Bank behavior determines home prices. They control the supply, and they control the money that drives demand. Whenever the banks change their policies, it shows up in the foreclosure statistics, and these changes determine the future of home prices.
In August, three important developments happened in the foreclosure market:
Banks greatly increased their REO acquisitions.
Banks sharply curtailed new filings of notices of default.
Banks stopped their internal liquidations of REO standing inventory.
Each of these developments has implications for future home prices.
“We continue to see reports that there will be a wave of foreclosure sales after the election or at the start of the year,” stated Sean O’Toole, Founder & CEO of ForeclosureRadar. “The lack of Foreclosure Starts this month puts a nail in the coffin of this theory. There will be no wave of foreclosures for at least five months. The good news for investors and first-time buyers is that Foreclosure Sales have at least remained flat or slightly up, continuing to provide some opportunities in the meantime.“
It’s becoming a safe prediction that the banks are not going to process a large number of REO any time soon. In a recent post Mostly through short sales, banks met 40% of settlement requirement, I posited that the banks would continue to keep foreclosure rates low until they reached their settlement requirements spelled out in the agreement reached earlier this year. At current rate of compliance, they should meet their goals by the middle of 2013. Until then, those who are delinquent on their mortgages will be allowed to squat.
The Golden Age of Delinquent Mortgage Squatting
This is the best time to be a squatter. Anyone who isn’t paying their mortgage now is unlikely to come up on their lender’s radar any time soon. Lenders utilize terrorist tactics of random violence and foreclose on a few squatters each month to deter the herd from strategic default, but the vast majority of delinquent mortgage squatters are left to squat in peace. This will not change until the banks meet their settlement requirements, and even when it does change, lenders will still be cognizant of managing their liquidations to prevent a future price collapse. There will be some squatters who get five to eight years of free housing by the time the debris is cleared out.
California REO acquisitions up 30%
Last month, REO filings were up 10%, and as a sign that was more than a statistical blip, lenders increased their acquisitions of REO at auction by 30%.
Why are lenders increasing their REO acquisitions?
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. Last month, they did not reduce their standing inventory after 12 consecutive months of declines with the last six months being very significant. Overall they reduced their standing inventories by 36.45% over the last year.
Not that lenders have reduced their inventories to processing pipeline levels, they were able to increase the number they took back at auction. With the super low MLS inventory levels, banks have plenty of room to increase their liquidations.
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 65,000 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.
This one defies explanation. Lenders have greatly reduced their foreclosure filings over the last year despite the fact they have no shortage of delinquent squatters to foreclose on. Last month’s drop reversed the trend of three months of increases. These numbers are somewhat volatile, so it may be simply that the people in the department that processed notices went on vacation in August. Who knows. It is a sign that banks are in no hurry to process California foreclosures despite the upcoming law changes on January 1.
The story in Orange County is similar to the rest of California. The increase in REO processing was more dramatic with a 40% increase, but last month’s sales were still low compared to last year’s levels.
Amend-extend-pretend continues. Lenders are in no hurry to process more foreclosures, and their liquidations still hang over the market. Over the last six months, their snail’s pace of liquidations has created a dramatic and completely artificial shortage of supply which has caused prices to shoot upward. The rally will not last. We may not see a return to last winter’s lows, but with so much inventory overhanging the market, double-digit price increases are not on the way.
3 1/2 years squatting
The lady who used to own today’s featured REO certainly benefited from her term of “ownership.” Between the HELOC abuse and squatting, she was either paid for living here or she got to live for free. If that’s what home ownership has become, it’s not surprising everyone wants to own a home.
This property was purchased for $400,000 on 10/10/2001. She used a $359,900 first mortgage and a $40,100 down payment.
On 4/22/2003 she refinanced with a $440,000 first mortgage.
On 5/17/2004 she refinanced with a $521,000 first mortgage.
On 7/12/2007 she refinanced with a $595,000 first mortgage.
Total mortgage equity withdrawal was $235,100.
Total squatting was three and one half years.
Recording Date: 03/02/2012
Document Type: Notice of Sale
Recording Date: 10/31/2011
Document Type: Notice of Default
Recording Date: 01/11/2010
Document Type: Notice of Rescission
Recording Date: 07/30/2009
Document Type: Notice of Sale
Recording Date: 04/27/2009
Document Type: Notice of Default
$179,900 ………. Gross Gain (Loss)
($32,000) ………… Commissions and Costs at 8%
$147,900 ………. Net Gain (Loss)
45.0% ………. Gross Percent Change
37.0% ………. Net Percent Change
3.4% ………… Annual Appreciation
Cost of Home Ownership
$579,900 …….. Asking Price
$115,980 ………… 20% Down Conventional
3.54% …………. Mortgage Interest Rate
30 ……………… Number of Years
$463,920 …….. Mortgage
$113,463 ………. Income Requirement
$2,094 ………… Monthly Mortgage Payment
$503 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$145 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$190 ………… Homeowners Association Fees
$2,931 ………. Monthly Cash Outlays
($327) ………. Tax Savings
($725) ………. Equity Hidden in Payment
$131 ………….. Lost Income to Down Payment
$92 ………….. Maintenance and Replacement Reserves
$2,103 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$7,299 ………… Furnishing and Move In at 1% + $1,500
$7,299 ………… Closing Costs at 1% + $1,500
$4,639 ………… Interest Points
$115,980 ………… Down Payment
$135,217 ………. Total Cash Costs
$32,200 ………. Emergency Cash Reserves
$167,417 ………. Total Savings Needed