The bogus housing rebound narrative bankers believe
In early 2012 lenders embarked on a new policy of choosing loan modification and squatting over foreclosure. Their goal was to dry up the distressed inventory and create an imbalance between supply and demand that would force buyers to compete over limited inventory and drive prices higher. So far, they have been successful, and all signs are that this policy will continue to work as the banks intended.
The truth as I’ve outlined above is not how bankers are portraying their actions in their own publications. According to their version of events, their can-kicking loan modifications and permissive attitude toward squatters who won’t play their game are instead characterized as permanent solutions to a problem they’ve merely deferred to another day.
In January 2012, Carrington Holding Co. was so bullish on buying and renting out foreclosed single-family homes that it obtained $450 million in financing to fund a buying spree of vacant real-estate owned (REO) properties from banks and mortgage servicers.
But less than 18 months later, the Santa Ana, Calif.-based firm — one of the nation’s largest players in single-family property management, lending and servicing — decided it was time to throw in the towel. The market had lost its lucrative yields and had become oversaturated with hundreds of institutional investors.
After witnessing the fast rise in home prices this year and the disappearance of REO discounts from banks in the reheated housing markets of California, Nevada and Florida, Carrington called it quits this past May.
There is direct confirmation of something we knew was happening. Unless prices drop again, the big hedge funds are done buying houses. (See: Investor activity to plummet, home sales volumes will drop)
“REO properties used to trade at a 20- to 30-cent [on the dollar] discount three years ago,” says Christopher Whalen, Carrington’s managing director and executive vice president. (He also is one of banking’s more vocal risk analysts.) “Today, investors in REO properties for rent are basically paying retail, multiple-listing prices for residential assets.”
I witnessed this happen first-hand in Las Vegas. As the inventory dried up in early 2012, I watched bidders at auction start paying over retail price for properties just to deploy their capital. It was the main reason I stopped buying properties at auction there last year.
It’s a turnaround few anticipated after the housing slump reached a trough in 2009, when discounted distressed properties accounted for about a third of total home sales, according to CoreLogic.
The reason nobody anticipated this is because it was an unannounced policy change at the banks. This was not a change in the market, it was a change in bank policy. Look at this sudden and dramatic decline in foreclosure processing in January of 2012. This certainly did not occur because the banks were out of delinquent borrowers to foreclose on.
As recently as December 2011, Fitch Ratings gloomily forecast that the bank-owned property glut was “staggering.”
It was staggering. The shadow inventory is still staggering. (See: Is distressed house inventory actually twice as large as commonly reported?) But the banks reasoned it was better to stop the foreclosures and instead profit from the appreciation themselves rather than force a sale to a hedge fund.
But a flood of investors stepped up in early 2012 after the Federal Housing Finance Agency started allowing white-shoe investors to purchase pools of Freddie Mac- and Fannie Mae-owned properties in certain distressed markets to relieve the glut of foreclosures on the books.
This is where the narrative becomes bogus. It wasn’t an influx of investors that turned things around. It was the change in bank policy that turned foreclosures into can-kicking loan modifications that changed the dynamic of the market.
Today, the REO headache many thought would be amassed in banks’ portfolios for years to come has all but dissipated in those former trouble spots.
The REOs are merely delayed. Loan modification redefault rates range between 25% and 40% depending on whose statistics you look at. Lenders will end up either foreclosing on these people or forcing them to sell once prices have risen enough to cover the loan balance. (See: Loan modification entitlement will be rescinded as prices near the peak and Bank’s attitude toward struggling loanowners toughening as prices rise)
“REO inventory is down significantly,” says Paul Leonard, senior vice president of government affairs for the Financial Services Roundtable’s Housing Policy Council. “I’ve heard that it’s down more than 30 percent since 2011—some have said more—mainly driven by fewer delinquencies and foreclosures.” …
Again the narrative doesn’t tell the full story. There are fewer delinquencies only because lenders started aggressively modifying loans they know will later fail. These delinquencies that should have been foreclosures are instead floating in cloud inventory.
Carrington is leaving the market at a time when other investors remain active in amassing bulk purchases of REO properties. Many of these investor groups have failed to turn a profit on the properties, but like private equity giant Blackstone Group, which owns $4.5 billion worth of single-family rental properties, carry on in hopes of either riding the crest of higher rents in a rebounding housing market, or someday securitizing portfolios of “REO to rentals.”If the securitized market for REO-to-rental were to take off, then it might be worth the low-single-digit margins that investors currently are tolerating on their REO purchases, after accounting for taxes and maintenance costs. …
It’s shocking that so many funds are still buying even though vacancy rates are appalling and expenses are running much higher than anticipated.
Legal hindrances, such as the homeowners’ bill of rights in California that restricts dual tracking and imposes stiff fines on improper documentation, also have been a prod for banks and servicers to steer clear of foreclosing on delinquent owners. …
So the loanowners bill of rights encourages squatting. What better evidence can we have of the failure of this law?
Distressed sales are, of course, more pronounced in certain markets. In Nevada and Michigan, problem properties make up nearly half of all home sales. In California and Florida, it’s between 30 percent and 35 percent.
Considering the normal rate of distressed sales is near zero, we have a long way to go before this mess is cleaned up.
Heidenreiter sees several other trends contributing to the declining threat of REO exposure for banks, including a seven-year low in the default rate in California. But he warned of an overhang of “shadow inventory” foreclosures that have yet to hit the marketplace.
Though CoreLogic estimates the number of delinquent homes that banks have failed to act on is down to 2.2 million (versus 3 million in 2010), Heidenreiter tallies up 26 U.S. states that carry 90-plus day delinquency rates above 5 percent. In nine states, the percentage is above 7 percent.
“Unless they all win the lottery, those aren’t going to shore up overnight,” Heidenreiter says.
Realistically, these loans are never going to cure. But for the bankers to come out on top, they don’t have to. Lenders will continue to bait these borrowers with loan modifications to get a few more pennies out of them, and they will allow millions of borrowers to continue to squat until prices rise high enough for the banks to foreclose and recover the outstanding balance on their loans.
“There are still underlying issues there. There’s still delinquency. There are still borrowers whose homes are at risk, which is going to equal more foreclosures and more distressed homes sales in the future.”
Apparently, not all bankers have their heads in the sand.
Bankers are aware of the delinquencies issue, which is why they have been picking up the pace of loan modifications and short sales, says Eric Selk, executive director of the industry-backed HOPE NOW Alliance, which is trying to resolve issues of REO distribution and foreclosure prevention. …
Many institutions, through the guidelines established by the Home Affordable Modification Program, are able to keep troubled homeowners in their residences by helping them stay below a 31 percent debt-to-income ratio on modified payment plans. …
The social injustice of loan modification programs
Both bankers and left-wing political operatives portray loan modification programs as some kind of panacea saving the homes of struggling borrowers. That is what’s seen, but there is a price being paid by others that is not seen and not discussed.
In the post Loanowners are in no hurry to list and sell their houses, I recounted my conversation with a loan owner. This gentleman is paying $2,000 per month on his modified loan for a property that would rent for about $3,800 per month. He is being rewarded with a significant subsidy to his monthly housing costs for being a fool who over-borrowed and purchased a house he could not afford.
Besides the moral hazard of this policy, this family is displacing another family that could be living in this property who could afford the payments. Since this house is not being foreclosed on and recycled through the market, the loanowner enjoys a subsidy, and the displaced family who could afford that house is being forced to buy another property — and pay extra for it — because the inventory is lower than an unmanipulated and unsubsidized market would provide.
The family being displaced and forced to pay more for a house is the hidden social injustice of loan modification programs. Any of you buying homes today who are being forced to pay 30% more than you would have just over a year ago should recognize the social and financial injustice being inflicted upon you by the “struggling borrowers” receiving the loan modifications to stay in houses they can’t afford.
Thanks for the $400,000
The former owners of today’s featured property exercised their put option to the bank. They refinanced right at the peak and extracted over $400,000 in mortgage equity withdrawal. If prices had gone up, they could have extracted more. If prices went down — which they did — then they can leave the property for the bank and let them be the bagholder. It worked out well for them.
[idx-listing mlsnumber=”MB13156020″ showpricehistory=”true”]
1155 NORBY Ln Fullerton, CA 92833
$814,900 …….. Asking Price
$393,000 ………. Purchase Price
2/13/2003 ………. Purchase Date
$421,900 ………. Gross Gain (Loss)
($65,192) ………… Commissions and Costs at 8%
$356,708 ………. Net Gain (Loss)
107.4% ………. Gross Percent Change
90.8% ………. Net Percent Change
7.0% ………… Annual Appreciation
Cost of Home Ownership
$814,900 …….. Asking Price
$162,980 ………… 20% Down Conventional
4.46% …………. Mortgage Interest Rate
30 ……………… Number of Years
$651,920 …….. Mortgage
$161,176 ………. Income Requirement
$3,288 ………… Monthly Mortgage Payment
$706 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$170 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$4,164 ………. Monthly Cash Outlays
($823) ………. Tax Savings
($865) ………. Principal Amortization
$268 ………….. Opportunity Cost of Down Payment
$224 ………….. Maintenance and Replacement Reserves
$2,968 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$9,649 ………… Furnishing and Move-In Costs at 1% + $1,500
$9,649 ………… Closing Costs at 1% + $1,500
$6,519 ………… Interest Points at 1%
$162,980 ………… Down Payment
$188,797 ………. Total Cash Costs
$45,400 ………. Emergency Cash Reserves
$234,197 ………. Total Savings Needed