Jul252012
Second mortgages held short sellers hostage
Why do short sales take so long? Basically, banks don’t want to take a loss, and short sales cause them to lose money — a lot of money.
Short sales come in two basic varieties; properties with second mortgages and properties without. If a property does not have a second mortgage, short sales are generally quicker and easier to approve. The first mortgage is often covered by mortgage insurance, and as a percentage of the total loan amount, any losses are generally small. If a property has a second mortgage — and millions do — then the situation becomes much more complicated.
In lien priority, when a property sells in a short sale, the first mortgage holder gets paid in full before the second mortgage holder gets a penny. There is no sharing of losses by law. Therefore, if the first mortgage is underwater, the second mortgage has no collateral backing, and if the property goes to foreclosure, the mortgage is worth nothing — a 100% loss. During the housing bubble, banks often held second mortgages on HELOCs on their own books and sold off the first mortgage to MBS pools. As a result, the major banks hold billions of dollars in underwater second mortgages worth basically nothing. Of course, thanks to mark-to-fantasy accounting, that’s not how they record them on their books.
When borrowers want to sell their underwater properties, holders of second mortgages have a huge problem. Approving the short sale is tantamount to recognizing a huge, if not total, loss. Obviously, lenders don’t want to do this. On the other side of the transaction is a seller who took out a second mortgage with the assumption some future take-out buyer would pay it off for them when they sold their house for more money than they paid. It never occurred to them they might have to sell for a loss and pay off that second mortgage out of their own pockets. In their world, the debt was associated with the property, and whatever the property sells for is what that mortgage holder gets. Unfortunately, that isn’t how reality works. Second mortgages are real debts owed by the short seller, and the holders of those second mortgages want to get paid.
The main reason short sales take so long to complete is because short sellers don’t want to pay off their second mortgages (and often they can’t), and the only leverage a second mortgage holder has to compel repayment is to say no. The leverage a short seller has is the threat to quit paying and force a foreclosure where the second mortgage holder gets nothing. The two parties enter into this dance where the seller pleads poverty and attempts to shelter assets, and the second mortgage holder scrambles to make a deal where they get some or all of their money either in cash or in future promises to pay on an unsecured basis. Since these two parties are often very far apart in what they believe is a reasonable settlement, the negotiations drag on and on, and nearly half the time, a sale never occurs.
Home Sales Held Hostage by Junior Lien Holders: Mortgages
By Prashant Gopal and John Gittelsohn on July 23, 2012
(hat tip to Keith Jurow for emailing me this article)
Tom Axon’s mortgage-collection firm gets about 25 calls a day from delinquent homeowners’ brokers seeking approval to sell their houses for a loss and avoid foreclosure. We’ll help, his staff tells them, as long as we get paid enough.
Axon, working with co-investors, buys distressed U.S. home- equity loans and other junior real estate liens, often for pennies on the dollar. Investors like Axon have to be dealt with whenever a home is sold in a short sale, a transaction in which the lenders agree to accept less than what’s owed on the property.
“The short-sale brokers know us — they know we’re not cupcakes,” Axon, 60, chairman of Jersey City, New Jersey-based mortgage-servicer Franklin Credit Management Corp., said in an interview. “At the end of the day, my friend, you signed a contract. You owe money and we’re willing to reach an accommodation that is commensurate with your ability to pay.”
Vultures buying distressed second mortgage debt is a big business. They make a profit by squeezing a few more pennies out of a second mortgage than a large bank felt they could get. They have little incentive to be accommodating because any such accommodation comes out of their bottom line.
Tough bargaining by second-lien holders is delaying deals and killing some short sales, even as banks embrace the practice to avoid costly foreclosures and help clear the market of homes that are worth less than the loans on them, said Vicki Been, a New York University law professor who has studied mortgages.
“It’s an opportunity for the second-lien holder to charge a price for their cooperation, because it’s needed for a short sale,” Been, a director at NYU’s Furman Center for Real Estate & Urban Policy, said in a telephone interview. “If they’re too greedy, it may squelch the whole deal.”
Is it a matter of the debt vulture being too greedy or the debtor feigning poverty? Very few who are asked to pay on a second mortgage feel they owe anything.
Second Mortgages
Roadblocks involving second liens are standing in the way of more short sales, which reached the highest number in three years in the first quarter — 133,192 total transactions — said Daren Blomquist, vice president at RealtyTrac Inc., a real estate information service in Irvine, California.
While about 39 percent of homes that have entered the foreclosure process have more than one lien, just 4.2 percent of short sales — 5,658 transactions — completed in the first quarter were on homes with second mortgages, according to an analysis RealtyTrac performed for Bloomberg.
Apparently, borrowers are telling second mortgage holders to pound sand. Very few short sales with second mortgages are getting approved while nearly 10 times as many are going to foreclosure. This barrier is one of the reasons we don’t see more people attempt short sales, with the main reason being they can squat for nothing if they don’t bother.
The average time to sell a property with multiple liens was 448 days, up 27 percent from a year earlier, the company said. It took 352 days to sell homes with a single mortgage, a 6 percent increase from the first quarter of 2011.
A second mortgage lien adds more than three months to the process, and probably accounts for most of the failed transactions.
“It appears that short sales with multiple liens aren’t happening as frequently and are taking longer to complete,” Blomquist said in a telephone interview. Short sales that fail tend to end up as foreclosures instead, he said.
This makes sense because most sellers tell the second mortgage holder they will receive nothing, and the borrower generally doesn’t bother negotiating. After all, if they don’t complete the short sale, they get to live free a little longer, and the debt becomes much more difficult to collect after the foreclosure. Most borrowers believe the second mortgage debt dies at the foreclosure sale, but the mortgage holder does have the right to pursue a deficiency judgment if they wish.
‘Biggest Hurdle’
… Second-lien holders are protecting their interests, “which, unfortunately, don’t dovetail with everybody else’s interest,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.
“Subordinate liens have become the biggest hurdle to resolving the foreclosure crisis more quickly,” he said.
Second mortgage liens are what will derail the bank’s plan to move more borrowers through the short sale process rather than forcing a foreclosure. It will take a year for banks to give up and finally foreclose on the remaining squatters.
Homes with second mortgages were twice as likely to be underwater, according to a July 12 report by real estate information provider CoreLogic Inc. That makes them candidates for short sales, even if they don’t have delinquent loans, because their mortgage debt is greater than their resale value. The average negative equity for homes with second liens was $82,000, compared with $47,000 for single-mortgage homes, Santa Ana, California-based CoreLogic said.
Two-thirds of underwater borrowers are there because of their second mortgages.
‘Hostage Situations’
“It’s very much like hostage situations,” Sam Khater, CoreLogic’s senior economist, said of second-lien holders. “It’s like an all-or-nothing situation in terms of payoff, and they’re very unwilling to bargain.”
The starting point for this negotiation is miles apart. Borrowers feel they owe nothing because the house was supposed to pay the debt. Lenders feel they are owed everything because, well… they are. The sums are so large, most borrowers couldn’t pay the shortfall if they tried, so both parties must move to some middle ground. Unfortunately, often neither party is willing to back off their demands.
Holders of first mortgages are pre-approving short sales, streamlining the closing process, forgoing their right to pursue unpaid debt and giving some borrowers cash incentives of as much as $35,000 for relocation expenses. …
Particularly after the bank settlement, first mortgage holders are ready to deal. Second mortgage holders are not.
60 Days
For loans guaranteed by Fannie Mae and Freddie Mac, the government-run mortgage companies, servicers now must communicate final decisions on approvals within 60 days of a buyer’s short-sale request. Fannie Mae tries to put a limit on negotiations by capping the amount junior-mortgage owners can receive at $6,000 or 6 percent of the unpaid balance, whichever is less. The company’s guidelines don’t allow any party to the transaction, including the buyer, seller or real estate agent, to kick additional money to the junior-lien holder. …
Look for the GSEs to relax this restriction under pressure from NAr lobbyists who want to see more MLS transactions.
“PNC pursues deficiency judgments unless otherwise negotiated in the short-sale agreement,” Fred Solomon, a spokesman for the Pittsburgh-based lender, said in an e-mail.
Some lenders make it policy to go after borrowers who don’t negotiate a short sale. It’s the only threat they have to counteract the seller tendency to simply blow out the second mortgage holder in a foreclosure.
Largest Banks
The four largest U.S. banks — Bank of America Corp., Wells Fargo & Co., JPMorgan and Citigroup Inc. — held 48 percent of the $849.5 billion in second liens as of March 31, according to the newsletter Inside Mortgage Finance. Home equity lines of credit accounted for $590 billion, or 69 percent of the value of second liens, as of that date, according to Amherst Securities Group LP.
This is no small problem for the banks. Unless they can force prices back up to the peak, these losses are going to bankrupt one or more of our major banks.
Valuable Liens
Nonperforming junior liens sell for between a quarter of a penny and 60 cents per one dollar of the outstanding balance, he said. ….
Not all second mortgages are completely underwater, and many of the borrowers who are underwater are still paying, so these mortgages often still have value. However, with no collateral value backing them, they are very risky.
While Axon of Franklin Credit Management declined to say how much his company collects on average, he said it’s higher than the industry standard of 6 percent of the unpaid balance. …
The major banks better hope they collect more than 6% of the $849.5 billion in outstanding second liens.
The key to success is knowing something about the borrower, according to Axon. … A BMW parked in the driveway may be a clue to a homeowner’s finances, Axon said.
The company also compiles a profile of the borrower using public databases, credit scores, original loan applications and, sometimes, Facebook and Twitter pages, and ranks borrowers based on their ability to pay, Axon said.
“We are making our decisions based on characteristics of the borrower,” he said. Homeowners are “the ones being stubborn. They’re the ones who got their money and bought their boat, and now they want their boat for free.
I have made that same point about a million times now. Borrowers looked at this debt as free money. They still do. Very few, if any, of the borrowers who took on this debt thought they would pay it back from their wages or other assets. It was free money generated by the house and paid for by the house. This belief is one of the central pathologies of the housing bubble.
The fact is we’re willing to discount the obligation, get this behind them, and have them fulfill their obligations. If everybody gave everybody what they got for free, we wouldn’t have a banking system.”
No, we wouldn’t. We would have the United States of Bailouts, which is what we have now.
Prices Up, but 2nd Half of 2012 Could See Declines: Radar Logic
Radar Logic’s composite to measure home prices may show monthly and yearly gains, but contrary to other reports, the analytics company argues that the increases don’t mean prices have hit bottom.
“Those people looking at current results and calling a bottom are being dangerously short-sighted,” said Michael Feder, Radar Logic’s CEO. “Not only are the immediate signs inconclusive, but the broad dynamics are still quite scary. We think housing is still a short.”
According to Radar Logic’s RPX Composite, which is based on 25 metropolitan statistical areas, prices in May rose 2.6 percent month-over-month and 0.7 percent year-over-year.
Despite these findings, Radar Logic contends the increases are due to temporary forces, such as the warm winter weather, and appreciation may not be consistent for the entire year based on previous trends.
Radar Logic data from 2009 to 2011 revealed a pattern of price appreciation from the beginning of the year through the end of June, followed by price declines for the rest of the year.
For example, from January 1 to June 30, the RPX Composite increased 3 percent in 2009, 3.4 percent in 2010, and 2.2 percent in 2011.
However, from July 1 to December 31, prices moved in the opposite direction and fell by 2.7 percent in 2009, 6 percent in 2010, and then by an even greater 7.7 percent in 2011.
“Even if the mild winter hypothesis turns out to be false, home prices are not likely to appreciate on a sustained and meaningful basis. Rather, short-term appreciation will paradoxically short-circuit long-term appreciation and perhaps trigger further declines,” Radar Logic stated.
The analytics company explained the higher prices seen will lead to more supply as financial institutions start unleashing their foreclosure inventory and homeowners that were unable to sell due to negative equity will at last list their homes. As supply increases, prices will move downward again.
Also, with much of the current demand coming from institutional investors, Radar Logic also argued that the rise in prices may mean fewer purchases from investors, who may not be able to yield the returns they are seeking as prices climb.
While the speculation is based on data from previous years, it’s still hard to be certain about where prices are headed for 2012.
“From one year to the next, price trends tend to vary much more in the second half of the year than in the first,” said Quinn Eddins, director of research at Radar Logic. “We will have to wait to see data for October or later to know whether 2012 will turn out to be a good year or a bad year for home prices.”
Wasn’t it true that most 2nd liens about 15 years ago were between private individuals? Or the liens were seller financed to help to close the deal between a buyer and a seller? Let’s say if the buyer was $15,000 short in credit, especially if it was their first home.
Breaking….
New U.S. home sales decline 8.4% in June
By Jeffry Bartash | MarketWatch – 14 minutes ago
WASHINGTON (MarketWatch) – Sales of new single-family homes fell 8.4% in June to an annual rate of 350,000 after reaching a two-year high in May, the U.S. Commerce Department said Wednesday. Economists polled by MarketWatch had forecast new home sales to rise to an annual rate of 375,000 last month. Sales in May were revised up to a seasonally adjusted 382,000 from an initial reading of 369,000 – the best month of sales since April 2010. The median price of new homes, meanwhile, fell 1.9% in June to $232,600, the lowest level since January. The supply of new homes on the market would last 4.3 months if they were all sold before any others were built. That’s up from 4.0 months in May. Sales of new homes rose the fastest in the Northeast and fell the most in the South.
Even despite record low rates coupled with the lauch of a massive multi media, sell-side ‘bottom is in’ marketing campaign, A SWING AND A MISS….. new home sales just in: June (prime/peak selling season) = Jan (weakest/trough selling season)
*New home sales declined 8.4 percent sequentially in June, missing expectations and falling to the lowest level since January.
That really is a surprise. With the declining MLS inventory, I expected new home sales to continue to rise and actually exceed expectations. If resales were off strongly in June, and if new home sales were also down, particularly with record low interest rates, the economy must be much weaker than is generally acknowledged.
Get this, purchase mortgage applications fell 3% this week. You are right the economy is weak.
maybe the swamp is finally drained of fools
More evidence that investors are the buying support in California, Nevada, and Arizona.
HousingPulse: Hot Markets Drove Sales-to-Price Ratio Up in June
Limited inventory and increased competition helped push June’s average home sales-to-listing price ratio above 95 percent, according to the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey.
The survey found that the average sales-to-listing price ratio hit 95.6 percent in June, the first time in nearly three years the ratio has been so high. HousingPulse attributed the boost to increased competition for the falling inventory of non-distressed property listings, as well as particularly strong home purchase activity in three states.
“Strong demand, particularly in areas of California, Arizona, and Nevada, are pushing up home prices very quickly in the short term,” said Thomas Popik, research director for Campbell Surveys and chief analyst for HousingPulse. “And because many of the home purchases in these areas are cash transactions, there appears to be less braking of prices by our current appraisal system than seen in other parts of the country. This trend raises the distinct possibility of housing price bubbles emerging in some of these hot housing markets.”
In addition, both average time on market and average sales price for non-distressed properties showed strong improvements. Time on market for non-distressed listings fell to 11.7 weeks, down from 12.7 weeks in May and the lowest recorded time on market in more than two years.
Average sales price for non-distressed properties rose 1.4 percent to $260,000 (from $257,000 in May).
Real estate agents who responded to the survey said they believe that closed sales prices would have increased more if not for rigorous appraisal standards that require comparables from distressed properties.
Property prices increased faster in markets with higher proportions of cash sales. HousingPulse found that sales-to-list price ratios in western regions of California, Arizona, and Nevada-where cash sales make up a higher share of the market-exceeded all other areas of the country.
Not very wise “investors” considering they are the only buyers. And all cash at a time when we have all time low interest rates. The more money you have doesnt make you smarter.
Many of these all-cash buyers are hedge funds trying to deploy a large amount of capital. They are making a long-term bet on the cyclic nature of real estate markets. Only time will tell if they are foolish or not.
Many of these all cash buyers are hedge funds trying to launder large amounts of freshly printed money they got from their well connected friends.
Bank super king wants to break up banks
Wall Street Legend Sandy Weill: Break Up the Big Banks
CNBC.com 25 Jul 2012 | 08:02 AM ET
Former Citigroup Chairman & CEO Sanford I. Weill, the man who invented the financial supermarket, called for the breakup of big banks in an interview on CNBC Wednesday.
“What we should probably do is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail,” Weill told CNBC’s “Squawk Box.”
He added: “If they want to hedge what they’re doing with their investments, let them do it in a way that’s going to be mark-to-market so they’re never going to be hit.”
He essentially called for the return of the Glass–Steagall Act, which imposed banking reforms that split banks from other financial institutions such as insurance companies.
“I’m suggesting that they be broken up so that the taxpayer will never be at risk, the depositors won’t be at risk, the leverage of the banks will be something reasonable, and the investment banks can do trading, they’re not subject to a Volker rule (the Volcker rule explained), they can make some mistakes, but they’ll have everything that clears with each other every single night so they can be mark-to-market,” Weill said.
He said banks should be split off entirely from investment banks, and they should operate with a leverage ratio of 12 times to 15 times of what they have on their balance sheets. Banks should also be completely transparent, Weill said, with everything on balance sheet. “There should be no such thing as off balance sheet,” he said.
If banks hedge in any way, Weill added, positions should be mark-to-market (mark-to-market explained) and cleared through an exchange.
Weill said that by breaking up banks, they would be “much” more profitable.
“This is what all the regional banks do and everybody says buy regional banks,” he said. “They’ll just be bigger regional banks.”
Weill suggested that breaking up banks is the only way to rebuild the financial industry’s reputation in the wake of recent scandals and missteps.
“I want to see us be a leader, and what we’re doing now is not going to make us a leader,” he said.
© 2012 CNBC.com
Unfortunately, his pleas will fall on deaf ears.
Could this surprising move, by one of the premier ‘puppet-masters’ in modern financial times signal that systemically, the inflection point of maximum extraction has finally been reached?
If so, the trap-door that supports the entire ‘illusion of solvency’ is about to be sprung wide open.
The pyromaniac, after burning your house and getting billions in insurance money, now pretends to be a fireman.
LoL!!! Ha ha ha ha.!! ROFL!! Never going to happen Sandy!
What idiot takes on a second lien anyway? Not this idiot!
It’s official. As of yesterday I am no longer (at least currently) underwater. We paid-off our second purchase mortgage draining our savings. It will now take 3-4 months to have enough cash to refinance into a conforming (< $417K) loan.
So, not only did I choose, knowing the risks, to buy in mid-2007, but I also chose to payoff a non-recourse underwater subordinate lien five years later. Me so smaht!
Paying off debt is always a good thing. You will not regret that decision. When you can get into a conforming mortgage, you will be really in a good spot. You will have equity again, so when prices start rising, you will be able to make a move up while your counterparts are still groping to get back above water.
I was ready to do this months ago, but it took many detailed conversations with the Mrs to convince her. We have effectively been paying ~$500 monthly (considering tax adjustments) to preserve the right to strategically default and/or receive a modification at some point. That’s just too expensive considering all reasonable projections for the next couple years.
Cash in Refi, my sister had to do the same to also hit the conforming rate. Will go with a 30 year mortgage or a 15 year mortgage?
The spread is unusually large between 15Y and 30Y rates (50-100 bps) which encourages taking the 15Y. However, we need that extra ~$900 monthly to repair other areas of the balance sheet right now; so we’ll probably go with the 30Y. It’s going to take a couple years to rebuild the savings to a point where we could put 20% down on a nice Irvine-area home.
Another proposal to help underwater borrowers refinance, but this one includes details and at least attempts to balance all interests:
http://www.housingwire.com/news/senator-unveils-plan-refi-8-million-underwater-borrowers
I have been formulating a post on principal forgiveness with equity recapture. That’s essentially what he is proposing. Look for this article next week. Thanks.
[…] Second mortgages hold short sellers hostage […]
[…] To really unfreeze the resale market, this zero-interest second must have automatic short sale approval written into the agreement. If the seller wants to get out before the house has appreciated to the point the zero-interest second is no longer underwater, the sale should require no further approval. This wouldn’t have worked years ago, but first mortgage holders are no longer holding up short sales anyway. The existing second mortgage holders are the ones causing problems with short sales today. […]
[…] To really unfreeze the resale market, this zero-interest second must have automatic short sale approval written into the agreement. If the seller wants to get out before the house has appreciated to the point the zero-interest second is no longer underwater, the sale should require no further approval. This wouldn’t have worked years ago, but first mortgage holders are no longer holding up short sales anyway. The existing second mortgage holders are the ones causing problems with short sales today. […]