If anyone thinks selling REOs is gravy, take a look at this:
San Diego sold pricing is showing roughly a 10% increase over the last 12 months on this $/sf chart. Seller optimism is way out in front, though the blue line is only measuring those that haven’t sold, so it should always be higher:
On a day where 2 billion people are engrossed with the kisses of two British 20-somethings, let’s shine the spotlight on San Diego’s own King of Graphs, Rich Toscano.
Here’s an excerpt and two of the graphs from his post, click here for the full story:
It is interesting, however, that the low-priced tier of the index dropped as much as it did. After weathering the recent fall/winter lull better than the other tiers, the low-priced homes were spanked for 2.7 percent in February. The middle tier was down 1.4 percent and the high tier by .5 percent for the month.
This looks like somewhat of a catch-up move which reverses the low tier’s previous strength and gets it more into line with recent price changes in the overall market.
We just saw the FICO study a few days ago, here are excerpts fromareportby the Federal Reserve Board, in an article written by Keith Jurow at the Business Insider:
Last May, a very significant analysis of strategic defaults was published by the Federal Reserve Board. Entitled “The Depth of Negative Equity and Mortgage Default Decisions,” it was extremely focused in scope. The authors examined 133,000 non-prime first lien purchase mortgages originated in 2006 for single-family properties in the four bubble states where prices collapsed the most — California, Florida, Nevada, and Arizona. All of the mortgages provided 100% financing with no down payment.
By September 2009, an astounding 80% of all these homeowners had defaulted. Half of these defaults occurred less than 18 months from the origination date. During that time, prices had dropped by roughly 20%. By September 2009 when the study’s observation period ended, median prices had fallen by roughly another 20%.
This study really zeroes in on the impact which negative equity has on the decision to walk away from the mortgage. Take a look at this first chart which shows strategic default percentages at different stages of being underwater.
Notice that the percentage of defaults which are strategic rises steadily as negative equity increases. For example, with FICO scores between 660 and 720, roughly 45% of defaults are strategic when the mortgage amount is 50% more than the value of the home. When the loan is 70% more than the house’s value, 60% of the defaults were strategic.
The implications of this FRB report are really grim. Keep in mind that 80% of the 133,000 no-down-payment loans examined had gone into default within three years. Clearly, homeowners with no skin in the game have little incentive to continue paying the loan when the property goes further and further underwater.
While the bulk of the zero-down-payment first liens originated in 2006 have already gone into default, there are millions of 80/20 piggy-back loans originated in 2004-2006 which have not.
We know from reports issued by LoanPerformance that roughly 33% of all the Alt A loans securitized in 2004-2006 were 80/20 no-down-payment deals. Also, more than 20% of all the subprime loans in these mortgage-backed security pools had no down payments.
Here is the most ominous statistic of them all. In my article on the looming home equity line of credit (HELOC) disaster posted here in early September (Home Equity Lines of Credit: The Next Looming Disaster?), I pointed out that there were roughly 13 million HELOCs outstanding. This HELOC madness was concentrated in California where more than 2.3 million were originated in 2005-2006 alone.
How many of these homes with HELOCs are underwater today? Roughly 98% of them, and maybe more. Equifax reported that in July 2009, the average HELOC balance nationwide for homeowners with prime first mortgages was nearly $125,000. Yet the studies which discuss how many homeowners are underwater have examined only first liens. It’s very difficult to get good data about second liens on a property.
So if you’ve read that roughly 25% of all homes with a mortgage are now underwater, forget that number. If you include all second liens, It could easily be 50%. This means that in many of those major metros that have experienced the worst price collapse, more than 50% of all mortgaged properties may be seriously underwater.
JtR Summary: These studies and charts show what we’ve suspected – that negative equity is the main reason why borrowers are doing strategic defaults.
We’ve been monitoring the NOD/NOT lists, but to stay ahead of potential defaults, you need to peruse the tax rolls and determine how many homeowners have negative equity in your target neighborhood. You can’t judge it by date purchased, because they could have refinanced in 2004-2007 – we seen many foreclosed who bought 20-30 years ago.
It needs to be a property-by-property search of neighboring streets around any home you are thinking of purchasing. It sounds like a lot of work, but it needs to be done – and realtors have access to the tax rolls. If there were 1-3 potential strategic-defaults within a block or two, you could probably survive them without a big hit to values. More than that might be pushing it.
A proposed law facing a key vote in Sacramento on Wednesday would require lenders in California to make a decision on mortgage modifications for delinquent homeowners before beginning the repossession process, in effect ending “dual track” foreclosures in the state.
Financial institutions commonly pursue foreclosure even if a borrower has requested a loan modification, a two-track process the lending industry has argued is necessary to protect its investments. But dual tracking is under fire from regulators and lawmakers in the wake of last year’s “robo-signing” scandal, which revealed widespread foreclosure errors.
The California Homeowner Protection Act, authored by state Senate President Pro Tem Darrell Steinberg (D-Sacramento) and Sen. Mark Leno (D-San Francisco), is one of the furthest-reaching efforts to limit the practice. Several other states have passed requirements for third-party groups to oversee mediations between mortgage servicers and homeowners.
The California bill, SB 729, would require a lender to fully evaluate a borrower for a loan modification before filing a notice of default, the first stage in the formal repossession process, and a significant change in the way foreclosures are conducted in the Golden State.
The law would give delinquent homeowners the right to sue their lenders to stop foreclosures if they believe the requirement to properly evaluate their loan modification requests had not been followed. If the sale occurs without the proper evaluation,homeowners would also be given the right to sue for damages or to void a foreclosure sale for up to a year after the sale.
Such a change is necessary in the state because the two-track process often leads to unintended foreclosures by mortgage servicers that “don’t know what they are doing” and often bungle the loan modification process, Leno said in an interview.
“We know of folks not only entering the loan modification process, but folks who have already been accepted, and are making timely loan modification payments, and then getting a knock on their door and being told ‘your home will be sold,'” Leno said. “The stories are many and horrifying.”