Feb142012
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.
Foreclosure Deal to Spur New Wave of U.S. Home Seizures, Help Heal Market
By Prashant Gopal and John Gittelsohn — Feb 9, 2012 9:01 PM PT 
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.
Housing Agency’s Reserves at Risk
The Federal Housing Administration could exhaust its reserves over the coming year, according to budget projections released Monday, which would require a Treasury infusion for the first time in its 78-year history.
The FHA has burned through its reserves as defaults mount on loans it guaranteed as the housing bust worsened four years ago. The agency—which played a small role in the housing market during the boom years—has become a major source of financing for home purchases since the mortgage crisis began.
The FHA is an attractive option for borrowers because they can make down payments as low as 3.5%. But as home prices continue to fall, many of those borrowers have fallen under water, where they owe more than their homes are worth and are at greater risk of default if they experience a loss of income. The FHA now backs nearly $1 trillion in mortgages, and more than 9% of those loans are at least three months past due.
The estimates by the White House’s Office of Management and Budget show that the FHA’s capital reserves, which stood at $4.7 billion in October, would be wiped out in the coming year, forcing the agency to seek nearly $700 million from the U.S. Treasury.
The FHA may not ultimately need that appropriation because last week’s $25 billion mortgage settlement with 49 state attorneys general and five large banks over foreclosure-processing abuses will result in the FHA collecting fines of around $1 billion.
Officials could take other steps, such as boosting the mortgage insurance premiums that the FHA collects, to prevent any draw on taxpayer funds.
Still, any taxpayer assistance would be a watershed moment for the New Deal-era agency because it has always been self funded.
The FHA doesn’t have to ask Congress for money if it runs out of cash. Instead, it has what’s known as permanent and indefinite budget authority, giving it an effective credit line from the Treasury.
FHA loans will cost more
By Polyana da Costa · Bankrate.com
Tuesday, February 14, 2012
If you plan to get an FHA mortgage or want to refinance with an FHA loan, act quickly.
A few weeks ago, I told you that mortgages insured by the Federal Housing Administration would get more expensive this year because of recently approved legislation that calls for an increase on FHA’s mortgage insurance premium. At the time, it wasn’t clear when FHA would implement the hike. Many in the mortgage industry expect the increase by no later than April. But it may come before then and it won’t come alone.
The FHA plans to announce another increase in its mortgage insurance premiums, in addition to the increase required by Congress.
Carol Galante, the FHA’s acting commissioner, told the Wall Street Journal that the FHA plans to announce an increase this month.
Brian Sullivan, a spokesman for the U.S. Department of Housing and Urban Development told me that “the recent premium increases required by Congress, as well as those FHA intends to announce, will be published in a mortgagee letter in the coming days.”
The legislation requires the FHA to raise the mortgage insurance premium by 10 basis points, or one-tenth of 1 percent of the loan amount. That alone will translate into an additional $200 per year, or about $17 per month, for a borrower who takes out a $200,000 FHA mortgage. It remains to be seen how big the other increase will be. But if I were you I wouldn’t wait to see. If you need an FHA loan and can refinance now, don’t waste time waiting. I mean, you can. But you’ll end up paying more for your loan.
I’m supposed to rush and buy a house due to a 10 bps increase in FHA MIP? That’s silly.
Now if you considering an FHA refi, then you’d want to act quickly if your LTV exceeds 80%.
Reports always seem to miss the obvious fact that higher costs will make for lower prices. Rather than hurry, I recommend people wait and see how the higher costs impacts market pricing.
For those considering refinancing, the advice would be the opposite. Their amount is fixed, so any increase in costs is a problem.
It think you see big increases in Fannie and Freddie fees this year, maybe to 50-75 basis, could be over 2 years. This MIGHT be on top of the mortgage tax. But it’s all talk right now, except for the mortgage tax, it was meant to pay for the payroll break. Fannie and Freddie will have to increase their fees to cover their losses.
I’m 2014 buyer, so let’s see.
Any sense as to the actual effect of this settlement on the higher end zips in Irvine
such as Turtle Rock (92603, 92612)?
It will be interesting to see which of the three options will now be used [by the banks]
to handle REO in such areas.
I don’t think this will do much to save the jumbo market. Houses priced over $750,000 on on their own. The cashflow on these properties doesn’t make sense, so investors won’t want these for cashflow purposes. Some investors may be attracted to this market thinking high-end real estate will appreciate faster. They will be disappointed. The high end will endure its measure of pain.
I think there is still alot of room at the high end to see depreciation, especially in the non-conforming group. The biggest pressure I see is the near wipeout of the move up buyer. In combination with wage stagnation, eventual rise in interest rates, and weak economic fundamentals, I think there is still about a 10-20% drop in this segment.
That’s exactly how I see it as well.
Arman/IR, any thoughts on how long time it will take for these price drops to play out…?
Just to give you an example, I have a family member who is a well established doctor living in Irvine. They bought 2200sqft SFH in oak creek for nearly 1M at the time of the peak. House is probably now around 750-800K. He makes probably about 350K/yr but as I see it now, a large chunk of their equity is wiped out. They had hoped to move up to turtle rock but they will likely be at least 3-5 years away before they have enough equity built up again to make the jump.
Tor, your guess is as good as mine. There will be tremendous resistence as I’ve seen before in the last few years. Those who have a sound foundation (stable jobs, fixed mortgages, and some equity) will likely hold the fort down and commit to the long haul in a buy and hold strategy (at least until kids have graduated or built up enough equity to move up). Keep in mind though from beyond the 750-1M category you start to move into properties that are typically involve cash purchases or large down payments. The issues to consider maybe more the outlook of the job market, wage inflation, and interest rates. Also to what degree is the subprime exposure in the higher end group?
Want a date? Buy a home
NEW YORK (CNNMoney) — When it comes to dating, homeownership can be the ultimate aphrodisiac.
In a survey of 1,000 single people, more than a third of women and 18% of men said they would much rather date a homeowner than a renter.
Only 2% of women said they preferred to date a man who rents, while only 3% of men said they would choose a woman who rents over one that owns her home, according to the survey, which was conducted by Harris Interactive for real estate site Trulia.
Both sexes also clearly prefer it when there’s no roommate in the picture; 62% of survey respondents, men and women, prefer to date singles who live alone.
I’m home! Adult children move back in with parents
And there was bad news for the growing number of boomerang kids — the young adults who went off to college, graduated and then wound up back in their old bedrooms. It’s going to be hard to find love, except (perhaps) from your parents. Less than 5% of all singles surveyed said they would date someone living in their childhood homes.
“That’s a real deal-breaker,” said Michael Corbett, a spokesman for Trulia. “If you’re still living with your folks, you’re dead-on-arrival for dating.”
The home they could love
Trulia also asked which home features are the biggest turn-ons. Number one turned out to be a master bath. Men (64%) love that private sanctum almost as much as women (75%) do.
Cool and unusual homes for sale
Walk-in closets were cited by 55% of men and 72% of women and gourmet kitchens got 51% of the male vote and 62% of the female. Hardwood floors, outdoor decks and home theaters also came in high on the list.
Interestingly enough, hot tubs got a lot less love from respondents. Only 26% of men and 22% of women cited the old standby in the science of seduction as an amenity they would truly want.
Looks like oaktrz and companies like gp investments ltd are going to gain all the hoped for profits of any market crash by manageing these reo’s. They seem to be locked up by employee stock and look privately owned. But I don’t know much about stock, except what somebody can do w/ $64 billion in assets like oaktrz sure must be nice! I ran across another stock called agnc that does government secured loans and pays 20% that looks like a play on Obama stratagies.
Interesting stuff. Well, at least soon the squatters will actually be paying rent. Wait, doesn’t that mean that rents will fall? If the supply of houses on the market is going to be shifted from squatters into the rental supply won’t that mean that rent prices will shift downward for the single family homes that get put onto the market? The upper end of the rental market can only bear so much in terms of payments, and that upper end will move into those SFH rentals because they are better than the townhouses and condos, and then rents for townhouses and apartments will suffer in the years to come.
A property is only a valuable investment if it is purchased at a price where the rent is sufficient to cover all monthly costs and then some. This means that the bulk sales will occur at a price point where all monthly costs are less than the rent. That also means that these investors would be able to turn an immediate and significant profit selling these properties at current market prices in places like Irvine, because to buy a house in Irvine still requires monthly outlays that are much more than the price to rent a similar property.
Just as an example, in Woodbridge a 1500 square foot townhouse rents for $2100 a month. Recent sales for such townhouses are around $425-450k, and they have a home owners association fee of $300 a month. An investor buying with 100% cash at 400k will make 3.9% a year before taxes renting this property if it is fully occupied and there are no major repairs. Another way of looking at it is that rent is only 6% of the purchase price here. That isn’t enough of a discount to make it worth buying and renting.
If they buy it at 280k then annual rent is 9% of the purchase price, and they will make around 6.4% a year before taxes on their money provided it is fully occupied. This is a much safer place to buy, and I think you would see some interest at this price point for investors. It is a 35% discount off of current market prices, and it would rent for a decent profit at this price point provided rental prices do not drop off creating a negative spiral for these calculations a la Las Vegas.
So, now my question is this. If this is the kind of discount that we are talking about in terms of bulk sales in order to get an investor interested in renting these properties and making some money. Why would they not simply just sell the property into the current market and make a quick 145k? Honestly. . . that is exactly what I would do. A bird in the hand is worth 2 in the bush, right?
“Interesting stuff. Well, at least soon the squatters will actually be paying rent. Wait, doesn’t that mean that rents will fall? If the supply of houses on the market is going to be shifted from squatters into the rental supply won’t that mean that rent prices will shift downward for the single family homes that get put onto the market?”
For each property put on the market as a rental, there is a corresponding renter added to the rental pool from a squatter who must go find a new place to live. Also, builders are hoping that all the people who doubled up during the recession will form new households and buy homes. In reality, most of those people will rent because they don’t have the credit or the down payment to buy houses. In short, I don’t see the new rental program crashing rents, but it will certainly slow the increase in rents we have been seeing over the last 18 months on single-family homes.
“Why would they not simply just sell the property into the current market and make a quick 145k? Honestly. . . that is exactly what I would do. A bird in the hand is worth 2 in the bush, right?”
The bulk sales have contractual provisions were the bulk sale buyer must hold the property as a rental for a minimum period specifically to prevent them from selling these properties too soon and causing further price distress.
These hold provisions are important, and until now I haven’t seen them explicitly stated. It makes sense, how could they ever keep the inflated price of housing up if those provisions did not exist?
These investors and banks will be set if they can just hold on to these properties until we get some serious inflation. I would love to invest in a property, and then rent it to myself until the hold provision ends and I can then sell it to myself for the price of the investment + a commission for the company that helped to set it up. Any companies helping people to do that? It’s pretty simple right? Lease to own for the duration of the hold provision. I bet there is some kind of prevention built in to stop this sort of activity.
Many of these properties will likely be sold with rent-to-own provisions. It will be encouraged as a way of moving people from renting back to home ownership. I doubt they would have any provisions against what you describe. None of these deals have happened yet, so there aren’t companies set up to make these deals currently.
The investors would likely be required as part of the terms to hold the property for a set amount of time before liquidating (?5-10years?). The banks/GSE already have enough property out on the market, adding more would depress the price so that 145K profit is an illusion as prices would likely tumble even more.
Like always the devil is in the details, what is the rental holding period before they can sell these houses or can they just flip them. This also seems like the real start of the breaking up of the banking cartel. Finally someone else will be holding these properties that may have a real desire to sell
The hold provisions will vary by the deal. Each buyer and seller will negotiate their own terms. The banks will still be liquidating REO on the MLS, so they will be keen to limit their competition for as long as they need to get rid of their inventory. I would expect the minimum holding periods will be at least 2 or 3 years.
Even if the banks can manage their inventory with a combination of MLS and bulk sales, that doesn’t change the fact that prices are still way too high to be supported without access to crazy debt. I’d put my money on easy lending coming back in the near future thanks to the moral hazard inherent in all these policy “solutions.”
In markets like Orange County, we will still have price pressures because prices are too high and unaffordable, particularly for high-end properties absent a move-up market. In beaten down markets, affordability is not a problem, and the bulk sales should alleviate the supply pressures there and help the markets stabilize.
Agree Pwned, we were recently looking in the 750-1M market but after looking for 6months we are starting to change our mindset and will likely stay renting.
The possibility of further price drops (although we would be looking at holding for 10years or so) and no foreseeable change in mortgage rates makes us think we would be better served looking again in fall 2012 or early spring 2013.
In the mean time my wife and I will look to wipe out the rest of our student debt and car loan build more for a downpayment. Also, we’ve been reading Thomas Stanley’s book “Stop Acting Rich” and it is really having an effect on our mindset. I would definitely recommend taking a look.
The bottom line is that the half-life of slowing the rate of price declines continues to get shorter and shorter. The downside ‘over-shoot’ is coming.
But what would be the the 2 or 3 tell-tale signals that would suggest to most observers on the ground here that “hey, we’ve finally arrived. Single family home prices really have finally STABILIZED in OC”?
I ask this dumbe question because to some living here, stabilized home prices actually means loads of 4 bed 2.5 bath SFH available in Irvine for $750K+. There seems to be a lot of people fully expecting a return to the “good ole days” of 2004 with ridiculous appreciation expectations and the endless stream of willing, easily qualified buyers, etc.- after all this is OC!
You say that, but look at what you’re talking about. Put 20% down on that $750K Irvine house financing $600K at 4% for 30 years, and your mortgage payment is just $2,864.
I’m not suggesting that’s reasonable or fair, but rent isn’t reasonable or fair in Irvine either…
The primary problem OC homeowners and prospective buyers face going forward is the fact that the current price model is based on the continuance of negative real rates.
Reality is, observers on the ground will know… “hey, we’ve finally arrived”…. when they receive word that the largest banks are going to be restructured.
When the bond bubble bursts and interest rates are double digit. anything else is meaningless banter.
But you must differentiate between real and nominal house prices, concentrating on the former.
Breakdown of how the AGs’ settlement could affect OC:
http://lansner.ocregister.com/2012/02/14/deal-will-cut-o-c-mortgages-by-668-million/158569/
This is such a crock. I just spent about two hours on the phone with the Homeownership Preservation Foundation on their “HOPE Hotline”. I lost my job at the end of 2010 and have been on unemployment ever since. I asked the rep if there was ANYTHING available for me in terms of loan modification and the answer remains: “No”. Unless you have an income (and I don’t mean unemployment), you aren’t going to get a loan modification. The rep told me that the best thing I could do would be to short sale my place (not sure where I’m supposed to live – I guess a homeless shelter). Here is what kills me: I bought the place in 2004. I did everything “right” — I didn’t over-buy (it’s a one-bedroom 740 sq. ft. condo), I held out for a fixed rate instead of falling for one of those interest-only loans every broker was waving in my face, and while I had a job, I was able to swing it. Then the millionaires that own the firm I worked for decided to outsource my work (so much for the rich creating the jobs). I’ve been supplementing my unemployment with my savings in order to keep current on my mortgage. I’m under water to the tune of about $100K and my mortgage payment is $1400/month. If I do a short sale on my condo, the person that ends up buying it will get payments equal to about half of what I’m paying now. All I’m trying to do is hang on to my home a little longer in the hope that I’ll find a job since all you hear on the news is how the unemployment situation is getting so much better, but they aren’t going to help you unless you have a job with an income – and I don’t mean a contract or temporary job either. They want you to have a “permanent” position. Take a look at how many jobs out there are permanent versus contract (so the employer doesn’t have to pay benefits) these days. So from my perspective, this bit settlement doesn’t mean diddly if you’re unemployed. Sure sounded good when I heard about it on the news though.
Cash For Gold Los Angeles
In your case some people would tell you that you should continue to pay, don’t ever fight a foreclosure, then under no circumstances re-purchase your home at auction for much less than what you owe.
I am not one of those people…
I hear you, but everyone one of us is in danger of losing our financed or rented home if we have to go two years on an extremely reduced income. I’m fearful of this, and that’s why I save so much each payday.
I think you’re forgetting, that your “help” is coming – not in the form of a loan mod, but in the form of extended unemployment benefits.
FHA Financially on the ropes; gets robo-signing bailout
by Mike at North Orange Housing Blog
Two news articles came out on Valentine’s Day. The first story from the WSJ detailed the declining reserves at FHA due to losses and loans that they insured. The second news story is from Bankrate and it covered the immediate FHA fees increase now and then again in a few months.
MORE
“Up to this point, banks have not had the option of bulk portfolio sales.”
This simply is not true. They’ve always had this option with their own portfolios and with select investor pools of mortgages. The difference now is that the GSE’s are getting in on the action and they have such large portfolios that it creates headlines.
Banks may have had the desire to sell them, but there were no large takers on these portfolios. Only in the last few months has large equity funds had appetite for single-family homes.