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.

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

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.

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.

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.

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.

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

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.

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.

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.

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

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.

Professor: Underwater homeowners acting irrationally

I bet this professor didn't get a government grant for this study (emphasis mine):

Millions of American homeowners are "underwater" on their mortgages – owing more than the value of their homes – and would be better off walking away.
...
"These emotional constraints are deliberately cultivated by the government and lenders who self-servingly tell borrowers that they have a moral and social obligation to pay their underwater mortgages," said White of the UA's James E. Rogers College of Law.

"Meanwhile, lenders ruthlessly seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility," he added.
...
He argues that while irresponsible lenders have received government bailouts, responsible homeowners "who just happened to buy at the wrong time continue to bear a disproportionate burden of the housing collapse."
...
"The government, lenders, and credit-counseling agencies bombard homeowners with moral and fear-laden messages that overstate the consequences of foreclosure," said White.

"Moreover, as a way of enforcing the double moral standard, lenders hold borrowers' credit scores as collateral and will trash it in retaliation for the borrower's exercise of their contractual option to default."

"Lenders don't want these houses and, with the government's help, do what they can to scare and shame borrowers into making what is in many cases a bad financial decision to stay in their home."
...
"To the contrary, walking away may be the most financially responsible choice if it allows one to meet one's unsecured credit obligations or provide for the future economic stability of one's family," he said.
...
"The current housing bust should be viewed for what it is: a failure to regulate – not a moral failure on the part of American homeowners," White said.

I haven't read the paper yet but I will put it on the reading list for tomorrow night. I don't think one professor will get much airplay but most of the stuff I have heard him say so far I have agreed with. Though I disagree that the credit score hit is asymmetrically unfair as the borrower is causing a loss to the lender in that situation when taking the aforementioned option to walk away. The smartest financial decision for many is to walk away and hit the reset button. But emotion and logic don't mix. People don't want to admit failure and will go to great lengths not to do so. Many people will continue to throw good money after bad and the banks are counting on that.

San Fernando Valley home sales report - September 2009

San Fernando Valley Single Family Home sales for September 2009 came in at 684 which is up 2.09% MoM and up 3.95% YoY. The median price for single family homes came in at $380,000 which is down 2.31% MoM and down 3.18% 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.

Condo sales came in at 189 which is down 17.82% MoM and down 10.43% YoY. Median price for condos came in at $232,000 which is up .87% MoM and down 10.77% YoY.

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.

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

Note: I have added a foreclosure research link to the site, see here

Here is the sales breakdown for the San Fernando Valley for October 2009. Note, September 2009 had a much higher percentage of late reporters than usual but even if October matches the late reporters in percentage terms sales will still have dropped YoY. Fewer total distressed sales will mean fewer sales until prices align with incomes. The tax credit is becoming much less of a boost for sales and I would expect October and next April/May (if extended as expected) to be the last month of significant boost in sales by the credit.

Short Sale & Foreclosure for Ventura County - October 2009

Note: I have added a foreclosure research link to the site, see here

Here is the breakdown of sales for Ventura County for October 2009. With late reporters I would expect sales to be around 730-740 for the month or roughly flat to down with last year. It will be interesting to see how many sales were rushed in order to make sure they get the tax credit. Last year the $7,500 tax credit was passed on July 30th and I think that helped sales volume in October along with the desire to close escrow before the holidays. This year the fear of the tax credit expiration and the same seasonal factors I believe helped sales volume but sales are still weak historically only off the ultra-never-seen-before lows of late 2007.