On that BofA increasing foreclosures rumor...

In case you haven't heard, Irvine Housing Blog said they were are at a conference on Friday when the "OREO Managing Executive for West Region" of BofA said they would be increasing the number of foreclosures a month from 7,500 to 45,000 (this wasn't just for California).

One of the data points pointing to this statement coming to fruition can be seen in my tracking of data from Recontrust the trustee that was acquired during the Countrywide deal. They handle many of the old Countrywide (now BofA) loans.

Here are the Notice of Trustee Sales:

Here are the foreclosures made on a rolling 30 day basis:

As you can see these numbers do seem to be spiking. We shall see if this trend continues.

Picking winners and losers...

From an interview with Barry Ritholtz on NPR (emphasis mine):

SIEGEL: But what's the risk of providing some kind of mortgage relief, whether it's a suspension of full monthly payments, or whether it's a reduction in the principal for somebody whose house plummeted in value and who is also unemployed and really will have a very hard time making the payments regardless?

Mr. RITHOLTZ: From a broad perspective, again, you're keeping them in a house that they can't afford, and they'd be much better off going to a place that leaves them a little spare change in their pocket, as opposed to just draining everything they have to make those payments.

Secondly, if these banks have their balance sheets just festooned with bad loans, we're not allowing them or not forcing them to do what they're supposed to do, which is take the write-down, get it off their books, free up some capital and move forward as a healthy lending institution.

SIEGEL: There's another party to this I want you to address, and that is homeowners who are not underwater, indeed who may have paid off their mortgage or never had a mortgage, for that matter. If the banks, indeed, do clear of all the bad mortgage loans from their books, and we foreclose on everything that's to be foreclosed on, everyone's real estate values would go down as a result, wouldn't they, and therefore homeowners have a stake in seeing that not happen?

Mr. RITHOLTZ: Yes, that's true. But remember, a lot of the value that we've seen, the quote-unquote "price gains in homes," were completely artificial. So by propping up home prices, you're punishing everybody who is waiting to buy a house. Anybody who's been saving, you're forcing them out of the housing market because you're artificially maintaining this house price. And I say this as someone, we own a home, we have a vacation property. It's not in my interest to see home prices come down. But for the rest of the economy, it's in our interest to see prices normalize, and that hasn't happened yet.

The government is picking winners.. they are first and foremost the banks... and secondly the people who strategically default and don't get foreclosed on because the government has massively interfered with that process. I'm sure many strategic defaulters will win twice... first not paying and then.. eventually getting a heavily modified mortgage and resuming paying. Renters, taxpayers and savers get the shaft (pretty much in that order). Lucky for me I am all three!

A fair overview of strategic default

I thought this article was a pretty fair conversation of strategic default. I think it is notable because in general most articles are biased against strategic default or any of the other options on the table. While I don't think this article is particularly earth shattering I am heartened to see at least a fair conversation as to the alternatives being represented.

Rewarding bad behavior...

From "Report shows strategic defaults increasing" (emphasis added):

Even more interesting are other charts that demonstrate borrowers…
…are intentionally defaulting to take advantage of the [HAMP] modification program. Or at least to take advantage of extra time living in the house rent free, courtesy of the modification program.
...
Amherst concludes:
Borrowers respond to their economic incentives. This has always been the case, be it for refinancing or for defaulting on mortgages that are deeply underwater. Over the past year, however, property values have been largely steady, but the environment has become much more kind to borrowers. There have been foreclosure moratoriums, the emergence of the HAMP modification effort, and the attendant increases of time spent in the delinquency/foreclosure pipeline, as well as a stretching out of the liquidation process in judicial states. As a result, borrowers can stay in their home rent free for a much longer period than was previously the case. However, few of these benefits apply to investor properties. Thus, when we look at the difference pre- and post-HAMP in the behavior of owner-occupied borrowers versus that of non-owner occupants—we find a dramatic difference in performance. Owner-occupied borrowers behave far worse than their non-owner occupied counterparts.

Reward bad behavior and it turns out you get more of it. Who knew? The governments goal of keeping housing prices high to minimize losses to the banks is in fact causing more losses. You now have a stagnant market and borrowers deciding to do what is in their best economic interest, namely live rent free and pocket the money until they get kicked out. I was in a house today that the owner had a NOD filed for over a year before getting sold, they then stayed in the house for 6 more months after the trustee sale. With an average NOD filing taking 5 months that means these people potentially lived rent free for two years. If the lenders hands are basically tied from foreclosing, and thanks to all the government interference they are, then it is the best move of the borrower live rent free for as long as possible. I also wouldn't be surprised if they get cash-for-keys at the very end. You'll find out very quickly who wants and is economically able to keep their home if you made it easier to foreclose instead of harder. Instead all the roadblocks to foreclosure have incentivized strategic default.

San Fernando Valley home sales report - February 2010

San Fernando Valley Single Family Home sales for February 2010 came in at 458 which is down 7.29% MoM and down 4.58% YoY. The median price for single family homes came in at $375,000 which is down 1.32% MoM and up 10.33% YoY. The supply constrained market is hurting sales in the SFV. Based on what I am seeing in the weekly inventory reports that doesn't appear to be changing anytime soon.

Condo sales came in at 190 which is down 6.86% MoM and up 17.28% YoY. Median price for condos came in at $227,000 which is up 5.58% MoM and up 8.09% YoY. Condos are faring much better than SFH because there is more supply due to all the new condo construction during the boom 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.

Ventura County February 2010 Home Sales

Dataquick reported home sales for Ventura County for February 2010 today. Home sales came in at 580 up 6.4% YoY. The median sales price came in at $350,000 up 7.0% YoY. This report was exactly in line with the prediction I made at the beginning of the month. Slowing YoY sales due to constricted inventory, the second worst monthly sales on record. The market is in an artificial state, low sales and high prices because that is exactly the stated goal of the various government agencies. This month I added in the YoY change graph, as the year progresses I think we will see a shallow decline in solds as the low inventory state has shown no sign of abating. Median YoY changes are highly dependent on mix shift (especially in this small of a market) so I don't have much of a prediction there.

Principal Reduction plan coming to Fannie/Freddie soon?

From the Huffington Post:

A senior Treasury official told HuffPost on Monday that the department was heading towards more writing down of principal as part of its mortgage modification efforts, and that an announcement was to be expected in the next few weeks. But a Treasury spokesman e-mailed to say that Treasury was "NOT poised to roll out a major principal write-down program."

Anyone want to bet against Fannie/Freddie rolling out a principal reduction program and the Treasury backing them in the next few months? The above quote makes complete sense when taken in that context. That way the Treasury doesn't get blamed for supporting "moral hazard" but is still putting the taxpayer on the hook for bailing out homeowners. Treasury can say that Fannie/Freddie made the decision and Treasury merely is doing everything it can to keep Fannie/Freddie afloat to keep mortgage funding going.

Ventura County Trustee sales for February 2010

Ventura County Trustee Sales for February 2010 came in at 253. This is essentially flat to the previous months on a foreclosure per day basis. The market continues in its static state with no change apparent on the horizon.

Trustee Sales for Los Angeles County February 2010

Los Angeles County Trustee sales came in at 2515 for February 2010. Flat to slightly lower on a foreclosure per day basis.

Orange County Trustee sales for February 2010

Orange County trustee sales for February 2010 came in at 670. As always I am impressed with the number of third party sales in the OC.

San Diego Trustee Sales February 2010

San Diego trustee sales for February 2010 came in at 1090, Basically flat on a foreclosure per day basis to the previous months.

Short Sale & Foreclosures for the San Fernando Valley - February 2010

Here is the sales breakdown for the San Fernando Valley for February 2010. 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 or strong sales will ultimately be for February . It appears that sales should be lower YoY when all the late reporters are counted. These sales levels are extremely weak historically and just an indication of this highly engineered market. Stagnation continues to be the word of the day.

Short Sale & Foreclosure for Ventura County - February 2010

Here are the sales for Ventura County for Febuary 2010. Sales are still very low, with late reporters I expect the official Dataquick numbers will be up a bit YoY at around 580-600 sales (still very low historically). This continued stagnation in the market is the same boring story, less supply due to government intervention trying to keep prices high at all costs. I don't see any signs of the ice melting yet just more of the same with a bit of seasonal inventory coming on market. The stuff in the affordable ranges gets gobbled up quickly, the overpriced stuff just sits. Short sales and foreclosures are around half the market but the shift has been ongoing for some time from predominately foreclosures to an even split of short sales and REO.

San Fernando Valley home sales report - January 2010

San Fernando Valley Single Family Home sales for January 2010 came in at 494 which is down 22.45% MoM and down 4.63% YoY. The median price for single family homes came in at $380,000 which is down 5.00% MoM and up 8.57% YoY. The supply constrained market is hurting sales in the SFV. Based on what I am seeing in the weekly inventory reports that doesn't appear to be changing anytime soon.

Condo sales came in at 204 which is down 13.55% MoM and up 22.90% YoY. Median price for condos came in at $215,000 which is down 10.41% MoM and up 13.15% YoY. Condos are faring much better than SFH because there is more supply due to all the new condo construction during the boom 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. Anyways the predictor is predicting sales flat for February.

Ventura County January 2010 Home Sales

Dataquick reported home sales for Ventura County for January 2010 today. Home sales came in at 530 down 8.3% YoY. The median sales price came in at $360,000 up 7.5% YoY. This report was exactly in line with the prediction I made at the beginning of the month. Slowing YoY sales due to constricted inventory, the second worst monthly sales on record. The market is in an artificial state, low sales and high prices because that is exactly the stated goal of the various government agencies. It is amazing to think that their goal is to keep housing unaffordable but that is exactly what is happening.

Just to add to the insanity, I have a bid in on another house. The price isn't great but the house meets every one of our other criteria and I've only seen one other houses since 2005 that has done that even close to our price range.

Short Sale & Foreclosures for the San Fernando Valley - January 2010

Here is the sales breakdown for the San Fernando Valley for January 2010. 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 or strong sales will ultimately be for January. It appears that sales should be higher YoY when all the late reporters are counted but not significantly strong. These sales levels are extremely weak historically and just an indication of this highly engineered market.

Short Sale & Foreclosure for Ventura County - January 2010

Here are the sales for Ventura County for January 2010. Sales are still very low, with late reporters I expect the official Dataquick numbers will be down a bit YoY at around 550 sales. This continued stagnation in the market is the same boring story, less supply due to government intervention trying to keep prices high at all costs. I don't see any signs of the ice melting yet just more of the same with a bit of seasonal inventory coming on market. The stuff in the affordable ranges gets gobbled up quickly, the overpriced stuff just sits.

If you think I get bored typing the same thing month after month since last January or so you'd be right!

Ventura County Trustee sales for January 2010

Trustee sales for January 2010 in Ventura County came in at 271. With the Treasury announcing the HAMP foreclosure freeze I am surprised sales were even this "good". So far the market is still in a static state. The HAMP guidance given last week gives me a bit of hope that the impasse might be broken but it is an election year and people have shown an unending capacity for doing anything to prolong the crisis instead of dealing with reality.

Trustee Sales for Los Angeles County January 2010

Los Angeles County Trustee sales came in at 3069 for January 2010. Essentially flat compared to the last quarter of 2009.

Orange County Trustee sales for January 2010

Orange County trustee sales for January 2010 came in at 820. As always I am impressed with the number of third party sales in the OC.

San Diego Trustee Sales January 2010

San Diego trustee sales for January 2010 came in at 1285, Basically flat relative to the last quarter of 2009.

HAMP changes.

The HAMP insanity continues. Back in July of last year the administration took servicers to task for not offering enough trial modifications. The servicers said it was because they asked for a minor amount of paperwork from the borrower first since it made no sense to start a trial mod if there was zero hope of the borrower getting a modification. The administration, wanting to hit their announced trial mod number, said that wasn't good enough and that anyone calling for a HAMP mod should immediately be put in a trial mod. This had the effect of the administration hitting their announced modification number. Then it turns out very few of the trial mods were turning into full modifications. Turns out many of the borrowers wouldn't qualify for a full modification and many months were lost and the losses built up. So what does the administration do? It now has brilliantly directed that servicers shouldn't put any borrower in a trial mod without getting some basic paperwork from them first.

One of the good news that came out of the latest directive is a bit of sense of dealing with reality. The directive stated that trial mods that missed payment or missed the majority of the paperwork should be kicked out and go into "foreclosure alternative" (short sale / deed in lieu) phase. That is good news in that the stagnant market might be getting some more supply on the market. The sooner we get to dealing with the facts on the ground instead of dreaming up pie in the sky magic bullets the sooner we will be done with this mess.

You can read all the HAMP changes coming here.

Note: Although this post sounds vaguely optimistic, I fully realize that the administration is working on another modification proposal and that we will be going back to fantasy land soon enough.

On the FHA guidelines changes

Recently the FHA changed their underwriting guidelines. They have increased the up front mortgage insurance premium from 1.75% to 2.25% of the loan, required FICO's under 580 to have 10% down and capped the maximum seller contributions at 3%.

Considering the losses that FHA is facing these are extremely mild changes and will be negligibly felt by the market. The FHA is even looking to soften the blow by getting authorization to increase the monthly premium to a rumored 75bps up from 55bps and then decreasing the up front premium back down to 1.75%.

The lending industry breathed a big sigh of relief that the changes were so minor. The taxpayers on the other hand get to pay for the losses.

I got a loan modification, now what?

Note: The thread title is deceptive, I didn't get a loan modification. That would be especially difficult since I rent. I thought it apropos based on the NPR article I read today.

NPR hits the nail on the head about a homeowner who successfully got a loan modification. The question now becomes... Now what?

Salter needed to lower his $2,300 monthly payment because he lost his job as a human resources executive — and with it, 40 percent of his family's income.

It took a year, but his lender, Chase, offered to extend the mortgage from 30 to 40 years and lower the interest rate from 6.8 to 2 percent. That would cut his payment roughly in half, which makes Salter's initial reaction to the offer seem bizarre.

"I call it extortion," Salter said. "Government-backed extortion. I mean, who in their right mind would accept this? No one would. No one should."

The mortgage modification solves a short-term problem: It allows Salter to stay in his home. But it doesn't address a long-term issue. Salter's mortgage is about $300,000. Today, his home is worth $125,000. He's underwater.

To prevent fraud and to gain on any upside in housing lenders will defer principal to the end of the loan. The balance isn't due until the end of the loan. This borrower got $107,000 deferred. He is just now realizing he is renting the home from the bank. He always was. I just wonder how many loan mod success stories will come to the same realization.

The "Black Box" and loan modification

MSNBC had an article today on the "flaws" in HAMP modifications. I think it misses the mark almost entirely about the real purpose of the program and also misses much of the publicly available information about HAMP.

First on the "Black Box" of the Net Present Value calculation:

Under HAMP guidelines, lenders can deny a loan modification if the “net present value” of the new loan is less than the return they would get from not offering a new loan and going through In other words, the official guidelines allow mortgage servicers to base their decision entirely on whether the outcome is in the best interest of the lender or investor, not the homeowner.

Because the Treasury has kept the formula a secret, homeowners who have been rejected for modification can't check the lender’s math to correct possible mistakes about the borrower's income, home value, credit score or other critical pieces of
data.

Just for clarity, the servicer does a calculation and says is the present value of cash flows of the modified mortgage worth more now than foreclosing on the borrower. If the cash flows are worth more now, don't foreclose. The guidelines for the formula itself are on the HAMP servicers site here and here. What is of more interest is the inputs to the formula than the formula itself. If you are negative about price appreciation then it is harder to do loan modification, differences in geography and loss severity will affect the ability to get a modification as well. Also what the return on investment an investor thinks they can get will affect the ease of modification. The servicer is a FIDUCIARY of the investor, not the homeowner. It must have the best interest of the investor at heart. The homeowner doesn't have the right to check the servicers math, they can pay or not pay, that's their choice.

The servicers are in between a rock and a hard place. If they want to stay in the servicing business they better listen to their investors but the regulators can make their life hell if the don't listen to them. Add in a new directive coming from the Treasury every week changing the HAMP guidelines and it is no wonder the servicers are paralyzed. We now have the the Tresury telling the servicers not to foreclose in almost all cases while awaiting further HAMP guideline changes. The state of paralysis of the market will reach even more staggering levels. The servicers are being asked to underwrite loans after the loans have been made and if the decision comes out to basically "not make the loan" the Treasury says "then you must be doing it wrong, go back and try again".

The loan modification process is easily defrauded. Borrowers are benefitted for reduced cash flows, if you have an extended family and were using money from them living at home to pay your mortgage... just say now that money isn't available and ask for a modification based on your salary (this is just one example, there are many others, especially for self employed or people getting paid under the table). The lender can't tell who is pulling a fast one and who is in need of true help. We are maximizing the loss to the banking system instead of minimizing it. Foreclosing on people gives them a real choice to make. They can step up and pay or lose the house. In areas with a large amount of supply the NPV test leans towards modification, with less supply on the market the investor can liquidate for less loss severity so the NPV test leans to foreclosing.

We have had several incredible programs available for rate and term refinances of underwater homes, that should be sufficient to save the ones that can and should be saved. Standard forebearance options should be available for the temporary hardship issues. All the rest should be given the option of paying or going. It really isn't much more complicated than that. Loan modifications aren't a magic bullet for stemming losses, There are no magic bullets. The industry has known and tried modifications before and has seen their flaws.

San Fernando Valley home sales report - December 2009

San Fernando Valley Single Family Home sales for December 2009 came in at 637 which is up 9.45% MoM and down 7.81% YoY. The median price for single family homes came in at $400,000 which is up 1.27% MoM and up 13.31% YoY. The supply constrained market is hurting sales in the SFV. I don't see any near term catalyst to drive sales higher, just a long slow slog while we get to wait and guess what the government is going to next to "fix" housing.

Condo sales came in at 236 which is up 17.41% MoM and up 2.16% YoY. Median price for condos came in at $240,000 which is up 6.67% MoM and up 6.67% 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.

Ventura County December 2009 Home Sales

Dataquick reported home sales for Ventura County for December 2009 today. Home sales came in at 896 up 2.3% YoY. The median sales price came in at $360,000 up 6.5% YoY. This report was a bit surprising to me because all of the data up through January 3rd (last time I looked) showed sales coming in down 10% YoY. The number of late reporters this year was much higher than normal by at least triple. Also the number of sales that aren't seen through my data sources were higher than average so my formula for predicting sales under predicted by much more than I have seen. This was the strongest December in the last 3 years but still a very weak sales volume. To put it in context if you look at the top chart you will notice this December doesn't even match the ultra-slow January/February sales volume for most years this past decade.

I still believe we will have a weak spring due to constricted supply caused by HAMP and higher mortgage rates. We shall see how things unfold this coming year.

ForeclosureRadar: More trustee sale cancellations than trustee sales

The ForeclosureRadar December 2009 foreclosure report is out:

Foreclosure activity dropped dramatically in December, especially when looked at on a daily average basis. For example while Notices of Default dropped 17.5 percent in aggregate, they actually dropped 32.5 percent on a daily average basis due to the fact that December had 22 days on which documents were recorded, versus 18 in November.

“The dramatic drop in foreclosure activity may have been a Christmas gift to homeowners,” says Sean O’Toole, Founder and CEO of ForeclosureRadar.com, “however, given rising mortgage delinquencies it is becoming increasingly clear that foreclosure activity no longer fully represents market realities”.

Less supply, less sales, paralyzed market for 2010 if something doesn't give.

The walking away meme.

Since the New York Times did an article on walking away from a mortgage a bunch of people are commenting that walking away will become mainstream. I've always wanted walking away to be talked about for its pros and cons, a rational discussion of all the facets regarding the option. Many people think the moral obligation trumps all others. Others think it is a pure business decision and if X is greater than Y you walk away.

On the moral decision I thought this post framed it best as to why just because you bought a home doesn't mean you are obligated to destroy yourself financially:

The loss was something that lenders could have anticipated at least as easily as borrowers. The reality is that ordinary people are lousy at figuring out the ins and outs of real estate transactions. Relying on the one act rule to get out of a mortgage is not to abuse the system--it is to use the system in precisely the way it was intended to be used. The reason that the one act rule exists is that lenders and developers have through the years shown a great deal of ability to maneuver unsophisticated buyers into crummy real estate deals. The reason that the one act rule exists is to put the risk of these deals on the lender, not the buyer. The purpose is to discourage bad underwriting, dishonest marketing, and unjustified price inflation by making it very, very hard for a lender to get back the money if they lent more on a mortgage than a house was worth. The system is designed to let people walk away. California has a system that puts a higher premium on keeping people out of debt slavery than avoiding bank losses.

There are many variables to the issue and the layers involved are enormous and extremely individual to each borrower. Some people have reputational risk. Others need access to credit so their credit scores are very important. Some have recourse mortgages. Some can ride out the loss. Some are completely emotionally tied to the home for one reason or another. Others would never be able to recover financially from the one bad decision of buying a home during a bubble.

I don't think walking away has become mainstream yet. I think most of the borrowers are sticking it out and trying to make ends meet and don't even know how to rationally weigh all the issues at hand. I think if many did the math would dictate they walk. Instead I think many will just keep paying until the money runs out or they need to move due to normal life events.

The good ole days...

From Broker's Outpost a forum for mortgage brokers regarding a recently closed refinance:

I just closed this week on a RENTAL property- NO APPRAISAL, STATED INCOME SELF EMPLOYED, STATED ASSET, 105% LTV (based on automated value). Original loan HAD Mortgage Insurance even! The customers did not have a great credit score, but as you may know the TOTAL adjustments are capped at 1.75%.

It was like 2005 all over again.

In case you are wondering how this is possible, Here is Freddie Mac's data regarding the program in question called "Relief Refinance Mortgages".

Both the Same Servicer and Open Access options under the Relief Refinance Mortgage offering allow LTV ratios up to 125 percent, unlimited TLTV/HTLTV ratios, and relief from standard mortgage insurance requirements to provide qualified borrowers with expanded refinancing opportunities.

They figure they are backing the loan anyways so they might be able to improve their book by refinancing people at todays lower rates. As far as the bubble era no underwriting, I think drinkers call it "Hair of the dog that bit you".