Notice how people think that foreclosures automatically mean lower prices?
The pundits and mainstream media talk about a surge of foreclosures plunging us into the abyss; that prices would plummet.
Why? I don’t see any REO listings being given away around here, if anything they are going for retail, or retail-plus because servicers are marketing the REOs correctly. They clean them up, put an attractive price on them and make them easy to see. After letting them sit on the open market for a few days, they pick a winner. It is a very effective marketing strategy.
If servicers would foreclose on more properties in North SD County Coastal, creating more REO listings, three things would happen to help put more of a floor in the market:
1. They’d provide more well-priced inventory for waiting buyers.
2. They’d help convert lookers into buyers.
3. They’d create some certainty that we need not fear foreclosures.
There are 656 SFRs on the NOD and NOT lists in the North SD County Coastal region. If buyers saw some real market clearing they’d have more confidence that future foreclosures are a good thing. If the market was really hopping, it would put a scare into the deadbeats too, and maybe some of them would pay up.
Here’s a year-over-year comparion of the detached sales between Sept 1-to-Dec 31:
| REO vs. Non-REO | # of sales | $$/sf | SP:LP | DOM | Average SP | Avg SF |
| 2009 REO | $296/sf | 101% | 35 | $820,863 | 2,960 | |
| 2010 REO | $331/sf | 98% | 40 | $878,168 | 2,851 | |
| 2009 Non-REO | $411/sf | 95% | 85 | $1,142,691 | 2,832 | |
| 2010 Non-REO | $394/sf | 96% | 86 | $1,181,358 | 3,084 |
The difference between REOs and Non-REOs is the quality of product. The servicers aren’t giving away houses for 10% to 20% less, rather they are stuck with the inferior homes that the owners wouldn’t fight to keep, or short sell. When they do list homes of better quality, they can’t underprice them – the marketing system ensures that they get bid up to retail, or higher, pricing.
Servicers, please keep the foreclosures coming!
Seriously… Come on banks!
You’ve been given all the FREE fed/tarp/taxpayer money to stay in business it’s time to “trickle down” some of your ill gotten gains.
Take the pill and get the market going again. The longer you sit on nonperforming “assets” they less they’re going to be worth. Deadbeats aren’t going to pay extra to fixup a property they’re already not paying for.
Off topic question: I bought a house in June ’09 and have been living in it. If I sell before 2 years (June ’11), do I have to pay full capital gains tax on any profit? or is the tax shelter ‘pro-rated’ based on what percentage of 2 years I’ve been in it?
You can exclude a portion of your gain if you are selling your home and lived there less than 2 years and you meet one of the three exceptions – job transfer, health reasons, or unforeseen circumstances.
You calculate your partial exclusion based on the amount of time you actually lived in your home.
Count the number of months you actually lived in your home. Then divide that number by 24. Then multiply this ratio by $250,000 (if unmarried) or by $500,000 (if married). The result is the amount of gain you can exclude from your taxable income.
For example: you lived in your home for 12 months, and then sold the home because your employer asked you to relocate to a different office. You are an unmarried person. You calculate your partial exclusion: 12 months divided by 24 month (for a ratio of .50) times your maximum exclusion of $250,000. The result: you can exclude up to $125,000 in gain. If your gain is more than $125,000, you include only the amount over $125,000 as taxable income. If your gain is less than $125,000, then your gain can be excluded from your taxable income.
JtR- Got to disagree. REO’s are destructive to everyone. Plus too many supposedly potential buyers are hanging their hat on REO’s for what appears to be 656 houses if I’m reading the entry correctly.
What’s amazing is how flippers like J. Mann are cleaning up..
The banks and private lenders should hold onto the properties and just consider it an investment. The fundamentals for a sustainable and improving real estate market are here now as indicated by affordability. Better to wait it out.
I’m not a banker but I also wonder if the banks with their profits in 2010 can also utilize these non-performing loans to offset their tax gains. Meaning if the strategy is to wait for the banks to cave then you’ll be waiting forever. Nobody should underestimate the cunning and intelligence of bankers.
What I agree needs to change is an end to people getting loan mods or a free ride. Yes, foreclose on the defaulters, scare the hell out of some deadbeats, but to flood the market would be a mortal self inflicted wound for the banks and take the rest of us down with them.
Mozart, are you just throwing me a fat pitch?
Those who benefit from foreclosures:
1. Neighbors get new owners who have qualified for their financing, and have some investment in the property – and many have a substantial down payment. The neighbors are thrilled to see the change.
2. Flippers, and their crews (as you mentioned).
3. Servicers are raking in fees.
4. Agents, lenders, escrow, title and related ancillary services get to process more sales/make more money.
5. Former owners get 1-2 years’ free rent.
Very few foreclosures I see are actually owned by a bank – maybe one out of ten. I don’t think we have to worry about the banks going out of business as long as Ben has ink.
Look at the SFR foreclosure history in SD County:
2008 – 11,758
2009 – 8,732
2010 – 7,441
Last year’s foreclosures county-wide were 37% lower than 2008, and remember what happened coming out of that year? Yes, the beginning of 2009 was when we saw liftoff.
A “flood” of foreclosures would be moderated by the servicers own limited capacity. Can we at least get back to 11,000 or 12,000? Please?
There are currently 9,643 SFRs on the NOD and NOT lists.
Half will get loan-mod or short sold? Third?
It would be miraculous to see 12,000 get foreclosed this year.
Yet cnbc is relentless in sticking microphones in front of every doomsdayer with some celebrity – and all say the same thing:
http://www.cnbc.com/id/40887670
JTR – Here is Mort’s 25 minute detailed video interview on the topic with Steve Forbes.
http://www.forbes.com/2010/12/10/mort-zuckerman-boston-properties-intelligent-investing-video.html
Not exactly sure what you mean by the statement “If the market was really hopping, it would put a scare into the deadbeats too, and maybe some of them would pay up”. What is this? 1920s mobster lingo?
Unfortunately, Jim makes a convincing argument. I hope he is wrong though.
What is this? 1920s mobster lingo?
Yes, but I’m older than most. Want me to stick with Sopranos-speak?
The reason some defaulters would pay up is because they’d finally take a look around at renting, and see that there’s not much of a break on monthly payments there, at least in NSDCC.
But also because they might think if they hold out just a bit longer, the prices might go up enough.
There isn’t a guy in NSDCC who wants his wife sticking her finger in his face in 2020 saying, “see, we shoulda hung in there!”
Jim-thank you for making me chuckle today with comment #10. I needed it after such a bleak few months as a home hunter! :):):):) I positively hate renting!
There isn’t a guy in NSDCC who wants his wife sticking her finger in his face in 2020 saying, “see, we shoulda hung in there!”
Sounds like another version of the saying a “Slope of Hope”
I have no idea what’s going to happen in the next 3-5 years, but I get the sense that there’s quite a bit of hope in the housing market. We hope worst case is a mild double dip of maybe 5-10% and I think that might be reasonable. The thing we want to avoid is a mild 5-10% decline to snowball into something worse which is the biggest worry in this fragile economy. We don’t want to spook the potential buyers, they already are facing enough frustrations.
I wonder what effect Gov. Brown is going to have on things, if any. Thoughts?
“I wonder what effect Gov. Brown is going to have on things, if any. Thoughts?”
Personally I don’t know that Brown will have that much of an affect on the housing market. What can he really do. The state is facing a 15-20 billion dollar deficit so I don’t really see any housing related tax credits on the horizon. There’s really no political will for that right now.
I other aspect is public sector employee wages which will likely be frozen at best and cut/layoffs at worst. I’ve always believed that the stability of public sector jobs and the fact that many public sector employees could rely on a predictable steady increase in salary allowed them to overpay for housing and other items. Effectively their knowledge that they could expect a raise and not get fired allowed them to pay inflated prices. They’d eventually be able to catch up to the payment. Of course this forced private sector employees to possibly take more risk than they really were able to in order to compete.
Amen, JtR, amen. Servicers need to start fastracking the nonperforming loans to a trustee sale – it’ll be slow enough with all the bankruptcies that deadbeats will file as the last delay tactic – and start selling some REOs. There seems little doubt the market could absorb 100-150 REOs a month in SD and a whole lot more in OC and LA without recreating the 2008ish downward pressure on pricing.
In my neighborhood, foreclosures always sell at market value. It is the short sales (the few that actually get approved) that leave you scratching your head.
My thoughts on Gov Brown are the same as my thoughts on the Governator….
Dudes hands are tied. Not a freakin’ thing he can do with a state that is gerrmandered to the nth degree and a legislature intent on giving away the store to any interest group that comes a callin’.
Not to mention an electorate that insists on voting for unfunded mandates via a completely irrational proposition system.
California, as it stands now, is ungovernable.
You are right. It sometimes only foreclosures that get people to jump off the fence and actually buy. Everyone thinks a foreclosure is a better deal than a normal resale, even if they are priced similarly. I think people just like to tell all their friends and family that they got a screaming deal on a foreclosure.
@Art Eclectic
You sir are correct. I suspect this time near year we’ll have even a bigger deficit and larger debt. Until we get as bad a Illinois I don’t think much will change in Sancremento, unfortunately.
If the government required banks to immediately write a lost when someone doesn’t pay their mortgage would that force banks to shorten the foreclosure cycle?
Thaylor,
Banks rarely own mortgages anymore. Usually after they make the sale the mortgage us bundled with a bunch of other mortgages and sold off to a secondary market where the main buyer is the fed.
If mortgages aren’t bundled and “sold” as MBS’s they’re purchased directly by fannie or freddie.
What’s annoying is banks hold onto the servicing of the loan before selling it off. His allows them to continue billing homeowners and making money off the service charges.
Shadash – Who would you prefer service the loans…the Fed??? Imagine the state of the market if the gov was the servicer too…
Clearfund,
The problems with originators maintaining the servicing of the loan include.
1. It allows banks to controll foreclosure numbers in the marketplace.
2. Fees are much more attractive to banks than foreclosure.
If I was an MBS investor I would a third party controlling the servicing. Ideally kicking the additional profits back to me.
When I just refinanced a few months ago my loan was sold (literally) the next day to Fannie. Flagstar Bank is retaining the servicing.
Clearfund and Shadash,
The bigger problem with servicing of all pooled mortgages is that the PSAs fail to impose any meaningful fiduciary obligations or economic incentives on the servicer or master servicer to promptly dispose of nonperforming loans in the pool or to eliminate or minimize the servicing fees during periods of default. That is compounded by the practical obstacles in the PSAs that are designed to block certificate holders from taking concerted action to enforce their contractual rights. I have read a multitude of them over the past year, and it’s just unbelievable in hindsight.
The PSAs were drafted by the investment banks and master servicers to minimize their exposure to anyone and maximize the profitability of the securitization arrangement for them. The only obligation clearly spelled out is the distribution of monthly income to the various tranches, which apparently is all the buyers of this garbage cared about during 2004-2007. They were not drafted to provide an effective or efficient resolution of nonperforming pooled assets.
No JtR, you may not have 12,000!
I second Sean’s post in 25 on the PSA servicing fiasco. I know of an anecdote where the servicer if you did not know what was going on behind the scenes seemed determined to turn a property into the largest possible loss they could.
I hope that the reported fact that the sweetheart deal B of A just cut with Fannie and Freddie on the loan buy backs issue did not cover servicer issues will result in B of A coughing up a lot more down the road.
I know, wishful thinking, I am wearing rose colored glasses.
Sean & Kingside, agree that it’s all about the language of the contracts/investments which people did not read or care to understand. Ignorance is bliss, until it isn’t.
You’ve got to be kidding. “…which people did not read or care to understand?”
Somehow when a bank refuses to meet their contractual and legal responsibilitiesin the name of profit,it’s a mere “paperwork error,” but when a homeowner/borrower can’t fulfill their obligations and take steps to avert financial catastrophe, they’re deadbeats?
I don’t think we’ll see a rebound in the RE market until some really rich bankers and shady RE “investors” are doing the perp walk. But don’t wait for the bank media relations people to tell you that, they’re too busy protecting their money by beating up on homeowners.