Dec192012
Banks go “all in” betting on success of loan modifications
Lenders in California are placing their faith in the success of loan modifications. Of course, to them success can mean something different than what it means to a loanowner. Success to a lender can be defined as obtaining a few more payments prior to a short sale or foreclosure. Lenders often profess that Financial health is arguably as important as physical health, but the interest rates that they charge so liberally say otherwise. With prices rising, lenders benefit two ways from loan modifications. First, they get cashflow from non-performing loans. They know this is likely temporary as about 50% of loan modifications fail each year, but some cashflow is better than none. Plus, since prices are rising, when they do finally approve a short sale or foreclose on the property, they will recover more of their original capital than if they were to foreclose today. Lenders are kicking the can and playing the amend-extend-pretend music. 
November 2012 California foreclosure inventory—the total of Preforeclosures, properties in foreclosure that are Scheduled for Sale, and Bank Owned properties (REO)—fell 7.6 percent from the prior month and is down 31.8 percent compared to last year. While the November decline in inventory is not an unusual event, the significant decline in foreclosure inventory over the past year has contributed to what some are calling an “inventory crisis” of total homes for sale.
The November foreclosure inventory shortage is partially due to the jump in California Foreclosure Cancellations. Cancellations were up 4.7 percent from the prior month, up 69.9 percent in the past two months and up 34.7 percent compared to last year. In taking a closer look at the reason for cancellations, it did not appear the majority were due to statutory time frames or filing errors, but were more likely due to short sales or successful loan modifications.
November 2012 California Notices of Default were down 19.9 percent from the prior month and down 51.5 percent compared to last year. November 2012 California Foreclosure Sales were down 14.8 percent from the prior month and down 30.3 percent compared to last year.
“The policies of ‘extend and pretend’ continue to slow foreclosure activity while ensuring foreclosures will play an important role in our economy for years to come,” said Sean O’Toole, Founder and CEO of Foreclosure Radar. “While we are grateful that the government has extended the relevance of our company, we recognize our customers will need additional tools to be successful in this market. I couldn’t be more excited about what we have coming soon in 2013. Current customers will get it first.”
Lenders are determined not to clear the market. Due to their double incentive to wait that I described above, they will continue to modify loans over and over again until either they have the capital reserves to absorb the write down or until prices reach the loan balances when they can foreclose and get all their money back.
California REO acquisitions down 16%
Despite the fact that prices are rising and inventories are critically low on inventory, banks actually took back fewer homes last month. The inventory shortages are becoming the new normal.
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. The pipeline REO has stabilized statewide at about 63,000 units over the last 4 or 5 months.
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 63,000 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.
Notices are also declining
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 due to the upcoming law changes on January 1.
Orange County
The story in Orange County is similar to the rest of California. REO processing dropped 28% last month and is back to levels of April through July. Overall, REO processing is down about 58% from last year’s levels.
Notices of default in Orange County also took a dive for the forth 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 seven months, their snail’s pace of liquidations has created a dramatic and completely artificial shortage of supply which has caused prices to shoot upward. Expect more of the same going forward.
How does a housing market improve while an economy does not? This is a clear example of how the market is not responding to fundamentals but instead to manipulation.
Fannie Mae: Housing Market to Press On While Economy Lags
After rising in the third quarter, overall economic growth is expected to decline this quarter and in early 2013, according to Fannie Mae. However, the GSE anticipates further strengthening in the housing market.
Economists at Fannie Mae anticipate economic growth of less than 2 percent for the first half of 2013 followed by more accelerated growth for the remainder of the year.
Factors contributing to the slow-down in economic growth include the effects of Hurricane Sandy, uncertainty regarding the fiscal cliff, the recession in the Euro zone, the sovereign debt crisis, and tensions in the Middle East.
However, while the overall economy remains somewhat dismal, Fannie’s economists finds a bright spot in the housing market, which “has stayed resilient and continues to show signs of a strong, sustained recovery, according to Doug Duncan, Fannie Mae’s chief economist.
In fact, Duncan points out that residential investment will likely bolster annual economic growth for the first time since 2005.
“Despite unsteady macroeconomic conditions, we anticipate housing and mortgage activity to gain momentum in 2013,” Duncan said.
Mortgage rates are low, and home sales and home prices are rising with the exception of a recent seasonal dip during the fall and winter. Fannie Mae expects these overall trends of rising home prices and sales to continue.
Fannie Mae anticipates a 7.5 percent rise in home sales over the course of 2013 after this year’s 10.2 percent increase.
Low interest rates and artificially low inventory levels are having the effect banker’s desire
Prices Continue to Climb in November
Even as the market heads into its slow season, sales numbers continued to stand well above their year-ago level in November, according to RE/MAX’s latest National Housing Report.
The report shows home sales were up 15.7 percent year-over-year in November, the second highest annual increase this year (behind October’s 17.8 percent yearly rise). According to RE/MAX, November is the 17th consecutive month in which sales have posted year-over-year increases.
Of the 52 metros included in the survey, 49 reported higher sales than November 2011, and 37 of those markets saw double digit increases, including: Providence, Rhode Island (62.6 percent); Burlington, Vermont (50.8 percent); Manchester, New Hampshire (38.8 percent); Nashville, Tennessee (35.7 percent); Tampa, Florida (35.1 percent); and Boston, Massachusetts (32.0 percent).
Prices also rose both on a month-to-month and year-over-year basis. The median price for homes sold in November was $163,750, 3.6 percent higher than October and 6.9 percent higher than November 2011. November is the 10th straight month to experience year-over-year price gains.
“2012 has been a great turn-around year for housing, with prices and sales moving beyond where we were last year,” said RE/MAX CEO Margaret Kelly. “We’re ending the year the way we started it, with better than expected performance. If we can get more reasonable regulation from Washington and if mortgage availability improves, 2013 will see a much stronger housing market.”
Perhaps the biggest contributing factor the continued rise in prices is a dwindling inventory. The average number of homes for sale in November was about 8.0 percent lower than in October and 29.1 percent lower than the previous year. As of November, month-to-month inventories have now fallen for 29 consecutive months.
The decline in inventory is something of a double-edged sword: While it boosts prices, it also creates difficulties for potential buyers in dried-up markets. According to the report, some areas—including San Francisco and Los Angeles—posted months’ supplies as low as 1.1 months in November, well below the national average of 5.6 months. A balanced market will sit somewhere between five and six months’ supply.
NCUA Files Largest Suit Yet Against JPMorgan, Bear Stearns
The National Credit Union Administration (NCUA) announced Monday it has filed suit against JPMorgan Securities and Bear Stearns over allegations of falsely representing the quality of mortgage-backed securities (MBS) sold to corporate credit unions.
At $3.6 billion, the legal action is the largest suit ever filed by the NCUA.
According to the agency, Bear Stearns (purchased in 2008 by JP Morgan) misrepresented the underwriting standards of loans in securities sold to U.S. Central, Western Corporate, Southwest Corporate, and Members United Corporate. The four credit unions became insolvent and were placed into NCUA conservatorship and liquidated.
NCUA’s 280-page complaint alleges that although Bear Stearns’ offering documents for the securities described the firm’s adherence to underwriting guidelines, the originators had in fact “systematically abandoned the stated underwriting guidelines in the Offering Documents.”
“Because the mortgages in the pools collateralizing the RMBS were largely underwritten without adherence to the underwriting standards in the Offering Documents, the RMBS were significantly riskier than represented. Also, properties were routinely overvalued at the time of origination, rendering the average LTV ratios inaccurate. Indeed, a material percentage of the loans collateralizing the RMBS were all but certain to become delinquent or default shortly after origination. As a result, the RMBS were destined from inception to perform poorly,” the complaint reads.
“Firms like Bear, Stearns acted unfairly by ignoring the rules for underwriting. They packaged these securities and then told buyers the paper was sound,” said Debbie Matz, NCUA board chairman. “When the securities plunged in value, we learned the truth. NCUA is now working to hold these underwriters accountable and secure recoveries on behalf of federally insured credit unions.”
The agency has eight similar actions pending against other companies, including Barclays, Credit Suisse, Goldman Sachs, and Wachovia. It’s the second suit brought by NCUA against JPMorgan, the first being in 2011.
“NCUA and credit unions have successfully worked together to restore stability to the credit union system,” Matz said. “Now we are holding responsible parties like Bear, Stearns accountable for their actions. It’s the right thing to do.”
The median is up due to a change in the mix, and sales volumes are only up slightly. This is what a manipulated real estate market looks like.
California Home Prices Have Biggest Increase in 8 Years
California home prices rose 25 percent in the 12 months through November, the most in eight years, as demand rose in expensive coastal areas, the state Realtors group said.
The median price of an existing, single-family detached home was $349,300 last month, up from $279,910 a year earlier, the California Association of Realtors said today in a statement. The last time prices had a larger gain was in June 2004, the Los Angeles-based group said.
Enlarge image California Home Prices Have Biggest Increase in Eight Years
California home prices rose 25 percent in the 12 months through November, the most in eight years, as demand rose in expensive coastal areas, the state Realtors group said. Source: Coldwell Banker Previews International via Bloomberg
California’s median price was driven up by a decline in sales in lower-priced areas of the most populous U.S. state, and an increase in transactions involving mid- and higher-priced homes, the Realtors said.
“The significant increase in price was due in part to the change in the mix of sales,” Leslie Appleton-Young, the group’s chief economist, said in the statement. “Coastal markets, which tend to have high-end properties, accounted for a larger share of total sales and led to strong price gains overall.”
California homes sold at an annual pace of 518,290 last month, up 2.7 percent from a year earlier, the association said. The figure is the total number of properties that would be sold during 2012 should sales maintain their November pace throughout the year. Sales dropped 4.9 percent from October.
If home prices go up just 10% I can afford that lavish party next next year.
All your neighbors could also afford a lavish party. It would be a real celebration in your neighborhood.
Sorry, not to sound like broken record, but it looks like FHFA is setting everything for principal reductions when they replace DeMarco.
I don’t know. If some of the other pundits are right and this appointment has more to do with stopping the lawsuits against the banks, the new head of FHFA may not be a free-money Democrat. We may see a small-scale principal reduction effort on the most deeply underwater loans, something that will get good press, but I don’t foresee any massive principal reduction program because the cost would simply be too high. With the FHA needing a bailout, the last thing politicians want to see is another huge bailout bill for the GSEs.
IR, the fed will pay for the cost =)
Do the free-money democrats (to be fair there are plenty of free-money repubs too), voters or politicians, really feel the consequences of our actions are a lesser evil than dealing w the problem correctly ie phasing out gov real estate subsidy?
Has it not already proven a complete disaster?
“We’ve created a large disaster. We must act quickly in order to perpetuate the disaster to avoid dealing with it now.”
This is twilight zone realm.
The sad truth is, yes, they would rather exacerbate the problem by doing more of what created the problem in the first place.
The politics behind the scene at the FHA are interesting. Bob Corker may get some of his common-sense reforms implemented after all.
Fate of Bipartisan FHA Reform Bill May Hinge on Sen. Richard Shelby
During the final days of this Congress, Senate Banking Committee Democrats are continuing to push for passage of a Federal Housing Administration reform bill that will require unanimous consent.
An objection by one senator would kill the bill.
Sen. Pat Toomey, R-Pa., is supporting passage of the FHA reform bill (H.R. 4264) that overwhelming cleared the House by a 407-7 vote. But the ranking Republican on the banking committee, Sen. Richard Shelby (Ala.), has not tipped his hand, according to sources.
Nevertheless, banking committee Democrats are continuing to push for passage this week.
A Democratic Banking Committee aide said: “Given the urgency of the situation, we remain hopeful that Republicans in the Senate will allow this important legislation to be approved by unanimous consent and send the bill to President Obama to be signed into law before the end of the year,” the aide added.
The House-passed FHA reform bill would give the Department of Housing and Urban Development more powers to police lenders and require indemnification for bad loans as a way to reduce FHA loan losses.
The financially strapped FHA mortgage insurance fund may need to borrow from the U.S. Treasury later this year to pay for claims on bad loans.
Behind the scenes, Sen. Bob Corker, R-Tenn., and HUD officials are negotiating possible administrative changes that FHA could make to reduce its risk exposure.
One source indicated that the success of these talks may determine Sen. Shelby’s position on the FHA bill. Sen. Shelby’s spokesman could not be reached for comment in time for this story.
HUD officials also want an agreement with Sen. Corker because it could lead to Senate confirmation of Carol Galante to be the FHA commissioner. She has served as the acting commissioner since April 2011.
Wow, it’s so different that what has happened in the last 5 years. I still need to believe it to see it.
Bipartison??
”bipartisan usually means that a larger-than-usual deception is being carried out” –George Carlin
I write Minyanville.com’s Housing Market Report and Larry has written several great posts about my articles. He and I are two of the very few analysts who’ve been explaining to you with compelling stats what is really going on in housing markets from California to NYC. Today’s post uses great stats from foreclosureradar.com showing how the banks are severely cutting back on foreclosure filings and foreclosure auctions to try to artificially lift prices.
This scam didn’t work to fix the market in early 2009 and it won’t work now. But the plunge in REO sales throughout California has pushed up median sale prices because the REOs are the least expensive homes in a market.
Don’t be fooled by this rise in median prices. The number of delinquent properties in California continues to rise and the servicing banks will sooner or later have to act on them.
Here in the northeast where I am, the banks haven’t been foreclosing since the spring of 2009. The number of seriously delinquent properties in NYC and Long Island is beyond belief. I have very reliable data which shows this.
Very simply, talk about a housing bottom is utter nonsense. If you’re interested in seeing what I’ve been saying for nearly 3 years, go to this link which has the archives to all my BUSINESS INSIDER articles:
http://www.businessinsider.com/author/keith-jurow
Happy Holidays
Dr. Jurow,
What is the end game? Are looking at a multi-year slow release of the shadow inventory?
Or some sort of principal reduction lottery for the some lucky upside down homeowners?
Thanks,
Mike
Inflate and buy time by slow release.
Rising prices in everything we need will allow house prices to fall to where the market needs prices to be, in real terms. It is too confusing for most College Grad Comrades.
Few understand nominal v real prices; and if they do, they inflation adjust using gov sanctioned CPI numbers.
One must also factor in a currency crisis depending on how much time they buy, er bide.
That’s exactly what will happen. The inevitable result of can-kicking and printing over the problem will be inflation. They will preserve the nominal cost by driving up the inflation-adjusted cost for everyone.
I dont understand this strategy. Do they actually think that the past 30 yrs of inflation was not enough? How do they expect housing to inflate when the costs of everything else will skyrocket? Do they really think salaries will inflate?
If you want to see what the county will look like just study SF.
90% of the people rent at least 50% of thier income. The rest who own are million or even billionairs.
Rising Mortgage Rates Spook Housing
A slight move up from 3.47 percent on the 30-year fixed to 3.50 percent, caused mortgage refinance applications to plummet 14 percent from the previous week, Applications to buy a home also dropped 5 percent week-to-week, indicating a weak and rate-sensitive purchase market.
http://www.cnbc.com/id/100327898
That was big .86% increase in the cost of borrowing. 🙂
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The new foreclosure law in CA is the reason for the spike in cancellations, plain and simple. It’s not some coordinated conspiracy by the banks. We are now a judicial foreclosure state. California’s already long timelines will soon resemble Florida’s and New York’s. Better get used to it folks.
Also, Keith Jurow’s assertion that California delinquencies are rising is COMPLETELY BOGUS.
He has absolutely no data to back that up. Corelogic recently reported a 25% YoY decline in delinquencies for California, with Orange County experiencing a 30% YoY decline.
Keith Jurow is one of the only remaining housing bears, but he’s ignoring important data to make his points. That tells me that he should be ignored at all costs.
who/where does Corelogic get their data from?
Merry Christmas…
http://www.corelogic.com/about-us/data.aspx
P.S. Where does Keith Jurow get his “very reliable data” from?
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