Global Financial Meltdown

A viewer’s comment on YouTube led me to this terrific inside view of the 2008 financial crisis, and the resulting impact on the world. It rightly blames the entire fiasco on the Tan Man, who pitched his mortgages to Wall Street based on the yields generated if borrowers made their full-interest payments, when in reality, only a much smaller minimum monthly payment was all that was due.

It’s eerie to watch today as our financial markets are in question again:

I make a quick comment in at the 2:38-minute mark, standing in front of the most-expensive REO listing we received in the era – a 2,900sf house in downtown Carlsbad that sold for $603,000 in December, 2009.  It’s still owned by those buyers! The realtor.com estimate today is $973,900.

Foreclosures Halted

They won’t foreclose on you, but your credit score will be affected. From the AP:

Certain borrowers nervous about missed house payments got some relief as two major government backers of mortgages have said they’re stopping foreclosure work for the next 60 days.

The Federal Housing Administration and Fannie Mae announced moves to help out borrowers behind on house payments as part of effort to mitigate the financial impact of the coronavirus outbreak.

Loan servers of FHA and Fannie Mae loans have been directed to stop starting new foreclosure actions; suspend foreclosures in progress; and not evicting residents of foreclosed properties with loans backed by these agencies. Borrowers in financial trouble are encouraged to contact their loan servicer to inquire about various relief programs.

“Today’s actions will allow households who have an FHA-insured mortgage to meet the challenges of COVID-19 without fear of losing their homes, and help steady market concerns,” said U.S. Department of Housing and Urban Development Secretary Ben Carson. “The health and safety of the American people is of the utmost importance and the halting of all foreclosure actions and evictions for the next 60 days will provide homeowners with some peace of mind during these trying times.”

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Kayla Is Home!

Kayla flew home from Manhattan this morning on Delta – there were only 20 people on the plane!

Her Douglas Elliman offices are closed through March 31st and probably longer.  Hopefully she didn’t bring the bug back with her, but it’s better than her catching it there and having to cope with it alone.

She loves being in Manhattan, and plans to go back, of course.

But what will the market be like for newer agents everywhere?

The big, successful agents will use this off-time to prepare additional marketing materials, and be ready to go once the virus is done.  We’ll have 1-3 months of pent-up supply and demand, so we’ll try to squeeze the whole 6-month selling season into 60 days.  The crafty experienced agents will be glad to facilitate those sales, but there won’t be enough to go around for everyone.

I’m guessing that we will probably sell 20% to 30% fewer homes this year, and it could be less.  The sales will drop off long before sellers think about dumping on price, and because the virus isn’t a permanent change in the marketplace, it will be too easy for sellers to wait it out instead.  It will be tough on every agent who is on the edge.

Somebody said today that they expect to see big price declines and foreclosures in the next 2-3 months, but that’s not happening.  The moratoriums are in place, and homeowners who can’t make payments will get as much time as they need.  It’s more likely that we will experience the Big Stall-Out, with the market still airborne and just waiting for the engine to kick back on.

Mortgage Mess Ahead?

Low mortgage rates and large down payments are how buyers today are able to afford these lofty prices. Wondering where the big money comes from? Some of it could be from cash-out refinances:

The article has a couple of other zingers too – excerpts:

In recent years, wealthy homeowners have gotten into the cash-out refi game in a big way. A CoreLogic report in January 2019 found 230 active giant refinanced mortgages between $10 million and $20 million — most originated since 2013. Almost half of these loans were identified as cash-out refis. The average amount of cash pulled out was $6.6 million.  Last year, the average had risen to $8.3 million.

Almost 10 million cash-out refis were originated during the wildest bubble years of 2004–07. While a significant number of them have been foreclosed, most still have not.  As I noted in a previous column, mortgage servicers nationwide have been extremely reluctant to foreclose on long-term deadbeats since 2012.

Another column earlier this year laid out the enormous problem of modified mortgages that have re-defaulted one or more times. Close to two-thirds of all sub-prime bubble era mortgages had already been modified by 2015.  The re-default disaster was so great that by mid-2010 there were more subprime modified mortgages re-defaulting than there were delinquent loans being foreclosed and liquidated by mortgage servicers.

The author is probably the biggest doomer on the beat. He called me once and insisted that I agree with him on his gloomy predictions, and when I wouldn’t, he hung up on me.  But his articles here are a good reminder – whatever happened to those loan modifications?

Link to Full Article

Foreclosure Story

Readers have wondered about the story of the billion-dollar property being bought for $100,000. It was the lender (who was the previous owner) who got the property back, and who is now in position to make a tidy profit on their original $45 million mortgage:

On Tuesday, it sold for a mere $100,000 at a foreclosure auction, a fraction of the $200-million loan outstanding on the property.

A markdown of 99.99%, of course, comes with some fine print. Any other buyer would have been on the hook to repay that loan — and this buyer has to eat that loss.

That’s because the buyer is the estate of late Herbalife founder Mark Hughes, which previously owned the property. The estate set this current saga into motion by selling it to Atlanta investor Chip Dickens in 2004.

Dickens borrowed around $45 million from the Hughes estate to buy the property, and that debt has since ballooned to roughly $200 million with interest and fees. Three years ago, Dickens transferred ownership to a limited liability company controlled by his partner on the project, Victor Franco Noval.

Noval is the son of convicted felon Victorino Noval, who pleaded guilty to mail fraud and tax evasion in 1997 and was sentenced to federal prison in 2003.

Unable to pay the debts, their limited liability company, Secured Capital Partners, tried — and failed — to declare Chapter 11 bankruptcy last month, which led the Hughes estate to force a foreclosure auction to either sell the property in hopes of recouping its losses or buy it back, likely losing the $200 million they were owed in the process.

They chose the latter.

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Regulating SFR Investors?

Now that the big investors have virtually stopped buying homes, a legislator wants to find a way to regulate them.

Typically the term “institutional investor” refers to private investment firms that buy dozens of residential properties with the explicit aim of generating a steady income stream through rentals. Often they invest the money of wealthy individuals and public pension funds, like those established for California state workers and teachers.

The best example is Blackstone, a publicly traded Wall Street firm that barrelled into the country’s single-family home market in the depths of the Great Recession in the late 2000s. Through its residential investment-focused subsidiary, Invitation Homes, Blackstone is now the largest owner of single-family homes nationwide. In California, they own about 13,000 homes.

But firms such as Blackstone have stopped buying wide swaths of California homes. According to the real estate data firm ATTOM Data Solutions, which defines institutional investors as entities that buy 10 or more homes in a given year, institutional investors accounted for less than 2 percent of the state’s single-family home and condo sales in 2017.

That’s a pretty steep drop from as recently as 2012, when institutional investors accounted for about 7 percent of sales.

Why the decline? California no longer has a glut of cheap houses that can be easily gobbled up in foreclosure auctions. A sustained economic recovery and a lack of construction of new housing has sent housing prices skyrocketing. It’s now too expensive for institutional investors to buy lots of California homes. Blackstone’s Invitation Homes bought only 82 California houses last year.

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Effects of No-Foreclosure Policy

Here is a bunch of happy talk by three ivory-tower guys, but they never considered the consequences. Preventing foreclosures and pushing down mortgage rates helped to create a safety net that caused buyers to rush back into the market. Prices went up too quickly, trapping homeowners into their existing homes, rather than being able to move up, down, and around. Now only the affluent can afford a house, rents are skyrocketing, and homelessness is running rampant.

Hat tip to daytrip for sending this in:

The subprime mortgage crisis that broke out a decade ago is widely recalled as an uncontrolled and destructive plunge in housing prices. New research suggests, however, that at least one effort to halt the plunge was in fact quite effective. UCLA Anderson’s Stuart Gabriel, the Federal Reserve Board’s Matteo Iacoviello and Copenhagen Business School’s Chandler Lutz found that California’s 2008 anti-foreclosure law prevented the loss of some $470 billion in home value wealth.

The California law, examined against other anti-foreclosure efforts, stands as a potential model for future housing crisis interventions. The researchers found that the passage and implementation of the California Foreclosure Prevention Laws (CFPLs) simply and effectively made foreclosures more difficult and more expensive for lenders to initiate, slowing what could have been a more calamitous spiral in housing prices.

Limiting foreclosures is key to containing a housing panic. If foreclosures go unchecked in a crisis, they can spread. Because foreclosed-on houses are “priced to sell,” the first wave of foreclosures depresses the prices of all homes in the area. Additional borrowers who can’t make their payments then cannot sell without taking a loss, causing a second wave of foreclosures, further depressing prices. And a downward spiral has begun.

A wave of foreclosures seems to also produce a “disamenity effect”: someone who defaults on her mortgage slacks on maintaining the house, and its appearance of disrepair drags down the desirability of the neighborhood.

In some states, the law requires that lenders process foreclosures in state courts. Judicial foreclosure laws result in foreclosures costing much more time and money than they do in states like California, which does not have judicial foreclosure laws. The upside to not having judicial foreclosure laws is efficiency — for both the lenders and the government.

The downside is that, following market shocks, foreclosures are in danger of spiraling out of control, as they seemed to be in California in 2008. In the midst of the crisis, hundreds of thousands of people lost their homes to foreclosure, and it emerged that banks were “robo signing” on the procedural documents: They were pushing foreclosures through at an unreasonable rate, often without justification or authority to do so.

In 2008, California state senator Don Perata of Oakland authored SB-1137, the first of the California Foreclosure Prevention Laws. SB-1137, and the 2009 California Foreclosure Prevention Act after it, both increased the time and the monetary cost of foreclosing on property in California.

“The mortgage crisis is taking a terrible toll on Oakland and the rest of California,” said Perata, as quoted in the SB-1137 analysis. “It is crucial that we give homeowners the tools they need to avoid foreclosure when possible because that’s the best outcome for everybody.”  Gabriel, Lutz and Iacoviello’s research suggests these laws saved the state hundreds of billions of dollars.

Link to Article

Here’s a glimpse of how it’s working on the street today:

Results of Bank Settlement

Kamala Harris, who has been dubbed the ‘female Obama’, is likely to run for president of the United States – possibly as soon as 2020.  This is a long article on her performance in public office:

LINK

This excerpt summarizes the impact from her $20 billion foreclosure settlement – another example of how the bankers got a slap on the wrist:

The deal Harris got for California was ultimately much better. It provided $18.4 billion in debt relief and $2 billion in other financial assistance, as well as incentives for relief to center on the hardest hit counties. This is particularly impressive when one considers the banks had originally only offered California, the state hardest hit by the housing crisis and fraud, $2-4 billion.

Nonetheless, the settlement was woefully inadequate. For one, while the $20 billion total sounds good, it was a fraction of what the banks would have had to pay to compensate for all of their malfeasance. For instance, investors had won $8.5 billion in a settlement with Bank of America over mortgage securities backed by faulty loans.

Secondly, the banks themselves paid very little — only around $5 billion, with most of the settlement involving the banks modifying loans owned by others, such as pension funds, who had nothing to do with the misconduct that necessitated the deal. In terms of direct financial relief, underwater homeowners — weighed down by average debt of close to $65,000 each — received around $1,500 to $2,000 each. One called it “a slap in the face for a lot of us.”

Moreover, more than half of the $9.2 billion in principal loan forgiveness in the state went to second mortgages, and many of those were already delinquent. While it did benefit homeowners, it also meant, as one economist told the LA Times, that in practice the banks “were writing off loans that were essentially dead.” A year later, only one-fifth of the aid went to first-mortgage principal forgiveness. And even at the end of this, just 84,102 California families had any mortgage debt forgiven — far short of the 250,000 originally predicted.

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