Safe Haven Markets are Really a Squatter’s Haven
I am shocked by the squatting. I really am. It never occurred to me that lenders would simply give away homes to people. Do lenders really believe they can do this without dramatic long-term consequences on borrower behavior?
Back in 2004 to 2007 I was very confident the market would crash. The Option ARM was an obvious Ponzi loan, and it was only a matter of time before the market imploded. To me, it seemed like a really foolish time to buy because I knew the decline in value would put me underwater. If I had known that I could borrow 100% of the money, possibly get some HELOC booty, then squat indefinitely while the lenders denied there was a problem, I might have made different choices.
The most foolish and imprudent borrowers are the ones getting most rewarded by the banks amend-extend-pretend policies, particularly those in the jumbo loan neighborhoods. There have been almost no foreclosures over $800,000 since the crash started because lenders know there are so few buyers to absorb all the product. They have bulldozed homes in a virtual sense by simply pretending the houses are not there.
The moral hazard this creates is obvious and pervasive. If you are a distressed borrower, why are you making payments? Lenders will not foreclose on you, and with little effort, you can gain a year or more of free living. There isn’t much incentive to struggle. Also, for those of you who didn’t participate in the madness, why wouldn’t you next time around? You know when lenders do this again, you will be given the same free pass as your predecessors. Why not borrower imprudently and squat when the Ponzi scheme collapses? I think it’s wrong, but I also can’t think of a compelling reason not to do it.
By Nick Timiraos
Housing markets that have escaped the brunt of home-price downturns may not be home free.
A new report shows that the “shadow inventory” of homes, with delinquent mortgages that have yet to go through the foreclosure process, is growing fastest in areas that have so far avoided the biggest home-price declines, according to a report by ratings agency Standard & Poor’s.
The areas where prices have not crashed yet are the areas without many subprime loans and subprime foreclosures. The alt-a and prime loans, particularly interest-only and Option ARMs, that are blowing up now are not going through foreclosure, and the owners are being allowed to squat.
Mortgage companies could be forced to reduce their prices on these foreclosued homes as they work through that supply, and as more of those homes sell, that could continue to put pressure on prices. At the top of the list: the New York City area, where at the current rate it would take 103 months to clear the shadow inventory of loans that are more than 90 days delinquent or in foreclosure. That’s nearly 3.5 times the national average.
“The big problem of course in the New York metro area is that we have not had the re-pricing that the West Coast has had,” says Daniel Alpert, managing partner at Westwood Capital LLC, an investment fund. “This is very similar to what happened in the early 90s where the crisis moved regionally from one area to another.”
I guess we have seen this before.
After the New York region, Miami has the largest backlog with a 62-month supply. But unlike New York, Miami’s shadow inventory has fallen from its March 2008 peak of 129 months. New York’s backlog has held at more than 100 months since early 2008.
Indeed, cities that avoided the worst of the housing downturn so far—and which have seen fewer distressed sales—are now seeing a bigger increase in shadow inventory, as prices adjust in some of those late-to-the-party markets. Phoenix and Las Vegas, which have had the sharpest price corrections, also have among the lowest levels of shadow supply, at 18.5 and 21.4 months, respectively.
The biggest increase in shadow inventory came in Dallas, which had a 43-month supply, up from 19 months in September 2008. Other cities with big increases in recent months include Atlanta, Boston, Denver and Charlotte. Shadow inventory has remained elevated, but hasn’t increased much, in both Seattle and Portland.
Nationally, foreclosure timelines have swelled over the past two years as lenders deal with rising piles of delinquent loans and as they are under pressure to modify those loans and avoid foreclosures. But so-called “judicial” states that require banks to get a court order in order to foreclose, including New York, New Jersey and Florida, have seen foreclosure timelines grow even larger.
In the post There are 36,000+ Distressed Properties in Orange County, I pointed out the huge disparity between delinquency rates, currently running at 8.4%, and foreclosure rates, currently running at 2.37%. There are 3 times as many borrowers delinquent as there are in foreclosure. The supposed health of our local real estate market is an illusion created by lenders and enjoyed by squatters.
What will cause a change?
Realistically, there is only one thing that will force this to change: strategic default. As long as lenders are permitted to avoid foreclosure and fail to liquidate their properties, and as long as the struggling borrowers continue to struggle until their implosion, this situation will persist. The banks benefit because they can slowly liquidate their inventories without drastically reducing prices, and delinquent borrowers benefit by squatting and avoiding housing payments. The prudent borrowers, the struggling borrowers who continue to make payments and ultimately the US taxpayer are the ones who are hurt. In other words, most of the readers of this blog are the ones being screwed.
The nightmare scenario for lenders is a sea change in borrower attitudes. As the reality of squatters becomes more widely publicized, and as struggling borrowers see the benefits others obtain by stopping making payments, widespread accelerated default could force a change. The only reason borrowers keep making payments, particularly struggling borrowers, is because they fear foreclosure. Once that fear is gone, why would anyone keep paying? They won’t. That is what would force a change in lender policies.
It’s still a cartel
The lenders are acting in unison right now because they are all enjoying the benefits of restricting inventory to bring up prices. However, not all lenders are equally healthy, and the weaker lenders have a stronger incentive to liquidate than they have to hold on to their REO. Once they feel they have reasonable pricing and available volume, they will step up their liquidation efforts, and the cartel will weaken its grip. Once the cartel starts to crumble, some lenders may speed up their liquidation to get out while they still can. If things get really out of control, we could see a stampede for the exits.
Transition to short sales
One phenomenon we are witnessing in the trustee sale market is a dramatic decline in NODs and NOTs. As Sean O’toole from ForeclosureRadar.com points out, “Given the staggering number of delinquent home loans, foreclosure activity should be rising, not falling as we found again this month” says Sean O’Toole, founder and CEO of ForeclosureRadar.com. “We have recently witnessed a number of cancellations where the owners have vacated the property and are clearly not working to modify their loan or complete a short sale. The most telling statistic that we present today may be that it takes lenders two months longer to foreclose then it did a year ago.”
This is surprising because earlier this year, lenders were planning to increase their foreclosure activity. Since the foreclosure backlog is enormous, the losses are less in a short sale, and the new HAFA program facilitates short sales by paying everyone off, banks are making a concerted effort to push more people through the short sale process. Ultimately, I believe we will see the foreclosure notices pick up again because short sales alone will not clear out the inventory. A short sale requires a participating owner, and many properties with delinquent borrowers are empty, or the owners are simply squatting without bothering to contact the lender. The only way to clear out squatters who do not communicate with the lender is through foreclosure. The banks are not going to give homes away… at least I don’t think so. If they are, I want one too.