In my last post Waiting to catch a wave? Surge of REO’s unlikely, I speculated that foreclosures had dropped primarily because of U.S. Treasury Secretary Henry Paulson’s announcment to seek troubled asset relief for banks. The result being that banks are incentivized not to foreclose thanks to mark-to-model accounting changes, and an implied promise that the Fed or taxpayers will take bad loans off their hands at a premium if necessary.
This topic, and shadow inventory, which I also recently posted about, have been hot topics in the blogosphere and in the news. Many have predicted a wave of foreclosures is coming, while others are predicting that foreclosures are being held off the market to manipulate home prices. If you read my recent posts you know I have a different take. A few days ago, Diana Olick of CNBC did what I hoped someone would do and put the question directly to Bank of America. They essentially said that foreclosures had been delayed by the Making Home Affordable program, and would likely increase soon.
Despite it being hard to take banks at their word right now, I do think it is likely that the Making Home Affordable program, and specifically the Home Affordable Modification Program (HAMP) component of that program are playing a significant role in the delay of foreclosure sales. We actually pointed to some evidence of it in our July California Foreclosure Report, where we noted that many scheduled foreclosure sales were being postponed due to lender requests — likely because of this program.
So is it possible that foreclosure sales have simply been “HAMPered”? While I certainly think HAMP has played a role in delaying foreclosures, I don’t believe it is the full story. HAMP was not announced until February 2009 and details were not out until March yet we saw foreclosure sales drop dramatically just days after the Paul announcement last September. A commenter on my blog suggested the foreclosure drop in September was due to Fannie and Freddie being put into conservatorship and implementing moratoriums, rather than the Paulson announcment. That too is a great point. But we saw across the board drops in foreclosures, including for loans that clearly weren’t owned or guaranteed by Fannie or Freddie, so it too is an insufficient answer in and of itself.
The reality is that there are a lot of moving parts, and while its hard to do more than speculate about the specifics, the bigger picture remains clear. As a society we don’t have the political will to foreclose on everyone who isn’t paying their mortgage, and whether by implementing foreclosure moratoriums at Fannie and Freddie, announcing troubled asset relief, or pushing new loan modification programs we will continue to see the government intervene to keep foreclosures down.
Near term I believe this will help put a floor under housing prices and provide some sense of stability. Longer term I believe the government interventions to date fail to adequately deal with the negative equity problem and that they have simply kicked the can down the road leaving us with foreclosure problems for years to come.
The foreclosure “can” certainly does appear to be kicked down the road. Foreclosure alternatives seem to be the order of the day. The challenging part to all of this is the government’s and the lending world’s “one size fits all” approach to the foreclosure crisis. In Central California the floor would certainly fall further on housing prices if restraint is not used in the release of foreclosures into the market. The problem with applying this “cautious approach” to the entire market is that it further delays the return of prices to normalcy in places like Central CA. If the same factors at play keep prices low everywhere then there is little opportunity for gain of equity in stronger markets and less chance of relocation into lower priced markets. Without the significant increase of prices in stronger markets there is less chance for recovery in the weaker markets. If the shadow inventory was released and consumed quickly in strong markets prices would likely rise, in those strong markets, to the point that buyers would move in mass to find low priced housing. Who knows… maybe then recovery would be in sight.
Once again a brilliant summary of the latest foreclosure situation. Sean, your commentary on foreclosures is virtually the only honest take on what is actually happening along with why it is happening and what it will mean in the future … all extremely important factors when creating a foreclosure investment strategy. Thank you again for your insight and keep up the great work!
Either way, the American Taxpayer is subsidizing the ATM housing that took place from 2001 – 2007. The American Taxpayer needs to demand that FREELOADERS vacate the homes or pay their rent/house payments instead of just staying in the home for free , which is exactly what is happening right now. How can an OCCUPANT whether a tenant or a homeowner feel justified to remain in a property for which they are not making any financial payment for??? It is stealing from your neighbors… your American Taxpayer neighbors. ACORN IS ON THE WAY OUT… be a true American and move out or PAY TO STAY! The buck stops here! 9.12
As a society we don’t have the political will to foreclose on everyone who isn’t paying their mortgage…
I agree with you, Sean, and you know what bothers me about that? Why isn’t it the other way around? Why hasn’t political will been needed to forestall all of the people (constituents) who have been waiting and waiting to buy a house, and can’t because prices are too high? Why can’t the focus be on…”making houses affordable again for those millions of people who have been waiting and waiting to be responsible homeowners,” instead of “keeping families in their houses.” Spin goes both ways. Even our president, with his big emphasis on “personal responsibility” won’t touch this with a 10-foot pole. I just don’t get it.
As an auction buyer/investor, I have come to the conclusion that all of this manipulation of foreclosures is a good thing. Basically, the ongoing supply of REOs and short sales will continue to supress prices. The continued default rate of loan mods will provide a slow drip of homes that cannot be saved and will be either be taken back by the lender or sold to 3rd parties. The floor and price stability in the market combined with discounted distressed properties and a good supply of buyers looking to get a home at an affordable price will provide a good environment for buying, fixing and flipping.
I agree that the focus needs to be on homebuying not forestalling the inevitable foreclosures and allowing people to live for FREE in homes while RESPONSIBLE people continue to make their mortgage payments.
What does this teach my children? Do the right thing, only buy what you can afford, only sign contracts that you read and understand, live below your means, budgeting and saving and foregoing purchases you can’t afford……oh ya and then after trying to live responsibly and with financial smarts, watch so many others buy, buy, buy and then continue to live above their means because they are living FREE in their home they could never afford in the first place. Great lessons to teach…….do the right thing and suffer even more loss then those that didn’t. Oh, and I checked but there doesn’t seem to be any loan modifications, principal reduction, bailouts, interest rate reduction or loan offsets for those of us who continue to make our payments as we legally agreed to do. Maybe a responsibility reward?
On another note, is anybody concerned about the huge number of investors buying these properties all cash rather than homebuyers as primary residences? Because of these brilliant moratoriums, these properties in suburban areas are being scooped up by investors…..gee, can’t wait. Not only is my property now worth what I bought it for 16 years ago but now I’ll get to live in a suburban rental slum that our government is creating with their brilliant control over the foreclosure situation.
Personal responsibility…..you are right on target there! I completely agree with what you have said in your blog. What is going on in our society today makes me worried for my children. If you have no sense of personal responsibility what is left?
We need to spin the focus on getting people who can AFFORD a home into a home as their residence.
most investors are not buying and holding as rentals right now… altough i will admit we do keep some rental inventory. If your neighborhood is nice enough to warrant homeownership prices will rise too high for any competent investor to have a rental in your area. i have bought over 100 homes in the last year, and i can say that if it wasnt for these ‘investors’ that you seem to think are doing something wrong, then many more homes would sit as an eyesore in your neighborhood. would you rather have renters, or just he neighborhood thugs hanging out partying in the house next door? if we really want to fix this, sell everything to the investors, remember we fix them, then sell them back to the homeowners who can rightly afford them! open the flood gates and let’s fix this freakin’ mess!
Here is another take:
What’s the real reason that banks aren’t foreclosing? - Housingstorm.com
“Banks make more money by NOT foreclosing on homes. Banks are dragging out the foreclosure process for their own selfish reasons. Until the day they foreclose, the amount of money owed to them is an asset…sure, it’s an asset that isn’t paying interest payments…but it is still an asset. The day they foreclose, a $400,000 asset could become a $150,000 asset and a $250,000 loss.”
It is my informed understanding that a Bill addressing the problem of “walk-aways” is moving through Congress.
The Bill would place a wage garnishment on the income of each “walk-away” that would be life-long.
In any event, a permanent black mark should appear on each and every credit report of every person who walks-away from his or her mortgage contract.
It is my understandiing of contract law that every party to a legal contract must agree to the termination of a contract in much the same way that renters/leaseholders cannot just “walk-away” from a rental or lease agreement without the consent of all parties which would include the landlord or his or her agent.
Those who state they are making a “business decision” to “walk-away” my question form them would be:
“May I see your business license number, please?”
~Misstrial
I don’t really believe foreclosures are actually going down. They are more like being “postponed” due to HAMP. Unfortunately, many of these homeowners still end up in default even on their new loans.
The other factor is short sales. Many owners are selling their homes at a discount before the actual foreclosure takes place. The bank will postpone the sheriff sale in lieu of the owner selling prior to the re-scheuled date.
Due to these factors, it just seems as though the foreclosure rates are dropping, however they are still at absurd numbers.
Last year my wife died of cancer and because of this, I lost half of my
income source (which I believe is a valid harship) and that my income
supported the 31% level outlined in Making Home Affordable. I applied
for HAMP with my lender Bank of America (after being denied in Nov’08)
and was declined after 12 months of trials and tribulations…for the
3rd time!!! The first time they said that this program doesn’t apply
to people who are current so with this bit of info I decided to stop
making the payment. Two months go by and I reapply a second time,
which then they denied based on mysterious “Net Present Value Test”
after receiving a Notice Of Trustee Sale! Upon speaking with different
modification companies and real estate attorneys it appears that
lenders have a magical formula to get out of offering deserving
homeowners this modification so to all you homeowners, BEWARE!!!
Because I had equity, the bank wanted to take my home and keep the
equity. I was able to delay the Trustee sale for awhile by a company
called ASND Inc. while my realtor was able to sell my Southen
California home, which thankfully just closed last week! I am so
grateful to the team at ASND and my realtor for stopping foreclosure
and allowing me to get most of my equity out of the home from those
loan sharks at BofA.
My feeling is that HAMP is just another
trick the bank can employ to take homeowners’ properties and string
them along with BS slogans that they actually care about you and has
caused me to lose my faith in the American banking system.
Great post! Keep us the good work!
Here’s the Other Side of the Story – From the LA Times –
Strategic Defaults a Growing Problem – And Look at the Numbers in California – These figures indicate that while lenders may think they can HAMP or “kick the can” of overwhelming debt burder to homeowners down the road, the homeowners have other ideas…
http://www.latimes.com/classified/realestate/news/la-fi-harney20-2009sep20,0,2560658.story
It starts with this observation:
Homeowners who ’strategically default’ on loans a growing problem
A
study shows that people who abruptly and intentionally abandon their
mortgages often have high credit scores, in stark contrast with most
financially distressed borrowers.
And goes on to these findings:
Among researchers’ findings are these eye-openers:
* The number of strategic defaults is far beyond most industry
estimates — 588,000 nationwide during 2008, more than double the total
in 2007. They represented 18% of all serious delinquencies that
extended for more than 60 days in last year’s fourth quarter.
* Strategic defaulters often go straight from perfect payment
histories to no mortgage payments at all. This is in stark contrast
with most financially distressed borrowers, who try to keep paying on
their mortgage even after they’ve fallen behind on other accounts.
* Strategic defaults are heavily concentrated in negative-equity
markets where home values zoomed during the boom and have cratered
since 2006. In California last year, the number of strategic defaults
was 68 times higher than it was in 2005. In Florida it was 46 times
higher. In most other parts of the country, defaults were about nine
times higher in 2008 than in 2005.
* Two-thirds of strategic defaulters have only one mortgage — the one
they’re walking away from on their primary homes. Individuals who have
mortgages on multiple houses also have a higher likelihood of strategic
default, but researchers believe that many of these walkaways are from
investment properties or second homes.
* Homeowners with large mortgage balances generally are more
likely to pull the plug than those with lower balances. Similarly,
people with credit ratings in the two highest categories measured by
VantageScore — a joint scoring venture created by Experian and the two
other national credit bureaus, Equifax and TransUnion — are far more
likely to default strategically than people in lower score categories.
* People who default strategically and lose their houses appear to
understand the consequences of what they’re doing. Piyush Tantia, an
Oliver Wyman partner and a principal researcher on the study, said
strategic defaulters “are clearly sophisticated,” based on the patterns
of selective payments observable in their credit files. For example,
they tend not to default on home equity lines of credit until after
they bail out on their main mortgages, sometimes to draw down more cash
on the equity line.
Just these findings alone may have a massive impact on the foreclosure markets in the near term and longer term – perhaps even more impact than HAMP or anything else…