The Future of Foreclosures

The Perfect Storm...again?

Greg and I have been speaking publicly for the last few months about a few factors affecting the near future of the housing market. Today, MSNBC picked up an AP story which I linked to below.

Based on our experiences, observations, many anecdotal stories and a recent informal and off-the-record conversation with a Senior Vice President of a major national bank (which received significant TARP funds), we began putting together our vision of what to expect next.

Almost everyone we have spoken to either is in the midst of or knows someone who is trying to get their mortgage modified. We have met only one person who has successfully received a "permanent" loan modification. Of the over half-million modification applications in process at the major mortgage lender mentioned earlier, the bank has "permanently" modified only 98 loans. NINETY EIGHT....nationwide, only 98 loans. Tens of thousands have been granted a "trial period" of between three to six months, but these are not permanent. In order for them to become permanent, the borrower must complete the trial period with all payments made on time, then, at the end of the trial period, RE-APPLY for the modification based on updated and current borrower information. At that point, most applicants cannot qualify. The loan is then immediately declared in default and the foreclosure proceedings begin. Our source at this particular bank admitted to us that the bank has no intention of modifying any more loans than is absolutely necessary in order to keep the Feds off their back and that by using the "Trial Period", the bank can at least get some payments on the account and delay moving the asset into the "bad asset" pile.

We have spoken to hundreds of people who have looked at the current market, the forecasts, what has happened in their neighborhood and the values of the surrounding homes and have made a complete business decision to walk away from the property. Each has cited the same set of factors in their decision: Their lenders unwillingness to modify their loan, the drastic drop in values in their neighborhood, the strictly financial outlook of owing more than double what their neighbor owes and what that will mean for years to come for re-sale and, in many cases, what the lower home prices have done to their neighborhood in terms of appearance and overall enjoyability. These borrowers made a decision that a foreclosure on their credit record and possible bankruptcy, depending upon their circumstances, would be less devastating than staying, even though they could afford the monthly payments. This has recently been dubbed "Strategic Default".

"Shadow Inventory" was a term Greg coined over a year ago and has since been picked up by almost everyone. The term was originally meant to describe the tens or hundreds of thousands of residential properties which had been abandoned or had borrowers who had not made a payment for months or even over a year but were not yet foreclosed upon. Again, we thank our source at that bank mentioned above for validating what we had already assumed: by not foreclosing, or an many cases not even filing a notice default, the bank can keep the number of bad assets "reported" lower than the "real" number should they foreclose on every property meeting the requirements. This artificially inflates the books, artificially lowers the foreclosure rate and allows then bank to boast big gains when, in the real world, they would still be posting record-shattering losses. We can now add the tens of thousands of foreclosed and bank-owned properties which are not yet listed and on the market. Again, this simply keeps available, "for sale" inventory artificially low, competition between their own assets artificially low and keeps the sales numbers artificially high.

Finally, the fantastic government incentives for buyers has helped increase home sales. This worked as it was meant to. First time home buyers have been able to finally get into a home of their own. With exceptionally tight underwriting standards for these loans, these home owners should be in a good position to actually be able to afford the home they just bought.

Now, we can add in a factor that began only a few months ago: higher income borrowers in higher priced homes running out of the savings that has kept them going for the last year or so. These otherwise well-qualified, former grade AA borrowers are making the same business decisions others are making and walking away from their second or vacation homes or sizing down to a smaller home, and, unable to sell their larger and much more expensive home, deciding to walk away from that loan. This has moved the price point of the foreclosures up significantly and is leading to a new round of foreclosures previously not anticipated.

Bottom line: Unwillingness by banks to modify existing loans, strategic default by borrowers, shadow inventory, foreclosures creeping in to higher-income borrowers and the uncertainty of the future of government incentives for home buyers have all factored together for another inevitable perfect storm - another dip, another round of foreclosures, possibly even broader and deeper than what we have already seen.

What does this mean for a potential buyer? Keep your eyes open, stay aware and be ready with as much cash as possible to pounce on the home you want when it finally becomes available.

Look for our next quick article on how to structure your offer on a bank-owned property to make it as attractive as possible to the seller.

Housing may be headed for double dip

MSNBC.com

Data adds to worries industry is mostly propped up by government stimulus

The Associated Press

updated 12:36 p.m. PT, Tues., Jan. 5, 2010

WASHINGTON - The number of people preparing to buy a home in November fell sharply in the latest sign that the housing market, which had been rebounding strongly, may be headed for a "double-dip" downturn over the winter.

Consumers are taking their time following the extension of a tax credit deadline, and that is draining momentum from the summer's recovery, according to data Tuesday from the National Association of Realtors. The figures echoed what homebuilders saw in November and showed how dependent the housing market is on government programs to lower interest rates and lure buyers with tax credits. If those programs expire as planned early this year, the housing market will have to stand on its own.

But outside of housing, there are other signs the economy is climbing out of the recession. Orders to U.S. factories posted a big gain in November, the Commerce Department said Tuesday. That data was the latest evidence of a strong turnaround in manufacturing as industries from China to Europe flash recovery signs.

Taken together, the reports show that, while housing remains vulnerable, makers of steel, computers and chemicals are mounting a surprisingly robust rebound.

"We expect housing to just limp along even as the rest of the economy is growing fairly strongly," said Nomura Securities economist Zach Pandl.

The stock market, meanwhile, zigzagged after the reports gave mixed signals about the economy.

The National Association of Realtors said its seasonally adjusted index of sales agreements fell 16 percent from October to a November reading of 96. It was the first decline following nine straight months of gains and the lowest reading since June.

The drop was far larger than the 2 percent expected from economists surveyed by Thomson Reuters, and analysts were surprised.

"This was bound to happen at some point, although not by this much," wrote a startled Jennifer Lee, senior economist with BMO Capital Markets. "Gulp," she added.

"It will be at least early spring before we see notable gains in sales activity as homebuyers respond to the recently extended and expanded tax credit," Lawrence Yun, the Realtors' chief economist, said in a statement.

Typically there is a one- to two-month lag between a contract and a done deal, so the index is a barometer of future sales. Pending sales were down 26 percent from October in the Northeast and Midwest, 15 percent in the South and 3 percent in the West.

The housing market had been rebounding from the worst downturn in decades, aided by aggressive federal intervention to lower mortgage rates and bring more buyers into the market. Sales of existing homes surged in November to the highest level in nearly three years, but analysts expect December sales to show a big drop.

And concerns remain that the market recovery will stall as the federal programs are phased out.

"This sudden drop risks the stability housing markets have enjoyed in recent months," wrote Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.

The nation's factories, however, are faring much better. The Commerce Department orders rose by 1.1 percent in November, more than double the 0.5 percent increase economists had forecast. The increases were widespread with the exception of autos and aircraft, which posted declines.

The Institute of Supply Management had reported Monday that its key gauge of U.S. factory activity showed manufacturing was expanding in December at the fastest pace in more than three years.

Economists are hoping that the fortunes of the manufacturing sector are beginning to rebound as the economy struggles to emerge from the worst recession since the 1930s.

“Shadow Housing Inventory” Put At 1.7 Million in 3Q

“Shadow Housing Inventory” Put At 1.7 Million in 3Q According to First American CoreLogic
Summary:
• As of September 2009, First American CoreLogic estimated there was a 1.7‐million‐unit pending supply of residential housing inventory, up from 1.1 million a year earlier. Pending supply, sometimes referred to as “shadow” inventory, estimates real estate owned (REO) by banks and mortgage companies, as a result of foreclosures and other actions, such as deeds in lieu, as well as real estate that is at least 90 days delinquent. Normally shadow inventory would not be included in the official measures of unsold inventory. At the current sales rate, the pending supply is 3.3 months, up from 2.4 months a year ago. The months’ supply measures how quickly the inventory will run off given the current sales rate.

• The visible supply of unsold inventory was 3.8 million units in September 2009, down from 4.7 million a year earlier. The visible inventory measures the unsold inventory of new and existing homes that are currently on the market. The visible months’ supply fell to 7.8 months in September 2009, down from 10.1 months a year earlier.

• The total unsold inventory (which combines the visible and pending supply) was 5.5 million units in September 2009, down from 5.7 million a year ago. The total months’ supply was 11.1 months, down from 12.7 a year earlier. This indicates that while the visible months’ supply has decreased and is beginning to approach more normal levels, adding in the pending supply reveals there is still quite a bit of inventory that will impact the housing market for the next few years, especially in the context of the current increase in home sales, which is in part due to artificially low interest rates and the homebuyer tax credit.

Number of escrows on rise in Palm Springs Valley

Increase shows 'we're inching in the right direction,' top Realtor says

Erica Solvig
The Desert Sun

Monthly sales may be down, but the number of escrows is slowly rising in the Coachella Valley.

With the exception of a slight dip during traditionally slow December, the upward trend started in September.

Unlike housing sales figures - which show what's been happening month to month - experts use escrow data to indicate what's coming in the market.

The numbers, released this week by the California Desert Association of Realtors, show January's pending sales still lag the escrow figures seen in early 2007.

Still, officials say the increasing number of pending sales means that other market indicators - mainly the closely watched sales tallies - also should start showing an upswing.

"It's going to be a while before these numbers all start to turn positive," said Greg Berkemer, executive vice president of the California Desert Association of Realtors.

"We're inching in the right direction."

January saw 549 pending sales, down about 7 percent from a year ago and up 11.4 percent from December, according to association figures.

February figures have yet to be released.

But if One Brokerage with 400 desert agents are any indication, the upward trend is continuing.

With a few days to go in February, their agents earlier this week reported 206 pending sales - versus the 150 seen in January - said regional vice president Ron Gerlich.

"Normally, around this time of the year, sales do start to increase," he said. "To have this many openings so far in February, this is the best month we've had in six or seven months.

"Its an indication. There are people out here buying."

Villain or Hero?

Greg Thomas and Gary Drake are realtors with Windermere Real Estate in the Coachella Valley representing sellers and buyers in the cities of Palm Springs, Palm Desert, Indian Wells, Rancho Mirage, Cathedral City, Indio and Desert Hot Springs.

I remember just two years ago being the good guy by finding buyers great homes and getting top price on properties for the sellers we represented. Gary and I worked with a handful of first time buyers back then and talked most of them out of the teaser loans they were being offered at that time, explaining what would happen if the market slowed down and prices dropped. Yes, we did lose some higher commissions by selling homes that our buyers could actually afford with a loan where the payments remained steady rather than jumping $600.00 a month or more in three years. Today we are heroes to those families and they will be our clients for life.

What I find interesting is that Realtors® were heroes a few years back when we were hustling to find homes to fit clients’ needs in a very low inventory market. Now the media paints a picture of greedy, misleading agents who sold people homes with crazy loans just to get higher commissions. I know there were some unscrupulous agents who did that, but, quite frankly, I am not sure if most of them have been able to survive this current market; I have a feeling they were in it for a quick buck.

To survive long-term in any business, my belief is to put the client first and be honest and you will make out in the long run and be able to sleep at night (it’s not rocket science).

Palm Springs area real estate is blessed in many ways since it is a vacation destination for people around the world during the season. We also have many baby boomers flocking here to retire and to enjoy the easy living the desert offers, not to mention the second home owners and full-time families who now live here year-round.

Gary Drake and I have had three escrows in January and we represented the sellers on all of these transactions. If homes are priced right and fairly they do sell. Two of the buyers were from Canada and the others were baby boomers who bought a home on the golf course for under $400,000 near Mission Lakes in the newer side of Desert Hot Springs.

I know I am one of those damn Realtors® who no one wants to listen to now compared to three years ago when I was a hero because everyone was making double-digit appreciation on their homes. There are some really great buys right now in the Coachella Valley prices are down. You see, now it’s your turn to take advantage of the greedy people who bought new homes as commodities, waiting to flip them and make a quick $75,000 or more. Some of the greedy ones are now in trouble and are either losing the property they never lived in or selling them at hugely discounted prices!

So in the long run who wins?

Just make sure you get all the facts that you possibly can and have a true professional help you navigate the market they specialize in. Chances are that you will be calling that person a hero in a few years because it is my opinion that at some of the prices I see now, you can’t lose in the long run.

Greg Thomas
The Thomas and Drake Group
www.ThomasAndDrake.com