Nash Equilibrium. This is exactly what I anticipate. First out, best value/price, then the all come out.
Pappy,
Yes, I’m sure about that. The fundamentals underpinning housing prices are crumbling.
Furthermore, given OER declines any price increases reflected in the overall CPI mean less money available for shelter, not more.
There is collusion between the banks – either concious or unconcious (where their interests and goals conicide) – to keep foreclosures off the market. Otherwise, one would have broken ranks with the others and started dumping more than the rest. Might happen yet, but should have already happened.
Chuck and Mak-Daddy – while your thinking is sound, you are not familiar with the constraints mark to market accounting changes put on the banks.
In a nutshell, Lets assume that bank A will post 100MM in profits in FY 2009. Further, lets assume bank A has non performing loans in its portfolio, equaling 600MM in losses.
Before MTM change, the 600MM loss was “recognized” and showed up on its books. Thus, as of that moment, the bank was insolvent to the tune of -500MM, so it was in their best interest to dump those REO ASAP.
That all changed the instant FASB approved the MTM change. As of the moment MTM was changed, the 600MM in non performing loans are NOT “recognized” til they are sold. Thus, if the bank sold zero houses that year they are solvent to the tune of 100MM.
Since they are now solvent, the banks can now unload homes at their leisure. Note however, if profits from new loans will not exceed 100MM, they will NOT sell more than 100MM in REO losses. Instead they will sell like 90MM in REO losses, thereby posting a 10MM profit. They will then reserve the remaining 510MM in reo losses to offset against future years earnings.
Thus, even if the banks wanted to dump REO (to rat in the parlance of the prisoners dilemma) they cannot sell more than 100MM because if they do, they are insolvent and subject to takeover by the FDIC.
This is the fundamental piece of the puzzle that everyone is missing. Even if the banks wanted to get out ahead of their competition, they cannot sell all they have because it will cause them to be deemed insolvent and subject to takeover. I recognize the choices set up in the nash equilibrium, but that equilibrium did not account for an externality like insolvency 🙂
Jace,
I’m wholly aware of the changes to MTM, which have little to do with bank processing REOs. Unfortunatly you must have heard this from someone else or read the FASB statement incorrectly, or misunderstand the interplay between banks, regulators, and accounting pronouncements. Luckily, Economics is not my forte’, as my undergrad is accounting with an MBA.
Let’s do a banking 101:
1. Accounting realization has little to do with captitalization requirements. Indeed, one can regonize losses on accounting without impinging on capitalization requirements. FASB governs recognition on Financial Statements only. Most banks maintain several asset ledgers, and accrue for asset non-performance without individual write-downs. This is the essence of MTM.
2. Capitalization requirements are set by banking regulators (FDIC), not by FASB. Write-offs do not directly impair individual assets (which are reviewed by banking regulators).
3. MTM has previously only applied to “held for trade” securities, and not for “held to maturity”. The new rules are largely the same as the old rules; unless the bank is actually trading the loans as securities, mark to market accounting is irrelevant. Individual assets are not impaired until substantial doubt arises that the value has declined when it comes to held-to-maturity loans. Most Alt-A and Option Arm loans are not securitized so MTM does not apply. This is why Golden West and Wells Fargo are able to largely avoid write-downs despite having significant recognized/unrealized revenue assets that made their balance sheets look great. However, regulators only concern themselves with performing/nonperforming assets in computing capitalization. The world could be going to hell in a handbasket and the company could be underreserving and as long as the bank had performing assets, the regulators could do nothing.
You’re actually incorrect on your assumption that the 600M “loss” showed up on the books because under MTM, only tier 1 assets were completely marked to market. Hence, we saw Lehman Brothers (not a bank) implode while Wells Fargo and Citibank did not (banks). Banks don’t go bankrupt, they go insolvent. Companies do not go insolvent, they go bankrupt. There’s a subtle but key difference. Insolvency is determined by banking regulators, bankruptcy is petitioned for by the company when its debts exceed its assets.
I’m not meaning to be rude, but your view is the 100K foot view without understanding the basics of how the system works. I’ll break it down simply:
We’ll assume that a bank is insolvent. That is determined by nonperforming assets vs. capitalization ratios and a whole lot of assumptions. Indeed, Wamu had shown huge amounts of income on Option-Arms prior to being deemed insolvent, though one could argue that the FASB treatment of accrued interest on Neg-am products is less than spectacular and I would agree. (I’d rather see corresponding liability or contra-asset booked than revenue, but I digress).
So, regulators see non-performing assets an order the bank to foreclose and sell those non performing assets. (adhering to applicable laws and moratoria). However, the FDIC has been charged to forestall foreclosures (thanks, Sheila!) and local moratoria in California have largely hampered the ability of the regulator to force the bank to foreclose and liquidate. Contrary to popular belief, banks cannot “sit on inventory” because the regulator would normally not let them do that unless their boss (Sheila) told them to. Largely, though, the delay in processing foreclosures has largely been because of inept management and poorly prepared staff. Just ask someone who has gone through a short sale!
So, in short… you said I was wrong, when in fact I am exactly correct in the basis of the model (admittedly there are some unknowns that I pulled out above, and there might be more), but Mark to Market and Capitalization Requirements are reason for MORE foreclosures, not less.
Chuck Ponzi
I agree with most of what Chuck says. The banks will take the easiest way possible. Currently, that means taking taxpayer money as provided by the government in return for holding back on foreclosures. When the government stops giving the banks taxpayer money, they will have to go back to business as usual.
Perhaps, as Jace explains, banks will be doing a balancing act of deleveraging until they’re books are cleaned up.
As far as thinking that inflation will fix the problem by raising prices negative falling prices, I think higher interest rates will come into play to offset the inflation. That will put a bit of a damper on rising home prices, especially if unemployment remains elevated.
It seems as though we’ve been through the worst of the subprime and hardship (job loss) foreclosures. Those were relatively easy to absorb by first-time buyers and investors looking to cash flow. However, the next ‘wave’ of foreclosures from the Option-ARMs and such will be more difficult to absorb. They won’t cash flow as easily and will be priced beyond what many first-timers will be able to afford. Prices will have to drop, in other words. That will force more into negative equity and the downward spiral will pick up steam again.
Chuck – I did not think you were wrong, I did however note there was no analysis of the MTM issue which (as it was explained to me was causing the bottlenecking) might be relevant to the discussion.
However you are right in that my view is a 100 ft view of the subject. As you clearly have a better understanding of this than I do, I will defer to you. Clearly, I was wrong about the subject matter. Thanks for clearing that up.
Hi Jace,
MTM has nothing to do with foreclosures.
Whoever told you so is wrong. (respectfully)
Chuck
The prisoners dilemma is exactly what I thought of when I first read the post, glad someone mentioned it.
Anyhow, I find the housing market in Southern California a bit creepy. Even a modest house in any decent area is only affordable to those in the top 15% or so income bracket, yet prices to some degree seem to be stabilizing. I suppose one should never under-estimate people’s ability to act irrationally, in the mean time there are other state’s with better economies and far more affordable housing.
The US would need several “calm” years to redistribute the properties. It doesn´t need much of a trigger to get the flood of sellers going. imo an inevitable event – considering that the world had to cope with some kind of crisis and bubble every 5 years…