In January 2010 we saw that despite apparent declines in foreclosure filings, daily foreclosure activity is up on all fronts as the foreclosure stalemate continues.
What’s morality got to do with it?
Last week a group of investors, including California pension funds CalPERS and CalSTERS, a Florida pension fund, and the Government of Singapore Investment Corporation, walked away from more than a billion dollar investment and a $4.4B loan on Stuyvesant Town – a 56-building 11,000-unit apartment city in Manhattan, whose value had dropped by $3.5B to below $2B.
Despite the massive loss, it was clearly a sound financial decision by these investment professionals to protect the funds under their care from further losses – put plainly, they were smart not to throw good money after bad.
Yet many continue to labor under the idea that unlike these businesses, homeowners have a moral obligation to make payments on their mortgage even when it makes no financial sense to do so.
The case I hear most often is that the homeowner has a moral obligation to “honor the contract”. This seems to me to naively set aside the simple fact that there are two parties to a contract, and that as part of the agreement between those parties the lender signed up for the very real possibility that they might end up with the property if the homeowner became unable or unwilling to pay. If this was not simply an option for the homeowner, there would be no reason for the foreclosure process to begin with… instead we’d be building debtor’s prisons.
Others, often those in homes that are rapidly declining in value, believe that homeowners have a moral obligation to make their payments as doing otherwise harms society at large by causing property values to fall. This is a flawed argument on multiple levels:
- It assumes high property values are in societies best interest. That’s questionable for a variety of reasons, but clearly there is a stronger moral argument for affordability when it comes to home prices.
- It assumes foreclosures cause price declines. I’d argue the opposite – price declines cause foreclosures. And in this case price declines were inevitable since prices were artificially inflated through unsustainable lending practices. Seems to me the morally correct thing to do is unravel that mistake as quickly as possible.
- It assumes that in our consumer driven economy the greater good is better served by leaving more than 25 percent of homeowners underwater in their homes. Wouldn’t we be more likely to see economic recovery and job growth if our national mortgage debt once again represented a sustainable percentage of our national income and we returned to traditional levels of disposable income?
Setting aside morality, the decision to walk away from one’s home is still anything but easy. Most people have an emotional attachment to their home and the memories associated with it. Walking away also impacts the homeowner’s credit, the lender may have further recourse against the homeowner, and there can even be tax consequences.
Unfortunately in all the talk around the morality of foreclosure and walking away, we are losing sight of the bigger picture – finding the most effective way to return to a sustainable level of debt, a healthy housing market and a robust economy.
VIDEO: Foreclosure Auction Guide
Buying property at the foreclosure auction, or trustee sale, can be rewarding or disastrous. The difference between gain and pain comes down to knowing how it works and being prepared. As a veteran of hundreds of auctions I put together this video to give everyone an overview of the auction process. In less than ten minutes you can watch and learn the basics of how an auction works.
- How to find the actual location of the auction
- The three possible outcomes: postponement, cancellation, or sale
- Things to watch out for, such as
- Multiple auctioneers operating simultaneously
- How to make sure you bid on the correct property
- The implications of the As-Is sale
- Qualifying as a bidder
- A typical bidding scenario
- What happens when you win
ForeclosureRadar.com gives auction investors the freshest foreclosure information – including exclusive daily auction updates – and is the only foreclosure service with tools for making sense of it.Armed with this information, you have the best chance of a rewarding experience on the courthouse steps.
H.A.M.P. Updated Documentation Requirement Makes Good Sense
The U.S. Department of the Treasury and the Department of Housing and Urban Development (HUD) announced this past Thursday an updated guideline for servicers participating in the Administration’s mortgage modification program commonly known as H.A.M.P. The rule change is intended to speed conversions of trial modifications to permanent ones by requiring documentation up front. “The updated process requires that key documents, including proof of income, be obtained from the borrower before a borrower evaluation can begin. This more robust requirement of upfront documentation will make it easier and quicker to convert trial modifications to permanent modifications and enable servicers to use their resources more effectively.” http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2010/HUDNo.10-021. The full text of Supplemental Directive 10-01, Home Affordable Modification Program – Program Update and Resolution of Active Trial Modifications, dated January 28, 2010 can be found at https://www.hmpadmin.com/portal/docs/hamp_servicer/sd1001.pdf.
Before the new requirements, a trial period plan could be based on verbal financial information obtained from the borrower, subject to later verification during the trial period. Now for all trial period plans with effective dates on or after June 1, 2010, a servicer may evaluate a borrower for HAMP only after the servicer receives the following documents: (1) Request for Modification and Affidavit (RMA) Form; (2) IRS Form 4506-T or 4506T-EZ; and (3) Evidence of Income.
We previously pointed out that the lack of permanent loan modification conversions might be more the result of homeowner’s resisting a program that leaves them in yet another exotic mortgage. Not just a paperwork-processing problem as the Administration suggests. Regardless, homeowners will be better off with the “more robust requirement” because the homeowner will be less likely to make several mortgage payments under a trial modification only to be denied permanency due to disqualification caused by the documentation. In other words, it will be less likely that the homeowner will throw good money after bad on a mortgage that does not qualify for modification. Ostensibly, under the new requirements the homeowner’s qualifications can be better assessed before any modified mortgage payments are made in good faith by the homeowner during the trial period.
Whether the new documentation requirements really make it easier and quicker to convert trial modifications remains to be seen. An argument can be made that the new requirements don’t simplify the documentary complexities associated with H.A.M.P. but merely push the problem forward in the loan modification timeline so that the ultimate number of permanent loan modifications achieved will not change. But if nothing else, in many cases the homeowner and the servicer should know sooner if the sought after loan modification is destined for failure and that makes good sense.
Housing on Steroids, Are We Addicted?
Are higher home prices really the answer to the housing crisis?
Looking back at 2009 we saw unprecedented support for the housing market in terms of government subsidized interest rates, tax credits, foreclosure moratoria and loan modifications that make subprime lending look safe. Clearly the drop from the dizzying heights homes prices reached in 2006 was staggering, and just as clearly the drop would have been far worse without this intervention. To justify this intervention one has to assume that higher home prices are in our best interest. But are they really?
Like an athlete using performance-enhancing steroids, should we be willing to risk our economic health and future for a remarkable, but likely unsustainable, performance now? Is it really reasonable to expect our current steroid induced housing market won’t come back to haunt both our personal finances and our national economy in the future?
Looking back to our previous foreclosure crisis in the 1990’s, we worked our way out of that one with housing steroids as well. We started with the Taxpayers Relief Act of 1997 that incentivized every homeowner to flip-that-house with tax-free gains on real estate. As we entered the millennium the housing steroid cocktail was enhanced with a loosening of regulations and an extended period of low interest rates. This stimulus led to the greatest housing bubble in our history, the aftermath of which we will continue to deal with for years to come.
As with steroid use by athletes, there are short term artificially induced gains followed by serious negative side effects. The gain was stratospherically higher but unsustainable home prices. The side effect has been negative equity, foreclosure and recession as the steroids wore off and homes prices returned to earth. As we once again embark on injecting a powerful cocktail of stimulus into the housing market let’s look at the winners and the losers of housing on steroids.
Who are the winners and losers of housing on steroids?
Winners
- Government: Higher property values mean higher property taxes and higher government revenues.
- Title & Escrow companies: Higher prices mean higher transaction fees.
- Realtors: Higher prices mean higher commissions.
- Insurance Companies: Higher prices mean higher premiums.
- Sellers: Anyone who flips, sells, downsizes, or simply cashes out – assuming they get the timing right.
Losers
- Homeowners: Periods of artificially inflated values only mean inflated taxes, insurance premiums and unpredictable future value potentially leaving them stuck in an underwater prison-of-debt during the inevitable busts.
- Realtors: While the highs are great, the busts are devastating – not only to their own income, but also to their reputation among those who trusted their mantra that “now is a good time to buy” at the peak.
- Retirees: And other fixed-income investors who can’t get a decent return on investment thanks to artificially low interest rates. It’s hard to get those 5-10% returns your retirement plans are counting on during a period of near zero interest rate policy.
Is the solution to our housing crisis really more housing steroids in the form of government intervention? Might we better off by kicking the habit and returning to a sustainable market, realistic growth that keeps pace with inflation, and prices that reflect actual incomes? Ask yourself a few questions:
As a homeowner, which would you prefer?
- Artificially inflated home values that eat at your income with higher taxes and insurance premiums while not otherwise benefitting you so long as you still need a roof over your head , or
- Confidence that the value of your home will remain stable and keep pace with inflation as you build equity by paying down the mortgage.
As a Realtor, which would you prefer?
- An unstable and dysfunctional boom/bust housing market with periods where commissions can be hard to find, or
- A stable housing market with continuous sales bringing a consistent stream of commissions.
As a citizen, which would you prefer?
- Covering up the real problem (too much debt) by artificially inflating home prices using tax payer dollars we don’t have (creating more debt) while still leaving our consumer-driven economy weak because too much income is going to mortgage payments, or
- Addressing the negative-equity problem and allowing prices to return to levels supported by reasonable incomes and loan terms.
The reality is that housing prices aren’t too low; it is our debt that is too high. Rather than continue to waste tax dollars we don’t have on temporarily inflating home prices, perhaps its time to “Just Say No” to the housing steroids that got us in this mess to start with.
I’m Flipping Over HUD’s Waiver of the Anti-Flipping Rule
On Friday, HUD Secretary Shaun Donovan announced that FHA mortgage insurance will be allowed on foreclosed properties that are quickly resold or “flipped.” The policy shift is a welcomed change. The Anti-Flipping Rule adopted in 2003 as 24 CFR 203.37a(b)(2) was designed to address predatory lending practices where a Lender, Seller and/or Appraiser might perpetrate fraud on an unwitting homebuyer by reselling a property far in excess of the fair market value or with substantial overcharges tied to the new mortgage. While the Rule may have helped on that front, it unnecessarily targeted foreclosures which are commonly flipped… either by the bank or an investor.
Typically, in today’s foreclosure environment an investor will purchase a foreclosed home at the Trustee’s Sale only when the property can be bought at a discount from the fair market value. The home is then rehabbed as necessary and resold at fair market value as quickly as possible to avoid holding costs and risks incident to ownership, often the resale occurs well within 90 days. Importantly, the notion of a fraudulent sale in excess of fair market value to an unwitting homebuyer does not arise nor is it a threat. Instead, the reality in today’s market is that an investor will not entertain a purchase offer from a buyer who requires FHA financing which is bad for the buyer, bad for the seller and bad for the community seeking to stabilize property values at full fair market. Kudos to HUD for finally recognizing this negative influence in the housing market and doing something about it.
The waiver will take effect on February 1, 2010 for one year unless otherwise extended or withdrawn. Also, note that the waiver comes with the following limitations:
- The transaction must be at arms-length
- If the sales price is 20% or more above the acquisition cost the lender must meet conditions concerning appraisal and property inspection
- The waiver is limited to forward mortgages, no Home Equity Conversion Mortgages
Interestingly, HUD acknowledged that eliminating the 90-day resale restriction will give the FHA greater opportunity to dispose of it’s single family REO “in a way that maximizes return to the FHA mortgage insurance fund” (in other words at the highest price). So HUD saw that the Anti-Flipping Rule not only hurt buyers, sellers and our communities, but hurt the FHA too. (See http://www.hud.gov/offices/hsg/sfh/waivpropflip2010.pdf for full text of the Waiver.)
The waiver is good in that it helps investors quickly resell foreclosed properties at full fair market price which will also help occupy homes and stabilize values. The waiver is good in that it makes available to buyers FHA-insured mortgage financing on a growing portion of the available homes for sale. The waiver is good in that it helps mitigate potential FHA mortgage insurance fund loses by increasing what buyers may be willing to pay for distressed properties. Bottom line, it’s all good.
December 2009 California Foreclosure Report
We just posted our latest California Foreclosure Report: DOWNLOAD HERE
Highlights from this report:
- Dramatic declines in Foreclosure Activity – not simply seasonal
- New Preforeclosure Inventory data – clearly shows we fewer filings, NOT fewer foreclosures
- Big Drop in Sales to 3rd Parties – banks cut discounts leaving fewer deals
Sign-up for our FREE monthly California Foreclosure Report by email
Video version:
The swell is huge, but no waves in sight
The cry of “wave!” continues. You don’t have to wait long between news stories about shadow inventories and impending waves of foreclosures that are poised to devastate the housing market.
In September, Bank of America predicted “a spike from now to the end of the year in foreclosures.” A spike that didn’t happen. Also in September, Amherst said that “favorable seasonals will disappear over the coming months, and the reality of a 7 million-unit housing overhang is likely to set in,” a prediction that was repeated last month in a hearing before the House Financial Services Committee.
Auctioneers on the courthouse steps called me before the end of the year to tell me to get ready for January as they had heard from their managers that properties will finally start selling, rather than continually postponing come January 1. Didn’t happen.
Even commenter’s on my blog posts try to explain to me that there is a huge shadow inventory — as if I wasn’t aware that there a lot of property owners who are underwater, delinquent on their mortgage, or stuck in foreclosure limbo.
Like everyone else, I see the signs that a wave of foreclosures should have been upon us long before now. Yet for some time now I’ve been a fairly lone voice in saying that a foreclosure wave isn’t coming.
So why do I believe there will be no foreclosure wave, at least not in the near future?
Because we simply don’t have either the political will, or the financial capacity to foreclose on everyone who is currently delinquent, not to mention the millions more who will become delinquent if the housing market is crushed with a wave of new inventory.
Our financial institutions are still struggling to get their footing, the FDIC is in no position to bail them out, and taxpayers have had more than enough of bank bailouts.
And while little has been done by Congress to address the root problem of negative equity, they certainly have worked to prevent foreclosures and preserve home values.
So if not a wave of foreclosures, what do I think we can expect instead?
Foreclosure limbo consisting of continued government interventions, whether in the executive, legislative or judicial branch, at the state level, by the Fed or even supposedly independent oversight boards.
They’ll accomplish this by keeping a bid under housing prices through low interest rates and tax credits; forcing banks through hoops; threats; foreclosure moratoriums or any other means necessary. As such I see little chance that housing will be allowed to fall, no matter the cost. Instead we will “extend and pretend” for years to come.
Foreclsoures will continue to be trickled out at something near the current rate. They can’t stop foreclosures completely or everyone would simply stop paying their mortgage.
Some may argue this won’t work. Certainly homeowners can’t just stay in their homes free forever. Perhaps, but governments should also not be able to run deficits forever – yet for now at least, they do.
Will common sense prevail?
Nick Timiraos over at the Wall Street Journal called my attention to a new study out from the New York Fed. It essentially says that loan modifications are less likely to default if they include a principal balance reduction. While my initial reaction was simply “Duh”, I’m glad to see this minor acknowledgement of the real issue – negative equity – at the federal level.
I’ve known for a long time that with the exception of the Five D’s (Death, Divorce, Drugs, Disease and Denial), foreclosure is the result of negative equity which leaves the homeowner trapped in a prison of debt unable to sell or refinance (with the possible exception of a short sale). Negative equity is so obviously the root cause of foreclosure it is hard for me to believe that the Fed had to commission a study to find out that loan mods which fail to address this core issue are less likely to succeed.
The root problem with the current Making Home Affordable loan modification programs, and the general idea that negative equity does not have to be addressed in order to avert this crisis can be traced back to a study by the Boston Fed. That study essentially concluded that negative equity was not enough in and of itself to result in default and that job loss or some form of payment shock, like payment resets, was also required. They looked at Massachusetts foreclosures from the 1990’s to come to this conclusion. I instantly had issues with the study, given that the 90’s downturn was due to a recession rather than a massive bubble, because home prices dropped far less then vs. now, and a much smaller percentage of the population was affected. How anyone could think that period was indicative of what we could expect this time around was a clear example to me of how economists regularly get lost by failing to take into account basic common sense. You’d think they’d get that after nearly universally missing the housing and credit bubbles which got us here in the first place. I wasn’t the only one who thought this study was off base and I thought the folks over at the Kellogg School addressed its short comings nicely in their study on Strategic Default.
Now perhaps, with this latest study, the Fed is finally getting a clue and coming to the realization that addressing negative equity will ultimately be a required part of getting back to a healthy housing market. And if so, what’s next? Nick Timiraos noted today that Barney Frank doesn’t think we can force lenders to lower principal balances. But perhaps the quiet move on Christmas Eve by the Treasury to remove the cap on funding to Fannie Mae and Freddie Mac is an effort to get this done through the backdoor… at taxpayer expense.
No question in my mind that we have to address the negative equity problem. The only question now is how. Will the powers that be try to sneak it onto the back of taxpayers, will they force lenders to eat the losses potentially pushing our financial system back to the brink of collapse, will there be a national discussion and administrative leadership on how to best deal with the excess $4 Trillion in housing debt, or will they continue to extend and pretend with foreclosures trickling out for years to come? My money remains on the last choice, but I’ll be watching closely.
Who’s Robbing Who?
Three interesting news items on the foreclosure front. First from the Atlanta Journal Constitution comes the story of a man robbing a bank to pay his mortgage. Apparently, the man handed the teller at SunTrust Bank a note that read “give me the money … I need to pay my mortgage … Merry Christmas.”
I was beginning to think we might see some better alternatives for homeowners terminally underwater than bank robbery after the Treasury Department provided details on their upcoming Home Affordable Foreclosure Alternatives program that made some progress on making short sales and deeds-in-lieu easier for homeowners who work with their lenders rather than simply “walking away”. Yet, just days later, HUD issued a letter to lenders classifying short sales by homeowners looking to escape their prison of debt as “strategic defaults,” and making those homeowners ineligible for future FHA financing with few exceptions. Examples of acceptable exceptions include “death of primary wage earner,” or “long-term uninsured illness,” with no mention of job loss.
Now contrast that with the following story from Bloomberg News – Morgan Stanley relinquished to the lender 5 commercial properties in San Francisco they bought at the top of the market in 2007. The current value of the property is estimated at $279 million, close to half of the value when Morgan Stanley bought it 2 years ago. Alyson Barnes of Morgan Stanley assured reporters, “This isn’t a default or foreclosure situation. It is a negotiated transfer to our lenders.”
Let’s compare and contrast. When things got tough for financial institution Morgan Stanley, they got $10B in TARP money, they walked away from their mortgage as part of a “negotiated transfer”, and got to keep their investment grade A+ credit rating. Joe Homeowner, on the other hand, is left to choose from continuing to throw good money after bad (payment based loan modifications), ruining their credit and chance to buy another home (short sale, deed-in-lieu or foreclosure), or apparently, robbing a bank.