20 Comments

1. 

   The Blur on November 25, 2009 at 10:01 am

   Wow, just looking at NOT vs. REO, there has to be some serious pressure. I can’t imagine prices stabilizing until those are about equal. Carlsbad, Encinitas, and CV aren’t surprising to me, but look how backed up La Jolla is.

   Tsunami or not, signs point to a flood. Distressed properties will start seeping out through the soil and cracks in the sidewalks (Chuck Ponzi made a great flood analogy a couple months ago.)

   Anybody know what the realistic hope is for a loan-mod once a house reaches the NOT stage?

2. 

   dafox on November 25, 2009 at 10:01 am

   If we are in for a tsunami, I think we’re *at least* 6-8mo away from it (I’m thinking closer to 12).
   Loan mods are still in trial mode right now (the first ones are just ending). Originally it was a 3mo trial, but those have been moved to a 5mo trial. The trials started in what, March? So you have a 5mo trial starting in March and ending in August. Then you stop paying your trial mod cause it went back to the normal mtg amout – we need another 3 months for NOD, +3 for NTS and another 1-6 for REO.

   Now, thats just for the ones that started in March. They ramped up effort considerably after that, so I think the bulk of the trial loan mods will be expiring in Jan-Mar 2010. Add 6-8mo for the foreclosure process to start over.

   And thats without any more zany intervention plans from the gubmint!
   Someone with more knowledge please feel free to correct my timeline guestimates.

3. 

   Jim the Realtor on November 25, 2009 at 10:07 am

   Anybody know what the realistic hope is for a loan-mod once a house reaches the NOT stage?

   No scientific evidence, just a hunch.

   I think the servicers probably believe that once they get around to modifying the terms, the borrowers should be grateful and roll over.

   But the borrowers have been digging the free rent, and have one foot out the door and believe they’ll bolt if they don’t get great terms.

   Once reality sets in, half of the candidates will suck it up and take whatever is offered, rather than try to rent with banged up credit and uprooting the kids.

   For now.

4. 

   cara on November 25, 2009 at 10:09 am

   You know if people are willing to jump in and buy 600k+ homes when there are potentially 800+ homes in the pipeline and only 192 sales, I don’t feel so bad about not being afraid of the 10 bank-owned and NODs in my neighborhood which has had 50+ sales this year.

   It could be worse, we could have bought in 2005-7. It could be worse, we could be buying in San Diego…

5. 

   shadash on November 25, 2009 at 10:11 am

   Consider also that FHA and Fannie/Freddie are going to need a bailout soon. Or where are all the 3.5% down mortgages going to come from?

   This is another wildcard that may effect the amount buyers are able to purchase in the near future.

6. 

   Jim the Realtor on November 25, 2009 at 10:17 am

   The 828 looks relatively tame if you divide them up – let’s guess:

   500 are loan mods, half will fail now
   328 are short-sales, half will fail

   Half of those in process, or 414 end up on the court house steps. JtR sells 100 of them direct to buyers, and the other 314 get dripped out over the next 8 months, or 40 per month.

   No problem 😉

7. 

   Chuck Ponzi on November 25, 2009 at 10:37 am

   The flood/tsunami discussion is here:

   https://www.bubbleinfo.com/2009/09/23/poll-will-there-be-a-flood/#comments

   Worthy of a re-read, if I say so myself.

   Chuck

8. 

   Jim the Realtor on November 25, 2009 at 10:40 am

   Let’s reprint Chuck’s thoughts here:

   10.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:

   We are going to see a spike from now to the end of the year in foreclosures as we take people out of the running” for a loan modification or other alternatives, says a Bank of America Corp. spokeswoman. Foreclosure sales had dropped to “abnormally low” levels in response to government efforts to stem foreclosures, she adds.

   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).

9. 

   Jim the Realtor on November 25, 2009 at 10:43 am

   I agree whole-heartedly with his thought:

   They will eventually settle in where they should be all along, eventually we will get there.

   From now on we’ll see more and more homes selling for less.

10. 

    Jim the Realtor on November 25, 2009 at 11:08 am

    OT, but if you own a mortgage company, you hate days like this:

    Banks’ Buybacks of Defaulted Single-Family Loans Surge

    Banks had to buy back $7.1 billion in defaulted single-family loans in the third quarter to reimburse mortgage investors, up from $1.9 billion in the previous quarter

11. 

    dafox on November 25, 2009 at 11:20 am

    “The move lower in [FannieMae MBS interest] rates interestingly comes on the day that the consumer confidence data reveals that those that plan to buy a home within 6 mo’s is at the lowest level since ‘82…”
    Found on ritholtz’ blog (if I link it’ll mark me as spam)

    JtR, are you seeing a drop in interest for properties yet?

12. 

    shadash on November 25, 2009 at 11:28 am

    Jim,

    You should consider a career in politics. You’re very good at appealing to many different groups all at once.

13. 

    JimB on November 25, 2009 at 12:15 pm

    “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.”

    Awesome take. So true.

    I personally think falling prices though are just one painful experience people in SD will have to suffer. The other is California reinventing itself yet again. I suspect half the buyers and sellers here will not live in CA 20 years from now. No disrespect to jtr, it;s just a little bit of history repeating.

14. 

    househippie on November 25, 2009 at 12:37 pm

    The thing that confounds me as a buyer are the micro markets that seem to be the exception to the rule. And, unfortunately it’s those particular neighborhoods and school districts where I want to buy. I’ve given up on market timing waiting for the mythological tsunami, because I need a home now to raise my family. Studying data and reading commentator forecasts led me to believe if I could just hold out a little while longer that one perfect house would come along at a great price . . . NOT! For me, at least, it’s past time to get off the fence and buy something already.

15. 

    Chuck Ponzi on November 25, 2009 at 1:31 pm

    HI,

    Actually, I thought my discussion of Nash Equilibrium was more apropos:

    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

16. 

    Genius on November 25, 2009 at 3:03 pm

    househippie – Unless you’re paying cash you’re still renting… the abstraction is just manifested differently. And even then you still have monthly payments. It is truly impossible to escape The Man, fence or no.

    Thanks Chuck, for taking the time to share your insight. The flood metaphor is pretty cool. Someone was talking about the prisoners’ dilemma back in the old thread. Their explanation is way different than what I remembered in my poli sci classes (stability theory to be specific), but both are applicable to the current situation.

    The argument is getting to the point of staleness, imo. Tsunami vs. flood only affects the rate of change and at some point we’re left arguing about a derivative.

17. 

    keepitinflated on November 25, 2009 at 7:22 pm

    One of the assumptions is that people sell their homes primarily to move to a different home in the same region. Needless to say that still applies, but with modifications this supply and demand component is drying up.

    Th other reason people sell homes in traditional SFH areas are divorce and forced movement because of work. With continued higher unemployment for a year or more in SD ($21B Cal budget deficit) and unhappy married couples no longer able to borrow money to hide (drown) their marital unhappiness, how long until prices start to fall?

    A tsunami is not needed, rather the flippers need to see declining rents and a normal flow of must sells coming on the market. This will create falling prices despite all the government actions to Keep It Inflated.

18. 

    keepitinflated on November 25, 2009 at 7:30 pm

    Chuck

    I think the one thing you did not mention is that the government is quickly buying up all the mortgages. In the conforming market almost every loan written this year was written by FNM, FRE, and FHA (GNM). The Federal Reserve is then buying all the bonds those organizations issues (and then some of their previous bonds).

    Which means the banks are not the ones making the foreclosure/no-foreclosure decision, the government is.

    This is important cause it seems that Obama, Reid, Frank, and Dodd are comfortable backstopping up to $250B in mortgage losses each year. What is next, will the government who now owns many of the mortgage loans soon choose to forgive the debts?

    BTW I almost hope they forgive the debts, cause then the homes will likely quickly hit the market at a lower price point.

19. 

    Chuck Ponzi on November 25, 2009 at 10:43 pm

    Keepitinflated,

    No offense intended, but “the government buying up the mortgages” is NOT correct.

    FHA is offering a helping hand for those underwater, but that’s having little impact, if you ask me. Most people who are more than 20% underwater, if faced with the dilemma will simply walk away.

    If you’re referring to the FED buying mortgages, that’s not technically correct. Banks (including FNM, FRE) still own the note, and they are only offered as collateral to improve liquidity. As they are marked down based the regulator, they are liquidated from the FEDs balance sheet and marked down as collateral. That’s bank accounting rules, and unless you can offer specific ways that basic bank accounting is being broken, I’d say that you’re getting a line from someone who doesn’t understand the process wholly in the first place. In most cases, I believe banks and FNM FRE are simply recycling the notes for other performing notes. There have been no FED write-offs to date, all GSE write offs have been taken to Congress and that’s why you’re seeing ugly messages that the GSEs lost hundreds of billions and needed money. The FED would never take writeoffs of their member banks… they are, after all, a private consortium, not a public arm of the government. It would be the FDIC’s responsibilty to take the write down after seizing the bank and liquidating it.

    I doubt that after the shitstorm that happened with AIGs honoring CDSs at face value after they were siezed, that we will make anyone whole. There may be some minimal debt forgiveness, and only for the really well connected, but not on a massive enough scale to solve any of our serious problems.

    Besides, none of this discussion helps the natural price of housing in SoCal. It’s just the music going on around us.

20. 

    keepitinflated on November 26, 2009 at 6:57 pm

    The federal reserve has stated they intend to buy over $1T of government backed mortgage debt. In fact the federal reserve has bought more mortgage bonds then FNM and FRE has issued this year.

    Yes technically speaking FNM and FRE pool mortgages and then issue bonds. However, since those orgs were taken into conservatorship the implicit guarantee has become explicit.

    What shitstorm. Yes there has been a couple articles but Geithner, Bernanke, etc all have their jobs In fact Bernanke was given Kudos and renominated. Do you think they did not know what happened with AIG a few months earlier? Lets not forget Barney Frank tries to pass mortgage cramdowns every other month, once the Federal Reserve buys all the notes it will mean far fewer orgs will object to it. Back Door principal forgiveness.

    FHA is huge. Jim has gone over cases of people getting tax credits and FHA loans. Cash buyers purchase from the bank and then sell to FHA borrowers.

    Simply said without FHA and the Federal Reserve mortgage rates would be much higher and far fewer people would be getting mortgages. If far fewer people could get a mortgage there would be more foreclosures and fewer buyers and hence lower prices.