Tuesday, December 29, 2009

78% off peak in Oxnard

128 N Harrison Ave, Oxnard, CA

This was a true bubble gem. A small house that is zoned M-1 (light industrial) purchased for $375,000 in 2005 and looks like a light remodel and then sold as a residence in early 2006 for $490,000. The loan from Homecoming Financial was for $480,000 with a $10,000 down payment coming from the seller.

It was foreclosed in October 2008 (during the financial panic) with the lender set Trustee Sale price of $433,000. Possibly set that high so that it could be valued on the books at that price (an assumption on my part). It finally sold this month for $106,000. After fees, commissions and considering opportunity cost the loss severity on this is probably in the 90%+ range.

To sell back in 2005/06 the lender probably didn't care about zoning. I'd be highly interested in seeing the appraisal done in 2006 as well. The listing agent / flipper represented both sides in the transaction and also does loans so I would not be surprised if he did the loan for the lucky borrower on this as well.

Fast forward to 2009 and the "too tight" lending. It's zoned industrial so I bet no residential lender would touch it. The person who bought it put $43,000 (40.5%) down, I bet because that is the highest LTV that banks would take for CRE. There are a lot more little details but the more I look at this gem the more I see almost every issue of the boom represented.

Sunday, December 20, 2009

On this years foreclosure moratorium

Last years foreclosure moratorium lasted from Thanksgiving through March. For California it was extra bad because there was a California specific law that extended the length for foreclosure timeline in July which extended many foreclosures into holiday foreclosure moratorium which then ran into the new Administrations loan mod effort.

This season it is much different. I only see one major servicer with a foreclosure moratorium, Citigroup has said they will suspend foreclosures for one month. Fannie Mae and Freddie Mac have only said they will suspend foreclosure evictions not foreclosures themselves and this only from December 19th through January 3rd. Bank of America and Chase have said they will suspend foreclosure evictions from December 21st through January 3rd.

Last year the backlog of foreclosed homes on the market was much greater so the moratorium mattered less. This will at least mean the supply shortage for the market shouldn't get too much worse. It is at least a recognition in some small way that you don't solve the problem by simply delaying the decision to some point in the future, though clearly that is the preferred method by the regulators.

Saturday, December 19, 2009

San Fernando Valley home sales report - November 2009


San Fernando Valley Single Family Home sales for November 2009 came in at 582 which is down 12.22% MoM and down 8.06% YoY. The median price for single family homes came in at $395,000 which is up 1.28% MoM and down 5.33% YoY. I doubt you will see the headline that this is the second worst November home sales on record but that is exactly what it is. The effort to remove supply off the market has worked but that means sales will stay at ultra low levels for the foreseeable future. We are going to have higher rates due to the stopping in MBS purchases and the tax credit being removed from market. It is hard to see exactly how the local market gets better unless more foreclosures or short sales make it on market. But this is exactly what the local, state and federal governments have been fighting against happening. It is going to be a tough slow grinding slog unless the market is allowed to find its equilibrium.



Condo sales came in at 201 which is down 11.84% MoM and up 1.01% YoY. Median price for condos came in at $225,000 which is down 4.26% MoM and up 2.27% YoY. Condos are faring a bit better than SFH because there is more supply and it appears some buyers are choosing to buy a condo when they can't find what they want in a detached home.

The red line was my attempt to create a predictor for sales but it hasn't been working out so well since May of this last year. IMHO, it appears that some pendings are being double counted, instead of falling out and going BOM (which would reduce my predictor), they are just switching buyers and updating the pending date which gets them counted in the current months pendings again. This is supposition on my part since I don't know how SRAR constructs their numbers but nothing much else makes sense. Also the dramatic drop in BOM this month is peculiar, I am thinking it is an error. Lately the SRAR stats have been a bit unreliable, I don't think the person in charge of that particular task is very competent (or just doesn't care).

Friday, December 18, 2009

So I pulled Bernanke's mortgage...

First and foremost, before yesterday I didn't care one iota about Bernanke's mortgage. But when he said this publicly my interest was piqued:

Do you have a mortgage?
Oh, yes, we refinanced.

Oh, perfect. When?
About 5%. A couple of months ago.

Good time.
Yes. We had to do it because we had an adjustable rate mortgage and it exploded, so we had to.

So, did you get a fixed rate at 5%? I think this might be the most valuable piece of information.
(Laughter.) Thirty years fixed rate at a little over 5%.

Needless to say when the guy in charge of monetary policy says he has a exploding ARM it is news so I checked out the public records. While the details are certainly not juicy it leads me down another path of thought which I will get to.

Bernanke bought in May 2004 for $839,000. He had a 5/1 ARM for $671,200 at 4.125% that adjusted to 12 month Libor in June of each year after his fixed period ended. To calculate his rate you take 12 month Libor on that date and add 2.250%, it can't adjust more than 2% in any one year due to restrictions on the note. He also had a purchase money second $83,900 but for some reason I can't find the interest rate on that one, nor do I see an ARM rider for it so it could very well be fixed. Both notes indicate they are amortizing loans.

So what does this all mean? Well according to the terms I see for Bernanke's first and the little information on historic LIBOR I can find (here)... his rate actually went down. So if his rate went down on his first and his second is fixed (an assumption on my part since I see no ARM rider on the second) then ask yourself why refinance now? You would only do so if you expect rates to rise in the future or you don't think fixed rates will ever be this good again. Winter time is a low demand time for mortgages so rates drop to encourage activity, also the Fed is ending it's MBS purchases so rates are expected to rise.

Based on his actions I think Bernanke does not expect rates to get better than this at the very least. One can't read how much worse he might think rates might get based on his refinance but he clearly fixed his rates now so the risk for lower rates in the future based on his personal financial decision is low. I was a little doubtful that the Fed would actually end their MBS purchases since the housing market is only this "good" due to the artificially low rates caused by those purchases. But now I am much more convinced that the Fed will at least let the MBS portion of the market to stand on its own two feet in the near future. They could always jump back in if rates jump higher than they want.

Thursday, December 17, 2009

CLUCERF releases their economic forecast

Just a quick note to let everyone know that CLUCERF released their economic forecast yesterday. You can watch a video of Bill Watkins presentation over at www.kadytv.com and I believe the total forecast will be online soon over at www.clucerf.org . While this is a US and California forecast they also have a Ventura specific forecast planned next year, one of the few economists who bother with the Ventura area.

Tuesday, December 15, 2009

Ventura County November 2009 Home Sales



Dataquick reported home sales for Ventura County for November 2009 today. Home sales came in at 752 up 3.2% YoY. The median sales price came in at $365,000 up 2.8% YoY and flat MoM. This months activity was pretty easy to predict based on the expectation that the tax credit would expire coinciding with ultra low interest rates. We now get to see how much demand was pulled forward. Historically for Ventura County sales go up from November to December. It is extremely clear this year that will not be the case, I am predicting DQ reporting sales of around 700 for December (and I believe I am being optimistic) which would be a 20% drop YoY and 6.9% drop MoM. Both highly unusual occurrences.
We also have Fannie Mae's underwriting change (lowering DTI to 45%) coming into effect just the other day. Lucky for agents Freddie has yet to tighten similarly, so those marginal conventional deals might just be delayed rather than blown up completely. The 10 yr note has also been rising lately and the Fed is lowering its MBS purchases. All of this combined with the low market inventory will mean 2010 will be a very slow sales year unless a miracle happens and more inventory comes on market. The only hope for that would be large number of short sales or foreclosures as they are really the inventory that will be enough to keep sales up.

California Foreclosures for November 2009

The November 2009 ForeclosureRadar foreclosure report for California was released today. The most important statistic relative to the market isn't the drop in NOD or NTS, that has more to do with the number of days the court was open in November. The important statistic is the rise in cancellations both MoM and YoY. From the report:

Despite the significant drop in filings of new Notices of Trustee Sale, and an increase in the number of Cancellations, the number of foreclosures Scheduled for Sale still rose. The simple reality is that homeowners are continuing to enter foreclosure faster than they are coming out. This will likely continue until we see meaningful progress on loan modifications, or the often predicted “foreclosure wave” finally occurs.

Note, both Sean O' Toole and myself do not predict a large new foreclosure wave. The political will to prevent that is great and is building every single day. One of the reasons TARP has been extended (and I suspect, one of the reasons the banks were allowed to pay it back so quickly) is because the administration wants to use that money to give to homeowners. They have a blank check and are going to use it.
The above is the breakdown for LA & Ventura County, as with all graphics on my blog you may click to enlarge.

Monday, December 14, 2009

Cleveland Fed: Comparison of Canada vs US housing markets

This research by the Cleveland Fed tries to figures out why the US housing market went bust and the Canadian market, whose appreciation was similar from 2000 forward did not. I thought the author was far too lenient on the US regulators more praising the Canadian regulators than shining the light on the US regulators. Regarding subprime in Canada vs US:

Perhaps the simplest story is that Canada was “lucky” to be a late adopter of U.S. innovations rather than an innovator in mortgage finance. While the subprime share of the Canadian market was small, it was growing rapidly prior to the onset of the U.S. subprime crisis. In response to the U.S. crisis, some subprime lenders exited the Canadian market due to difficulties in securing funding. In addition, the Canadian government moved in July 2008 to tighten the standards for mortgage insurance required for high LTV loans originated by federally regulated financial institutions. This further limited the ability of Canadian banks to directly offer subprime-type products to borrowers.

There are also several institutional details that played a role. The Canadian market
lacks a counterpart to Freddie Mac and Fannie Mae, both of which played a significant role in the growth of securitization in the U.S. In addition, bank capital regulation in Canada treats off-balance sheet vehicles more strictly than the U.S., and the stricter treatment reduces the incentive for Canadian banks to move mortgage loans to off-balance sheet vehicles. Finally, as noted above, the fact that the government-mandated mortgage insurance for high LTV loans issued by Canadian banks effectively made it impossible for banks to offer certain subprime products. This likely slowed the growth of the subprime market in Canada, as nonbank intermediaries had to organically grow origination networks.

There were monetary policy differences (interest rates were higher), regulatory differences (banks weren't getting away with the off balance sheet shenanigans and the regulators actually stopped them offering products, a novel concept to US regulators), structural differences (no Fannie or Freddie, much less securitization and little of that unregulated) and the basic mortgages in the two countries were different. The main mortgage being a 5 yr ARM in Canada means the tremendous drop in rates is buoying many homeowners without the need to refinance. Also I would bet their currency strengthening is also helping the household balance sheet by making imports cheaper. The other thing I would be very sure on, though I don't know how to check the data, is that debt load of your standard Canadian household during the boom years was much much less than US households. This was a credit bubble and looking at only one part of the whole bubble might lead you to some weird conclusions. It is also quite possible that Canadian home prices were undervalued in 2000 versus what I would call fairly valued for US homes and that would mean the overshoot to the upside was less of a bubble. David Rosenberg has more on what he believes to be the Canadian housing bubble here but I haven't gone through it yet.

Full Disclosure: I like hockey and the only stamps in my US passport are Canadian. So I might be a little biased to our Canadian friends to the north. But I do think their regulators and central bank got it much "less wrong" than their US counterparts. Though that is a very easy call to make.

Tuesday, December 8, 2009

The insanity of government micromanaging

So back in July the Treasury brings all the servicers together to discuss why there aren't enough trial mods being made. Many of the servicers report that they don't want to give a trial mod that doesn't have a reasonable chance of success so they ask for documents first. The administration had promised 500,000 trial mods by the end of the year and would miss on that promise if that happened so they harangued the servicers into not asking for documentation before commencing a trial mod. So now we have over 600,000 trial mods in process yet few of them are going into full modification because unsurprisingly many don't qualify or return their paperwork.

The result?
He also told me that Treasury is now considering upping the ante on the trial modifications, requiring much more documentation up front, so that banks won't have all these trial mods going with borrowers who inevitably won't reach permanent modification status.


You can't make this stuff up.

On the documentation front I think there are legitimate borrowers gripes about lost paperwork. Most servicers I heard use faxing and there is no automated way of associating the paperwork with the account in question (well, there is but none of the servicers are smart enough to implement it). Why not have document upload in their online banking account? It is a trivial technical exercise and solves the paperwork getting lost issue. If people don't have scanners to get the documents in electronic format then all the servicers with banking arms could have a scanner and computer available at each branch and solve that issue very quickly (many community groups would jump at the chance as well). The system is literally not built for the mod effort and since it is temporary not a lot is being done to invest in the infrastructure to make it run smoothly. So on that front some borrowers have a point but I think they are the minority.

Sunday, December 6, 2009

NMN: Fannie and Freddie exploring selling non-performing loans.

The National Mortgage News reports that the GSE's are looking at selling a large volume of non-performing loans. $250 billion in loans hitting the open market would really be interesting, it would allow creative solutions by the private market. I would bet the US Government would squash or restrict sales because it would maximize losses over the short term and they wouldn't get to control nearly as much the ultimate resolution of the non-performance like they can now.

If entities start recognizing losses sooner rather would be very encouraging for a market that is currently stagnated.

Saturday, December 5, 2009

Rich Toscano gets it exactly right..

I thought Rich Toscano's article "Forecasting the Real Estate Non-Market" was an excellent read as far as anyone trying to predict anything going in the market longer than a couple of months out. I highly recommend reading the whole article but will quote the most important part here:
The government has gone to amazing levels of effort to prop up the housing market. I described some of these fiscal and monetary undertakings in detail recently, so I won't cover them again here. But the long and short of it is that huge amounts of money are being borrowed or simply created out of thin air and shunted directly into the housing market through multiple channels. Even as demand is thus boosted, supply is being constrained by foreclosure moratoria and opaque and arbitrary financial industry bailouts.

The net effect is that government intervention is exerting an enormous influence on the housing market. So one can't just look at fundamentals as in the good old days. Instead, one is forced to practice a sort of real estate
Kremlinology in an attempt to figure out how fiscal and monetary policy will affect, or cease to affect, the market.

Just to throw out a few examples on the legislative side: will the home buyer tax credit be extended again? Will Congress find other ways to encourage/bribe people to buy homes? Will moratoria be lifted or lightened? Will there be another round of financial bailouts?

And on the monetary front: will Ben Bernanke, Fed chair and printer of over $1 trillion in support of the mortgage market, be re-appointed? Will the Fed continue to artificially boost demand for mortgage-backed securities and agency bonds by buying them hand over fist, or will they stop early next year as they have suggested? When will the Fed tighten policy or begin raising rates?

I thought Kremlinology was a perfect term in regards to the market and trying to figure out what is going on. There are people in power who believe they can define reality through the printing press and are now putting that theory into practice. There are people in power who believe they have to do everything in the world to encourage home ownership despite the housing bubble proving why that is a really bad idea. The confluence of these two groups makes it impossible to apply any sort of rational logic to the market. If the market isn't what they want it to be they will attempt to bend it to their will. Heck, I was reading an article today that Sheila Bair is saying any bank taking over another bank with FDIC help will have to be required to cut principal on mortgages of the acquiring banks distressed portfolio even though it will ultimately cost the FDIC fund more money. How can you possibly predict anything based on the whims of those in power?

Housing fundamentals no longer apply because of the amazing distortion being applied to the market. It is impossible to predict anything based on fundamentals when you have people in the Fed and Administration wanting something other than the fundamentals suggest. I can see a couple months out with reasonable accuracy based on the data I have available to me but anything past that is a crap shoot because there is no telling what the powers that be will do.

While I understand why economists are against the "Audit the Fed" bill going through the House right now I can definitely understand where the anger is coming from which generated the bill. The Fed aided and abetted the biggest credit bubble in history which is causing trillions of dollars in damage to the world economy, you have to expect some reaction. The first rule should be to do no harm and the Fed definitely failed in that regard. For people like me who were hoping to buy a house and not choose between financial armageddon or owning a home and chose not to participate in the bubble the actions of the last few years leave me with a bitter taste in my mouth (the cherry on top is getting to pay for it too!). I'm close to being "done" with real estate, my passion and focus are moving on to other things. I'll just be a life long renter, no sense of throwing a bunch of money away just to paint the walls (btw, I paint the walls of my rental, *gasp*).

Tuesday, December 1, 2009

Short Sale & Foreclosures for the San Fernando Valley - November 2009


Here is the sales breakdown for the San Fernando Valley for November 2009. The SFV has a lot more late reporters as a percentage of sales and so it is a bit tougher to discern right now just how weak sales will ultimately be for November. One thing is clear, sales will be down YoY. If I estimate 15% increase (which is about right historically) due to late reporters that means there will be a 7% drop in YoY sales. This is the context of mortgage rates down over 1% YoY, prices lower and the ongoing tax credit. Limited supply means limited sales and the market is running out of supply in the price points in which people can afford to buy homes. Sales will continue to stagnate as a result.

Short Sale & Foreclosure for Ventura County - November 2009


Here is the breakdown of sales for Ventura County for November 2009. November is clearly on track to again have sales down year over year a trend that has continued since July. This is because there are fewer REO's being sold, as clearly indicated by the table. Less motivated supply will mean continued slow sales. Rates for November were over 1% lower than the year before and there was the tax credit and yet demand is still dropping. Either prices fall and sales pickup or prices stagnate and so do sales, there is no free lunch.
We had this tremendous stimulus applied to housing and supply should have been liquidated while the brunt of the stimulus was in effect but instead supply was constrained. Now we have this large overhang of "shadow" inventory that is sitting in a netherworld of not paying, not being modified and not being foreclosed on. In other words, nobody is dealing with reality. Sales will suffer as a result. The NAR, who lobbied for many of these policies, should have been careful what they wished for... because they got it.

Monday, November 30, 2009

Administration quietly announces short sale plan

Since the housing news was dominated today by the administrations announcement of their displeasure for the low number of HAMP trial modifications going permanent the "foreclosure alternative" plan received little press. There is no mention of it on FinancialStability.gov or MakingHomeAffordable.gov, the only place it can be found is on the servicer specific website HMPAdmin.com. Clearly the administration wants the public to focus on the fact that they are trying to keep everyone in "their" homes while quietly planning for the reality that many could never afford the homes they bought over the long term. People are clearly overleveraged and getting out from under their debt through a short sale or deed-in-lieu is a smart move for both sides. The houses maintain their value better because they are occupied and the borrower reduces their debt load and reduces the time before they are able to get another home through FHA or the GSE by cooperating with a short sale.

The high level details from the
press release (My comments added in red):

Foreclosure Alternatives
The HAFA program simplifies and streamlines the use of short sale and DIL options by incorporating the following unique features:

Complements HAMP by providing viable alternatives for borrowers who
are HAMP eligible. In other words, borrowers who are eligible for HAMP but smart enough to realize it isn't in their best interest.

Utilizes borrower financial and hardship information collected in conjunction with HAMP, eliminating the need for additional eligibility analysis.

Allows the borrower to receive pre-approved short sale terms prior to the property listing. Extremely important point, this turns short sales from the nightmare they are now into a smooth transaction. Short sale prices will improve as a result and transaction volume should go up.

Prohibits the servicer from requiring, as a condition of approving the short sale, a reduction in the real estate commission agreed upon in the listing agreement. Clearly a win by the NAR, the max commission is set at 6%. In many places in California 5% is pretty much max. Investors will be getting 1% less in California as agents will be sure to be smart enough to be asking for 6%. The listing agent will probably get that particular bonus right now with inventory so low there is no reason to up the selling office commission.

Requires that borrowers be fully released from future liability for the debt. A clear win for borrowers, especially in many of the recourse states or who refinanced in places like California which allows recourse on refinances. Borrowers will be much more likely to participate if they realize after the sale is done they are out from under their massive debt. Like the commission deal point this one comes at a cost to investors.

Provides financial incentives to borrowers, servicers, and investors. Borrowers get $1,500 for completing a short sale, Servicers get $1,000, investors only get money for settling junior liens, up to $1,000.

One may ask what is in it for the investor since several of these deal points take money from them. The loss will most likely be less in the above scenario over a foreclosure. Since it takes so long to foreclose that is many months the investors money is tied up with no return. Also the house will most likely not be maintained once it is clear foreclosure is inevitable. Then there is the turn around time for getting the house onto market once it is foreclosed. All add up to increasing the investors loss.

This is the best program I've seen yet from the Administration because it deals with the reality of the market. It has tremendous potential of reducing the overhang of "shadow inventory" on the market. The only downside I have seen so far in a quick skim of all the documentation is that the program doesn't officially start until next April though services may opt to start sooner. I think with the political pressure being brought on servicers to reduce foreclosures and the desire for servicers to please both their investors and regulators this program could become a home run and could be a real beginning of the end of the housing crisis.

Ventura County Trustee sales for November 2009


Trustee sales for November 2009 in Ventura County came in at 258. This is about the same daily pace as the month before just reduced the total sales due to a shorter month and more holiday days. Third party sales dropped which could be an indication that as absorption rates drop for investor owned inventory they are slowing their purchases, either that or the banks weren't pricing as aggressively on the courthouse steps.

Trustee Sales for Los Angeles County November 2009


Los Angeles County Trustee sales came in at 3090 for November 2009. This is the same basic daily pace as the month before but the total number of foreclosures is lower because there is one less day in the month and more holidays in which the courthouse is closed.

Orange County Trustee sales for November 2009


Orange County trustee sales for November 2009 came in at 736. Third party sales are dropping, I am wondering if this has more to do with the banks realizing they are giving money away at the courthouse steps or if buyer participation is falling off due to seasonality. It will be interesting to see if third party sales percentage will ever hit their September highs again.

San Diego Trustee Sales November 2009


San Diego trustee sales for November 2009 came in at 1280. This is about on par with the daily pace of October minus the days lost due to holidays in November. Third party participation is slowly and steadily rising.

Saturday, November 21, 2009

San Fernando Valley home sales report - October 2009


San Fernando Valley Single Family Home sales for October 2009 came in at 663 which is down 3.07% MoM and down 11.01% YoY. The median price for single family homes came in at $390,000 which is up 2.63% MoM and down 4.88% YoY. Sales continue to be tremendously depressed even in the face of massive housing focused stimulus. The flip side of asset price stability is sub par transactional volume, there is no free lunch. Single Family Home sales are at levels not seen since the early 90's which was a deep recession locally in the San Fernando Valley.


Condo sales came in at 228 which is up 20.63% MoM and down 2.56% YoY. Median price for condos came in at $235,000 which is up 1.29% MoM and up 4.44% YoY. Condos are faring a bit better than SFH because there is more supply and it appears some buyers are choosing to buy a condo when they can't find what they want in a detached home.

The red line was my attempt to create a predictor for sales but it hasn't been working out so well since May of this last year. IMHO, it appears that some pendings are being double counted, instead of falling out and going BOM (which would reduce my predictor), they are just switching buyers and updating the pending date which gets them counted in the current months pendings again. This is supposition on my part since I don't know how SRAR constructs their numbers but nothing much else makes sense.

I think because of the large number of pendings, many of them short sales, and longer underwriting times by lender we will see a more flattened out sales curve going into the slow winter months. While sales will still be very low I would guess January and February will beat YoY numbers but I think November and December will be flat to lower than the year before.

Weekly Housing Inventory update for SFV & Ventura - 11/21/09

Here are the weekly inventory and pending counts for Ventura County and the San Fernando Valley. For the legend Single Family Homes is abbreviated SFH, Ventura County is abbreviated VC and San Fernando Valley is abbreviated SFV. For readers who might not know, REO are bank owned foreclosures and short sales are owners hoping to sell the home for less than what is owed on the mortgage balance.

Update: Please see the home page for the latest graphs, I am reverting earlier weeks to text to maintain site speed.


San Fernando Valley:
Single Family Homes
Active - Total 1706
Active - Short sale 435
Active - REO 143
Backup - Total 761
Backup - Short sale 477
Backup - REO 43
Pending - Total 1514
Pending - Short sale 848
Pending - REO 248
Distressed active / Total active = 33.9%
Distressed pending / Total Pending = 72.4%

Condo
Active - Total 579
Active - Short sale 247
Active - REO 64
Backup - Total 351
Backup - Short sale 266
Backup - REO 18
Pending - Total 562
Pending - Short sale 323
Pending - REO 121
Distressed active / Total active = 53.7%
Distressed pending / Total Pending = 79.0%

Ventura County:
Single Family Homes
Active - Total 1262
Active - Short sale 167
Active - REO 96
Contingent - Total 942
Contingent - Short sale 604
Contingent - REO 50
Pending - Total 618
Pending - Short sale 178
Pending - REO 132
Distressed active / Total active = 20.8%
Distressed pending / Total Pending = 50.2%
Release from Showing 275

Condo
Active - Total 374
Active - Short sale 81
Active - REO 39
Contingent - Total 454
Contingent - Short sale 349
Contingent - REO 21
Pending - Total 249
Pending - Short sale 85
Pending - REO 77
Distressed active / Total active = 32.1%
Distressed pending / Total Pending = 65.1%
Release from Showing 62

Thursday, November 19, 2009

NYT: Easy Loans in Expensive Areas

FHA was designed for low income borrowers and has been rushed into "saving" the overheated housing market by giving a loan to much higher incomes and house prices than the underwriting was ever designed for. There is also an issue of the obvious lack of internal controls at the FHA to stop fraud and abuse by the lenders which is magnified by more loans and more loans at higher limits.

The NYT has an article about FHA loans in expensive areas. Here are some quotes:
In 2007, the government did not insure a single mortgage in this city, one of the most expensive in the country. Buyers here, as well as in Manhattan, Santa Monica and every other wealthy area, were presumed to be able to handle the steep prices and correspondingly hefty down payments on their own.
...
Policy changes such as the shift in insurance, while often introduced on a temporary basis, are becoming so popular that they could prove difficult to undo.

Like most government programs, once they start they are almost impossible to stop. The special interests will insure they keep going. As will be shown later, The politicians simply can't help themselves.
Kenneth Donohue, inspector general for the Department of Housing and Urban
Development, the parent agency of the F.H.A., said the higher loan limits were increasing the potential risk to the F.H.A. Last week, the agency said its cash reserves had fallen below their Congressionally mandated minimum because of the large volume of foreclosures.

“If one of these higher-limit loans fail, that’s equivalent to two or three cheaper loans,” Mr. Donohue said. “You have to ask yourself, was the F.H.A. ever intended to address these markets?”

He sees another risk: larger loans will be a greater draw for those who want to commit fraud. That would exacerbate a problem already besetting the agency.

This is their own Inspector General saying these things. I'm sure he will be replaced soon with someone who will be more of a "team player".

And I often say that Barney Frank is always good for a blood boiler.. He certainly doesn't disappoint this time.
A few weeks ago, Congress extended the higher lending limits for another year. Representative Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that he planned to introduce legislation next year raising the maximum F.H.A. loan by another $100,000, to $839,750.

His bill would make the new limits permanent.

They simply can't help themselves. Housing is unfortunately seen as sacred by one side of the aisle and that view is easily exploited by the special interest and/or gives an fig leaf to cover the massive subsidies to the market. We had this housing crisis because housing was viewed as sacred by one side and the free market was viewed as sacred by the other.. the confluence of those two views culminated into a massive unregulated credit bubble with housing as it's engine of growth.

Also remember that Fannie Mae and Freddie Mac jumped in to "save the housing market" as more and more lenders abandoned the market.. Look how well that has ended up for the American taxpayer. It is clear policy that everything will be done to "save" housing, and by save I mean to keep asset prices as high as possible. This will require a massive amount of money from the taxpayer much of which should be borne by bondholders and equity holders instead. The end game was clearly revealed by Mr. Stevens last week when he said that the FHA doesn't have to go to Congress to get a bailout. It already has an unlimited blank check for funding straight from the Treasury provisioned. This dogmatic belief that housing must be "saved" combined with no checks and balances (one party effectively controls the legislative and executive branch) will prove to be very expensive for the all of us.

Wednesday, November 18, 2009

Optimistic 2010 Home Sales Forecasts

Since the NAR recently trumpeted their 2010 forecast at their convention I decided to look at the national home sales forecasts for the NAR, Fannie Mae and Freddie Mac.

The NAR sees existing home sales (EHS) rising 13.6% from 5.011 million sales to 5.694 million sales. From my observation when these associations must face their membership at the yearly convention it is when they have the most optimistic number for sales. That is an awfully bold prediction, maybe it is because they think prices will fall thus spurring sales. But no the NAR predicts median prices will increase 3.6%. Hmmm, well Home sales up.. prices up.. maybe they think mortgage rates will drop in 2010. Again, no, they are predicting an increase from 5.2% to 5.7%. Maybe they think unemployment will drop? Again, no, from 9.3% to 9.8%. Usually you can squint really hard and figure out where people are coming from and how they arrive at their numbers but I am having a hard time figuring out the immaculate housing recovery the NAR is predicting.

For Fannie Mae they are predicting EHS rising 10.1% from 4,959 to 5,459. At least they think prices will drop from 173.8 to 170.8. Their belief is mortgage rates will rise from 5.07% to 5.42%. Fannie mae is also predicting mortgage origination volume will be down 30% with refinances dropping by half and purchases increasing.

For Freddie Mac they are predicting Total home sales rising 13.4% from 4.85 million to 5.50 million. Freddie Mac is predicting prices dropping 3% according to the Case/Shiller Index. Interestingly Freddie Mac is predicting basically flat originations YoY and interest rates rising from 5.1% to 5.6%.

To me this seems like wild-eyed optimism. The restraints on supply in the price ranges that are selling means we will have fewer sales not more. If interest rates are going up, a safe bet because of the Fed announcing stopping MBS purchases, then affordability goes down and again sales will drop. The tax credit is expiring but has been less and less effective motivating sales and I think the abundance of REO inventory and tremendous interest rate drop last year had more to do homes selling than the tax credit. Fannie Mae's forecast for refi originations dropping 50% makes the most sense and I think we will see a wave of additional mortgage officer layoffs in 2010. Refinances are spurred by rates dropping below what the mortgagor currently has.. rising rates isn't conducive for a refi wave.

Here are the headwinds for the coming year:
  1. The Fed ending MBS purchases and interest rates rising.
  2. The Tax Credit ending
  3. Unemployment increasing.
  4. Political pressure choking off foreclosures, i.e. motivated supply

Here is what I see could help the market:

  1. The other half of last years stimulus bill taking effect.
  2. A new stimulus bill.
  3. The plan to increase short sales should be announced soon.

The stimulus bills might just remove supply from the market resulting in even fewer sales. A job temporarily kept or received because of a government contract probably won't instill confidence and spur home sales.

It looks like the NAR and their kin are betting on a V-shaped housing recovery. I think they should be praying that home sales can maintain this level that was only this good because of tremendous stimulus combined with motivated supply. It is extremely difficult for me to envision any scenario which makes home sales increase YoY and none of those scenarios involve home prices going up and interest rates rising.

Tuesday, November 17, 2009

Ventura County October 2009 Home Sales



Dataquick reported home sales for Ventura County for October 2009 today. Home sales came in at 879, up 9.6% YoY. The median sales prices came in at $365,000 which was down 2.7% YoY. Assuming people lock the month before they close September 2008 rates were 6.04%, September 2009 rates were 5.06%. Such a dramatic drop in rates combined with the tax credit expiration (it has been extended but people who would have wanted to take advantage of it would have had to sign contracts before it was extended) and the desire to close before the holidays start all made October the best sales month of the year. We will now see sales drop due to seasonality and the lack of inventory on the market. Rates are below 5% currently but there is little motivating reason for purchasing right now. Between the holidays and the lack of selection people purchasing now have either lucked out and found 'the one' or just settled on a lesser home.
I expect November to come in flat to slightly down YoY and December to definitely be lower YoY for sales. We are at historically very low sales and very little evidence of that changing anytime soon. Prices kept artificially high will mean sales will be kept artificially low.

Mid-Month trustee sale update...

Usually I publish mid-month trustee sale updates. For all the counties I follow November is almost exactly matching the daily pace seen the month before so I will wait until the end of the month before generating all the charts. Based on 1 less day in the month, Veterans Day plus the Thanksgiving holiday I would expect trustee sales to come in a bit below the previous month based on the fewer days in which to conduct sales. If I see any dramatic shift I will be sure to post an update.

Sunday, November 15, 2009

The end of the homebuyer tax credit

Just in case people think the tax credit will be extended again after next April, from this article from Inman (behind a pay wall):
There was considerable resistance to raising the income limits for claiming the credit and expanding it to include existing homeowners with a track record of five years or more in that home, Goold said.NAR’s chief lobbyist, Jerry Giovaniello, was on the phone constantly with Sen. Johnny Isakson, the Georgia Republican and former real estate broker who was among the biggest proponents of extending the tax credit, she said.In the end, lawmakers "made us promise, practically in blood, that we would not come back," Goold said. She said NAR agreed that, "barring market surprises," Realtors would not seek another extension of the tax credit."So make it work," Goold said.

The whole article was pretty much the NAR gloating how much it got or is expected to get out of Congress (which is pretty sickening) and what it expects for next year. This quote for what is on tap in 2010 was pretty interesting:
Looking ahead to next year, Giovaniello said the big battle in 2010 will be deciding the fate of Fannie Mae and Freddie Mac, which because of heavy losses are now operating under government conservatorship. "By the time we meet next year, we are going to have to reinvent Fannie and Freddie," Giovaniello said.

The process will begin in earnest after President Obama’s State of the Union address, he said.

More FHA: Higher premiums coming and the need for humility

First from Bloomberg, It seems extremely likely the premiums FHA charges will be going up relatively soon:

Insurance premiums for mortgages guaranteed by the Federal Housing Administration may rise as the Obama administration looks for ways to shore up the agency’s finances, Housing and Urban Development Secretary Shaun Donovan said.
Increasing premiums is preferred because it rebuilds the capital base quicker. If they were looking at truly reducing their risk there would be underwriting changes like higher FICO's and higher down payments. Since those issues are political hot potatoes and the fact that premiums can be financed into the loan it is likely that we see the premiums increase before underwriting changes.

Secondly, The FHA needs to find some humility and realize that if they were a private business they would be on the verge of bankruptcy. Instead the FHA director David Stevens is giving speeches like this trumpeting the FHA (emphasis mine):
Federal Housing Administration Commissioner David Stevens said Saturday that concerns the agency is headed for the same financial trouble that snared Fannie Mae, Freddie Mac and the subprime sector are unwarranted.
...
But Stevens sought to dampen those concerns, noting that despite the most severe housing recession in decades, the agency has $31 billion in capital — $3.5 billion more than it had a year ago.
...
FHA is "the only participant in home financing services in the U.S. economy that hasn't needed a bailout, hasn't needed (funds from the government's Troubled Asset Relief Program), hasn't needed special assistance and is still completely self-sustaining," Stevens said.
"Without FHA there would be no (housing) market, and this economy's recovery would be significantly slower," he said.
...
About 17 percent of FHA borrowers are at least one payment behind or in foreclosure, compared with 13 percent for all loans, according to the Mortgage Bankers Association.
...
"That is why we're still standing while many of others did not survive this tumultuous time," he said.
FHA has more capital than last year but much less reserves a very important distinction. The capital is being set aside for expected losses and is only this high because the FHA is using new business to offset its previous losses it hadn't properly set aside capital for. Since FHA messed up so bad on its old book of business its only way of staying "self sustaining" would be to write new business with fewer losses (stricter underwriting) and they could increase their premiums.

Also hyperbole like "Without FHA there would be no (housing) market" is just stupid. There is always a market. It would be lower than it is now, but there is always a market. It reminds me of Mozilo back when Countrywide was unraveling making similar type of comments to justify the risky lending which ultimately doomed the firm. Fannie and Freddie were similarly arrogant before being placed in conservatorship. FHA will only survive this bust because of its backing by the US Government. It is that simple. It would be helpful if they learned some humility because in businesses with long lags between making decisions and then seeing the consequences of those decisions the bold words of management usually come off pretty stupid when looked at through the lens of history. Management needs to be worried about limiting the damage already done instead of going around tooting its own horn.

Saturday, November 14, 2009

Weekly Housing Inventory update for SFV & Ventura - 11/14/09

Here are the weekly inventory and pending counts for Ventura County and the San Fernando Valley. For the legend Single Family Homes is abbreviated SFH, Ventura County is abbreviated VC and San Fernando Valley is abbreviated SFV. For readers who might not know, REO are bank owned foreclosures and short sales are owners hoping to sell the home for less than what is owed on the mortgage balance.

Update: Please see the home page for the latest graphs, I am reverting earlier weeks to text to maintain site speed.


San Fernando Valley:
Single Family Homes
Active - Total 1752
Active - Short sale 449
Active - REO 157
Backup - Total 758
Backup - Short sale 468
Backup - REO 40
Pending - Total 1486
Pending - Short sale 838
Pending - REO 250
Distressed active / Total active = 34.6%
Distressed pending / Total Pending = 73.2%

Condo
Active - Total 607
Active - Short sale 242
Active - REO 62
Backup - Total 346
Backup - Short sale 264
Backup - REO 16
Pending - Total 567
Pending - Short sale 323
Pending - REO 124
Distressed active / Total active = 50.1%
Distressed pending / Total Pending = 78.8%

Ventura County:
Single Family Homes
Active - Total 1303
Active - Short sale 173
Active - REO 99
Contingent - Total 958
Contingent - Short sale 619
Contingent - REO 60
Pending - Total 618
Pending - Short sale 183
Pending - REO 130
Distressed active / Total active = 20.9%
Distressed pending / Total Pending = 50.6%
Release from Showing 273

Condo
Active - Total 356
Active - Short sale 82
Active - REO 34
Contingent - Total 463
Contingent - Short sale 354
Contingent - REO 21
Pending - Total 259
Pending - Short sale 92
Pending - REO 68
Distressed active / Total active = 32.6%
Distressed pending / Total Pending = 64.5%
Release from Showing 68

Friday, November 13, 2009

California Foreclosures for October 2009

The October 2009 ForeclosureRadar foreclosure report for California was released today. NoD are down MoM and significantly up YoY. NTS are up MoM and YoY. The YoY comparisons were much easier because of the delay caused by SB 1137 last year. Both foreclosures and 3rd party sales are up MoM and YoY, with 3rd party sales seeing a significant increase. Cancellations aren't spiking at all, if loan mods are going through one would expect to see cancellations jump as evidence.

The above is the county level data for Ventura County and Los Angeles county. As always you can click to enlarge any graphic.
Investors are adept at finding the trustee sale bargains. I thought Sean O' Toole's words in the release about 3rd party sales matched what I had been seeing/blogging in the monthly trustee sale charts and will quote it here (emphasis mine):

The number of foreclosures sold at auction to 3rd party bidders, typically investors, continues to grow significantly. Given that this increase in sales to 3rd parties happened in conjunction with a decline in the average discount to market value received by these investors, it is clear that the sales at the court house steps are becoming increasingly competitive. Many auction investors are gaining confidence that they can make money reselling homes purchased on the court house steps, given the limited supply of homes available on the MLS and continued demand stimulus in the form of tax credits and low interest rates.
Investors are having a field day with the current enviroment. As long as REO's are being metered out and supply is being choked off from the market they will continue to do so.

Tuesday, November 10, 2009

How not to reassure the public, FHA style.

The FHA is looking to reassure taxpayers and politicians that it won't need a bailout from all the bad loans it has made and is still making.

From WAPO:
"It is absolutely a myth that they would have to go to Congress for money," said Marvin Phaup, a former budget analyst at the Congressional Budget Office and now a budget expert at Pew Charitable Trusts. "The FHA has permanent authority to get money from the Treasury because it is backed by the full faith and credit of the federal government."
...
. The agency is in effect tapping money it previously parked with Treasury. But if losses on FHA-backed loans continue, the agency could find itself overdrawn, yet payments from Treasury would not stop. They would automatically continue, rescuing the agency with taxpayer money

Great, well I am sure the politicians feel blessed that they won't have the political embarrassment of funding another bailout (and they WOULD). But the taxpayer still gets the shaft which is the whole point. So I am not sure why the FHA is going around tooting the horn on how they won't need a bailout.

More:
"FHA could not compete as well for the best borrowers, and it was left with some of the riskier borrowers,"

Here is a radical idea.. Don't try to compete for bad borrowers. It turns out you lose a lot of money doing that.

More:
FHA Commissioner David H. Stevens has said that the audit results will appear dire because they offer a snapshot of the agency's financial standing at the depths of a severe recession without taking into account new loans the FHA will insure or the fact that many of these loans have been made to more creditworthy borrowers than the FHA typically caters to.

Bernie Madoff could have had the same logic. That accounting for losses as the fund stands now doesn't account for all the people he is about to swindle in the future. If the only way the fund is solvent is to take in more business then it isn't a solvent insurance fund. But no politician will touch this with a ten foot pole, taking away any "support" from the housing market is verbotten. So the taxpayers will continue to pay. But nobody in politics can look further forward than today so they can have an excuse that nobody can possibly have seen it coming.

Sunday, November 8, 2009

Ventura County Loan To Value Chart - August 2009


Note: I haven't posted these charts in awhile so I am putting up May through August in four consecutive posts.

If you click and enlarge the chart it basically shows how much people are putting down at different price points. A dot at 80.0 and $300,000 means that a borrower put 20% down on a $300,000 place. This gives us a feel for how (down payments and loan types) people are getting into the market and where (sale price) they are getting into the market.

For people in the market right now if you go to the left hand side and look and find around the price at which you are thinking of buying and then you can go to the right and see what your competition has done as far as down payments and loan types.

The FHA loans at the higher price ranges are, in my opinion, very risky. FHA used to be for low income people and were underwritten with lower DTI ratios. Now they are used somewhat by high income people at higher income ratios, their prospect of higher income is low and lower income is high. I think this will affect the higher end move up markets as the people who rushed to buy have little to no equity for many years. I think this is true of FHA used in massive quantities in the market like we have now (which was 37.4% of the So Cal market in August according to Dataquick). With little down it will take that much longer to buildup significant equity and long term move up and relocation transactions in the market should stay low.

Ventura County Loan To Value Chart - July 2009


Note: I haven't posted these charts in awhile so I am putting up May through August in four consecutive posts.

If you click and enlarge the chart it basically shows how much people are putting down at different price points. A dot at 80.0 and $300,000 means that a borrower put 20% down on a $300,000 place. This gives us a feel for how (down payments and loan types) people are getting into the market and where (sale price) they are getting into the market.

For people in the market right now if you go to the left hand side and look and find around the price at which you are thinking of buying and then you can go to the right and see what your competition has done as far as down payments and loan types.

The FHA loans at the higher price ranges are, in my opinion, very risky. FHA used to be for low income people and were underwritten with lower DTI ratios. Now they are used somewhat by high income people at higher income ratios, their prospect of higher income is low and lower income is high. I think this will affect the higher end move up markets as the people who rushed to buy have little to no equity for many years. I think this is true of FHA used in massive quantities in the market like we have now (which was 37.2% of the So Cal market in July according to Dataquick). With little down it will take that much longer to buildup significant equity and long term move up and relocation transactions in the market should stay low.

Ventura County Loan To Value Chart - June 2009


Note: I haven't posted these charts in awhile so I am putting up May through August in four consecutive posts.

If you click and enlarge the chart it basically shows how much people are putting down at different price points. A dot at 80.0 and $300,000 means that a borrower put 20% down on a $300,000 place. This gives us a feel for how (down payments and loan types) people are getting into the market and where (sale price) they are getting into the market.

For people in the market right now if you go to the left hand side and look and find around the price at which you are thinking of buying and then you can go to the right and see what your competition has done as far as down payments and loan types.

The FHA loans at the higher price ranges are, in my opinion, very risky. FHA used to be for low income people and were underwritten with lower DTI ratios. Now they are used somewhat by high income people at higher income ratios, their prospect of higher income is low and lower income is high. I think this will affect the higher end move up markets as the people who rushed to buy have little to no equity for many years. I think this is true of FHA used in massive quantities in the market like we have now (which was 36.8% of the So Cal market in June according to Dataquick). With little down it will take that much longer to buildup significant equity and long term move up and relocation transactions in the market should stay low.

Ventura County Loan To Value Chart - May 2009

Note: I haven't posted these charts in awhile so I am putting up May through August in four consecutive posts.

If you click and enlarge the chart it basically shows how much people are putting down at different price points. A dot at 80.0 and $300,000 means that a borrower put 20% down on a $300,000 place. This gives us a feel for how (down payments and loan types) people are getting into the market and where (sale price) they are getting into the market.

For people in the market right now if you go to the left hand side and look and find around the price at which you are thinking of buying and then you can go to the right and see what your competition has done as far as down payments and loan types.

The FHA loans at the higher price ranges are, in my opinion, very risky. FHA used to be for low income people and were underwritten with lower DTI ratios. Now they are used somewhat by high income people at higher income ratios, their prospect of higher income is low and lower income is high. I think this will affect the higher end move up markets as the people who rushed to buy have little to no equity for many years. I think this is true of FHA used in massive quantities in the market like we have now (which was 38.4% of the So Cal market in May according to Dataquick). With little down it will take that much longer to buildup significant equity and long term move up and relocation transactions in the market should stay low.

Saturday, November 7, 2009

A reply to a users comment regarding underwater homeowners

Comment from reader Richie regarding underwater homeowners: “When you buy a house, even at peak prices, chances are good that you will be able to sell that house for the same price (or more) than you paid for it - at some point during the 30-year mortgage.

There was a day when you looked at that house and decided you can afford it and it was a fair price. You signed contracts in relation to that. So as long as you can continue to afford to pay for it, I don't see why you should ever quit paying.”


I think people signed for a price based on all sorts of optimistic assumptions based on not understanding that they were in the midst of the final culmination of the greatest credit bubble in human history. This isn't hyperbole, this is the facts of the case as it stands now. The homeowners were making poor decisions.

Here would be a simple example. Let us say you saw the tremendous appreciation of the boom and were counting on that appreciation to replace your savings. In other words you were putting money into your house payment instead of your savings account. This is not radical thinking during the boom time but instead an emotional rationalization to overspending for a home that you desire. The last boom locally in the San Fernando Valley it took 11 years for median prices to recover... This boom was much much bigger.

In fact people took it much further, especially in places like California. The loans they took out were ARMs, during a period of extremely low interest rates. Or they were interest only, no amortization so you aren’t paying off any of the loan balance. Or the loan had a negative amortization feature, paying less than interest owed. These “subprime” loans are aptly named (Note, many banks wouldn’t consider the loan features subprime but based the classification subprime on the borrowers FICO score my subprime classification is of the features of the loan), the loan is less than ideal and designed to maximize what the borrower pays in total cost for the home. So people may be able to pay the payment today but realize they are just renting the home from the bank until such time they are no longer underwater which is now some indeterminate time in the future.


So the boom time appreciation no longer applies and in fact the boom time borrower has seen significant depreciation. Many put little into the home for a down payment, aren’t paying down the loan balance, have little to no savings, and are significantly overpaying every month for what the house rents for (and always were). They CAN continue to pay… but is it in their best economic interest TO keep on paying?

Once you realize you have made a mistake do you continue doing the same thing or do you try and fix it? What would be the best fix for people in this situation? I think many aren’t even at the point of realizing they have a problem, they didn’t have much in the bank before they bought and still don’t have much in the bank now. Barring an epiphany, only life events will jar them from their rut. But if they do have the epiphany and look at the math, realize the house isn’t doing the saving for them. Something will need to be done.

We can also apply this to various underwater borrowers, not just those without assets or put no money down. Those that weren’t building a nest egg have a choice of overpaying for a home or trying to build reserves. For those with significant assets and still significantly underwater it becomes more of a mathematical exercise, while they will be able to continue to pay it may mean a significantly diminished nest egg in the future. This is a result of them overpaying for the asset every month. Their nest egg may have also been hit during the market downturn and they realize they have fixed their costs higher than their assets will allow for long term financial stability.

Weekly Housing Inventory update for SFV & Ventura - 11/07/09

Here are the weekly inventory and pending counts for Ventura County and the San Fernando Valley. For the legend Single Family Homes is abbreviated SFH, Ventura County is abbreviated VC and San Fernando Valley is abbreviated SFV. For readers who might not know, REO are bank owned foreclosures and short sales are owners hoping to sell the home for less than what is owed on the mortgage balance.

Update: Please see the home page for the latest graphs, I am reverting earlier weeks to text to maintain site speed.


San Fernando Valley:
Single Family Homes
Active - Total 1698
Active - Short sale 435
Active - REO 150
Backup - Total 757
Backup - Short sale 463
Backup - REO 42
Pending - Total 1483
Pending - Short sale 830
Pending - REO 251
Distressed active / Total active = 34.5%
Distressed pending / Total Pending = 72.9%

Condo
Active - Total 599
Active - Short sale 232
Active - REO 77
Backup - Total 350
Backup - Short sale 269
Backup - REO 16
Pending - Total 563
Pending - Short sale 320
Pending - REO 116
Distressed active / Total active = 51.6%
Distressed pending / Total Pending = 77.4%

Ventura County:
Single Family Homes
Active - Total 1313
Active - Short sale 169
Active - REO 95
Contingent - Total 944
Contingent - Short sale 615
Contingent - REO 52
Pending - Total 622
Pending - Short sale 187
Pending - REO 139
Distressed active / Total active = 20.1%
Distressed pending / Total Pending = 52.4%
Release from Showing 263

Condo
Active - Total 360
Active - Short sale 74
Active - REO 33
Contingent - Total 467
Contingent - Short sale 356
Contingent - REO 29
Pending - Total 250
Pending - Short sale 93
Pending - REO 69
Distressed active / Total active = 29.7%
Distressed pending / Total Pending = 64.8%
Release from Showing 67

Thursday, November 5, 2009

Expanding some thoughts on homeowners acting irrationally

The esteemed Bill Watkins responded to my post regarding Brent T. White’s assertion about homeowners acting irrationally. It should be noted that both our responses were to the press release and not going through the whole study. But I would like to focus on a few points and add in some anecdotes.

First, the point that I thought was most compelling from the original article. Many places that a homeowner turns for help will be designed to maximize the lenders profit not maximize the homeowners current situation. I clearly disagreed that the homeowner’s credit score shouldn’t be affected during default as they are causing the lender a loss and that is the contract they signed up for. They get the walk away option at some non-zero cost to themselves.

For Bill’s response he took umbrage with Brent’s (I’m on a first name basis with everyone I’ve never met before, which is basically everyone) suggestions that homeowners basically need even more leverage over lenders. Bill's point is this would lead to an under-allocation of credit as more borrowers could strategically default and fewer lenders would be willing to make loans.

The point I was trying to make in my comments last night (and utterly failed) and why I thought the article was originally interesting is that I think most underwater homeowners are incapable of making the best economic choice for themselves due to many of the factors Brent suggested. The “solution” given by Brent is immaterial. I think the focus should be at what point is it in the borrower’s economic best interest to walk away from a home. There are of course a tremendous amount of variables, personal income and savings, overall debt level, amount underwater, local rents, future price appreciation, cost/need of the loss of access to credit, tax level, liability for any debt that was forgiven, etc. That is a model I want to see but I am sure there is no money being spent on researching it (though I have seen studies at which point an underwater homeowner is most likely to walk away from a home).

I have two personal anecdotes I’d like to share about underwater homeowners and rational choices. First would be my landlord. They purchased this home in late 1990’s for under $200,000 and ran up the debt to a bit under $500,000 culminating with a single 2/1 interest-only ARM. We found out earlier this year they went into default so they could get a loan mod. This person is 62 years old and the lender reduced the interest rate to market, added the missed payments onto the loan and amortized the loan over 40 years. Since the banks have tremendous political pressure and are playing extend and pretend I can see why they offered this modification. But I can’t for the life of me figure out why the landlord took it. Her credit is trashed over 8-9 months of non-payment; it isn’t the foreclosure that hurts your FICO as much as the rolling 90 day lates, so it isn’t the credit score. This mod basically let them go a bit less cash flow negative (I obviously know the rent and have the modified deed of trust) every month and reduced the worry about if the interest rate will change. Their liability is limited since there is only one mortgage and with the single action rule in California that severely limits the lenders ability for collecting deficiency judgments.

The second anecdote was a neighbor I had met for the house we had bid on (which we ultimately didn’t get). We were looking at the house when the neighbor came over and started talking to us, her husband soon joined us and I met their son as well, they were very nice people. In the conversation the wife asked how much the house we were looking at was on the market for and when I told her she said “OH no! We got all these flyers saying our house was worth so much and now look at it.” It was in a nice tone but there was a seriousness to it as well, I noticed right when I said the price the husband looked agitated and excused himself right after and though he came outside several times after never looked at us again. I later looked and saw they refinanced $200,000 out of their home and were now, conservatively, $140,000 underwater. I don’t know these people personal financial situation at all, they could be the Rockefeller's for all I know. But not too many people can take such large hits, remember the debt service obligation on the debt as well, and have much of a nest egg leftover for later. Is the cost of owning a home causing their overall financial situation to be less stable? Have they even looked or thought about it?

I bring up these anecdotes because I think your average homeowner isn’t very real estate knowledgeable and are working at an informational disadvantage relative to lenders. Not only is there the emotional side of it: the tremendous desire for stability, to have something you call your own, to not have to say you failed at what was up until now a tremendous point of pride, fear and uncertainty of what to do even if you wanted to get out from under your obligation, the basic goodness is most/all to want to fulfill the contracts they signed. But there is the informational side: knowledge of the law and liability (“can the lender come after me?”), how much is my home currently worth (I am thinking many simply do not know and are staying willfully ignorant), tax issues, etc.

I think because of the emotional and informational disadvantages your average homeowners are basically incapable of making the right economic choice without a LOT of work and study of their personal situation. The home ownership side of the housing market simply isn’t that efficient and that was the point I was trying to emphasize when highlighting the research paper yesterday. The number of true ruthless default stories are small. And while lenders have a right to be worried IF it ever became a problem I see no wholesale shift in homeowners mindsets yet. I think it is just too great of a leap for most people to even start to contemplate.

Both Bill and Brent argue either side of the coin, whether it is rational for underwater homeowners to pay for underwater homes. I don't think we are even at the point where we can have the discussion with any accuracy. And I would bet due to our cultural bias towards fulfilling obligations we won't see much effort put into studying the economically correct thing to do. So I can have my opinions over what I think is the right thing for many heavily indebted people to do. But it will remain that, an opinion.

I will have some other discussion in the comments section of yesterday's post. I was also planning to read Brent's paper tonight but that will have to be put off for the weekend as I have just burned up my free time writing this and tomorrow night I'll be watching Penn & Teller at the Kavali Theater in TO.