Since the housing bust began in 2007, housing analysts focused on lender activity as the best indicator of future housing supply and the direction of future housing prices. The reasoning for this is simple: lenders control the housing market. Prior to the housing bust, the housing market was a collection of individual homeowners unrestrained by their mortgage obligations. Once prices began to fall, many would-be sellers submerged beneath their debts and required lender approval for a sale. The short sale was born. Many others defaulted on their loans, and lenders foreclosed on the delinquent borrowers until lenders became overwhelmed with REO inventory. Between the REOs that the banks own and the short sales that they must approve, the market changed from a collection of millions of unencumbered individuals to a oligopoly of a small number of large banks and government sponsored entities. Once the lending cartel took over, the policies they enacted determined the fate of the housing market.
In early 2012, the lending cartel decided to stop listing homes for sale on the MLS. They correctly reasoned that if they withheld enough inventory, they could force prices higher even in the face of anemic owner-occupant demand. And since the lenders had to approve more short sales to comply with the terms of their settlement agreement, they began approving more short sales, and they abruptly stopped foreclosing and acquiring new REO. As a result, lenders have eliminated their excess inventory although they still maintain a large processing pipeline. The pipeline inventory is not enough to feed current demand, so MLS inventories sit at record lows, and prices are going up.
The fact that rising prices and the shortage of inventory is entirely an artificial condition raises valid concerns about future house prices. If lenders change their policies, they might increase MLS inventories and lower prices. If the federal reserve changes its interest rate policies, the cost of money could increase, buyer demand would plummet, and prices would follow. Both of these supports are entirely controlled by policymakers not the workings of a free market. However, I recently became convinced these very real threats to the housing market will not materialize.
First, lenders have no desire to recognize losses. They have been kicking the can for five years now, and they show no signs of changing their minds. In fact, since they can borrow money from the federal reserve or their depositors for next to nothing, they have no financial pressure to convert their non-performing loans back to investment capital. Without this cost push, lenders can wait as long as it takes for prices to come back before they foreclose on the long-term squatters. Also, regulators turned a blind eye to this nonsense back in early 2009 when they instituted mark-to-fantasy accounting. There is little or no chance of this policy changing as long as the banks are insolvent under the old accounting rules.
Second, I no longer fear rising interest rates will derail this market rally. The tax credit stimulus was easy to spot as a policy failure because it had a termination date. It merely pulled demand forward, and once the credit disappeared, so did the demand. Prices fell for 18 consecutive months after the credit was removed. I feared the interest rate stimulus would see the same end. However, when Ben Bernanke committed the federal reserve to an indefinite open-ended policy of buying mortgage-backed securities to drive down interest rates, I became convinced this stimulus will not be removed until owner-occupant demand returns to the market.
With the two biggest risks to the market contained, it certainly looks like prices will go up from here.
Last month, I reported that Banks increase foreclosures 30%, notices plummet, REO pipeline stabilizes. It looked that perhaps the banks were finally going to start processing shadow inventory and force out the most committed squatters. Unfortunately, that isn’t what happened. In a reversal of last month’s increase, lenders slowed their foreclosure filings once again.
September 2012 California Notice of Defaults were down 20.7 percent from the prior month, and down 48.1 percent compared to last year. There has been speculation that the banks would rush to clear inventory before the CA Homeowner Bill of Rights takes affect in January 2013, causing an increase in the number of foreclosures. Clearly this is not the case as we continue to see the number of Foreclosure Starts decline. Notice of Trustee Sales remains basically flat, up 1.9 percent from the prior month.
September 2012 California Foreclosure Sales are down 17.9 percent from the prior month, and down 30.4 percent compared to last year. However, a larger portion of Trustee Sales, 39.2 percent, are being purchased by investors compared to 27.2 percent last year.
In the other states in our coverage area, Foreclosure Starts are down with Arizona down 37.1 percent, Nevada down 40.1 percent, Oregon down 40.0 percent, and Washington down 31.2 percent from the prior month. Sales are also down with Arizona down 24.3 percent, Nevada down 19.5 percent, Oregon down 0.3 percent, and Washington down 33.5 percent from the prior month.
“It was recently reported that the nation’s five largest mortgage servicers have implemented all of the 320 servicing standards required under the national mortgage settlement,” stated Sean O’Toole, Founder & CEO of ForeclosureRadar. “The continued decline in Foreclosure Starts clearly shows that even though servicers are now apparently in compliance and clear to move forward with foreclosures, they are still in no rush to foreclose on the majority of delinquent borrowers.””
And for the reasons I outlined above, they likely won’t be in any hurry until there is collateral value backing their loans. Ultimately, lenders will either force the squatters to pay or to get out, but with prices down, lender losses would be large, so they are taking their time hoping prices will come back and make them whole again.
California REO acquisitions down 19%
REO inventories stabilize
The real goal of lender REO policy this year was to reduce their standing inventories. Lenders were holding tens of thousands of homes waiting for better days. Those homes have been cleared out, and the remaining inventory is in their (very slow) processing pipeline.
Pipeline processing taking even longer
Banks are certainly not worried about making their foreclosure processing any more efficient. Since it now takes them nine and a half months to process a foreclosure, the 65,000 they currently own are all in process. It represents the total acquisitions over the last 9 months. I don’t expect to see REO inventory levels drop much from here unless they decrease their processing times.
Why the fall in notices?
This one defies explanation. Lenders have greatly reduced their foreclosure filings over the last year despite the fact they have no shortage of delinquent squatters to foreclose on. It is a sign that banks are in no hurry to process California foreclosures despite the upcoming law changes on January 1.
The story in Orange County is similar to the rest of California. REO processing is back to levels of April through July. Overall, REO processing is down more than 50% from last year’s levels.
Notices of default in Orange County also took a dive for the second straight month. Squatters in Orange County can breathe a little easier.
The inventory saw a similar leveling off.
Amend-extend-pretend continues. Lenders are in no hurry to process more foreclosures, and their liquidations still hang over the market. Over the last six months, their snail’s pace of liquidations has created a dramatic and completely artificial shortage of supply which has caused prices to shoot upward.
The former owner of today’s featured property was a Ponzi who got to enjoy the superior appreciation of a high end property — at least until she imploded.
- She bought the property on 9/23/2003 for $740,000 using a $592,000 first mortgage and a $148,000 down payment.
- A year later she obtained a $100,000 HELOC, and on 1/25/2005 she refinanced her first mortgage for $694,000 with an Option ARM with a 1% teaser rate.
- On 4/14/2006 she refinanced with a $950,000 first mortgage.
- On 9/11/2007 Washington Mutual gave her a new $1,300,000 mortgage.
- Total mortgage equity withdrawal was $708,000 — on a condo.
- As if the $708,000 were not enough, she was allowed to squat in luxury for two years before being forced out.
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Proprietary OC Housing News home purchase analysis
$985,981 …….. Asking Price
$740,000 ………. Purchase Price
9/23/2003 ………. Purchase Date
$245,981 ………. Gross Gain (Loss)
($59,200) ………… Commissions and Costs at 8%
$186,781 ………. Net Gain (Loss)
33.2% ………. Gross Percent Change
25.2% ………. Net Percent Change
3.1% ………… Annual Appreciation
Cost of Home Ownership
$985,981 …….. Asking Price
$197,196 ………… 20% Down Conventional
3.88% …………. Mortgage Interest Rate
30 ……………… Number of Years
$788,785 …….. Mortgage
$202,778 ………. Income Requirement
$3,711 ………… Monthly Mortgage Payment
$855 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$246 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$426 ………… Homeowners Association Fees
$5,238 ………. Monthly Cash Outlays
($851) ………. Tax Savings
($1,161) ………. Equity Hidden in Payment
$261 ………….. Lost Income to Down Payment
$143 ………….. Maintenance and Replacement Reserves
$3,630 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$11,360 ………… Furnishing and Move In at 1% + $1,500
$11,360 ………… Closing Costs at 1% + $1,500
$7,888 ………… Interest Points
$197,196 ………… Down Payment
$227,804 ………. Total Cash Costs
$55,600 ………. Emergency Cash Reserves
$283,404 ………. Total Savings Needed