Feb092012
Lenders own $30 billion in California single-family homes
Over the last few years, I have decried efforts from crony capitalists to corner the single-family REO market by negotiating bulk sales directly from lenders or the GSEs. I still believe individual investors have a large role to play in cleaning up the mess, but after contemplating how large the problem really is, I am far less concerned that crony corporations could buy enough to impact the market. In California alone, each month lenders take back nearly $2 billion in single-family properties. They have a standing inventory of about $30 billion. They only obtain $2 billion a month because that’s all they can sell on the MLS, and they are trying not to increase their inventory.
How many REO?
There are no accurate measures of distressed inventory. Estimates vary based on the assumptions used. CoreLogic estimates approximately 1.5 million homes are currently in the foreclosure pipeline as pending REO, pending foreclosures, and seriously delinquent loans. As this data is collected from voluntary disclosures from lenders, there is legitimate concern this number is deliberately understated.
The current inventory number does not take into account future delinquencies. Zillow estimates between 25% and 30% of homeowners are underwater. However, their estimates are based on original first mortgage data and does not include subsequent refinances and second mortgages. The actual percentage of underwater homeowners is much higher, and when sales commissions and closing costs are factored in, some estimates conclude that over 50% of mortgage holders are effectively underwater.
7.5M homes to be liquidated over the next 5 years
With falling prices, hope of regaining an equity position is fading, and many will strategically default. Many underwater homeowners will end up as foreclosures. The future pipeline could be as many as 7,500,000 homes. With an average sales price of near $150,000, the single-family distressed property market could be $1.125 trillion.
Foreclosure Statistics
California, Nevada, and Arizona foreclose on over 20,000 each month. This number is actively managed by lender to mirror MLS liquidations in order to prevent their REO inventory from becoming any larger.
Third party auction sales in California, Nevada and Arizona total $1.245 billion each month. However, lenders take twice as many homes back each month adding $2.5 billion of newly acquired real estate owned.
Between California, Nevada, and Arizona, the total standing inventory of lender REO is $36.875 billion with the vast majority concentrated in California.
More than $3.5B sold at auction each month in California, Nevada, and Arizona
Each month approximately 14,000 foreclosures occur in California. This number is actively managed by lenders to mirror the absorption rate on the MLS. Each month about 65% of the foreclosures go back to the lender and 35% are sold to third parties at auction. Lenders take back approximately 10,500 homes. Third parties obtain around 3,500 properties per month with an average winning third-party bid of approximately $250,000. Each month 875 million in properties are purchased by third parties at auction.
In Nevada each month approximately 2,100 foreclosures occur with 65% going back to the lender and 35% going to third parties. The average winning bid on the approximately 700 homes per month is $175,000. The total cost of third-party auction purchases is $122.5 million per month.
Arizona has approximately 4,500 foreclosures per month with about 65% going back to the bank and 35% going to third parties. The 1,500 third party sales average $165,000 for a total monthly third-party auction cost of $247.5 million.
Nearly $37B in REO standing inventory
Lenders in California are adding $2.5 billion in each month to their existing inventory. They have been actively managing the rate of foreclosure to match MLS sales with new inflows of REO. They have maintained a steady inventory of 100,000 REO for the last three years. At an average resale value of approximately $300,000, that’s $30 billion of standing REO inventory just in California.
In Nevada, lenders maintain an inventory of about 13,000 REO with an average resale value of approximately $200,000 for a standing inventory value of $2.6 billion.
In Arizona, the average monthly inventory is about 22,500 homes with an resale value of nearly $190,000. Total standing inventory of REO is $4.275 billion.
Private equity preparing to buy bulk portfolios
The government actively courts private equity firms to solicit bids on bulk portfolios of GSE properties. Most of these firms will commit less than $100 million, but some of the larger players examine deals in the $100 million to $1 billion range, but that’s as large as they get. This is a multi-trillion dollar problem. There isn’t enough private equity to buy the homes available much less crowd out smaller investors.
What impact will bulk sales have on the housing market?
House prices are set on the fringes. If lenders and the GSEs start selling large amounts of inventory in bulk, they won’t have to sell them on the MLS. This could stabilize the housing market. Since these properties will be added to the rental pool, it will also blunt rent increases on single-family homes. In short, it will stabilize both markets, but it will also limit increases in both sales prices and rents going forward. 
The inventory of homes added to the rental market will someday be returned to the resale market. By then many former owners will buy who are currently forced to rent because their credit is ruined and they don’t have a down payment. Supply and demand will be rebalanced, but since so much supply will be added in coming years, price appreciation will be minimal.
Will bulk sales cause the housing market to bottom?
If the housing market does bottom this year, it will be due to bulk sales of REO. We know lenders are increasing their foreclosure efforts to clear out shadow inventory, but if these REO don’t come to market on the MLS and add to supply of must-sell inventory, prices will not be pushed lower. Without the added supply, the market will stop falling. There is little danger of a rally with rapidly increasing prices, but bulk sales may relieve the supply pressure enough to stop prices from going down.
BTW, Calculated Risk called the bottom a few days ago. If bulk REO relieve the supply pressure, he will be right.
Every foreclosed property incurs a number of fixed costs — realtor fees, title fees, closing costs, cleanup and repair. The lower the property’s value, the higher the percentage of proceeds these costs eat up. The fixed costs increase the loss severity of cheaper properties on a proportionally higher basis, so it makes sense to let them go to a third party and let the buyers absorb those costs.
More expensive properties may not get as many bids at the courthouse and the fixed costs are a much smaller percentage of the sales price. Also, a well executed marketing plan can make a big difference for high end properties, therefore it makes sense for lenders to hold on to them and sell them as REO.
I also think they are foreclosing on fewer high-end properties to avoid taking the write down on the loan. Delinquent mortgage squatters are concentrated at higher price points as many of the subprime or lower priced squatters have already been forced out via foreclosure.
So many houses entering the rental market will drive rents down. This will drive down house prices also.
It will only drive down rents if the houses are empty or if unemployment increases. Each foreclosure that creates a rental also creates a renter.
U.S. Mortgage Servicers in $26B Settlement
Five banks will pay $26 billion to end a nationwide investigation of abusive foreclosure practices stemming from the collapse of the housing bubble, a senior administration official said.
The U.S. Justice Department and Department of Housing and Urban Development will announce the resolution of the 16-month probe this morning. Citigroup Inc. (C), Bank of America Corp. and Wells Fargo & Co. are among the banks — the nation’s five largest servicers — participating so far.
The $26 billion agreement includes $5 billion in cash for states, $17 billion to help borrowers in the form of mortgage debt forgiveness, forbearance and short sales, and $3 billion in refinancings to lower homeowners’ interest rates, the official said in a phone call with reporters.
The total figure could grow to $40 billion if the next nine largest mortgage servicers sign on to the agreement, the official said. In a best-case scenario, if banks participate fully, the deal could be worth $45 billion to homeowners and victims of foreclosure.
Terms of the settlement were to be announced at a press conference in Washington by Attorney General Eric Holder and Housing Secretary Shaun Donovan.
The settlement comes more than a year after attorneys general from all 50 states announced an investigation into foreclosure practices following disclosures that banks were using faulty documents to seize homes. The agreement was reached with a group of state attorneys general and federal agencies, including the Justice Department.
Not Punishment
The goal is to not just punish banks responsible for botched foreclosures but repair damaged neighborhoods, said the administration official, who briefed reporters on condition of anonymity in advance of the official announcement.
“One of the things we’re concerned about is the broader impact on families and neighborhoods,” the official said. “This won’t only require lenders to pay for the misdeeds but force them to fix the problems.”
The official described the principal forgiveness as the largest since the crisis began.
Borrowers whose loans are owned by banks and haven’t been pooled into mortgage bonds will be most likely to benefit from the agreement, the official said. Borrowers who suffered foreclosures from the start of 2008 through 2011 will be eligible for payment.
The actual amount of restitution to individual borrowers will depend on how many make claims, with the official estimating that each borrower could get between $1,500 and $2,000.
Three-Year Timeframe
Banks must spend the money within three years or face a fine. The proposal must be approved by a federal judge.
About $5 billion of the payment will go to states that sign on to the agreement to pay for foreclosure-related initiatives, according to the administration official. About $17 billion will fund payments to homeowners who have lost their homes to foreclosure. The servicers also will refinance $3 billion worth of mortgages and pay about $1.5 billion to homeowners harmed by botched foreclosures.
The money has to be spent within three years, and banks will get extra credit for funds distributed in the first 12 months, the official said. All 50 states were expected to sign on to the agreement.
New York Attorney General Eric Schneiderman and California Attorney General Kamala Harris agreed to join the settlement yesterday, a person familiar with the matter said.
‘A Huge Deal’
“With California and New York signing on, it’s a huge deal,” said Kurt Eggert, a professor at Chapman University School of Law in California who has been following the talks. “California and New York were the biggest critics of this deal, so if they sign on, that’s a sign that this is a real deal.”
The settlement preserves any state and federal criminal claims, claims related to mortgage securitization, including those under New York’s securities fraud statute, and fair lending laws, and claims brought by individual homeowners, among other matters, the official said.
The resolution also establishes a monitor to track compliance with the terms of the agreement.
The 50-state investigation, announced Oct. 13, 2010, came after New York-based JPMorgan, the largest U.S. bank by assets, and Ally Financial (ALLY)’s GMAC mortgage unit said they would stop repossessions in 23 states where courts supervise home seizures, and Charlotte, North Carolina-based Bank of America froze foreclosures nationwide.
Foreclosures Halted
Ally, based in Detroit, was first to freeze evictions in September 2010, after depositions in lawsuits challenging foreclosures surfaced showing that employees signed affidavits containing information they didn’t personally know was true. In December 2009, a GMAC employee said in a deposition in a foreclosure case filed in West Palm Beach, Florida, that his team of 13 people signed about 10,000 documents a month without verifying their accuracy.
The attorneys general began negotiating first with the five largest servicers because they held almost 60 percent of home loans, Miller has said.
Bank of America, JPMorgan (JPM), New York-based Citigroup, San Francisco-based Wells Fargo and other mortgage servicers have also been required by the Office of the Comptroller of the Currency to improve their foreclosure procedures. The OCC in April 2011 announced enforcement actions against the companies for “unsafe and unsound” practices related to loan servicing and foreclosures.
Wells Fargo announced they’ll start reducing principal, rates, and doing refis in March!
Let’s get this ball rolling! I want my rate reduction and/or refinance.
Reality is, due to the fact that there is no longer sanctity of contracts in the US, the smart-money herd will completely abandon the sector.
The deflationary washout is coming.
BTW, Calculated Risk called the bottom a few days ago. If bulk REO relieve the supply pressure, he will be right.
After this robo-signing deal, he’s closer to being right. It has a large contingent for underwater homeowners that will get principal reductions.
IR, where’s your refund for paying your rent?
Good question. Renters get nothing — other than the bills for the bailout from our tax dollars.
I think the question is if the bottom is in, and affordability is at multi-decade highs, when does Irvine Renter become Irvine Owner? 😉
Probably not in 2012, but 2013 is a possibility.
[…] Injection Be? – CNBC Forecast: Drops in Home Values Less Severe in ‘12 – WSJ Lenders own $30B in California single-family homes – OC Housing News The Limits Of Monetary Policy Call For Moral, Sound Money – Forbes […]
[…] Injection Be? – CNBC Forecast: Drops in Home Values Less Severe in ‘12 – WSJ Lenders own $30B in California single-family homes – OC Housing News The Limits Of Monetary Policy Call For Moral, Sound Money – Forbes […]