Thursday, October 30, 2008

Statewide data regarding loan modifications.

I saw over on Mathew Padilla's blog that the California Department of Corporations has the results of a survey they take of loan servicers. One of the interesting statistics that matches what I am seeing in the local data is the increase in short sales that lenders are agreeing to. I think this will be the biggest growth segment of the market over the next few years as the majority of servicers work on loan modifications that adjust mortgage rates but few do loan modifications that reduce the principal balance. If the balance isn't reduced there is no way to get out from under the home except appreciation (unlikely anytime soon), short sale or foreclosure. If houses did magically start to appreciate the servicers will see the gain, not the borrower as a result of them not reducing principal balance. The possibility of selling the loan to TARP or on the secondary market is the reason I think few will reduce principal for the borrower.

In January of the the servicers surveyed only 5.69% (974) of completed workouts were short sales. By September that grew to 13.41% (3,732) of completed workouts. Reductions in principal were 0.08% (14) in January and 0.28% (79) in September. Reducing the interest rate at or below the initial/start rate was the most likely outcome for borrowers in January this represented 19.44% (3,327) and 20.36% (5,666) in September. One of the reasons why I don't think the Alt-A resets will be as big of a deal as some might think is how much latitude servicers have in dealing with rate reset issues. It is a far bigger deal for the borrower as to the type of loan they have than if the rate is resetting sometime this year or next. An Alt-A or subprime borrower is screwed because of the issues inherent in the loan and the marketplace much more than any rate reset potential.

The new FDIC plan being rumored to be unveiled is basically a standardized version of the rate reduction (usually for 5 years) for borrowers in default. There is a possibility of principal reduction under the plan but as we see from the above statistics, it is the road less traveled. I think it will do little to help the situation over the long term but may relieve some pressure over the short term.

6 comments:

Noz said...

Is there going to be ANY provision or attempt by these ass clowns to even try to filter out legitimate borrowers from the fraudulent criminals who knew what they were getting themselves into?

Effective Demand said...

Noz,

Basically if it is Owner Occupied, then no.

The banks aren't out for justice. They think by doing this they will maximize their portfolio of loans. Problem is, once word gets around everyone is going to want their handout too. The borrowers are sitting, in many cases, on a home worth hundreds of thousands of dollars less... the bank concession will probably amount to 10% of that in interest cost. The borrowers think they are getting something but the banks are getting far more by keeping them overpaying for their home.

The question remains, how many borrowers are smart enough to figure all this out.

Noz said...

Effective,

I'm waiting for the housing market to go down further before I buy. Do you think this will screw my chances, realistically, to afford a home in the future?

I'm at a point where if things don't correct enough, I'm packing my bags and heading out of LA. It's already become less than worth it to stay here for reasons other than RE....but that's the straw that's going to break the camel's back.

I project another 20-25% in home price reductions in the next 12-18 months. I don't think this bailout will work because the momentum, corruption, and carnage is so great. Plus, it's not likely the lending practices are going to return to what they were before so what are the odds that people will be able to afford anything if prices stay high...but what are you thoughts?

Effective Demand said...

Noz,

Once the banks returned to verifying income (and they have) the game was over. Affordability is again defined by how much you make. What the banks are trying to do is prevent the situation from getting worse and overshooting to the downside. They are trying to put a brake on the velocity of the correction.

Will it work? It's a great question, I'll know more in 6 months. But I don't think you'd have to worry about seeing another 20-25% decline over the next 12-24 months in the Ventura/LA county area.

But you will see some other weirdness due to the median being used. The CAR reported that the California state median for a SFH was 316k last month. A tremendous decline. I dont think the state median can eek out a 25% decline. But this is just a showing that the cheap homes sold last month much more than the expensive homes. I think the expensive homes turn for the greater percentage of the fall is upon us and next year at this time we could easily see the same median price but the difference is the amount of home you get for your money is far greater than shown in the median.

Noz said...

Effective,

So essence what you are saying is that the homes in areas that are still high will fall? Such as Glendale, Burbank, etc....

And just to clarify:

But I don't think you'd have to worry about seeing another 20-25% decline over the next 12-24 months in the Ventura/LA county area.

I interpret this as NO we won't see another 20-25% drop correct? Or is that I need not worry about it NOT dropping...i.e. it will drop?

Thanks and keep up the good work.

Effective Demand said...

I do think we will see a 20-25% decline in median over the next 12-24 months and I think the higher end homes will bear a greater share of the decline.

For example, the MI changes in California mean people need a much higher down payment (from 5% before to 10% now). Those homes higher up the spectrum require that much more down payment. Add in the change in the "jumbo" conforming limit from 729k to 625k in January and you have a recipe for the higher end to pancake down on the lower end.

The question becomes how many of those sellers are discretionary and how many of them aren't. That will determine how fast things drop, and I believe with a deteriorating economy and increased underwriting guidelines that the number of motivated sellers as a percentage of the market increases not decreases.