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.