Nov022015
Lenders cash in on the success of their housing market manipulation
As rising prices restore collateral backing to bad bubble-era loans, lenders ramp up foreclosure proceedings to get their money back.
Starting in early 2009, lenders placed their faith in the success of loan modifications. Lenders define success differently than underwater homeowners (loanowners): Success to a lender means obtaining a few more payments prior to a short sale or foreclosure, whereas success to a loanowner means maintaining ownership permanently.
Loan modifications were granted ostensibly to “keep people in their homes,” but this was disingenuous spin. It isn’t their home, and it never was. The people obtaining loan modifications borrowed a huge amount of money, often with nothing down, to get their name on title and occupy real estate.
Underwater loan owners have the same claim to real estate a renter does: none. They have no equity. The only thing they own is their loan. The truth of this becomes obvious if you consider what happens to a loanowner at the sale of a home. Rather than walking away with an equity check like a homeowner does, the loanowner walks away with a debt to the lender for the shortfall on the loan they owned, either that, or they obtain a large tax bill from the IRS for the amount forgiven. They obtained nothing for “owning” the house, but they endure serious consequences for owning the loan.
Lenders grant loan modifications while it’s in their best interest to do so, but loan modifications are not an entitlement, and lenders don’t want to make them one. Lenders made loan modifications difficult to obtain because if the process were too easy, everyone would apply for one. Lenders hoped most borrowers would give up and resume making payments, which some did, but many more simply quit making payments and squatted instead. 
Once borrowers squatted lenders had a more serious problem: they could either allow the squatting and risk an onslaught of strategic default as other borrowers quit paying to obtain free housing, or they could foreclose and endure a huge loss. In New York, a housing market where most of the head bankers lived, they opted to allow squatting rather than foreclose on delinquent borrowers and resell the foreclosures.
By not foreclosing, the bankers kept property values artificially high in their own neighborhoods, and they prevented their bank from enduring enormous losses. From their perspective it was a win-win. In the meantime, delinquency rates escalated dramatically, and many local borrowers enjoyed the free ride.
Since both loan modification or squatting removes a distressed sale from the MLS, lenders restricted the supply of homes for sale, and by 2012 this policy succeeded as housing inventory dried up, and house prices bottomed.
With prices rising, lenders benefit two ways from both loan modifications and squatting. First, if lenders talk the loanowner into a modification, the lender obtains some cashflow from non-performing loans. Lenders know this is temporary as about 50% of loan modifications fail each year, but some cashflow is better than none. However, more significantly, when 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; thus even permitting squatting benefits them in the end.
Foreclosures spike over 400 percent in Brooklyn
By Jennifer Gould Keil, October 30, 2015
Foreclosures have spiked a remarkable 433 percent in Brooklyn this year.
From January through September, 453 foreclosure auctions were scheduled, up from 85 in the same period last year, according to RealtyTrac.
A recent one-month comparison shows an even more dramatic percentage rise.
This September, there were 83 scheduled foreclosure auctions — up from 14 in September 2014, a 493 percent increase, according to RealtyTrac.
The spike is counter to a national trend that has seen a drop in foreclosure auctions to a more than nine-year low, added RealtyTrac VP Daren Blomquist.
Ironically, the hot Brooklyn real-estate market is spurring the rise.
“There was a backlog of foreclosures in Brooklyn and they were finally pushed through because people can [now] resell the homes and recoup their losses,” said RealtyTrac exec Ginny Walker.
This should come as no surprise to regular readers here. Back in 2011 I noted that Loan modifications are not an entitlement, banks don’t want to make them one. Then in 2013 I predicted the Loan modification entitlement will be rescinded as prices near the peak, evidence of this above.
The next phase of the process is outlined in a post from 2014, The final resolution of loan modifications will push people out of their homes. The result will be Mortgage and foreclosure crisis 2.0. , and ss I recently noted, The final wave of foreclosures is proceeding briskly.
Lenders loan money to maximize the return on their capital; they aren’t a charity providing lifelong subsidies to borrowers who want to remain in houses they can’t afford. Borrowers need to prepare for their exit because petitioning for continued subsidies will fall on deaf ears.
The lenders won. Their gambit to modify loans and allow squatting until house prices rose enough for them to recover their capital succeeded. Now, they are merely cashing in on their success, loanowners be damned.
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Fannie Mae, Failed Bailouts, and Whistleblowing
In January 2010, Caroline Herron, a high-level contractor in Fannie Mae, came to our office. She told us about how after working for Fannie Mae for eight years in-house as a vice president and as a contractor, Fannie Mae had fired her and blackballed her for disclosing to the Treasury Department serious failings in the Obama Administration’s signature anti-foreclosure program.
From late 2008 through 2009, this country was in the depth of a housing crisis that threatened the collapse of the U.S. economy. Many of those who suffered the most were borrowers whose houses were “underwater” – mortgages where the remaining balance was higher than the value of the house. In order to help these borrowers avoid foreclosure, the administration enacted a program called Making Homes Affordable. The idea behind MHA was to give borrowers a grace period on their loans for three months to see whether they would qualify for a permanent modification of their loans that would allow them to remain in their homes.
The Treasury Department entrusted the running of the program to Fannie Mae. Fannie Mae was and is in a government conservatorship because it had engaged in risky practice of buying worthless mortgages that left it undercapitalized. Fannie Mae had no prior experience in running a program such as MHA, and as government investigators later found, lacked the core competencies to run the program.
Treasury announced the MHA program amid great fanfare and claimed that it would help 7 million borrowers. It soon reduced its claims about the program to say it would help 3 to 4 million borrowers. Today, the U.S. government is forced to admit that MHA has helped no more than 1 million borrowers.
Instead, the program was often helping the executives of Fannie Mae, who drew huge bonuses because of the misleading statistics about the program that they presented in the company’s annual filings. These statistics were so infirm that they could not use those statistics for an accurate report to investors and shareholders in those same public filings. But they did use these statistics about the MHA program to justify big bonuses for themselves.
This is how it worked, and this is why Fannie Mae fired Ms. Herron for her reports to Treasury about the problems with the program.
Fannie Mae administered the program, and urged the holders of the troubled loans to give “trial modifications” based on stated income to homeowners in trouble. Stated income modifications were made simply on a homeowner’s unverified, oral statements about his income or resources.After a three month or longer time period, a trial or stated income modification could be converted to a permanent modification, but at that time the homeowner needed verify the household income, such as tax returns or paycheck stubs.
After the first three months, most homeowners could not verify sufficient income and were unable to obtain permanent modifications. These homeowners were worse off than before, because they had not been making their mortgage payments under the trial program, and were no longer eligible for any other permanent modification program.
Despite early evidence that about 90% of the trial modifications were not converting to permanent modifications, Fannie Mae executives forged full steam ahead with the stated income modifications.
In Fannie Mae’s 2009 10K filings with the Securities and Exchange Commission, it gave two different figures for loan modifications. The first figure was supposed to give an accurate picture of the company to investors and shareholders. That figure stated that Fannie Mae had completed 2 million modifications of troubled mortgages. It did not include the trial modifications that Fannie Mae knew would never convert to permanent modifications and help homeowners.
This article gets things right, but what they fail to acknowledge (probably due to the pending lawsuit) is that counting trial mods that wouldn’t convert to permanent was official Treasury policy.
The Obama Administration wanted as much good press early on for the program as possible, so they set up the stated-income trial mods in order to show that 500,000 homeowners had been “helped” by November 2009. The problem is that the vast majority of those trial mods never converted to permanent, or took many months to convert, because the servicers were unable to collect income documentation after the fact from borrowers, who assumed they were already approved. Treasury had a fundamental misunderstanding about borrower psychology and how to service mortgages, but they wanted to reserve the right to beat up on the mortgage servicers, so they refused to engage them to ask for help in designing the program. I mean why ask the experts right? So instead they designed the program from the top down in Washington and like most well-intentioned government programs, it failed miserably.
I was appalled by how the GSE executives used this bogus information to justify getting huge bonus checks.
Redfin’s Demand Index declines for sixth consecutive month
Decline gaining momentum
https://www.redfin.com/research/wp-content/uploads/sites/4/2015/10/DI.png
The Redfin Housing Demand Index posted its smallest annual increase so far this year, inching up only 0.3 percent to 93 in September from 92 a year earlier. Fewer people are touring and those who are have less to choose from.
After three years of unsustainable growth in home values, customers are reaching the limits of what they can or will spend. They’re also stymied by a lack of options, with too few houses to choose from.
For all of 2015, the Demand Index has held comfortably above 2014 levels until now. In September, it rose only 0.3 percent compared to last year–essentially flat. Prior to September, Demand Index growth was never below 8 percent year over year in 2015.
Buyers aren’t losing their heads or busting their budgets. The percentage of homes that sell above list in October is on track to hit a seven-month low at 24.7 percent. The sale-to-list price percentage also is trending downward.
Pending home sales down 2.3% in September
Signed contracts to buy existing homes dropped 2.3 percent in September from August and were just 3 percent higher than one year ago, according to the National Association of Realtors.
The August read of the Realtors’ Pending Home Sales Index was revised down slightly. Analysts had expected a slight gain for the month. This is the second-straight monthly drop and is the second-lowest reading of the year. Pending sales are a forward-looking indicator of closed sales for the next two months.
“There continues to be a dearth of available listings in the lower end of the market for first-time buyers, and Realtors in many areas are reporting stronger competition than what’s normal this time of year because of stubbornly-low inventory conditions,” Realtors’ chief economist Lawrence Yun said in a statement. “Additionally, the rockiness in the financial markets at the end of the summer and signs of a slowing U.S. economy may be causing some prospective buyers to take a wait-and-see approach.”
Sales dropped across the nation, with the weakest reading in the Northeast. Sales there fell 4.0 percent in September from August. In the Midwest, pending home sales declined 2.5 percent and were 2.6 percent lower in the South. The West was nearly flat, with sales down just 0.2.
Rent or Buy?
Buying or renting a house is always a big decision for households. It’s also important for millennials who, recently graduated from school, may be moving to a different city to start a career, buy a house and build a family. Just like buying stocks, no one wants to buy a house when the price is high. Seven years after the last housing bubble bust, home prices, especially in the lower tier, have returned to pre-crisis levels. People may start to argue whether we are entering another housing bubble. A colleague of mine wrote a blog which examined overvaluation in the top markets.1 With home prices forecasted to increase by 5 percent in 2016 and the Federal Reserve expected to raise interest rates, is this still a good time to buy?
This site examines the cost of ownership relative to rentals for every property for sale on the MLS. The higher the rating, the better the deal. That’s where the answer is found.
Renters, Break Out Your Hankies: Homeowners Will Build Serious Wealth (and You Won’t)
Assuming house prices don’t crash again and wipe out the wealth of homeowners
The news has been a little grim of late for renters. Homeownership is at all-time lows and, with rising prices and tight credit, the path to the American dream is likely to stay rocky and steep. Which means more competition for renters. Which means higher prices. Which means … ugh.
Not to rub salt in your renter’s wounds, but a recent assessment by Lawrence Yun, chief economist of the National Association of Realtors®, isn’t likely to lift your spirits. A homeowner’s net worth, he told Forbes, will be 45 times greater than that of a renter by 2016.
The Federal Reserve reported last year in its Survey of Consumer Finances, based on 2010–2013 data, that a homeowner had 36 times the net worth of a renter—$195,400 for the former and $5,400 for the latter.
It makes sense: Homeownership is a form of forced saving. Every time you make a mortgage payment, you’re contributing to your net worth.
So what’s a renter gotta do to grow some wealth around here?
Weigh your options, like all those hoping to buy a home who don’t have stockpiles of cash, or both great credit and a decent down payment, to compete in this tight market. Consider a smaller home. Consider moving farther away (“Drive until you can afford it,” goes the saying). Consider a city of opportunity, where home prices can still accommodate that entry-level buyer.
You could also choose to ignore the hype, no matter how substantiated it may be. We’re relying on the assumption that home values will continue to grow or remain stable in the long term. Certainly, the consistent rise in home prices, this year from last, would make it seem that way.
But there are still markets where your investment isn’t a sure thing.
You think?
Q: what’s a renter gotta do to grow some wealth around here?
A: invest its marginal savings into financial assets.
Game, set, match.
Only realtor.com would suggest there is no other way to acquire wealth than buy real estate.
Is there a link to Mr Yun’s methodology? I know there is no way he would do a direct comparision of recent college graduates who are renting to 60+ year old incumbent baby boomers right?
Here’s the methodology, unstated of course: “People with the income and assets able to enter the housing market and remain homeowners, have a larger net worth on average, than people without the income and assets to enter the housing market.”
Profound, eh?
Exactly. When you average in the multitudes of renters who don’t save money or manage their fiances well, of course renters look poorer than homeowners. I remember back in 2009 that although my net worth was small, since it was positive, I was far ahead of many homeowners who were hugely underwater.
I guess it depends on how you want to look at it. With our underwater condo, we could have stopped paying and let the bank have it back at any time, so I never thought of it as negatively impacting my balance sheet. In fact, many borrowers figured out how to live rent free for several years, so for them it became a sort of annuity on the down payment funds they contributed.
For the first few years of the bust, I advised people to strategically default and bank the savings. I doubt many people did that though. Most people simply became accustomed to living without a housing payment.
By late 2011, I told people it was too late to strategically default and gain from it. I had no idea the housing market was about to bottom, but even if the bust had dragged on for another couple of years, the amount of further declines was not going to warrant strategic default at that point.
The ones who strategically defaulted in 2008 and saved the balance did well, particularly if their credit recovered enough by 2012 to buy a house at the bottom.
I am sure not likely to take anything the NAR might say seriously. I am sure their “Net Worth” calculation includes false home values.
I hope nobody takes the NAr seriously. The only thing you can trust the NAr to do is to say whatever they believe will motivate buyers and sellers to generate a real estate commission.
Foreclosure Inventory Still More Than Double ‘Normal’ Level
The percentage of residential properties that were in some state of foreclosure—remains about two and a half times its “normal” or pre-recession level, according to Black Knight Financial Services’ September 2015 Mortgage Monitor released Monday.
According to Black Knight, about 737,000 residential properties remained in pre-foreclosure inventory as of the end of September.
“As of the end of September, Florida has ended its 8-year reign as the foreclosure capital of the U.S,” Black Knight Data & Analytics SVP Ben Graboske said. “Over the past 12 months, the state has reduced its inventory of loans in active foreclosure by 43 percent. That’s nearly twice the national average of 22.5 percent. Of course, Florida’s not out of the woods just yet—it still has the largest number of properties 90 or more days past due but not yet in foreclosure. New York—which has seen only a 19 percent reduction in its foreclosure inventory over the past year—has now taken Florida’s place as the state with the most loans in active foreclosure.”
Civil Rights Groups Urge Administration to Recapitalize GSEs and End Conservatorships
Back to business as usual risking taxpayer funds for dubious subsidies
In response to some recent announcements by key government officials to the effect that the FHFA’s conservatorships of Fannie Mae and Freddie Mac will continue for the final 15 months of the Obama Administration, several civil rights groups are calling on the Administration to recapitalize and reform the GSEs.
The National Community Reinvestment Coalition (NCRC), the National Association for the Advancement of Colored People (NAACP), and the League of United Latin American Citizens (LULAC) sent a letter to President Obama, calling on the Administration to end the conservatorships and recapitalize Fannie Mae and Freddie Mac. The letter came in response to last week’s remarks by Treasury Secretary Jack Lew and Counselor to the Treasury Secretary Antonio Weiss stating that the GSEs would not recapitalize and would remain in conservatorship during the final year of the Administration.
“The most sensible path forward for the housing finance system is to recapitalize Fannie and Freddie, take them out of conservatorship, and to build on the reforms of strong supervision and oversight of the Enterprises started in 2008 with the passage of the Housing and Economic Recovery Act,” NCRC President and CEO John Taylor said. “We agree with the Administration that there are a number of reforms still needed in the secondary mortgage market, but the answer does not lie in scrapping Fannie Mae and Freddie Mac. They can and should be recapitalized; they can and should be fixed.”
When asked about the potential risks to the US taxpayer, the group responded, “The costs and risks are not our problem.”
Why do so many young adults live at home? A record 34.5 percent of Millennials live at home with their parents in California.
A record 34.5 percent of Millennials live at home with their parents in California. This rate is higher than the national rate of 30.3 percent which is already incredibly high. There is ample evidence suggesting that Millennials simply do not want the same things as their Taco Tuesday baby boomer parents. And many simply don’t want the McMansion aspiration since many are going to have small families. This is an interesting shift. Boomers are trying to off load larger crap shacks to an audience that is more interested in smaller more centrally accessible properties. In California, those young adults that aren’t living at home are likely living in a rental and paying close to half their income on housing. Good luck saving that 20 percent down payment on a $700,000 crap shack (or $1 million crap shack in the Bay Area). So why do so many young adults live at home if the recession ended in 2009, more than half-a-decade ago?
When the odds favor ‘the house’ or even worse… it’s a rigged game, why not loan money to the suckers at the table.
Borrowing money to buy a house today contains an implicit guarantee from bankers to perpetually increase the amount they will loan to buy the property. Only if future buyers can leverage more than today’s buyers will prices go up, and without appreciation, today’s buyers may fall underwater and trigger a new crisis.
Suckers at the table indeed….
Several weeks ago OCHN profiled 490 Thalia Street in Laguna Beach. It was rated a “10” based on a projected monthly rent of 12K. A week later, this seller lowered his price to 1295K; just 25K more than he paid a year ago.
If Trulia is reliable, this seller is now in arrears on his 888K loan to what looks to be a hard money lender in Calabasas. No loan mod for him, I think.
if the Trulia info is correct, this purchase did not turn out to be a “10.”
And recent sales volumes at the beach seem to down–using Redfin sales history as a rough measure.
And short term rentals are becoming more and more popular as a last ditch measure to squeeze every possible penny of rent out of these overpriced specuvestments.
As PR might observe, this is just noise to the truly wealthy as posers get kicked to the curb.
IR, I confess to being critical of counting amortization as contributing to cash flow in the daily profiles; I could see it as a balance sheet item I guess. But contributions to equity are illiquid; it’s not cash in your wallet.
I started following this blog back when the bubble began to unwind; my neighbor sold to an intermediary who had a straw buyer lined up. The lender took a huge beating. I sent all the details to “zoller” but IHB was only doing Irvine based stories back then.
I think some of what we’re doing now is rationalization; high prices are the order of the day so we just say “these low rates are great, my loan amortizes faster.” It better–your principle is huge.
I guess I miss the old cautionary tales of bubble folly. I think there’s a good amount of risk again.
Regards.
Contributions to my 401k are illiquid, but build my balance sheet nonetheless.
Yes, builds your balance sheet big time, but not your cash flow until later.
The OCHN property profiles seem to treat amortization as a way to reduce the negative cash flow; so you wind up with most properties looking like “10s” I don’t think it does and too many of the profiles get rated 10 as a consequence.
scottnyc,
I publish both the direct monthly cash costs and the cost of ownership adjusted for amortization and tax savings and such. If I compared the monthly cash costs to rent, everything would rate a zero — and it would nearly always rate a zero in Coastal California. These would have rated zeros back to the mid 90s under that math.
The ratings are also based on a conventional borrower using market-rate mortgage terms. If someone uses a hard-money lender to perform a flip, they couldn’t rent it out for enough to cover that cost. That fool in Laguna Beach is getting reamed, as he should.
There’s good reason to believe we are in bubble territory. When you look at price-to-income, prices are about 30% too high. The distorting effect of low mortgage rates makes such high prices financeable, but the stability of that pricing is predicated entirely on maintaining low rates.
I agree in the sense that many of these expensive properties should rate zero. It is what it is.
There’s been a meme lately that rents will just keep going up to justify any price. Might be the case, might not. Remember that your profile for 490 Thalia supposed a 12k monthly rent. That would easily cover any hard money loan.
These properties are for cash players. But I can’t understand taking all the risk to get yields = long treasuries.
I agree completely with your last paragraph.
Regards.
You know what grinds my gears?
How central banks around the world can pump trillions into the global money supply without causing any inflation. How is all of this sustainable? And since when is it a good idea for central banks to buy up all of the stable investments available?
Also, look at the irony of who wins with inflation? It’s the central banks who win. How much do they win? They win in proportion to their balance sheet. Their nominal amount owed remains the same, but their investments are worth more in nominal dollars. Who controls inflation? The central bank. Who gets the dividends from inflation? The shareholders, who are the banks.
With a balance sheet of $4 trillion, shouldn’t the dividends paid on the inflation of that huge sum go somewhere else than to the banks? With 2% inflation, that would be $40 billion, or 10 times NASA’s funding.
The central banks can print all this money without creating inflation because they still battle deflation from their previous bad loans. Until their old borrowers become completely solvent, deflation will be a problem, and central banks can print as much as they want, and it won’t get circulated and become inflation. It’s not sustainable, but it will continue for a few more years because the entire world is awash in bad debt.
Keep in mind that most of the profits from the central bank come back to the US Treasury. Very little goes to the member banks of the federal reserve. It’s one of the reasons that if interest rates rise, the government will end up paying a lot of money back to itself through the federal reserve’s holdings.
https://en.wikipedia.org/wiki/Federal_Reserve_System
Well, well, well, so it looks like the Federal government actually CAN inflate away its debts.
Large FED balance sheet + high inflation = massive profits paid to the US treasury.
Correction: It’s already happening
http://danielamerman.com/va/Repression.html
Creating a combination of very low interest rates and somewhat higher rates of inflation that effectively uses private savings to pay down public debts in a manner that is complex enough that the average voter never understands how it works, thus allowing governments to use this potent but subtle method of taking vast sums of private wealth, year after year, decade after decade, with almost no political consequences.
[…] Lenders cash in on the success of their housing market manipulation Since both loan modification or squatting removes a distressed sale from the MLS, lenders restricted the supply of homes for sale, and by 2012 this policy succeeded as housing inventory dried up, and house prices bottomed. mortgage-foreclosure-crisis-2.0. Read more on OC Housing News (blog) […]
OC Reg on local housing:
http://www.ocregister.com/articles/median-689972-price-county.html
COLDEST
1. Irvine 92618 – Median of $706,000; prices down 18.7% and sales down 16%
2. Laguna Beach 92651 – Median of $1,625,000; prices down 17.2% sales down 9.7%
3. Irvine 92620 – Median of $790,000; prices down 1.4% and sales down 9.3%
Notice aside from the 1 million + irvine zip code the rest were all sub 500k in the hottest markets?
FHA to the rescue.
Orchard Hills is clearly that best place to live on earth! 😉
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