Foreclosure settlement and bulk sales will dramatically increase foreclosure rates
The newly announced foreclosure settlement deal should dramatically increase foreclosure rates because banks no longer have to worry about lawsuits over their foreclosure practices. Further, with impending sales of bulk portfolios to private equity groups, banks will be able to dispose of the REO once they acquire it at auction. With the two biggest impediments to foreclosure removed, banks have no reason to permit delinquent mortgage squatters to continue receiving free housing. Let the foreclosures begin.
The $25 billion settlement with banks over foreclosure abuses may result in a wave of home seizures, inflicting short-term pain on delinquent U.S. borrowers while making a long-term housing recovery more likely.
How does one inflict pain on someone getting free housing? Once the delinquent mortgage squatters are forced out, they will to rent and make housing payments like the rest of us.
Lenders slowed the pace of foreclosures as they negotiated with attorneys general in all 50 states for more than a year over allegations of faulty and fraudulent paperwork used to repossess homes. With yesterday’s agreement, banks are likely to resume property seizures.
“The best thing about the settlement, frankly, is that it will be done,” said Stan Humphries, chief economist for Seattle-based Zillow Inc. (Z), a provider of home-sales data. “The shadow of the settlement hung over the market for a year now.”
The backlog of foreclosures has trapped homeowners in properties they can no longer afford, depressed neighborhood prices by increasing the number of abandoned homes and led banks to tighten mortgage credit standards because of uncertainty about the cost of their potential obligations.
The above sentence is wrong on several points. First, nobody is trapped in a house. The ones not making payments are squatting by choice to get free housing. Second, shadow inventory does not depress housing values; in fact, the whole point of shadow inventory is to keep housing values up. Third, banks did not tighten credit because they were uncertain about the robo-signer deal. They tightened their lending standards because they used to give loans to anyone regardless of their capacity to repay, and now that many of those borrowers stopped repaying their loans, lenders stopped loaning them money.
Foreclosure starts fell 46 percent in December from October 2010, when the investigation into the so-called robo-signing of mortgage documentation began, according to Irvine, California-based RealtyTrac Inc. …
Robo-signer was responsible for a decline in foreclosure rates in judicial foreclosure states, but in non-judicial foreclosure states, the decline in foreclosure rates is due to the banks having too much inventory and their desire to match new REO with sales of existing inventory. If they foreclose any faster, they will end up owning more houses. If they liquidate them faster on the MLS, they will push prices lower. It’s a difficult balancing act.
Driving Down Prices
A surge of home seizures may drive down values, at least for a while, in a fragile market. The number of new foreclosure filings fell 34 percent last year, according to RealtyTrac, resulting in a backlog that now may flood the market with low- cost properties.
It bears repeating that prices will only go down if banks liquidate those properties on the MLS. Banks have three options with the REO they acquire in 2012: (1) sell them on the MLS, (2) hold them in REO inventory, or (3) sell them in bulk to private equity investment groups. Obviously, liquidating them on the MLS will push prices lower. Banks know this too, and they have been limiting their sales to stop prices from crashing for the last three years. Banks don’t want to hold any more REO inventory as evidenced by how steady they held this number over the last few years. Sales of REO in bulk to private equity groups is the new outlet for lenders. Expect to see bulk sales explode over the next few years as banks clear out shadow inventory and push them through this disposition channel as quickly as they can.
About 1 million foreclosures will be completed this year, up 25 percent from 2011, according to the firm.
“All of this will result in more foreclosure pain in the short term as some of the foreclosures that should have happened last year instead happen this year,” Daren Blomquist, a RealtyTrac vice president, said in an e-mail yesterday.
About 5 million homes have been lost to foreclosure in the U.S. since 2006, according to RealtyTrac.
“I think there’ll be more price weakness, because we’ll see the number of distressed sales pick up,” said Mark Zandi, chief economist for Moody’s Analytics Inc. in West Chester, Pennsylvania. “But I think the price declines will be modest. I think the banks themselves are going to be very sensitive to market prices. I don’t think they’re just going to dump property. That wouldn’t be in their best interest.”…
Lenders will still sell REO on the MLS at the absorption capacity of the market. They get their best capital recovery through this disposition channel, and that won’t change. As long as they make more selling on the MLS, they will continue to do so at its maximum capacity. However, with the ability to sell in bulk to recover capital, lenders have no incentive to flood the MLS with product and push prices dramatically lower. In fact, they actually have incentive to limit their MLS sales to allow prices to recover as this will also improve their valuations on bulk portfolio deals. In short, bulk portfolio sales are a game changer.
Buying in Bulk
Separately, Fannie Mae, the mortgage company under U.S. conservatorship, invited investors to apply for a new program to buy foreclosed homes in bulk to be managed as rental properties, under another program announced by the Federal Housing Finance Agency. The goal of that program is to reduce the inventory of foreclosures while providing rental homes to people who can’t qualify to buy or don’t want to own.
“No action, no matter how meaningful, is going to by itself entirely heal the housing market,” Obama said at an appearance with state attorneys general in Washington yesterday. “But this settlement is a start. And we’re going to make sure that the banks live up to their end of the bargain.”
Investors are likely to buy many of the foreclosed homes that come on the market to take advantage of low prices and demand for rentals, Zandi said. About 21 percent of home sales in December were investor purchases, according to the National Association of Realtors.
Investors will step up to buy these properties because sellers will make it worth their while. The GSEs will provide debt to facilitate these sales. Portfolio buyers will hold for cashflow then sell for appreciation years from now. These portfolio deals will ultimately be sold to owner occupants when their credit recovers years from now.
Manage as Rentals
Private equity funds including Los Angeles-based Oaktree Capital Management LP (OAKTRZ) and New York-based GTIS Partners announced plans in January to buy $2.5 billion of foreclosed single-family homes to manage as rentals, focusing on states with the highest number of foreclosures, such as California, Florida and Nevada.
“There’s pretty strong investor demand, particularly in some markets where prices have overshot,” Zandi said. “They’ve gone well below what you’d expect given incomes and rents.”
There remains a danger that “a wave of foreclosures” may destabilize the housing market, said Susan Wachter, professor of real estate and finance at the University of Pennsylvania’s Wharton School.
“The logjam has to be unleashed and it has been — this will do that,” she said. “That’s a good thing. But then there needs to be methodical loan-by-loan determination of the best resolution.”
What this means for future home prices
Bulk portfolio deals reduce the chance of catastrophic price drops caused by a flood of inventory. Up to this point, banks have not had the option of bulk portfolio sales. This put the market at tremendous risk of one or two major players liquidating REO on the MLS because they’re desperate for cash. Now if a lender is really desperate, they can sell in bulk at a discount. This option keeps these properties off the MLS where they can do real damage to prices. In short, bulk sales means prices are not going to crash.
No solution is a panacea. Bulk sales may remove the risk of a catastrophic crash, but in also removes any realistic chance of a robust recovery. Supply will steadily stream onto the market over the next decade. Any strong increase in prices will bring out more supply. Lenders and investors alike will liquidate what they can when they can into any strengthening demand. In short, bulk sales means prices are not going to appreciate much.
For those who want to see market stabilization, bulk sales are a great solution. For those hoping for a return of the go-go days of the housing bubble rally with rapid appreciation and plenty of HELOC spending, bulk sales are the death of a dream.