Ever since the housing bust began, banks have been caught between a rock and a hard place. On one side, if they foreclose and liquidate their inventory, prices plummet which prompts underwater borrowers to strategically default. The downward spiral of strategic default is in clear evidence in Nevada. On the other side, if banks don’t foreclose, borrowers know they can quit paying and live payment-free indefinitely. This method has the advantage for banks of providing an illusion of collateral value backing their loans, but recent data shows banks build an even larger shadow inventory that must eventually be liquidated. Those liquidations will most likely cause still-elevated house prices to drop.
By John Gittelsohn and Prashant Gopal on September 18, 2012
Wendell and Margret Brady haven’t paid their mortgage in more than three years, withholding the money amid a foreclosure dispute on the couple’s 11-bedroom house in Morristown, New Jersey. …
“This was like going back to day one,” said Margret Brady, 77, after she and her husband received on Sept. 15 the certified letter saying they must pay $223,730 by the end of the month or face losing the house. “It was like we hadn’t gone through any of the stuff of the last three years.”
Three year’s squatting in a Victorian Mansion? A $223,730 financial benefit, and we are supposed to feel sorry for them?
The state passed Nevada in the second quarter in the rate of homeowners with seriously delinquent loans — those 90 days late or in foreclosure — according to the Mortgage Bankers Association. Only Florida had a higher rate of serious delinquencies …
While home values increased in July from a year earlier in 42 states, New Jersey prices fell 0.8 percent, according to CoreLogic, a real estate services company based in Santa Ana, California. …
Serious delinquencies as of June 30 were up 6 percent from a year earlier in New York, Connecticut and Maryland, and up 5 percent in Pennsylvania and the District of Columbia, the Washington-based Mortgage Bankers said on Aug. 9. The rate fell by 27 percent in Arizona, 24 percent in California and 14 percent in Nevada, among states worst hit by the housing crisis.
“Shadow inventory is falling in much of the country — except for the Northeast,” said Zandi. “The implication is that house prices will be much weaker in the Northeast in coming years as these distressed properties eventually get sold.”
Keith Jurow has been writing about the upcoming collapse in the Northeast for quite a while. He is going to be proved correct.
In New Jersey, where about 60,000 foreclosures started since January 2008 still await resolution, borrowers in the foreclosure process haven’t made a payment for an average of 934 days, according to Lender Processing Services Inc. New York, at 953 days, and Florida, at 938 days, are the only states with longer time frames. The U.S. average is 742 days.
The average is approaching three years, the average. I wonder how many haven’t made payments since 2006 or 2007?
By some estimates, the visible inventory of 2.4 million homes for sale nationwide is dwarfed by the hidden supply, which may number 5.7 million, according to a Morgan Stanley analysis.
The shadow inventory is where the problems are.
“We are anticipating a glut in filings because that’s what the lending community is telling us,” Comfort said in a telephone interview. “We will do everything we can to move those in a timely fashion.”The Northeast’s path to recovery faces other headwinds. Of the nine geographical divisions tracked by the Bureau of Labor Statistics, the mid-Atlantic area, which includes New Jersey, New York and Pennsylvania, is the only region where the jobless rate didn’t fall in July from a year earlier.
Lenders are finally going to process the delinquent mortgage squatters in shadow inventory.
“You could drive down a street that looks perfectly normal, with minimal for-sale signs, and not realize that 20 percent of those homes are in foreclosure,” Cherry said. “There’s no big flag that says that a lot of these people are in trouble.”
Some sellers have backed out of short sales because they don’t want to pull their children out of school or aren’t in a rush to move because they’re living in a home for free, she said. Many others … would rather sell and move on with their lives, she said.The delinquent homeowners who remain in the shadows are keeping potential homebuyers on the sidelines amid concern that prices will fall more, Meehan said.“It has given buyers a wait-and-see attitude,” she said.
That’s true in the Northeast, mostly because buyers are smart enough to see through the bank’s game. The shadow inventory is larger and less well hidden.
Foreclosure delays in judicial states also are keeping capital on the sidelines and reducing borrowing options for buyers of high-end homes, according to Chris Whalen, a senior managing director at Tangent Capital Partners LLC in New York.“Here in the Northeast, we have a problem,” Whalen said in a telephone interview. “Investors won’t touch a state where they can’t foreclose on the house. They have no collateral.”
The inability to foreclose is going to be a hindrance to private lending for years to come. Who would loan money to someone knowing they had no recourse to get it back if the borrower stopped paying?
Squatting is worse than foreclosure
Lenders allowed squatting because they believed it would cost them less than foreclosure because prices would remain higher, and they wouldn’t have to recognize the losses. What they didn’t count on was the legions of borrowers who strategically defaulted once they realized they could live in the house for nothing. As the report above shows, lenders only delayed the inevitable, and in the process, they will have to foreclose on more borrowers and recognize more losses than if they had just taken out the trash.
She couldn’t wait to go Ponzi
Lenders generally make borrowers wait at least two months between new loans or refinances on the same property. If the ink still isn’t dry on the signatures on the first loan, there shouldn’t be much need to do another one. Despite this limitation, I am always astounded by the number of quick refis I see in the public records. The owner of today’s featured property couldn’t wait to get back her down payment, so she refinanced 60 days after closing on the first loan. Nine months after that, she extracted the remainder of her down payment and plus about $40,000 extra to boot. Home ownership is very rewarding.
- This house was purchased on 8/4/2003 for $410,000. The owner used a $328,000 first mortgage and a $82,000 down payment.
- On 9/30/2003 she refinanced with a $369,000 first mortgage.
- On 5/10/2004 she obtained a $82,897 HELOC.
- On 9/20/2004 she opened a $126,500 HELOC.
- On 7/29/2005 she obtained a $165,000 HELOC.
- On 11/8/2005 she refinanced with a $529,600 first mortgage and obtained a $34,500 stand-alone second.
- On 7/3/2006 she obtained a new $101,403 stand-alone second.
- Total property debt was $631,003.
- Total mortgage equity withdrawal was $303,003.
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Proprietary OC Housing News home purchase analysis
$401,900 …….. Asking Price
$410,000 ………. Purchase Price
8/4/2003 ………. Purchase Date
($8,100) ………. Gross Gain (Loss)
($32,800) ………… Commissions and Costs at 8%
($40,900) ………. Net Gain (Loss)
-2.0% ………. Gross Percent Change
-10.0% ………. Net Percent Change
-0.2% ………… Annual Appreciation
Cost of Home Ownership
$401,900 …….. Asking Price
$14,067 ………… 3.5% Down FHA Financing
3.51% …………. Mortgage Interest Rate
30 ……………… Number of Years
$387,834 …….. Mortgage
$100,509 ………. Income Requirement
$1,744 ………… Monthly Mortgage Payment
$348 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$100 ………… Homeowners Insurance at 0.3%
$404 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$2,596 ………. Monthly Cash Outlays
($259) ………. Tax Savings
($609) ………. Equity Hidden in Payment
$16 ………….. Lost Income to Down Payment
$120 ………….. Maintenance and Replacement Reserves
$1,864 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$5,519 ………… Furnishing and Move In at 1% + $1,500
$5,519 ………… Closing Costs at 1% + $1,500
$3,878 ………… Interest Points
$14,067 ………… Down Payment
$28,983 ………. Total Cash Costs
$28,500 ………. Emergency Cash Reserves
$57,483 ………. Total Savings Needed