Apr022012
The lending cartel believes they can hold back the REO flood
In what can best be termed as delusional optimism, the lending cartel is cautiously optimistic they can control the flow of properties as the liquidate their shadow inventory.
Based on what is happening today, lenders have reason to be optimistic. Collectively, they are withholding REO inventory and decreasing the supply of distressed inventory to force the market to bottom this spring. They don’t have much to lose. If they keep putting properties on the market, prices will certainly continue to fall. They hope that by removing the inventory, they can get the markets to bottom and with the constant barrage of bullshit from the NAr, they may be able to ingnite a rally as everyone tries to time the bottom of the market.
It’s easy for lenders to unite to withhold inventory to reverse the direction of prices. Cartels work when the members have an alignment of interests; however, once prices start going up, each member has incentive to cheat and release product into the rising tide to hasten their own liquidations. That’s when the strength of the cartel is tested.
We know BofA and other banks began increasing their foreclosure efforts last fall, many of those properties will go to auction over the next few months. What will these banks do with those properties? They hope they will have demand to sell into. Perhaps they will. Assuming they don’t release too much product and crush the rally they are engineering.
History is not on the side of the cartel. These arrangement are notably unstable. They have their moments, but over the long term, the interests of the participants fall out of alignment, and cheating among the members destroys the pricing power created by withheld inventory. What is the fate of the banking cartel?
Home Prices May Withstand Foreclosure Wave
By Teke Wiggin — Posted Mar 30th 2012 1:00PM
At best, an increase in foreclosures takes a double-edged sword to the housing market. On the one hand, it means we may be inching toward stabilization, as shadow inventory begins to move through the pipeline. On the other, it spells more stress for beleaguered homeowners and puts downward pressure on home prices.
This is the dilemma facing lenders over the next several years as they work through shadow inventory. Lenders don’t make money from delinquent loans (although their books may say they do). Non-performing loans must be cleaned up, the losses written off, and new loans which do perform must be put in place. Lenders are not going to give away several trillion dollars worth of homes. This isn’t optional.
As lenders process these non-performing loans, they must be careful not to process them too quickly and flood the MLS with too many properties because it will push prices lower and cause other borrowers to strategically default. If they process these loans too slowly, the risk going broke. Bank expenses don’t decline if borrowers quit paying. In fact, they go up substantially as lenders must spend money on collections. If non-performing loans fester on their balance sheets too long, even the too-big-to-fail lenders will become insolvent.
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Housing economists predict that the next wave of foreclosures is about to hit, following the recent settlement between government and lenders in the “robo-signing” scandal. No doubt it will still cause pain to hard-pressed borrowers. But in a break from the past, it may avoid depressing home prices. “There are countervailing strengths,” said Mark Fleming, chief economist at CoreLogic, an analytics firm. “We could very well see increasing prices in some markets this year, even though they have significant shadow inventories.” The “shadow inventory” is the overhang of homes expected to move through foreclosure that are not yet listed on the market.
Shadow inventory is not for-sale inventory, and if REO are kept in the shadows or sold in bulk to investors as rentals, lenders may succeed in keeping prices from going much lower.
A report from CoreLogic released today said that completed foreclosures edged down from 71,000 in January to 65,000 in February, and that the number of homes in a state of foreclosure has shrunk by 115,000 homes from February 2011 to 1.4 million homes in February 2012.
Despite the slight month-over-month drop, foreclosure activity has remained relatively steady recently, but economists predict that it will rise in the coming months because of the resolution of an investigation into illegal foreclosures between the government and major mortgage servicers.
Fleming told AOL Real Estate that the housing market may feel the impact of the robo-signing settlement during the summer, after the five banks involved in the settlement implement government-approved foreclosure practices.
“All of this will result in more foreclosure pain in the short term as some of the foreclosures that should have happened last year instead happen this year,” Daren Blomquist, vice president of online foreclosure marketplace RealtyTrac, said in February. The economist predicts that completed foreclosures will jump by 25 percent in 2012, totaling 1 million.
But since the market must eventually absorb the excess supply of foreclosed homes, breaking the foreclosure logjam isn’t necessarily a bad thing. “I would like to see the pace increase, because that means we’ll be able to work off the inventory faster,” Fleming said. And the downward pressure on prices that’s caused by an increase in foreclosures may be mitigated by improvements observed lately in other sectors of the market, as well as the economy as a whole, he says.
Is it better to perish by fire or ice?
Withholding inventory and dragging out the collapse (the ice scenario), keeps prices higher and helps save the banks which is why lenders are doing it. However, it’s the worst possible outcome for owners. A slowly formed bottom and a decade of grinding prices leaves everyone without equity. The move-up market will be dead for the next generation.
Allowing prices to crash by clearing out the inventory through capitulation provides equity for buyers who enter at the bottom and in the years that follow. The equity from those owners ignites a move-up market and helps absorb high-end properties.
Orange County is experiencing the Ice scenario. Las Vegas is experiencing Armageddon. Which market would you prefer to be in?
Lenders may hold back the flood of foreclosures this year. They are united in their desire to prevent prices from falling further; however, as the cartel succeeds, each of its members will look at its own balance sheet and reevaluate whether they believe it’s in their best interest to continue to withhold inventory or step up their liquidations. Once the fear of falling prices is abated, he pressures to liquidate will motivate lenders to process more and more foreclosures. With the lag times in reporting, its likely they will snuff out this year’s rally and several others over the next few years. We may hit the bottom tick of the market this year, but the instability of the cartel may make this bottom as illusory as the 2009 bottom was.
As the ship sinks, the sellers ‘window’ is rapidly closing….
CA AG Kamala Harris wants to change CA into a LIEN state
If Harris is successful in making CA a judicial state, the CA real estate market will be irreparably damaged.
http://www.zerohedge.com/contributed/2012-13-31/housing-crisis-do-you-know-difference-between-lien-state-and-title-state
It’s amazing how many of these HELOC abusers were recent buyers. They were people in the 40’s and 50’s that should have been thinking about retirement. They truly believe the equity on their house was their first or second job.
Were NOT recent buyers, is what I meant to say.
The NAr fighting for future commissions
NAR: Investor Purchases Increased, Advises Limiting REO Bulk Sales
For 2011, investment purchases increased significantly, according to data from the National Association of Realtors (NAR), and with more individual investors absorbing REO properties, the organization also thinks it is time to limit bulk REO sales to large institutions.
Investment-home sales increased 64.5 percent to 1.23 million compared to 749,000 in 2010, according to NAR’s 2012 Investment and Vacation Home Buyers Survey, which covers existing- and new-home transactions in 2011.
Investment sales also accounted for 27 percent of all transactions in 2011, up from 17 percent in 2010. On the other hand, owner-occupied purchases fell 15.5 percent to 2.78 million.
In its letter to federal agencies and regulators, the NAR stated that it urged policymakers and lenders to focus on expanding the availability of financing for qualified homebuyers and investors to reduce the number of REO properties on the market.
“More must be done to expand the availability of financing for qualified home buyers and investors to help draw down REO inventory rather than focusing on programs that could line the pockets of Wall Street companies and financial investment firms,” said Veissi.
NAR also urges caution when assessing mortgage-to-lease programs, such as the one Bank of America rolled out recently, which allows some customers facing foreclosure to rent out their home instead of losing their home in the foreclosure process.
“Realtors believe pre-foreclosure efforts should be intensified to help reduce the number of properties that end up as REOs,” said Veissi. “We hope that efforts will remain focused on keeping families in their homes as homeowners, rather than on programs that consolidate hundreds or thousands of properties into rentals and require large financial institutions to act as landlords.”
Proponents of the bulk REO rental programs see them as a way to reduce the number of foreclosed properties on the market, which bring property values down for other homes in the neighborhood.
Profile of investors:
-Forty-nine percent of investment buyers paid cash in 2011, and about half of all investment home purchases for the year were distressed homes.
-Half of investors said their main reason for the purchase was to generate rental income, and 34 percent wanted to diversify their investments or saw a good investment opportunity.
-Median investment home price: $100,000
-Median age: 50
-Income: $86,100
-Forty-one percent of investment properties were in the South, 23 percent in the West, 17 percent in the Midwest, and 15 percent in the Northeast.
From my POV the bank plan is working! I’m looking for a SFH 3/2 for around 500k in Huntington Beach. When one becomes available , and I mean something decent, it goes very quick. Anything under 425k is snapped up by an investor for 350k or so, cash, and flipped.
Andy, I’m looking in HB in the same price range. There is currently no inventory and anything halway decent that is priced accordingly will go within the first week. I’m going to wait out the market until we reach the slow season. I personally like seeing houses languishing on the market for two or three months, then deals can be made. There is no leverage being a buyer right now and you will likely get into bidding wars with other parties.
Waiting is likely the best strategy now. I don’t think prices will be going up, you can save more for a downpayment and likely have many more options later on. Good luck.
It’s the same in many markets around the country right now. At least for the next few months, it is a seller’s market.
Tru Dat….
The time to buy in Chicago was in early 2010 before the banks knew how they wanted to handle the mortgage crises. About the same time I was squatting in my own 400K shithohle, there were 400K foreclosed properties a block from the lake (albeit the southside, but still) that the banks were trying to unload for as little as 60K.
As a matter of fact, a good friend of mine walked away from his 400K mortgage and bought a foreclosure free and clear for under 70K. He then used the reduced purchase price to get his tax assessments lowered by 60%. With the money he saved he is now looking at homes in Brazil. But that’s another story.
Now, the very same properties the banks were trying to dump are listed on the MLS from 175K-300K. I know a Polish guy who was trying to flip a 30K home in 2011 for 300K after he put 70K into it in late 2010. Crazy. I knew some fool would pay and I was right.
I met the proud new owner, but didn’t have the heart to tell that proud woman the beautiful home that she just went into identered servitude for, was just a year ago listed on the MLS for 25K.
Nevertheless there are a few deals out there, but it seems to me that the banks their act together for the time being.
I watch the Las Vegas market very closely, and the supply of houses below $75K is drying up. Cash buyers got them all. The appraisals are not keeping up with the buying, and many financed buyers are falling out of escrow. Many of these low-end markets are becoming cash only.
Interest housing market situation. We have very low inventory, low mortgage rates, low sales volume and values are dropping. At the same time we have high cancellation rates, increasing rents, and 100,000 underwater owners.
It’s like the market is waiting for some thing big to happen.
you posted “…appraisals are not keeping up with the buying.”
Do you refer to BPO appraisers? I guess you are saying that appraisers take too much time.
BTW I’m no longer in Thousand Oaks, I left California after 60 years (since birth) and got a job in Panama City, Florida (panhandle) when I got laid off so I could get a better priced house.
So far so good: I’m waiting for a BPO on a short sale now. The house is 219k, 3450 sq ft, best part of town,on a lake, (not the beach) lots of land and $64/sq ft, in Irvine this house would still be over a million dollars.
Financed buyers are starting to get squeezed out by cash buyers at the low end. Financed buyers have to bid higher to get properties, and at the prices they bid, the appraisals don’t come in high enough to close the deal.
This owner doesn’t make me “sad” nearly so much as just disgusted.
Notice the TWO metal storage buildings on the side of the house in one of the photos. These buildings are doubtless there to store all the excess “stuff” the former owners spent all that Ponzi money on- all the consumer crap, most of it worthless, obsolete crap that these people just “had” to have, that ended up in the basement, the garage, these ugly container buildings, the trunks of the multiple expensive autos, or at a storage facility. Most of it is most likely destined for landfills in the near future.
We’ve squandered the bounty of the past 60 years and wrecked our financial system for a long time for a bunch of useless consumer crap that you can’t get $5 for at a yard sale. A person can live off on the good furniture and clothing that is disposed of before it’s even paid for in this country- I see good furniture being nearly given away on Craig’s List, and women with multiple closets stuffed with “designer” clothing but who have nothing, just NOTHING, to wear to work on Monday morning because it’s all a bunch of faddy crap that doesn’t hang with the rest of her wardrobe, that she bought on impulse, while her husband was down at the boat show trying to figure if he can get one more HELOC for that 3-deck cabin cruiser that burns 20 gallons of gas an hour, to replace the speedboat he bought with the refi 5 years ago.
I have a feeling that when we finally work our way through this, the Consumer Society will be over, as a frugal and sober generation of youngsters who learned through adverse example the value of money and dangers of credit, spend the early decades of their adult lives picking up the pieces.
“We’ve squandered the bounty of the past 60 years and wrecked our financial system for a long time for a bunch of useless consumer crap that you can’t get $5 for at a yard sale.”
That’s an interesting way to look at it. A sad truth reflecting our state of affairs.
We live in a culture in which we buy things we don’t need with money we don’t have to impress people we don’t know.