The “now is the time to buy” mantra has worn pretty thin over the last few years. With all the talk of foreclosures and shadow inventory, its a rallying cry that still rings hollow for many even though we currently have low interest rates, tax credits, and the lowest prices many areas have seen in years.

At the same time we’ve seen move-up buyers disappear from the market. Unwilling to sell because they think their house is worth more than they can currently get. And unwilling to buy because they fear prices might fall further. But reality is their house won’t rise in value while the one they want falls. And unlike the first time buyers and investors that this market has come to rely on, move-up buyers have the least to lose if the market did fall further… as their current home would fall in value in that event anyway.

In August 2009 the Federal Reserve approved an extension to the Term Asset-Backed Securities Loan Facility (TALF), committing funds to support asset-backed securities through March 2010. In November 2009 the Federal Reserve announced they would not extend the TALF past March so we may find interest rates rising shortly. In addition, move-up buyers may also benefit from current housing tax credits that will also disappear in the months ahead.

So while I believe short-sales and REO’s will be with us for years to come, dont’ forget that two-thirds of homeowners in California still have equity, still have jobs, and may not be in the house of their dreams, the school district of their choice or as close to work as they’d like. There may be a short period of time, right now, where the rallying cry of “now is the time to trade” actually makes good sense. Don’t miss the window.

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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:

1. 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.
2. 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.
3. 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.

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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.

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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.

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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:

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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.

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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.

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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.

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Why the army of 1.2 million Realtors should be deployed to fight the war against negative equity.

By any measure, the administration’s attempts to resolve the housing crisis have been, and continue to be, dreadfully ineffective. And they’ll continue to fail while they offer solutions that are worse than the policies that created the crisis in the first place.

Instead, let’s find real solutions and engage an army of Realtors, 1.2 million strong, to address the real problem.

The problem isn’t a big mortgage payment or a temporary drop in home value. The problem is $4 trillion in negative equity that was created by an epic credit bubble.

The best Washington can come up with is to incentivize mortgage servicers and lenders to push payment-focused loan modifications, which only leave homeowners upside down in a prison of debt, albeit with affordable payments. If we ever want to return to a healthy housing market, or a strong consumer base in our consumer driven economy, we’ll have to address the reality that millions of U.S. households are terminally upside down. And, as the administration has already realized, that can only be accomplished the way Realtors do things, one household at a time.

Realtors are on the front lines in this struggle. Like homeowners, their personal wealth has been adversely affected by the dramatic change in the housing market. Some may say Realtors took advantage of the housing bubble and helped create the crisis. However, in reality, they simply and dutifully followed our leaders in Washington, and the powerful financial institutions on Wall Street who rewrote the rules of the game.

Yes, these rules were often supported by the Realtor’s own industry leaders, who pushed for new loan programs, home-buyer tax credits and unsustainably low interest rates. Those same leaders encouraged them to ignore negative signs in the market and ceaselessly insisted that “now is a great time to buy;” even writing and promoting books on why the bubble would never burst.

We shouldn’t blame the foot soldiers for the mistakes of their generals.

It is in every Realtor’s best interest to see this nation get back to a healthy housing market. One where 25 percent of homeowners aren’t upside down in their mortgage, one where homeowners make their mortgage payments, and one where foreclosure isn’t a daily headline.

What we need are for our generals in Washington to develop policies that make sense, translate them into coherent marching orders, and unleash a troop surge of ready, willing, and able-bodied Realtors that can and will make real gains in the struggle against negative equity and return us to a healthy housing market, one household at a time.

The reality is that there is no one solution to this problem. Some owners are in homes they will never be able to afford; some are suffering temporary job loss; while others have already abandoned their home and moved on. Mortgage servicers are not equipped to address the problem. They lack the manpower to answer their phones, let alone talk with each owner, visit their home, and walk them through their options. Realtor’s have the manpower, and are eagerly awaiting clear instructions on how to best help homeowners and make a difference in their community. The truth is that their livelihoods depend on it.

Our army of Realtors should be mobilized now, as they can be the front-line resource for homeowners looking for a rational way to win their personal housing battle that will, in turn, lead to our winning the war against negative equity, returning us to a healthy housing market, and perhaps even a strong national economy.

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Monday, the administration announced a nationwide campaign to push their failing Home Affordable Modification Program (HAMP) out of the HAMPer. Until now the focus has been on getting loan modifications started with a stated goal of reaching 500,000 trial modifications by November 1, 2009. Unfortunately, despite having successfully hit this goal, it is becoming increasingly clear that the program is failing, as few of these trial modifications have converted to permanent modifications. A little over half of the 650,000 borrowers who started trial loan modifications are eligible to convert to permanent modifications by the end of 2009. The administration’s announcement today is an effort to rescue the program and make sure these modifications actually do convert with a campaign to:

• Extend the trial period, to allow more borrowers to complete the paperwork.
• Develop publicly reported operational metrics, to hold servicers accountable for their performance.
• Possibly impose monetary penalties and sanctions on under-performing servicers.
• Engage HUD field-office staff and HUD-approved counseling organizations to distribute outreach tools.
• Engage the National Governors Association (NGA), National League of Cities (NLC) and National Association of Counties (NACo) in thousands of state, local, and county offices, to increase awareness of the program and assistance for borrowers.

Apparently the assumption is that borrowers aren’t completing the paperwork because it’s too complex or confusing. But what if they aren’t completing the paperwork because they’re reluctant to fall for another toxic mortgage?

High-risk, sub-prime option ARM loans contributed to this mess in the first place. To fix the problem the administration proposes to:

• Offer homeowners temporarily lower payments on loans they are unlikely to ever be able to repay.
• Force servicers to expedite applications under threat of public flogging, financial penalties and sanctions.
• Enlist private associations and government agencies at all levels to hawk the its program as being good for homeowners.

Maybe borrowers have figured out that this program is really only another exotic mortgage like one they fell prey to when they bought or refinanced the house that resulted in their current predicament. HAMP and the adminstration’s newly announced campaign isn’t digging borrowers out of a hole. It’s only digging them a new one, and delaying the inevitable.

The original hole was created with a clear downside and a theoretical upside:

• The downside: exotic financing, that qualified buyers for homes they clearly couldn’t afford by offering a low payment up front, despite unaffordably high payments in the future.
• The upside: the expectation that the appreciated value in the house will allow the borrower to refinance or sell at a profit before their payment skyrockets.

The new hole offered by HAMP is all the downside with none of the upside.

• The downside: exotic re-financing, by which they make payments affordable today, but leave homeowners in the same boat down the road when payments ratchet back up after 5 years.
• The bonus downside: there is no reasonable expectation that home values will appreciate anywhere near enough to get these loans above water before the 5 years is up, or before the homeowner runs into a real life event like job loss, divorce or job relocation – leaving them stuck in an upside down prison of debt.

What’s more, it’s not just bad for borrowers, it’s bad for everybody. Servicers and lenders simply delay their inevitable losses and suffer a lousy rate of return thanks to the artificially low payment until then. Everybody suffers as the economy limps along, as it is hard to justify a spending spree when you are upside down in your home by tens or even hundreds of thousands of dollars. Even the stealth stimulus package disappears as people make their modified mortgage payments.

The housing problem may need an intervention, but not this intervention. Like offering drugs to an addict, repeating our past mistakes by putting people back into exotic mortgages is certainly not the cure. It’s time to go through withdrawal and kick the habit by addressing the real problem, negative equity.

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