What happened to the REOs that were due spring 2012?
Last fall B of A and other major banks increased their filings of Notices of Default. Since then I have been predicting a spring surge of REO that would snuff out the spring rally. Right on schedule in January, Notices of Trustee Sale and the number of REO acquired increased, and it looked like the REO would hit the market in time for the spring selling season.
Then lenders changed their collective minds.
In February, lenders abruptly curtailed their acquisition of REOs at the auctions, and in March they took back fewer than in February.
This has left many, me included, groping for an answer.
The rate of foreclosure activity does indeed appear to be increasing in the states most directly affected by the robo-signing delays and the negotiations involved in the AG settlement. But why the drop in the non-judicial states when we have a mountain of seriously delinquent loans that should be in the foreclosure pipeline by now, but instead are still waiting in the wings?
Like many of us, he is proceeding from a false assumption, that banks want to foreclose. Further, he erroneously assumes banks have been foreclosing as fast as they can, they haven’t. If you make those two assumptions, the decline is foreclosures is perplexing. If you understand those assumptions are flawed, the slowdown is much easier to explain.
Let’s see how he tries to explain it.
The answer may lie in the AG settlement itself. The top servicers control a huge percentage of the loans currently in default, as well as those that are delinquent and on the precipice. The majority of these are in non-judicial states, most notably California, which had a massive number of loans in the Countrywide portfolio alone. Dual-tracking, the practice of working with borrowers on loan modifications at the same time foreclosures are under way, was specifically disallowed because of massive consumer complaints that foreclosures too often happened before mods could be processed. With dual-tracking no longer permitted, and with the affected servicers tasked with writing down at least $20 billion in principal on these loans, it is less of a surprise to find foreclosures declining in those states.
Twenty billion is a drop in the ocean. Lenders currently own over $30 billion in REO right now. Through January, they were foreclosing on about $3 billion per month. If a third of that amount is underwater, they could reach their $20 billion just in California in less than 2 years. No, finding $20 billion in losses to count toward the settlement is not their issue.
Holding off on new foreclosure actions and standing pat on defaulted loans that would normally already be in the process makes sense, as servicers determine which borrowers are eligible for the principal balance reductions they are required to make under the settlement. By focusing on pools of loans in the states with the most foreclosures and the largest drop in property values, servicers can get to their respective increments of the $20 billion requirement more quickly.
… Additionally, reductions in foreclosure actions might be attributed to the systemic delays most servicers are seeing in their pipelines. Foreclosures are more difficult to complete, making for fewer scheduled trustee sales and fewer assets becoming REO. It all means the number of foreclosure actions will be lower than expected, overall.
The recent foreclosure figures are reminders that statistics are readily misunderstood and often misleading. Examining the stories behind the story reveals that the decline in foreclosure activity, while somewhat unexpected, is no longer unexplainable.
His explanation sounds reasonable and plausible. Unfortunately, the cause and effect is absent, and his complex explanation is simply wrong.
Why do pundits ignore the obvious and simple answer?
Sean O’Toole of Foreclosure Radar succinctly stated what’s really happening in his March report.
“It is easy to see why some analysts continue to predict that there will be a wave of foreclosures. Clearly we still have far too many homeowners in trouble, and with the recent Attorney General Settlement over robo-signing, and other issues, it seems completely logical that a wave of foreclosures would follow. It won’t.“, stated Sean O’Toole, Founder & CEO of ForeclosureRadar. “To reach the conclusion that there will be a wave of foreclosures, you have to assume that the banks either want to foreclose – they don’t – or will be forced to foreclose – they won’t. In September 2008 the rules of the game were changed to help the banks remain solvent, and since then it has been in their best interest to find reasons to delay foreclosures through whatever means necessary. I don’t see that changing anytime soon.”
Sean is right. Lenders don’t want to foreclose because they don’t want to recognize the losses, and now with nearly two years of declining prices since the expiration of the tax credit in May of 2010, lenders have another reason not to foreclose: their REO were causing prices to go down. Since last fall lenders have been putting fewer and fewer of their REO on the market to reduce MLS inventories and reverse the downward course of prices.
By reducing MLS inventory, lenders hope to create a balance of supply and demand that stops prices from falling. Just like the OPEC oil cartel reduced supply to drive up prices in the 1970s, the banking cartel has reduced supply in 2012. OPEC was successful for a short time in driving up oil and gas prices. Similarly, lenders may be successful for a short time in driving up home resale prices. Sellers certainly think so. Look at the kool aid flowing back into the market. Orange County asking prices are up nearly 10% in the first quarter of 2012.
So what happens next?
Not much has changed. Buyers can’t raise their bids because they must qualify based on real incomes and conventional financing. Further, with the collapse of house prices and rampant mortgage equity withdrawal, few buyers have the cash to increase their bids, and many deals will fall out of escrow because the buyers cannot perform. Unemployment is still high, so new household formation is not going to drive increased demand.
In other words, we will limp through another year. There will be much fanfare about the bottom being in, but I question its durability. It is another artificial bottom created by withheld inventory. Any increase in prices is going to bring the overhead supply to the market, and appreciation will be muted.
Perhaps lenders will manage their releases to keep prices above this springs lows, but perhaps not. Anyone betting on this being the bottom is placing their faith in a cartel of clueless lenders with different pressures and agendas. They may change their minds at any moment. The only certainty is there are a huge number of delinquent borrowers with unresolved loans that need to be processed, and the risks to the downside are greater than the potential upside over the next three to five years.