Thanks to SJ for sending this along, authored by Sean at foreclosureradar:
http://www.foreclosuretruth.com/blog/sean/waiting-catch-wave-surge-reo-listings-unlikely
Sean: For a number months now I’ve been telling reporters and others that I didn’t think we would see the big wave of foreclosure sales, and subsequent REO listing that some have been predicting. Until recently that was mostly based on a gut level feeling that banks (servicers) simply didn’t have the will to complete more foreclosures given the anti-foreclosure backlash. With a little hindsight, things have become clearer.
First, to be fair to those who have been predicting the wave, the numbers would suggest that California foreclosure sales should be surging right now. After a brief respite due to CA Senate Bill 1137, Notice of Default filings surged last December, and have remained at near records levels since, and even hit a significant new record in March at 52,163 filings. Similiarly, Notices of Trustee Sale have also surged, setting a new record as recently as May. Thus, it would be logical in normal times to conclude that foreclosure sales, and subsequently REO listings, should now be surging too.
But these aren’t normal times. While foreclosure sales have increased since the moratoriums began to lift, they remain well below the peak levels reached July 2008, and as you’ll see in our next CA Foreclosure Report, will actually fall from June to July this year.
So what happened? In my opinion the answer is found in the troubled asset relief announcment made on September 19th by U.S. Treasury Secretary Henry Paulson. Clearly Paulson believed at that time that banks (servicers) would fail unless they were releived of the mounting losses on mortgage backed securities and other troubled assets.
In fact the Fed began purchasing direct obligations of Fannie, Freddie and the Federal Home Loan Banks on September 24, and later began purchasing mortgage backed securities. Click here for details on purchases to date from the Federal Reserve Bank. The total has reached nearly $650 Billion. Keep in mind that the total loan value on ALL foreclosed loans in California since this crisis began is under $200 Billion.
While many will point out this was necessary to keep home loans available and interest rates low, I think it also clearly sent banks a message… you will get more for these assets from the taxpayer than you will through foreclosure. Add to that the mark-to-model rule changes from the Federal Accounting Standards Board, and a ton of politicial pressure and it should be no surprise to anyone that foreclosures have slowed.
The drop in foreclosure sales defies logic given the continued increase in properties scheduled to be foreclosed on. But defying logic to do what is politically expedient while simultaneously inflating bank earnings and bonuses and without regard to future consequences IS the new normal. We are yet again trading tomorrow for today.
For those of you still waiting for a surge of foreclosures, the truth is you’ll likely be waiting a long time.
Sean has a graph here comparing the before and after Paulson announced TARP:
http://www.foreclosuretruth.com/blog/sean/waiting-catch-wave-surge-reo-listings-unlikely
I said it before, I think the people ‘working’ things out will be on the hook one way or the other. Many will wish they simply went BK. There is no free lunch, though the check only comes after dessert at some restaurants.
You don’t have to set new records to have a lot of foreclosures. That would be like saying a 9.6 second performance in the 100 meter dash is nothing. There are a lot of foreclosures any way you cut it, and it will continue for some time.
Unemployment is also high. But it’s nowhere near as high as it has been in the past. Doesn’t mean it’s not high or alarming.
Then there is this:
Mortgage delinquencies hit record high in Q2
By ALAN ZIBEL (AP) – 18 minutes ago
WASHINGTON — With the recession throwing thousands of people out of work daily, more than 13 percent of American homeowners with a mortgage have fallen behind on their payments or are in foreclosure.
The record-high numbers released Thursday by the Mortgage Bankers Association are being driven by borrowers with traditional fixed-rate mortgages, rather than the shady subprime loans with adjustable rates that kicked off the mortgage crisis. As of June, more than 4 percent of all borrowers were in foreclosure, while about 9 percent had missed at least one payment.
And the layoffs keep coming. Lockheed Martin Corp. said this week it’s handing out about 800 pink slips in its space systems division, and audio conferencing company Polycom Inc. said it will cut about 80 positions.
New jobless claims rose last week to a seasonally adjusted 576,000, the Labor Department said Thursday. While the recession, measured by the nation’s total economic output, is likely over, most economists expect layoffs and foreclosures to keep rising for many months as companies remain in cost-cutting mode.
“Their confidence has been shattered,” said Brian Bethune, chief U.S. financial economist at IHS Global Insight. “They are going to be very conservative. They don’t want to be blind-sided by a false dawn economy.”
Nee Salam, 56, lost his engineering job at an automotive electronics supplier south of Atlanta more than a year ago.
At the time, he said, “I was thinking the job market was going to change right away.” But it hasn’t.
Since then, he’s been working as a consultant, earning less than half his old salary of $115,000. His wife has been cleaning houses to keep the family afloat.
But after draining their savings and retirement accounts, the couple have missed four payments on their $636,000 mortgage. Their request for a loan modification from OneWest Bank (formerly failed IndyMac Bank) was denied because the couple’s income was too low. A OneWest representative did not immediately comment.
As banks unload foreclosed properties at deep discounts, they are attracting homebuyers back into the market. On Friday, the National Association of Realtors will release July home sales data, and economists expect it to show the fourth-straight monthly sales increase.
While there have been signs that prices are stabilizing, some economists say that’s a temporary respite. “We don’t think we’ve seen a bottom yet in home prices because of the foreclosure problem,” said Michelle Meyer, an economist with Barclays Capital.
The worst of the trouble is still concentrated in California, Nevada, Arizona and Florida, which accounted for 44 percent of new foreclosures in the country. Nearly 12 percent of all loans in Florida were in foreclosure, the highest in the country, followed by Nevada at 9 percent.
Loan delinquencies among borrowers with prime, fixed-rate mortgages grew from the first quarter to the second in all 50 states, with the biggest jumps in Wisconsin, Illinois, Utah and West Virginia.
President Barack Obama has pledged to fight the problem, but its foreclosure prevention program, known as “Making Home Affordable,” is off to a disappointing start. As of July, only about one in 10 of eligible borrowers had signed up.
When homeowners don’t have much income left, there’s little that can be done to help. Cindy Kennedy, 44, ran a successful cleaning business in Allentown, Pa., for seven years. But she lost most of her customers once the recession hit.
Kennedy paid more than $1,700 to a California company that promised to help modify the loan. But the company stopped returning her calls in June, and she suspects she has been scammed.
She and her longtime companion stopped paying on their $840-a-month mortgage in February and their house has gone into foreclosure. They attended a mediation conference in county court Wednesday with their lender but are not optimistic about saving their home.
Now making $120 a week as a part-time supermarket cashier, Kennedy says she commiserates with her co-workers, some of whom are also facing foreclosure.
“We talk about it and laugh,” she said. “It’s not really a funny situation, but sometimes you have to laugh to keep your sanity, so you don’t make yourself nuts.”
AP Economics Writer Christopher S. Rugaber contributed to this report from Washington. Associated Press Writer Michael Rubinkam contributed reporting from Allentown, Pa.
Copyright © 2009 The Associated Press. All rights reserved
Jim, will you please discuss Dr. Housing Bubble’s views on alt-a loans in California by area and region and the delinquencies associated with those.
http://www.doctorhousingbubble.com/alt-a-option-arm-and-subprime-loans-will-turn-california-into-a-zombie-mortgage-state-28-percent-of-alt-a-loans-in-california-60-days-late-alt-a-mortgages-by-california-region-11-million-alt/
I think its clear how this will play out now – foreclosures will continue to build behind the dam, as will be reminded by every bloger citing how foreclosures are going higher, higher, higher well into 2010.
And yet, as foreclosures went higher, higher, higher in 2009, inventory went lower lower lower. Lets face it, there is NO TSUNAMI COMING despite we all wishing it were true. Instead those houses behind the dam will be slowly dispensed – like a time release capsule into a slowly improving market.
Im sure Im gonna hear, “govt cant do this forever” – well actually, yes they can, and they will. Moreover, the “cant go on forever” crowd were the same ones saying “the govt cant restrict foreclosures enough to stabilize the market”. How did that argument work out?
Pigpen,
I asked LY at lunch about the recasts, and he gave the standard answer about lower ARM rates should cushion the blow. But the problem is bigger than that, due to people just being underwater makes them want to bail.
I am a subscriber to the Dr.’s blog, and he is sensational. His stat today is that there are 70,000 Alt-A and neg-am mortgages in San Diego County. There are 1,133,061 housing units, according to the Census Bureau, so 6% of the total housing stock has a toxic loan.
The Dr. says most will get foreclosed, so let’s call it 50,000, and the servicers/banks proceed to onesy-twosy them out over the next five years.
Whether it is right or wrong, good or bad, it’s probably what’s going to happen.
My point with larry was whether HE is soliciting the servicers to waive the recasts, and he didn’t answer. The only way to slow down the barrage is for servicers to waive the recasts, AND conduct a powerful media campaign to publicize that Alt-A/neg-am homedebtors have a solution available – otherwise they’ll keep defaulting even though they could survive.
I said I wouldn’t bring up neg-ams again – I don’t want to get into how they work, toxic, etc. Pardon me if I’ve offended you.
I think the article is excessively pessimistic. I would like to think of the Fed’s program as one of shock absorber. If the banks had chosen to suddenly dump so many foreclosed homes, they would have dropped the market values so low as to increase even more voluntary defaults to generate a vicious cycle. Now, they can contain the foreclosed homes and slowly release it at 20-30% of market demand for as long as it takes, say even another 10, 20, 30 years. By then, inflation would eat away any price dropping effect and banks can even increase their sales rates at higher prices. I see nothing wrong in REOs being the primary source of affordable homes for a generation.
So much for moral hazard. If banks get more for troubled mortgage assets from the taxpayer than through foreclosure, then that means they continue to allow freeloading defaulters to live a millionaire’s lifestyle in paradise for free. I guess the lesson here is that crime does indeed pay!
Whether you like it or not, the government and the lenders will manage forced sales so that housing “bottoms” at or near current levels. Some submarkets will do better and some will do worse. As the economic recovery becomes more evident (We are in it now, but it takes time for progress to show up in employment, GDP, etc. measures.) buyers will return in increasing numbers, so “inventory” will be managed as well. There is no “end of days” for either buyers or sellers, but the 3,000-3,500 transactions per month will gradually rise. Desirable properties will get bid up a bit, and it will be harder to find what you want. People who sort of need to sell will wait a little longer, as they see prices stabilize and rise a bit. Like the bubble that preceded it, this housing fire sale is about to end.
Im sure Im gonna hear, “govt cant do this forever” – well actually, yes they can, and they will.
No they can’t, and they won’t (although they’ll certainly try).
My guess would be it will not take 10 or 20 years to offload these, I would say that by 2015 or 2016 inflation will take the housing market very close to where is was at the top of the last cycle, so at most another five or so years of dolling out REO’s mean while within 2 or so years at the most I would also guess the market would be back to 70% organic sales (really would anyone want this recession to last another 6 to 10 years) ,
Just something to think about.
Were in a new bull market according to the pros who want your money.Go spend all your money before it is to late.We are in a new era.Throw fundamentals aside my friends.
Man cnbc has went downhill.Jim cramer should be off the air.I wonder how the ratings are for this guy?
Government seems to forget the money they spend needs to come from somewhere.
Eventually the fed won’t be able to print money. When this happens the beast will need to feed and the only way to do that is to tax the people.
Let’s start a militia!
Can shut this blog down now as the Bubble is OVER! Who’s got the champaign?
Mark Hanson covers this scenario in great detail here:
http://mhanson.com/blog
Foreclosure supply (yellow) has been artificially held back, which has allowed the low end of the real estate market to perform very well over the past several months. But the reservoir of foreclosures (blue + pink) is getting full and at some point the dam will crack and break.
Yes, the servicers can continue to let these properties drip out while homeowners continue to default at a record pace each month. But that will only keep filling the reservoir until one day the dam breaks — it is already at critical levels. It is more likely that as the massive supply of pre-foreclosures in the reservoir continues to build, the number of properties that fall into the spillway increase naturally pushing foreclosures higher in tandem.
And a massive amount of foreclosure-ready supply is on tap as the first group of modifyees exit the HAMP trial-mod period within 30 to 60-days and monthly from then on out. At this point — before year end — either foreclosures will begin to flow hard again or the gov’t will come back in and change around the HAMP to prevent it. But the more they change the rules to allow people to stay in homes that they have no business being in, the more they will brand loan defaults and mortgage mods as mainstream turning good borrowers into bad borrowers who default on purpose.
The bottom line for July was that gov’t meddling did push down actual foreclosures in CA but pre-foreclosures (Notice-of-Defaults and Notice-of-Trustee Sales) remained above 2008 crisis levels. On a national basis, the foreclosure activity is so strong that actual foreclosures rose in spite of CA. The foreclosure reservoir is filling quickly, contains hundreds of thousands of foreclosure-ready properties, but the spillway is has a blockage for now.
With the tax credit still in place, mortgage rates still attractive, and first timers and investors slugging it out for a $150k house, there could not be a better time to foreclose and get houses onto the market. But don’t get too excited — ForeclosureRadar.com reported that in CA the average foreclosure was nearly $200k upside down on the mortgage.
It is important to always remember that when one person gets a ‘good deal’ on a house, orders of magnitude more are thrown into a negative-equity (or deeper negative equity) position exponentially increasing their likelihood of loan default. Loan default leads to foreclosure and another ‘good deal’ on a house and so on and so on.
CA & National Foreclosure Stats
Despite foreclosures falling, CA pre-foreclosures remained very strong. As a matter of fact, the number of foreclosure-eligible properties stuck in the pipeline has never been greater. Notice-of-Defaults at 45k in July remain above July 2008 crisis levels.
Talk about the wave all you want, but if the builders are not building, your going to need that wave just to keep up with demand IMO .
So what would get the builders building again ???
just a little food for thought.
shadash,
“Eventually the fed won’t be able to print money”.
What type of scenario would this fall under?I am no economist but curious.Seems like they have been creating a lot of electronic money lately.All they do is credit a member banks account and instantly they have money.What will be the ramifications of all this funny money?I guess inflation is in the cards.I am just wondering how all of sudden things are ok.
The fed can print money as long as people buy their bonds. Any prediction on one is a prediction on the other. The bottom line is their funds are borrowed, with the expectation that we and our children will pay them back through taxes. That’s real money.
No they can’t, and they won’t (although they’ll certainly try)…TJ 2009
The banks cannot hold off foreclosures enough to get price stability….TJ 2008
See you next year when that prediction fails too.
Arizonadude,
The reason I know the fed can’t print money to infinity is because 1plus 2 doesn’t equal 5. Eventually investors will want a return on their money. If inflation goes up faster than tbills commodities will become the investment of choice.
“If inflation goes up faster than tbills commodities will become the investment of choice.”
Well thats part of the plan too isnt it? All the empty houses in the IE, Detroit, etc, can be sold for the salvage value of their copper and lumber.
afikoman,
I stopped listening to Mr. Mortgage around a year ago when he became the biggest chearleader for principal reductions. I find everything he says now to be garbage just by association. Personal opinion.
Siva,
When I stated “price stability” I was talking about a bottom, not a temporary plateau on the way down. Besides, all the talk about stability is simply short-term anecdotal; YOY CS indices are still showing significant declines.
Perhaps you’re unfamiliar with such concepts as “seasonality” and “bear market rallies”.
So the government is letting the air out of the tires slowly instead of all at once. Means we have to suffer through years of economic malaise instead of having it over quick.
Let the damn market work! Have those who can’t afford their homes sell to those who can — at lower prices. We’ll have zombie homeowners for years (those who live in their homes mortgage/rent-free for years to come). Where’s the justice in that?
I am mad as hell.
Kelja,
Yeah, frustrating isn’t it? The clear incentive is to max out the FHA limit at 3.5% down, make a payment or two, then stop and ride the free rent train for as long as possible. Talk about moral hazard.
Must be something wrong with me, but I just can’t bring myself to do it.
I’ve been trying to move back to San Diego since I graduated from SDSU years ago!!! The problem with San Diego is that all of the good area’s ( La Jolla, Solano, Carlsbad, CV, Mission Vally, Mission Beach, PB Poway ) are still too expensive in comparison to San Diego wages. Do you know how hard it is to get a $100k+ corporate job in San Diego unless you are working as a Dr./Lawyer/ or Govt worker? The corporations pay way too low to let any of us L.A. people move down there.
“Perhaps you’re unfamiliar with such concepts as “seasonality” and “bear market rallies”.”
You mean like the stock market “suckers rally” you told us about this spring? Hows that one working out for you?
FASB = Financial Accounting Standards Board.
Not the “Federal Accounting Standards Board”.
“Since 1973, the Financial Accounting Standards Board (FASB) has been the designated organization in the private sector for establishing standards of financial accounting. Those standards govern the preparation of financial statements. They are officially recognized as authoritative by the Securities and Exchange Commission (SEC) (Financial Reporting Release No. 1, Section 101, and reaffirmed in its April 2003 Policy Statement) and the American Institute of Certified Public Accountants (Rule 203, Rules of Professional Conduct, as amended May 1973 and May 1979). Such standards are important to the efficient functioning of the economy because investors, creditors, auditors, and others rely on credible, transparent, and comparable financial information.
The SEC has statutory authority to establish financial accounting and reporting standards for publicly held companies under the Securities Exchange Act of 1934. Throughout its history, however, the Commission’s policy has been to rely on the private sector for this function to the extent that the private sector demonstrates ability to fulfill the responsibility in the public interest.”
http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176154526495