Fannie Mae slipped out a press release just before the Thanksgiving Holiday announcing their new “First Look” Initiative. Under the guise of neighborhood stabilization the program gives home buyers (those who plan to live in the home themselves) and public entities the first shot at buying any Fannie Mae REO’s — investors are locked out unless Fannie does not receive an acceptable offer within the first 15 days.

On first blush, this seems positive. Afterall, owner occupied homes should in theory be better taken care of which is good for neighborhoods, and public entities are using our money to buy so why make them compete with investors.

Let’s not forget though that Fannie loans are backed with “our” money as the loans from these entities have an implicit, if not explicit, guarantee from the federal government (this point could have been argued until we took them under conservatorship in 2008 – now I think their losses are unquestionably our losses). As such, I’d think our goal should be to limit Fannie’s losses, not limit competition to help certain buyers over others.

There’s no question this program could provide some relief to folks trying to buy a home to live in. We regularly hear about home buyers losing offer after offer to all-cash investors willing to pay prices not only over asking, but above appraisal value. An incredible fact given that we have a record number of homeowners facing foreclosure, and had exploding supply a year earlier. Just keep in mind that we only have this feverish battle right now because the government has worked hard to artificially limit supply, and artificially pump demand. So I have a simple question: is the problem that the real estate market is so slow that we need to stimulate it with low interest rates and tax credits, or is the market so hot that we need to protect home buyers from competition?

What I find even harder to understand is why this “First Look” program extends to public entities. As you may recall the government launched a number of programs to buy up foreclosures in an effort to limit their impact on neighborhoods. The theory at the time was that there would be far more foreclosures then there would be traditional buyers (homeowners and investors), and that these programs would help clean up the extra supply. But that is not the way it played out.

Instead we now have these programs competing for homes at a time when there simply is not enough supply for current demand (not unusual to see 10+ offers on a clean REO in California right now). As such it makes no sense for these public entities to use taxpayer funding to buy foreclosures AT ALL right now, let alone have Fannie  limit competition and take a bigger loss (using taxpayer dollars) to allow these public entities to buy them cheaper.

Bigger picture this program probably doesn’t matter much. There are so few REO’s coming to market right now, investors are already giving up on them and moving on to buy at trustee sales (foreclosure auctions). While riskier for inexperienced investors, the trustee sales are true public auctions where anyone with a check can come and compete for these homes before Fannie gets a chance to decide who does, or does not, get the “First Look”.

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A record-high 23,117 trustee sales are scheduled for sale Monday, November 30^th,  in the ForeclosureRadar.com coverage area (CA, AZ, NV, WA, OR).

Because state laws do not allow trustee sales on state holidays, we expected to see a significant bump in sales Monday. However, the total number of trustee sales per day for the region is typically five to six thousand. To cover Thursday, Friday and Monday, the number of sales should reflect three days (15,000 – 18,000). In addition, trustee sales typically slow during the holidays and see a bump in January.

So it’s a little surprising to see four-day’s worth of sales from a three-day period right after Thanksgiving. That being said, it doesn’t mean 23,117 families will lose their homes on Monday. Lately, ninety percent of trustee sales are just postponed to another day.

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In Part 1 of the nine-part series on the credit/housing bubble, I mentioned what I considered the three most notable contributors to the housing bubble: the Financial Services Modernization Act (1999), the Commodity Futures Modernization Act (2000), and artificially low interest rates after the dot-com bubble popped (2001).

While Congress continues to debate how to best re-regulate financial institutions to avoid repeating our past mistakes, I believe they have unwittingly set us up for a coming mini-bubble in early 2010.

It started with their well-intended efforts to stop foreclosures, ostensibly to keep prices from falling further. Through such programs as the Home Affordable Modification Program, relaxation of mark-to-market accounting rules, changes to foreclosure rules, and even overt threats they have significantly slowed foreclosures, and dramatically restricted the supply of homes for sale.

At the same time, by renewing the first-time homeowner tax credit and encouraging the Fed to keep interest rates artificially low by backing mortgages with taxpayer funds, the government has increased the demand for homes.

The goal of these measures is ostensibly to aid the housing market (read “keep prices from falling further”) by attracting buyers, while simultaneously preventing the purported wave of foreclosures from crashing on the housing market. For what it’s worth, attempts to constrain supply and stimulate demand are working. These days it’s not unusual to see ten offers on a house in California, as unbelievable as that may seem.

And so comes the mini-bubble. Stimulated demand with limited supply will have the inevitable effect of artificially inflating prices. Again.

To be clear I don’t expect this to be a significant bubble. Lending and appraisals remain far too constrained to let what happened earlier this decade repeat itself. Prices aren’t about to magically double. And that is kind of my point. There is ZERO chance we are going to get back to the price levels reached in 2005. We simply don’t have the incomes in California to support those prices without 1% negative amortization teaser rates – which I for one hope are not coming back.

Even if we could artificially stimulate our way back to 2005 price levels, would it really be a solution? Should it even be the goal?

Maybe it is time we realize that it is far healthier to have prices at levels that people can actually afford, given loan terms and interest rates that are sustainable for the homeowner and attractive to an investor other than the Fed. Anything else is simply setting us up for future failure. How can anyone think that prices won’t fall if the Fed someday stops artificially lowering interest rates, or Congress stops stimulating demand?

This boom-bust yo-yo effect is the unhealthy result of stopgap solutions that deal with the symptoms, rather than substantive solutions that address the root problem – unsustainable negative equity. Until everyone realizes that we can’t eliminate that negative equity through artificially higher prices, don’t expect a truly stable housing market. Instead, buckle up and prepare for the ride – with more ups and downs to come.

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I’ve talked in the past about some of the approaches to rescuing the housing market and providing economic stimulus, such as the Treasury Department lowering mortgage interest rates, the California Foreclosure Prevention Act, the Countrywide settlement, and the Housing and Economic Recovery Act of 2008.

Despite all of these measures we remain in housing limbo, with millions of homeowners underwater on their mortgages and unable, or unwilling to make their payments; yet with few being foreclosed, as lenders and the government desperately search for alternatives.  The reality is that we will likely remain in limbo until we as a society develop the political will to either move ahead on foreclosures, or bail out homeowners.

However, one effect of this housing limbo is the free rent we’re effectively giving to those homeowners, and the contribution this free rent provides to the local economy.

When homeowners quit paying $1500 per month on their mortgage, that cash is available for other parts of the family budget. I’ve purchased 150+ foreclosures, and I can’t remember a single homeowner that wasn’t broke when it came time to move. Rather than saving, they’re going out to dinner, subscribing to sports packages on TV, and buying iPhones or netbooks. Many of those purchases would have to be delayed, or foregone altogether, if they were still paying their mortgage.

By allowing banks to stall on foreclosures and keep non-paying assets on their books, we’ve enabled a redirection of resources that provides a short-term boost to the local economy, a stealth stimulus package. Whereas paying that money to the lender through mortgage payments would probably take it out of state, and maybe even overseas to China; shopping locally with that same money keeps it working in the local economy, and benefiting local businesses.

In addition, local governments are benefiting from increased sales tax revenues. Some may say that this gain is offset by the loss of property taxes, since people who don’t pay their mortgage also quit paying their property taxes. But property taxes will eventually be paid, with accrued interest on the next title transfer. Thus there is no loss of property tax revenue but rather a simple delay in payment.

With rising unemployment, this (perhaps unintended) stealth stimulus couldn’t come at a better time for local economies. When I go out to dinner I look around and wonder—how many folks around me are out tonight thanks to a delayed foreclosure, and no mortgage payments.

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There is currently no shadow inventory of bank-owned (REO) properties. What’s more, a surge in REO properties is not likely anytime soon.

If this sounds familiar, it’s because I’ve said it before, here and here and other places. However, it still seems to be news (see the recent WSJ article) and despite the fact that the most recent CA Foreclosure Report from ForeclosureRadar.com runs the numbers, some still insist the shadow is there.

First, let’s be clear about what shadow inventory is. These are homes that the bank has already foreclosed on, but which, for no apparent reason, aren’t listed. The implication is that banks are holding REO properties back from the market to restrict supply and prop up prices. This actually seemed like a distinct possibility a year ago when the banks were clearly holding more inventory than they were listing. But that is no longer the case. In the past year, they have resold far more than they’ve taken back, eliminating any possibility that a shadow remains.

Some observers, who earlier this year warned that this shadow inventory would deluge the market with REO listings, have now redefined shadow inventory to include properties that should be foreclosed on. They continue with misguided warnings of a deluge of REO listings any moment now.

Not so. These properties are not lurking in the shadows at all. We know exactly which properties are in trouble and where they are in the process. Using ForeclosureRadar.com you can easily see every potential REO listing, from Notice of Default to Notice of Trustee Sale, for the next six to nine months. In addition, even if banks reversed course and started foreclosing aggressively today, it would be months before we saw those listings as it takes time to evict the homeowner, clean up and list the property.

What’s more, they’re not going anywhere. These properties aren’t grinding through the pipeline to foreclosure and into the shadow inventory. They’re not moving at all because we as a society lack the political will to foreclose. Because the national focus is targeted on keeping homeowners in their homes, the drain is bigger than the spigot – REO properties are selling faster than distressed properties are being foreclosed on.

As a result, the pendulum has swung to the other side. Instead of a glut of properties hitting the market, as so many have warned, we currently don’t have enough inventory for those who want to buy homes, and homeowners are still in trouble because the so-called solutions (foreclosure moratoriums, loan modification, refinancing) don’t fix the real problem, which is negative equity.

No more conspiracy theories. We need to abandon the obsession with shadow inventory, which distracts us from the national discussion we should be having. With the current lack of inventory, its time to force banks to clean up their balance sheets by dealing head-on with the trillions in negative equity that remains, either though loan modifications that reduce principal balances to near current value, short sale, or, if necessary foreclosure. These are the only solutions that deal with the core problem of negative equity. It’s time for “extend and pretend” to end.

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This month’s report features not only a new look, but an important new statistic – Bank Owned (REO) Inventory. By looking at the number of foreclosures the banks have taken back and subtracting those that have since resold, we are able to show the number of foreclosures the banks have held as inventory over time.

Click here to download the September CA Foreclosure Report.

Check out our new video version:

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I mentioned previously (http://www.foreclosuretruth.com/blog/sean/are-foreclosure-sales-simply-hampered) that as a society we don’t have the political will to foreclose on every mortgage in default. As a result, we see government interventions including foreclosure moratoriums, troubled asset relief, and new loan modification programs. However, these are at best stop gap measures — each failing to adequately reduce principal balances to address the core problem of negative equity.

It’s time to stop waiting for a government bailout or for the bank to come take the house. Homeowners in default don’t have to choose between the lesser evil of foreclosure or a government solution that leaves them a prisoner of debt. There is another way — a short sale.

A short sale is a sale of a home for less than the amount owed on the loan or loans. There are many reasons why a homeowner who receives a notice of default should take charge and aggressively pursue a short sale. First is the impact to the credit report. Dealing with debt via bankruptcy affects a credit report for 10 years vs. a worst case of seven years with a short sale. When it comes to buying another home, foreclosure prevents the owner from getting a Fannie Mae loan for five years as compared to two years for a short sale. Then there is the opportunity to negotiate a full release from all lenders, allowing the homeowner to settle with no concern of future collection efforts. And proactively negotiating a short sale doesn’t bear the stigma of foreclosure or walking away from a debt.

However, navigating a short sale is not for the faint of heart or the inexperienced. Lenders differ greatly in how they respond to offers. Some lenders, such as Wachovia, are aggressively processing short sales, while others, such as Bank of America, are more cumbersome. (You can get detailed information about specific lenders at http://www.foreclosureradar.com/short-sale-report)

In addition, the regulations can be confusing, even to some industry professionals. In August 2009 in California, Senate Bill 306 was approved, which made changes to the California Civil Code related to real property transactions. (See http://www.leginfo.ca.gov/pub/09-10/bill/sen/sb_0301-0350/sb_306_bill_20090806_chaptered.pdf for the full text of SB 306.)

Some analysts have said they expect that SB 306 will dramatically speed the short sale process. In reality, SB 306 doesn’t address the overall short-sale timeline, just steps in the process after the agreement is executed. Specifically, a lender now must respond in writing to a request for a short-pay demand statement in 21 days. Since lenders already have a similar requirement for requests for a payoff demand for loans not in default, this will not likely improve short sale timelines dramatically.

When it comes to distressed properties, a REALTOR® is in the best position to partner with a homeowner to secure an offer on the home and negotiate a short sale with the lender. Proactive REALTOR®s use tools like ForeclosureRadar.com to locate homeowners best suited for short sales, to track the process and to monitor the status of the property during the short sale. Tracking and monitoring is important to insure that the property isn’t foreclosed on before the sale is successfully completed, a matter of interest not only to the sellers, but also to the buyers.

Finding an agent that is a good fit is more challenging when facing foreclosure. A few key questions will help verify that the agent has the knowledge, experience and infrastructure to handle a short sale scenario, such as:

• How many short sales have you handled in the last year? How many were successfully closed?
• Have you worked with my lender before?
• Do you work with the lender directly or with a short sale processing company?
• Can I get three references of homeowners for whom you have executed a short sale?

Homeowners should also seek advice from a qualified accountant and real estate attorney.

Foreclosure is not necessarily inevitable. A homeowner who receives a notice of default should contact a REALTOR® to investigate the possibility of a short sale. It can offer the quickest and cleanest path to financial recovery.

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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.

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For a number months now I’ve been telling reporters and others that I didn’t think we would see the big wave of foreclosure sales, and subsequent REO listing that some have been predicting. Until recently that was mostly based on a gut level feeling that banks (servicers) simply didn’t have the will to complete more foreclosures given the anti-foreclosure backlash. With a little hindsight, things have become clearer.

First, to be fair to those who have been predicting the wave, the numbers would suggest that California foreclosure sales should be surging right now. After a brief respite due to CA Senate Bill 1137, Notice of Default filings surged last December, and have remained at near records levels since, and even hit a significant new record in March at 52,163 filings. Similiarly, Notices of Trustee Sale have also surged, setting a new record as recently as May. Thus, it would be logical in normal times to conclude that foreclosure sales, and subsequently REO listings, should now be surging too.

But these aren’t normal times. While foreclosure sales have increased since the moratoriums began to lift, they remain well below the peak levels reached July 2008, and as you’ll see in our next CA Foreclosure Report, will actually fall from June to July this year.

So what happened? In my opinion the answer is found in the troubled asset relief announcment made on September 19th by U.S. Treasury Secretary Henry Paulson. Clearly Paulson believed at that time that banks (servicers) would fail unless they were releived of the mounting losses on mortgage backed securities and other troubled assets.

In fact the Fed began purchasing direct obligations of Fannie, Freddie and the Federal Home Loan Banks on September 24, and later began purchasing mortgage backed securities. Click here for details on purchases to date from the Federal Reserve Bank. The total has reached nearly $650 Billion. Keep in mind that the total loan value on ALL foreclosed loans in California since this crisis began is under $200 Billion.

While many will point out this was necessary to keep home loans available and interest rates low, I think it also clearly sent banks a message… you will get more for these assets from the taxpayer than you will through foreclosure. Add to that the mark-to-model rule changes from the Federal Accounting Standards Board, and a ton of politicial pressure and it should be no surprise to anyone that foreclosures have slowed.

Still unsure? Consider the following chart. The grey line is the total number of properties scheduled for foreclosure sale (using scale on right). The blue and green lines are daily foreclosure sales for California, divided into two parts – before and after Paulson’s announcment.

The drop in foreclosure sales defies logic given the continued increase in properties scheduled to be foreclosed on. But defying logic to do what is politically expedient while simultaneously inflating bank earnings and bonuses and without regard to future consequences IS the new normal. We are yet again trading tomorrow for today.

For those of you still waiting for a surge of foreclosure sales, the truth is you’ll likely be waiting a long time.

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I’m regularly asked about the so-called “shadow inventory” of bank owned homes that are supposed to flood the market at any moment. First, lets be clear about what shadow inventory is. These are homes that the bank has already foreclosed on, but has not yet listed. It obivously does not inlcude homes the bank has already sold, nor the ones it has listed for sale.

We know exactly how many homes the banks have taken back. In California they’ve taken back a total of 419,183 from January 2007 through June 2009. We also have an estimate of how many have been sold during that period: 328,645. Subtract the two and you have a total possible shadow inventory of 90,538, but that’s not the whole story. Around 20,000 REO’s have been selling each month and a typical escrow is 30 days, so subtract 20,000 that are currently pending and are likely to close. We also know that some of these are listed, but not yet pending, but unfortunately we have so many MLS’s in CA that it is hard to get the exact number. Let’s shoot low and assume there is only another 20,000 listed. We are now down to a shadow inventory of just 50,538.

But there is something else implied when people talk about shadow inventory… the notion that banks are holding properties back, in the shadows, in an attempt to hide something. To see if that might be true, I think it is only fair to remove those properties that likely will be listed as soon as they are available. Afterall, the banks get these properties back at the foreclosure auction with the current still in the property, requiring eviction. They may also have to make repairs, or haul away trash and debris. This process usually takes somewhere around 120 days. During the last 120 days banks took back 56,086 properties, though certainly some of these will be clean and vacant. But again lets be conservative and only deduct half from the shadow inventory – we now have a total possible shadow inventory of 22,495 REO’s.

At the current rate of REO resales that means that even if banks are purposefully withholding properties, the truth is that it can’t be very many — a months worth at most.

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