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Banks go “all in” betting on success of loan modifications

Lenders in California are placing their faith in the success of loan modifications. Of course, to them success can mean something different than what it means to a loanowner. Success to a lender can be defined as obtaining a few more payments prior to a short sale or foreclosure. With prices rising, lenders benefit two ways from loan modifications. First, they get cashflow from non-performing loans. They know this is likely temporary as about 50% of loan modifications fail each year, but some cashflow is better than none. Plus, since prices are rising, when they do finally approve a short sale or foreclose on the property, they will recover more of their original capital than if they were to foreclose today. Lenders are kicking the can and playing the amend-extend-pretend music.

November 2012 California foreclosure inventory—the total of Preforeclosures, properties in foreclosure that are Scheduled for Sale, and Bank Owned properties (REO)—fell 7.6 percent from the prior month and is down 31.8 percent compared to last year. While the November decline in inventory is not an unusual event, the significant decline in foreclosure inventory over the past year has contributed to what some are calling an “inventory crisis” of total homes for sale.

The November foreclosure inventory shortage is partially due to the jump in California Foreclosure Cancellations. Cancellations were up 4.7 percent from the prior month, up 69.9 percent in the past two months and up 34.7 percent compared to last year. In taking a closer look at the reason for cancellations, it did not appear the majority were due to statutory time frames or filing errors, but were more likely due to short sales or successful loan modifications.

November 2012 California Notices of Default were down 19.9 percent from the prior month and down 51.5 percent compared to last year. November 2012 California Foreclosure Sales were down 14.8 percent from the prior month and down 30.3 percent compared to last year.

The policies of ‘extend and pretend’ continue to slow foreclosure activity while ensuring foreclosures will play an important role in our economy for years to come,” said Sean O’Toole, Founder and CEO of Foreclosure Radar. “While we are grateful that the government has extended the relevance of our company, we recognize our customers will need additional tools to be successful in this market. I couldn’t be more excited about what we have coming soon in 2013. Current customers will get it first.

Lenders are determined not to clear the market. Due to their double incentive to wait that I described above, they will continue to modify loans over and over again until either they have the capital reserves to absorb the write down or until prices reach the loan balances when they can foreclose and get all their money back.

California REO acquisitions down 16%

Despite the fact that prices are rising and inventories are critically low on inventory, banks actually took back fewer homes last month. The inventory shortages are becoming the new normal.

REO inventories stabilize

The real goal of lender REO policy this year was to reduce their standing inventories. Lenders were holding tens of thousands of homes waiting for better days. Those homes have been cleared out, and the remaining inventory is in their (very slow) processing pipeline. The pipeline REO has stabilized statewide at about 63,000 units over the last 4 or 5 months.

Pipeline processing taking even longer

Banks are certainly not worried about making their foreclosure processing any more efficient. Since it now takes them nine and a half months to process a foreclosure, the 63,000 they currently own are all in process. It represents the total acquisitions over the last 9 months. I don’t expect to see REO inventory levels drop much from here unless they decrease their processing times.

Notices are also declining

Lenders have greatly reduced their foreclosure filings over the last year despite the fact they have no shortage of delinquent squatters to foreclose on. It is a sign that banks are in no hurry to process California foreclosures due to the upcoming law changes on January 1.

Orange County

The story in Orange County is similar to the rest of California. REO processing dropped 28% last month and is back to levels of April through July. Overall, REO processing is down about 58% from last year’s levels.

Notices of default in Orange County also took a dive for the forth straight month. Squatters in Orange County can breathe a little easier.

The inventory saw a similar leveling off.

Amend-extend-pretend continues. Lenders are in no hurry to process more foreclosures, and their liquidations still hang over the market. Over the last seven months, their snail’s pace of liquidations has created a dramatic and completely artificial shortage of supply which has caused prices to shoot upward. Expect more of the same going forward.

An example of amend-extend-pretend

The former owners of today’s featured REO were Ponzis. They extracted all the equity from their property, and when they quit paying, the played along with their lender modifying their loan. Finally, the lender got tired of the game and foreclosed on them.

  • This property was purchased for $181,000 on 6/19/1998. The owners used a $175,550 first mortgage and a $4,450 down payment.
  • On 3/3/2000 they obtained a $42,312 stand-alone second.
  • On 4/1/2003 they refinanced with a $252,000 first mortgage.
  • On 10/2/2003 they refinanced with a $273,750 first mortgage and obtained a $18,250 HELOC.
  • On 4/20/2006 they refinanced with a $310,000 first mortgage and obtained a $150,000 HELOC.
  • On 1/25/2007 they refinanced with a $380,000 first mortgage.
  • On 2/20/2008 they refinanced with a $380,000 first mortgage.
  • On 4/21/2008 they obtained a $77,000 HELOC.

Notice those last two loans were in 2008 when lenders were supposed to be cracking down on this stuff. The total property debt was $457,000 assuming they maxed out the final HELOC. Total mortgage equity withdrawal was $281,500 on a $4,450 investment.

Foreclosure Record
Recording Date: 11/15/2011
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 08/10/2011
Document Type: Notice of Default
Foreclosure Record
Recording Date: 11/10/2010
Document Type: Notice of Rescission
Foreclosure Record
Recording Date: 08/05/2010
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 04/28/2010
Document Type: Notice of Default

[idx-listing mlsnumber="P843218" showpricehistory="true"]

Proprietary OC Housing News home purchase analysis

10882 MACMURRAY St Anaheim, CA 92804

$449,900    ……..    Asking Price
$181,000    ……….    Purchase Price
6/19/1996    ……….    Purchase Date

$268,900    ……….    Gross Gain (Loss)
($35,992)    …………    Commissions and Costs at 8%
$232,908    ……….    Net Gain (Loss)
148.6%    ……….    Gross Percent Change
128.7%    ……….    Net Percent Change
5.5%    …………    Annual Appreciation

Cost of Home Ownership
$449,900    ……..    Asking Price
$15,747    …………    3.5% Down FHA Financing
3.40%    ………….    Mortgage Interest Rate
30    ………………    Number of Years
$434,154    ……..    Mortgage
$111,485    ……….    Income Requirement

$1,925    …………    Monthly Mortgage Payment
$390    …………    Property Tax at 1.04%
$0    …………    Mello Roos & Special Taxes
$112    …………    Homeowners Insurance at 0.3%
$452    …………    Private Mortgage Insurance
$0    …………    Homeowners Association Fees
$2,880    ……….    Monthly Cash Outlays

($284)    ……….    Tax Savings
($695)    ……….    Equity Hidden in Payment
$17    …………..    Lost Income to Down Payment
$132    …………..    Maintenance and Replacement Reserves
$2,050    ……….    Monthly Cost of Ownership

Cash Acquisition Demands
$5,999    …………    Furnishing and Move In at 1% + $1,500
$5,999    …………    Closing Costs at 1% + $1,500
$4,342    …………    Interest Points
$15,747    …………    Down Payment
$32,086    ……….    Total Cash Costs
$31,400    ……….    Emergency Cash Reserves
$63,486    ……….    Total Savings Needed

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