California bank repossessions continue to plummet, squatters rejoice in 2012
Like any business, banks adjust their business plans quarterly based on both internal and external forces. Internally, banks respond their need for additional capital to fund operations. Externally, they cope with a declining housing market, recent regulatory changes, and new conditions imposed by the bank settlement. When banks adjust their business plans, it may have sudden and dramatic effect on their policies. In the first quarter of 2012, the major banks which control most California REO dramatically reduced the number of properties they purchased at auction.
The precipitous declines in REO were not due to improving borrower delinquency. Far too many people are not paying their mortgages, and banks haven’t made significant progress in reducing shadow inventory. In short, they didn’t stop foreclosing because they ran out of people to foreclose on. So why did they?
Two key developments in the first quarter changed bank policy. First, federal regulators forced banks to recognize losses on second mortgages behind a delinquent first mortgage. This caused banks to greatly accelerate their steady write downs of these loans. Over the last several years, the major banks have been writing down a certain amount of first mortgages, second mortgages, and HELOCs each quarter based on their earnings. The regulatory change forced them to take much larger write downs on their second mortgages, so they didn’t have the same capacity to write down first mortgages as they have had in previous quarters. This forced banks to curtail taking losses on first mortgages which in turn forced them to stop taking back REO and processing the sales. After banks digest the losses on the HELOCs, they will likely resume their steady write downs on first mortgages and increase sales of REO or approval of short sales.
The second key development was the agreement between the major banks and states on the Robo-signer scandal. California extorted a significant sum from the banks (which they now want to spend on other bills). To comply with the agreement, the major banks must write down billions of dollars worth of loans. Short sale losses are credited toward their settlement obligations, so lenders are shifting gears to approve more short sales. This changed the incentives for lenders toward short sales and away from REO.
With lenders unable to afford their typical quarterly write downs on first mortgages, and with their changed incentives to favor short sale processing over REO sales, the number of REOs has plummeted in the first quarter. As a result, MLS inventories have shrunk, and the market has turned from a buyer’s market to a seller’s market — at least in the short term. Perhaps 2012 will be the year of the short sale. Of course, this requires the delinquent mortgage squatter to participate, and since most are planning to enjoy the free ride as long as they can, I really don’t expect short sales to increase much. Ultimately, banks will abandon their efforts to encourage short sales and foreclose on the committed squatters.
Foreclosure Activity Declines Hurting Investors
April 2012 Foreclosure Starts declined across our coverage area wiping out the small gains in new foreclosure filings last month. In California, Notice of Default filings are down 69.8 percent from the peak in March 2009, and 15.8 percent from April 2011. Notice of Trustee Sale Filings, the start of Arizona’s foreclosure process, are down 59.4 percent from the peak in March 2009, and down 8.0 percent year-over-year.
Foreclosure Sales also declined, however, foreclosure investors purchased a record percentage of the limited inventory that was actually sold. Nevada investors purchased more than 50 percent of foreclosure sales for the first time at 50.7 percent. Arizona followed with 44.6 percent and California at 41.3 percent. The low number of sales, combined with record percent purchased on the courthouse steps left very little to become Bank Owned (REO). This further depletes the inventory of Bank Owned homes as REO sales continue to outpace the addition of new inventory.
For the last several years, lenders held the ratio of REO to third-party sales at 2:1. In February, lenders began slowing their acquisition of REO, but the number of third-party sales only declined fractionally. As a result, the number of third-party sales is set to overtake the number of REO sales. It’s unclear exactly how lenders intend to process their bad loans, but taking on additional REO doesn’t seem to be part of the plan. Perhaps they will approve more short sales, but there is little evidence of that so far. What is certain is that many more squatters will be given additional time in their free houses.
Banks took back 50% fewer REO in April than they did in January.
Despite investors purchasing a higher percentage of foreclosure sales, margins have rapidly declined in recent months. In both Arizona and Nevada winning bids on the courthouse steps on average equal the current estimated value of those properties. In California the discount between market value and winning bid have on average declined to 12.3 percent. This leaves investors who intend to resell their purchases with record low profits after eviction, repairs, and closing costs.
Flipping is on the decline. Aggressive bidders are buying properties for two reasons: first, many believe the bottom is in, and they don’t want to miss the bottom tick. There are many fools chasing the market higher. They may be very disappointed when the inventory liquidation resumes. Second, many new buyers operating on a buy-and-hold business model are acquiring properties, and they don’t need a flip margin to operate. This new demand coupled with reduced supply is causing auction prices to rise significantly.
“Foreclosure declines would be wonderful news if they were being driven by a true market recovery in which hundreds of thousands were no longer unable to make payments, and millions were no longer upside down. That is not the reality today. Instead we are seeing unprecedented government intervention into the foreclosure process leaving underwater homeowners in limbo, while stealing opportunity from investors and first time buyers.” stated Sean O’Toole, Founder & CEO of Foreclosure Radar. “California’s pending legislation, which is similar to laws we previously saw enacted in Nevada, will almost certainly bring foreclosure activity to a near halt there if passed. The reality is that these laws don’t solve anything as they fail to address the real problem – negative equity – while instead they punish real estate professionals, homebuyers, and investors far more than the banks they were aimed at.”
Sean is being kind suggesting “homeowners are in limbo.” It’s more accurately stated as, “delinquent loan owners continue squatting.” This is unquestionably stealing opportunity from investors and first-time buyers. Sean’s statement that the banks aren’t addressing the problem with negative equity isn’t accurate. Banks are addressing the problem. They hope they can force prices higher by withholding inventory. Banks are intent on solving the problem with negative equity by raising prices rather than writing down debt. I can understand their desire, but it won’t work.
This summer lenders will discover that buyers cannot raise their bids due to prudent lending standards. Buyers are limited to loan amounts financeable by verifiable incomes. Plus the recession and foreclosure depleted buyer pool will continue to dampen demand. Basically, prices will not rise as lenders hope, and transaction volumes will begin to taper off due to lack of supply, and the high end will continue to languish due to a lack of a move-up market. We will see another failed attempt to force prices to move higher.
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