Aug212014
Loan modifications destroyed the move-up market for a generation
Loan modifications for underwater borrowers preserves the debt so appreciation that ordinarily supports a move-up housing market instead flows to lenders.
Lenders limit financed homebuyers based on borrower income, yet many houses sell at prices prices far above the limits of borrowing power because buyers take profits from a previous sale to increase their down payment and bid up prices far in excess of what most first-time homebuyer can afford.
The move-up market functions when equity accumulates; however, unrestrained mortgage equity withdrawal during the housing bubble plus a large number of peak buyers left many homeowners with little or no equity; millions of homeowners are still underwater. Without this accumulated equity, the the move-up market only finds support from the continued withholding of supply by owners who can’t or won’t sell for a loss — a temporary market manipulation, not fundamental support.
Back in early 2013, I wrote that the move-up market will suffer for another decade. I recently noted the lack of first-time homebuyers is starting to weaken the move up market, just as many more owners of move-up homes list their homes for sale. The overhead supply will be a long-term drag on appreciation, and some believe its a precursor to a crash.
Why the Trade-Up Housing Market Is Gone
August 18, 2014 by Keith Jurow
Introduction
For four years, I have stood alone in offering compelling evidence that the housing crash is far from over and that the so-called recovery is nothing more than an illusion.
Recently, concerns began to be uttered in the mainstream media that the recovery was showing signs of faltering. After all, new home sales were weak and the Case-Shiller index was showing slower price gains.
(See: Shiller: housing faces “turning point” as seasonally adjusted prices fall in May, and Owner-occupant sales stall while distressed sales plummet)
Did this mean that Wall Street economists finally thought there was something to be worried about? Not at all. Sales of million-dollar homes were stronger than ever. Wall Street is still convinced that a return of the housing collapse is totally out of the question.
For now, I believe Wall Street has good reason to believe a housing collapse is out of the question. The must-sell inventory has been converted to can’t-sell cloud inventory, and housing inventory manipulation overrides all bearish predictions.
With mounting signs that the housing recovery is faltering, let’s take an in-depth look at whether the recovery has any basis in reality.
Soaring Inventory of Homes for Sale
In an article published in early June, I offered evidence that the number of homes for sale has soared in major metros around the country. As I predicted, owners who had held their houses off the market expecting to get a higher price have been pouring onto the market in droves. …
If sales volume was stronger, this huge increase in home listings would not be very troublesome. However, Redfin.com’s latest report for June showed that sales volume was down year-over-year in 21 out of 29 major metros which they track. You don’t need to be a genius to understand what the soaring number of listings combined with weak sales means for home prices.
This is where Keith implies but doesn’t explicitly state his belief that a crash is coming.
I believe reality is more nuanced than Keith’s simple statement implies. The composition of the inventory matters. A small number of must-sell homes has much more destructive power than large numbers of can’t sell cloud inventory homes. Must-sell inventory when combined with weakening demand — a condition we experienced in 2008 — is the recipe for a price crash; however, that isn’t what we have today. Now we have can’t sell cloud inventory combined with weakening demand — a recipe for extremely low sales volumes and stagnant pricing.
The Delinquency Problem Just Will Not Go Away
I have also been writing about the serious delinquency problem for four years. Wall Street continues to disregard the issue.
I recently asked, with flattening house prices how will 300,000 SoCal loanowners get above water? I don’t believe lenders can modify loans and wait for prices to come back in every market. There are many places where prices won’t reach the peak in the working lives of the underwater borrower.
There are two key points which are absolutely crucial for you to understand.
First, the delinquency figures put out by the Mortgage Bankers Association and others are misleading and quite useless. Why? More than 22 million homeowners have had their mortgages modified since 2008. Most of them had been delinquent in their payments. Once the modifications become permanent, the loan is considered current and no longer delinquent. So of course, this pushes the delinquency rate way down. What do you think the delinquency rate would have been without these modifications?
I believe today’s loan modifications are tomorrow’s distressed property sales because these loan modifications will fail; a view Keith and I share.
As I have emphasized in article after article, between 40% and 80% of homeowners with modified mortgages have re-defaulted. Take a look at the latest re-default figures through July 2014 from TCW for mortgages held in private, non-guaranteed mortgage-backed securities (RMBS).
For the first time, TCW now includes the re-default rate for the 2012 and 2013 modifications. Notice how the re-default rate for the 2012 modifications has already surpassed 30% and is clearly heading higher.
The chart above is one of the most important for understanding the future of the housing market. Lenders and the financial media work feverishly to convince potential homebuyers the delinquency and foreclosure problems of 2008 are resolved. I have written extensively that these bad loans are not permanently resolved as lenders are merely can-kicking with loan modifications. The truth of the matter rests on recidivism rates. If borrowers continue to reliably make payments on modified loans up through an equity sale when prices reach the outstanding loan balance, the yarn spun by lenders and the financial media will come true. However, if borrowers redefault in large numbers and fail to reliably make loan modification payments, lenders may be forced to deal with these loans with short sales or foreclosures and endure the painful write-downs.
I believe delinquency and foreclosure rates will remain elevated far above historic norms for many more years than most believe because these loan modifications will continue to go bad, particularly as they reset to higher interest rates and recast to fully amortizing loans. This is also a view Keith and I share.
Where Keith and I differ is on how these will be resolved and what it will do to the market. I believe lenders will stretch this out as long as possible in order to prevent another crash. Their dispositions will keep prices flat, but they won’t push prices lower. Keith believes the resolution of these loans will push prices lower.
Second, the servicing banks continue to avoid foreclosing on these seriously delinquent properties. This has nothing to do with court delays in those states which require judicial foreclosures. Take a good look at this map showing the average length of time that defaulted properties have been delinquent in different states as of June 2014.
Source: Black Knight Financial Services
You can see that the average length of delinquency for states which do not mandate a judicial foreclosure has now grown to more than two years. In those states which require court approval of foreclosures, the average delinquency period is almost three years.
For the worst culprit — New York State – the average time in delinquency now approaches four years. I have written about the delinquency problem in this state since 2011. Delinquent borrowers there laugh while they remain in their home for years without either paying a nickel or being forced out through foreclosure. Before you condemn these squatters, ask yourself whether you would be able to resist such a tempting deal. By way of contrast, delinquent renters are normally evicted within six months.
New York is the extreme of the free ride. In Las Vegas lenders foreclosed on everyone and pounded prices back to the stone ages. This prompted a great deal of strategic default because borrowers were so far underwater it became hopeless. In New York, they didn’t foreclose on anyone, so many people stopped paying their mortgages because they knew there were no repercussions for doing so.
I am now convinced that the servicing banks are simply not interested in pursuing foreclosure. I suspect that most of the lenders are unwilling to take the hit on their earnings that foreclosing would compel them to do.
Many people became convinced of this back in 2009 when lenders began mark-to-fantasy accounting and modifying loans to avoid loss recognition. I knew it was going on but didn’t believe lenders would succeed until October of 2012, about six months after the market bottomed. Keith resisted this idea for a long time, so I’m glad to see him acknowledge what we’ve been seeing in the market for quite a while.
The “too-big-to-fail” banks – which all have large servicing divisions — have no incentive to pursue foreclosure because they own second liens on millions of properties whose first lien they service. There is a clear conflict of interest because foreclosing on the first lien would render their second lien on these underwater properties essentially worthless.
Do the lenders really think that this delaying strategy can solve the problem of seriously delinquent homeowners? My answer: I doubt that they really care about long-term solutions. Their focus is strictly on short-term earnings-per-share. They are inclined to let someone else worry about long-term solutions. …
There are only two solutions to the underwater borrower problem: either house prices must go up, or debt levels must go down. As housing markets across the country reach the limit of bubble reflation efforts, the only alternative is for borrowers to pay down their mortgages.
Fortunately, at very low interest rates, more of the payment goes toward principal than at higher rates, and we’ve had near-record low interest rates for several years. Those borrowers are amortizing their loans quickly, and any of them who are underwater will not be underwater for long. This prompts many to erroneously believe amortization on loans will solve the underwater borrower problem in time because whether or not house prices move up, loan balances are going down. Unfortunately, that is not the case.
Many of those most deeply underwater borrowed too much money at the peak either to buy or to refinance. Most couldn’t afford a fully-amortized payment on the loan, so when they borrowed, they either used interest-only or negative amortization loans. Many of those loans blew up and were foreclosed, but many more were modified. Most private-label modified home loans do not amortize, and of the 7 million modified loans, about 5.5 million are private-label. These loans were designed by lenders to benefit lenders, as I documented in Lenders benefit from loan modifications, homeowners not so much.
Loan amortization will not solve the underwater borrower problem because far too many of these loans don’t amortize. The borrower is making no progress on reducing their loan balance. In my opinion, today’s loan modifications are tomorrow’s distressed property sales.
So when will these distressed sales occur? Will all those underwater borrowers wait for the market to come back? Will some strategically default or demand a short-sale approval? Will lenders ultimately be forced to foreclose?
I believe we will see an increase in foreclosures again as first borrowers and then lenders give up on endless can-kicking. Borrowers will again default, and lenders will be forced to foreclose. Without strongly rising prices to give borrowers hope, there is little reason for them to struggle and keep renting from the bank.
As I have argued repeatedly for several years, this trade-up market is dead. You must get used to that idea. Until you accept this as fact, it will be very hard for you to comprehend what is occurring in major metro housing markets and what awaits us down the road. …
Conclusion
Those desperate homeowners opting to rent out their house rather than selling at a loss have no idea what headwinds await them. You do.
With listings soaring and prices now weakening around the country, the number of underwater homeowners will be increasing rather than falling. Here is my advice to you and to your clients in this situation:
- Disregard the optimistic pundits and do not assume that your underwater house will regain its equity in the foreseeable future.
- If you are thinking of moving try this company, put your house on the market now at a realistic price and take your lumps before the market deteriorates further.
If you have clients with underwater investment properties, my analysis also applies to them. They should seriously consider liquidating their investment real estate holdings while markets are still liquid.
Since Keith believes house prices will do down, his advice is to sell. Since I don’t believe house prices will drop much, I don’t see much urgency to sell — of course, since I don’t believe prices will rise much from here, I don’t see much urgency to buy either.
When prices are stagnant, buying a home for appreciation benefits is off the table. Buyers should focus on buying a property they want, they can afford, and that suits their family. The loan modification can-kicking ruined the move-up market for many years to come, so prices should remain flat while lenders process the loan modification redefaults. Lenders can’t afford another crash, and they know how to limit future declines, so unlike Keith, I don’t see much reason to fear a future drop. But like any other market pundit, I could be wrong.
[listing mls=””]
IR: I am now convinced that the servicing banks are simply not interested in pursuing foreclosure.
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Well, the only ‘skin’ in the game these banks have are servicing rights, which could explain everything.
The servicing banks certainly have zero motivation to foreclose as it cuts off their only income stream. The banks holding these assets on their balance sheets have zero motivation because it forces them to take a loss. Combine those two, and you see why loan modifications and squatting are so popular.
The servicing rights on highly delinquent pools are not all that valuable to banks because the advance and capital costs are so high. For those that don’t know, advance costs refer to the servicer’s obligation to continue forwarding PI payments to investors even though the borrower isn’t making payments. The taxes, insurance, HOA, and maintanence/inspection costs must also be fronted by the servicer. This gets very expensive, very quickly.
Firms like Ocwen and Nationstar are pursuing MSR’s like crazy because they have strategies to monetize these pools, but the big banks take a major capital hit under Basel III and that’s the other reason they aren’t benefiting from MSR’s like they used to.
Thanks for the explanation of the accounting nuances. Interesting how regulatory and accounting rules impact the business incentives of these different organizations.
I apologize for the problems with the website. CRMLS changed all their data, so my IDX provider had to redo our entire database. These problems should be resolved soon. Thank you for your patience.
Another day, another record settlement for bank malfeasance.
Bank of America reportedly reaches $17 billion RMBS settlement
According to The Wall Street Journal, Bank of America (BAC) has reached an agreement to pay $17 billion to resolve claims over the toxic residential mortgage-backed securities the lender issued prior to the financial crisis.
Bank of America had no comment as of press time.
The WSJ reports that the bank will reportedly pay the $17 million in a combination of cash and consumer relief.
If true, the $17 billion settlement would exceed the previous high of $13 billion paid by JPMorgan Chase (JPM) in November to settle similar claims.
The U.S. Department of Justice then used some of that money to speed up its cases against other big banks, like Bank of America and Citigroup (C).
Last month, Citi officially announced a $7 billion dollar settlement with the U.S. Department of Justice, several state attorneys general, and the Federal Deposit Insurance Corporation to settle residential mortgage-backed securities and collateralized debt obligations after industry whispers that the bank was nearing a resolution.
BofA took a little longer, as the New York Times said the bank was at an impasse in negotiating a multi-billion dollar settlement deal related to the bank’s involvement in the mortgage crisis.
Now, according to multiple reports citing people close to the deal who were not authorized to speak about the settlement, BofA will finally settle for a record amount.
I recently opined that Some criminal bank executives should go to jail. My preference would be for Anthony Mozilo to go to jail. If prosecutors can’t put him in jail, taking all his money would be good enough.
Countrywide’s Mozilo may face lawsuit over subprime mortgages
This time prosecutors have a new weapon
Although Countrywide Financial no longer exists, co-founder Angelo Mozilo is not in the clear as prosecutors attempt to still hold him responsible for the company’s role in the U.S. housing bubble, an article in Bloomberg stated.
And he is not alone. According to the article, more than 12 months after the deadline passed to file criminal charges, U.S. attorneys in Los Angeles are preparing a civil lawsuit against Mozilo and as many as 10 other former Countrywide employees.
But this time, the article said the government is going with a different tactic, using a 25-year-old law that has helped the Justice Department win billions of dollars from Wall Street banks.
Until now, the harshest penalty imposed on Mozilo, 75, has been a $67.5 million accord with the U.S. Securities and Exchange Commission from 2010 to resolve allegations that he misled Countrywide investors.
Mozilo said he has “no regrets” about how he ran Countrywide, according to a June 2011 deposition he gave in a lawsuit between the mortgage lender and bond insurer MBIA Inc.
Meanwhile, Bank of America (BAC), which acquired Countrywide, reportedly reached a $17 billion agreement with the DOJ to resolve claims over the toxic residential mortgage-backed securities the lender issued prior to the financial crisis. And the toxic loans in question actually date back to Countrywide.
The worst part of Mozilo’s fine is that he personally paid very little of it…nice having insurance + BofA pay that…
This is from a newspaper article around the time Mozilo agreed to pay the fine…mostly using other people’s money (OPM):
The sting of the penalty, however, was dramatically reduced because Bank of America and insurance will foot much of the bill, said John Coffee, a securities-law professor at Columbia University.
“Both sides are engaging in the usual game of making this settlement look better than it appears,” he said. “Both sides have an interest in putting the most positive spin on a settlement.”
That’s disheartening. I was really hoping Mozilo would feel some pain.
Realtor.com economists desperately spin bad market data
Realtor.com is touting data from July showing that, by its metrics, July shows the best price appreciation and inventory increases hit during the peak spring buying season in three years.
It’s been a rough year for housing overall, but realtor.com’s national housing trend survey says that from April to July, price and inventory increases continued their upward trend untouched by external economic factors.
“In July 2012 and 2013, we saw external economic factors overwhelm the healthy gains established in the housing market during the spring home buying season,” said Jonathan Smoke, chief economist for realtor.com. “This year, we’re ending the traditional season with high buyer and seller confidence demonstrated by price appreciation, increases in inventory and quick home sales.”
Realtor.com’s July 2014 national housing data reveals homeowners are more optimistic about selling than in previous years.
This month, the number of homes on the market increased 2.3% compared with last year and increased 4.5% over June. One factor fueling this uptick in inventory is a strong 7.5% increase in median list prices year-over-year.
Despite higher prices and more homes on the market, buyers are snatching up properties faster than last year. Median age of inventory for July 2014 is 82 days, three days faster than 2013.
“This is the first time, since the beginning of the recovery, that we expect to see positive momentum throughout the second half of the year,” Smoke projected. “While seasonal patterns are emerging in July month-to-month comparisons, all other metrics point to fundamental market health and a build-up of momentum.”
“all other metrics point to fundamental market health and a build-up of momentum.”
Like a 20 year low in mortgage applications? Good stuff.
That one jumped out at me too. He writes as if saying it makes it true, when he is obviously just making it up. Based on the real data coming in, the market is not displaying fundamental health (job and wage growth are weak), and the market has no momentum at all (sales are down significantly this year).
When spin has no basis in reality at all, it degrades into laughable bullshit.
California Home Sales Weakest Since 2008
Single-family home and condominium sales in California experienced a month-over-month increase of 3.9 percent for July but saw a 9.2 percent decline year-over-year, according to PropertyRadar’s July 2014 Real Property Report for California.
Sales for single-family homes and condos for the first seven months of 2014 year-to-date are at their lowest levels since 2008, the report stated.
Several factors contributed to the significant year-over-year decrease in California home sales, which fell in 13 of the state’s 26 largest counties, the report said. A major reason for the decrease was the decline in distressed property sales. In July 2014, 17 percent of home sales were distressed properties, down from 25.6 percent in July 2013. PropertyRadar reported that rising interest rates and affordability due to price increases were also factors in decreasing home sales.
“Lackluster sales volumes so far this year should come as no surprise given the fact that in many California counties houses have simply become unaffordable,” said Madeline Schnapp, director of economic research for PropertyRadar. “The decline in affordability in concert with the rapid decline in lower priced distressed properties for sale has exacted a toll on demand.”
The median price of a home in California in July edged slightly upward by 0.3 percent ($1,100) to $390,000, the smallest month-over-month gain since January 2014, according to PropertyRadar. Compared to July 2013, median home prices shot up 7.8 percent from the previous month. The slight uptick in median home price from June to July this year was fueled by a 4.4 percent month-over-month increase in the sales volume of more expensive non-distressed properties, which comprised 83 percent of total sales in July 2014 as opposed to 74.4 percent a year ago.
Other highlights from the PropertyRadar report for July 2014 for California include:
•Cash sales comprised a significant percentage (21.6) of all sales even they have been falling since they reached their interim peak of 36.5 percent in August 2011.
•Negative equity continues to decline but is still high. More than one million homeowners in California (12.1 percent) are underwater on their mortgage.
Lack of distressed sales continues to dampen housing market activity
For the 19th consecutive month, distressed home sales fell on a year-over-year basis, declining to 11.4% of home sales in June.
Distressed sales, which include both REO and short sales, accounted for the lowest share since December 2007 and a strong improvement from the same time a year ago when this category made up 15.8% of total sales.
Within this category, REO sales made up 7.2% of total home sales, and short sales made up 4.2% of total sales in June.
At its peak, the distressed sales share totaled 32.5% of all sales in January 2009, with REO sales making up 28% of that share.
“The more recent shift away from REO sales is a driver of improving home prices, as REOs typically sell at a larger discount compared to healthy sales than do short sales,” CoreLogic (CLGX) reports. “There will always be some amount of distress in the housing market, so one would never expect a zero percent distressed sales share, but the pre-crisis share of distressed sales was traditionally about 2%.”
http://www.housingwire.com/ext/resources/images/editorial/Trey-2/Distressed.png
California experienced a 14.6-percentage point drop in the distressed sales share, the largest of any state.
Sacramento-Roseville-Arden-Arcade, Calif. had the largest drop in its distressed share, falling by 17.1 percentage points from 33.1% in June 2013 to 16.1% in June 2014.
“…Delinquent borrowers there laugh while they remain in their home for years without either paying a nickel or being forced out through foreclosure…”
A federal (or even state specific) imputed income tax on the fair value of equivalent rent would change would change these squatters minds in a hurry.
But, of course, it goes without saying the NAR and like organizations would fight such an idea to the death.
On the other hand, governments of all stripes are so desperate for cash that maybe somehow such a regulation could be implemented.
“Loan amortization will not solve the underwater borrower problem because far too many of these loans don’t amortize.”
Loan amortization may not directly solve underwater borrower’s problems. But, amortization of loans does occur more often than not in the market as a whole. As loan balances are paid down, equity is built. This equity powers future sales at higher prices. Amortization, in and of itself, can drive appreciation – for both above water and underwater buyers.
In areas with a high concentration of non-amortizing loans, the problem will persist longer, and may not be curable via amortization-induced appreciation. Other areas with a low concentration of non-amortizing loans won’t feel the weight of the fly on the elephant’s back. As the saying goes: a rising tide lifts all boats – even the leaky ones.
Loan mods not only keep distressed homes off the market and prevent prices from falling, they also keep potential salable inventory off the market, and thereby drive prices up. I look at it this way: an underwater owner is occupying a home that normally would be part of the housing market (either a current listing or a future listing currently amortizing). This home is essentially not part of the housing market at all. Areas with high concentrations of underwater homes may only have 80% of normal inventory. As long as the underwater condition persists, low for-sale inventory will also persist. In built-out areas like OC, demand already rises faster than inventory can. Reducing existing inventory by retiring it in place can only make the inventory situation worse for buyers.
The underwater buyer also reduces the demand side; at least to the point where the buyer is actually a buyer and not a life-long renter induced into the buyer pool by creative financing.
You’ve outlined exactly why and how loan modifications work to keep prices up and prevent any meaningful correction. It’s also why I don’t see how prices could crash. If prices went down, more borrowers would be underwater, so less and less of the housing stock could transact. This reduces inventory and causes the squeeze like 2012 that pushes prices back up.
The fact that inventory is down nearly everywhere shows that the underwater problem is still severe even in the better markets. In the markets where prices were really pummeled, the problem is worse, but even in OC or other coastal California areas, the problem hasn’t gone away or we would see normal inventory levels, which we don’t. I wrote in a post last year that the shortage of inventory is a direct measure of mortgage distress. I still believe that.
Inflation will be the eraser of bad bets. Since inflation is still low at the moment, it will take many more years before the RE market can be remotely called “normal”. The lack of wage growth show that there is still another leg up in RE that has yet to materialize.
Why the conflicting info?
Home sales for July decreased slightly from the previous month after increasing for four months in a row…
http://dsnews.com/news/08-15-2014/home-sales-decline-first-time-five-months
Existing home sales increased in July to their highest annual pace of the year…
http://www.housingwire.com/articles/31113-existing-home-sales-reach-2014-high
That is odd. The reports come from different sources, REMAX versus the NAr, which explains some of the difference. The NAr numbers, which are rosier, are always suspect because the NAr has zero credibility. Part of the increase in July the NAr reports is based on a downward revision for June — which was overstated to make the numbers look better in June, a bad habit they have.
It’s hard to see how sales can be getting better considering week after week for the last three months, we’ve been getting reports about declining purchase mortgage applications.
Based on what your seeing in the market, would you say sales are improving or getting worse?
Seasonally-Adjusted vs. Non-Seasonally Adjusted.
The RE/MAX report is what really happened, the first decline in 5 months. The NAR report seasonally adjusts the data which turns the decline into a gain.
I meant to post this yesterday for IR:
Stated income loans make comeback as mortgage lenders seek clients
http://www.reuters.com/article/2014/08/14/us-usa-banks-loans-analysis-idUSKBN0GE09Z20140814
Thanks. I have that article in my queue of potential articles for posts. I am trying to set my preconceived notions aside and find some justification for stated income, but I can’t think of one. To me it’s like the lender saying “I don’t care if you have income or not, but I need you to say you do so I’m protected in case of default.” If the down payment requirement is high enough, even stated income doesn’t have risk to the lender because they can always foreclose and get their money back, plus interest and penalties. In fact, it’s an ideal program for predatory lending, particularly for wealthy old people who have assets but little income. But just because lenders can make money on these loans doesn’t mean there is a place for them. Since the basis is a lie, either the borrower is seeking to cheat the lender or the lender is seeking to cheat the borrower. Is that a desirable loan?
Yes, a low LTV plus some verified assets (non-retirement) protects the creditor from loss. However, there’s ATR risk here. The creditor needs to be reasonably certain the borrower won’t default, because if the borrower does default within three years, or enters foreclosure at any point in the future, you can guarantee an ATR claim. In other words, the verifiable income shouldn’t be dramatically lower than what is reasonably necessary to pay the monthly housing costs.
Of course, you can always estimate the litigation cost, multiplied by the probability of occurring, and simply charge higher fees/rate to compensate.
“I am now convinced that the servicing banks are simply not interested in pursuing foreclosure. I suspect that most of the lenders are unwilling to take the hit on their earnings that foreclosing would compel them to do.”
This is true in a sense, but not in the way he thinks. These monumental settlements that TBTF banks are paying every other week are not in the form of cash, but in the form of “homeowner relief”. So getting these loans into modifications or short sales gives them credit towards their “fine” and helps the bottom line, whereas foreclosing has the opposite effect, a tangible cost to the bottom line.
“I am now convinced that the servicing banks are simply not interested in pursuing foreclosure. I suspect that most of the lenders are unwilling to take the hit on their earnings that foreclosing would compel them to do.”
A non-performing second lien is already valued at 10 cents on the dollar or less, so it doesn’t matter if they foreclose on the first or not. It will simply be charged off and referred to collections in states that allow it.
For several years into the housing bust, lenders were allowed to keep these on their books as full face value. There was some proper accounting enforcement a few years ago to force them to write down at least part of the book value of non-performing underwater second mortgages, but that’s the last I read about it.
Are non-performing second liens on underwater properties now held at 10% of face value? If so, that is a good step forward for removing bad debt (through write downs). Also, as you noted, it becomes a less of an issue for banks because they don’t take much of a balance sheet hit; however, all these loans have significant option value because if lenders can fully reflate the housing bubble, they restore collateral value behind these loans, and they could profit hugely from foreclosing on them or forcing the holder of the first mortgage to refinance and buy them out.
I believe FAS-157 is still effective, allowing mark-to-model for mortgage loans.
Meanwhile Zillow says LA/OC is the least affordable housing market in the country…don’t worry folks, recovery is right on track…
The real estate website crunched for-sale and rent prices and incomes across 35 housing markets in the U.S. It found that a family earning the median household income of $59,424 in metro Los Angeles — defined as L.A. and Orange counties — would need to spend 47.9% of its income to afford a median-priced rental apartment, and 42.6% to afford a median-priced house. Both were the highest share in the U.S., though L.A. tied with San Francisco in for-sale housing.
I believe the numbers would be the same, if not worse, if we moved-up from the median household income and median house price, into the top-quintile of household income and top-quintile of house prices in LA/OC.
That underscores one of the problems with my system. I compare current rents to current prices to measure affordability, but what happens if both rents and prices are inflated? My system would say everything is okay, but the reality on the ground is that people are spending all their money on housing and getting poor quality in return.
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