Apr252012
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.
Why Are We Seeing Fewer Foreclosures?
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?
We will likely see a small spring rally characterized by low sales volumes and frustrated buyers competing with one another for the slim selection on the MLS.
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.
Since 2009, we’ve had one reflation attempt FAIL implemented after another— Two rounds of buyer tax credits, state buyer tax credits, down payment assistance and a continuous buying-down of mort rates. $trillions spent, yet, the ‘sacred cow’ could not be reflated. Now, an apparent inventory-squeeze has been uncleverly devised.
Problem is, the amount of new credit is unable to service the prior credit expansion.
Lowering interest rates has helped increase the amount of credit in an attempt to equal the prior expansion, but it’s still not enough. Incomes barely supported half the previous expansion, so even with much lower house prices and much lower interest rates, we still see contracting credit.
At this point, a case can be made…. by simply maintaining the status quo (extend and pretend), the fed is merely attempting to constrain the collapse to provide acceptable ‘exits’ for its chosen survivors.
This is why I’m not in a hurry to buy a place. There are plenty of nice homes in the shadow inventory. Eventually the banks will not be able to hold back any more.
Right now is certainly not the best time to buy in Las Vegas. Many people are getting caught up in the frenzy believing the bottom is in. I have my doubts. There are too many people not paying their mortgages to believe a durable bottom is in place, particularly for houses priced above the median.
A increase, over 2 years, to 7% mortgages rates will finally deflate the the last of the bubble. However, even with a new President, I can’t see the Fed increasing rates. It’s not in the banks best interest.
Great! Houses will be reasonably priced relative to incomes.
Too bad 25% of us will lose our incomes when the 30Y mortgage rate hits 7%…
Fed and government are stuck in a box with regard to rates. Rates must stay low or house prices fall, bailouts fail, politicians look bad. Fed could give a shit. Every additional liquidity injection is simply a journal entry. Since the Fed will suffer NO REAL LOSSES, after all it is f’ing monopoly money with the only backing being the american taxpayer, the Fed will likely end up being the buyer of last resort. Additionally, scared money from Europe and Japan will push rates lower as it seeks the perceived safe haven of US sovereign debt. This will keep interest rates low/lower for the foreseeable future. Lower rates reduces our nation’s cost of servicing debt, read: HELOC ARM borrower. They are giving us more rope with which to hang ourselves. I care not whose motives are what nor why, only that the death of the dollar is the result.
The banks are a cartel, and they are colluding in an attempt to artificially control housing prices. They’ve been doing this for years … but now it’s on a complete different level. It’s egregious (and unfair) to see on all the home debtors in the best neighborhoods of Orange County, in default, month after month after month, with no recourse. Home prices are NOT controlled by buyers and sellers, and ARE controlled by what a bank is willing to loan a buyer to pay for a home. It’s a big scam.
That leads me to a very famous quote by one of my favorite Americans:
“I believe that banking institutions are more dangerous to our liberties than standing armies…” ~ Thomas Jefferson
Finally, why has the media completely ignored this problem? Why is Jonathan Lansner not writing a story about the Doctor and his wife who live in Laguna Niguel, and haven’t paid a mortgage payment in 2 years?!? It’s so much easier, and politically convenient, to focus the story on the poor minority family who was suckered in the robo signing scandal, now losing their family home. It’s all a mirage designed to keep YOU looking the other way!
During the bubble, priced-out buyers substituted into lesser accommodations to participate in the OC real estate Ponzi scheme. Lenders are hoping to force buyers to again substitute into lower quality homes to absorb inventory at higher prices. This will add to the pressure at the high end where there is no market right now. Until lenders capitulate and foreclose on the squatters inhabiting houses currently priced over $800,000, I don’t see how this bottom can hold.
The one sided nature of the coverage of the housing bubble collapse is annoying. You’re right. You see very few stories about people squatting in luxury, but we are inundated with sob stories about loan owners who supposedly deserve a break.
Hey IR … I think you’re gonna have to rewrite all your forecast for local housing based on the banks behavior.
There can be no bottom in local housing as long as there are thousands of home debtors living in mini mansions all over Orange County with $800k+ mortgage balances. These are ticking time bombs and will either be bulldozed (very unlikely) or forced back into the marketplace to the highest bidder. The banks are simply extending this crisis.
Going back to 2008, I never would have believed that the govt, the Fed and the Banks would taken the steps that we’ve seen the last 4 years. They have taken over all asset classes in an attempt to ease the pain. Now they’ve set the stage for a Japanese style deflation to last for years.
Nailed it. I had an idea they “could” do this, but my naive little mind couldn’t imagine it. We are all Japanese now. Let’s face it, capitalism and free markets no longer exhist.
Its political season year round now. Our housing market is completely manipulated.
Read the book; “How to kill 11million people? You lie to them.
Four years after the government took over the GSEs, we take it for granted. For over 40 years the government consistently denied they would do that, yet when the going got tough, they did. There is so much about the response to the price collapse that falls in the category of “they could but they never would.” Well, they can and they did. How about the federal reserve buying something other than short-term treasuries? Or mortgage-backed securities? Astonishing stuff.
Like Lee, I wonder what they are going to do with the plethora of $800K+ mortgages out there. The squatting at those prices ranges is everywhere. So far, we are five years in and the banks show no signs of cracking down on these people. There are not nearly enough buyers in that price range to absorb the inventory over the next 20 years. Are some of these people going to be allowed to squat until prices come back? What’s the end game?
Theoretically, the median might not change much. It may actually go up as these properties are released because it will change the mix of sales. However, the $/SF measurement will show people getting more for their money as the value of individual homes drops.
The crash is not over yet.
This is one giant asset grab folks. Lower rates to entice overindebtedness, run prices to the moon, mania ensues, let it crash, buy the toxic debt, foreclose. Price matters not. If i was the money printer, I would do the same thing. I want the hard assets, nothing more. I will print as much fiat as needed to get hard assets. Tales of an Economic Hitman – in real time.
Lee: The poor folks have long been foreclosed on. They were the first wave and not a peep from the media. It’s hit the middle of the middle class and is moving up. That’s why all the story of saving the children are popping up. I guess the middle to lower class children weren’t worth saving in their book, but make a great story too sell squatting in manisions.
As you wrote: ” It’s all a mirage designed to keep YOU looking the other way” The banker industrial media complex will do any thing to keep their gravy coming.
IR: “There are too many people not paying their mortgages to believe a durable bottom is in place…” why pay when you can squat for free? As long as you have negative equility, squatting maximizes the profit. Is that what they been taught in business school and by WS?
I think as it becomes more commonly known and less stigmatized, more home debtors will actually stop paying their mortgage payments. If I know my neighbors stopped paying their $5,000+ mortgage payment 18-months ago, with no threat of foreclosure, I’ll be more motivated to do the same. It’s very easy to see how a home debtor will make a business decision on an upside-down home, and sacrifice his credit to save more than $100,000 in mortgage payments. It’s called moral hazard.
JMO ~ The only thing that can stop this is a reversal in home prices.
“It’s hit the middle of the middle class and is moving up. That’s why all the story of saving the children are popping up. I guess the middle to lower class children weren’t worth saving in their book”
I’ve read comments from people decrying those lowly subprime deadbeats like they were an underclass unworthy of compassion. As you noted, it was when the crash started hitting middle and upper income borrowers that the sob stories began to appear. When it wasn’t subprime low-lifes, the middle class became victims of one form or another.
“IR: “There are too many people not paying their mortgages to believe a durable bottom is in place…” why pay when you can squat for free? As long as you have negative equility, squatting maximizes the profit. Is that what they been taught in business school and by WS?”
People will squat as long as they can. The reason prices won’t stop declining is because squatters become distressed inventory at some point, and the liquidation of that inventory will either flatten prices or drive them lower.
I’ve been told by coworkers who are looking to buy that once the presidential elections are over, the prices of houses will plummet noticeably. Any truth to that?
The fall and winter is usually the best time to find a good deal. Everything depends on how the banks manage their inventory. Banks have no incentive to flood the MLS with product over the fall and winter, so there is no guarantee prices will plummet. However, as was pointed out above, lenders have to deal with this problem eventually, and withholding product just delays the inevitable.
I thought that myself, but it seems the Fed can keep the banks going with just fumes in the tank. Two years after the tax breaks the banking cartel is still going strong. I have to admit, I’m really impressed. We’ll all be paying for it, which is ridiculously upsetting, but the determination seems absolute. The government is determined to go bankrupt before the banks to keep the banks going.
Actually, it all makes perfect sense.
The fed will always act in the best interest of their shareholders, NOT the populus.
They will burn down empty over priced homes before they sell them at a price the market can afford. If they destroyed million of crops and cattle while hungry Americans waited in soup lines during the Depression, why wouldn’t they do the same for realestate?
“If they destroyed million of crops and cattle while hungry Americans waited in soup lines during the Depression, why wouldn’t they do the same for realestate?”
Holding them empty and off the market does the same thing. Even keeping a squatter in the property works the same. They don’t need to actually destroy the house to prevent it from adding to supply. Lenders have been virtually bulldozing houses since 2008 when they began creating shadow inventory.
I like CR, but I think he’s wrong on the bottom calling. He’s quoting others.
First a comment: Back in February, I argued that The Housing Bottom is Here. My previous house price call was back in December 2010, and at that time I thought we’d see another 5% to 10% decline on the repeat sales indexes. Corelogic is down 7.3% since October 2010, and the Case-Shiller composites indexes (NSA) are down about 7.6% (both will probably fall further with the March report). About what I expected.
Here are some more bottom calls (or close to bottom calls). Most of the following analysts and economists haven’t called a bottom before – so this isn’t the usual annual “Rite of Spring” bottom calls, but we have to be careful about an echo chamber since we all look at the similar data. Also these are just forecasts ..
LINK
This smells bad – smells of colussion. But since the the government is one of the parties involved, don’t except this fact (almost certainly a fact) to ever see the light of day.
Nation of Sheep. Screw the Renters!
Some enterprising attorney needs to sue the major banks based on anti-trust laws. In any other market, such collusion to manipulate prices would bring the ire of regulators, but right now with the biggest asset purchase of a family’s life, the government is turning a blind eye to widespread collusion and price fixing. It’s shameful.