By invitation from the California State Senate and on behalf of ForeclosureRadar, I recently presented to the Joint Oversight Hearing of the Senate Banking, Finance and Insurance Committee and the Senate Judiciary Committee on the issue of the impact of government intervention on foreclosures. Here’s what our Senator’s saw since sometimes a picture is worth a thousand words.

From 2007 to 2009, Notices of Default and Notices of Trustee Sale increased year over year, meaning more and more properties entered the foreclosure process and were teed up for sale by the lender. At the same time properties exiting the foreclosure process through cancellations increased but not nearly on pace with the number of properties entering the process. On top of that, fewer properties exited the foreclosure process through foreclosure sale in 2009 than the year before. Bottom line is that year-over-year we are seeing an increasing number of properties entering foreclosure with fewer exiting through cancellation or sale

• SB 1137: Effective September 2008, this bill required lenders to contact the borrower at least 30 days before a Notice of Default can be filed.
• SB2X-7 and AB2X-7, also known as The California Foreclosure Prevention Act: Effective June 2009, these bills imposed a 90-day moratorium on filing of the Notice of Trustee Sale unless exempted under specific guidelines.

SB1137 had a temporary drag effect on Notice of Default filings, but didn’t slow the growth trend for long. AB2X-7 and SB2X-7 was followed by a temporary decline in Notice of Trustee filings, but the drop was short lived as most lenders were exempt from the law.

A closer look shows the immediate effect of SB 1137 was to slash the number of Notice of Default filings from 2,979 on Friday to 174 the on following Monday.

It took four months for the number of Notice of Default filings to return to, and subsequently exceed, pre-SB 1137 levels.

Viewed on a daily basis, the California Foreclosure Prevention Act was followed by an immediate drop in Notice of Trustee Sale filings from 4,192 on Friday to 268 on the following Tuesday.

Yet a month later in July 2009, Notice of Trustee Sale filings had almost returned to pre-SB2X-7/AB2X-7 levels.

Other governmental induced initiatives designed to address the foreclosure crisis were:

• 9/08 Fannie and Freddie Conservatorship and Moratoriums. The federal government took over the two biggest loan finance companies in the US and imposed a temporary ban on foreclosures.
• 9/08 Troubled Asset Relief Program (TARP). The federal government authorized $700 billion to purchase assets and equity from financial institutions to stabilize markets – and began steps to alleviate lenders from marking down assets to current market value.
• 3/09 Servicer Moratoriums Lenders agreed to voluntarily delay filing foreclosure notices in anticipation of HAMP at the request of the Federal Government.
• 3/09 Home Affordable Modification Program (HAMP). The federal government provides eligible homeowners the opportunity to modify their mortgages to make them more affordable, mainly through refinancing the existing balance.
• 4/10 Home Affordable Foreclosure Alternatives Program (HAFA). The federal government provides opportunities for homeowners avoid foreclosure through a short sale or deed-in-lieu of foreclosure.

While the impact of the government programs has not permanently reversed the rising number of foreclosure filings, we have seen an increase in the average number of days from the filing of the Notice of Default to the Foreclosure Sale from 145 days when SB 1137 became effective in 3Q 2008 to 226 days estimated for 1Q 2010. If there is any clear impact of government efforts it is that it now takes longer to foreclose.

While government programs have been aimed at reducing foreclosure filings and encouraging cancellations once filed, they have not focused on mortgage delinquencies. If there were no delinquencies there would be no foreclosures. The problem is that the number of delinquencies continues to rise , growing from 1.3 percent to 11.3 percent of mortgages in the past three years.

Where are we now?

So far all of the government intervention that we have seen over the past two years, while clearly well intentioned, has done little more than add delays to the foreclosure process, allowing banks to avoid losses by pushing the problem off to another day. New programs such as HAFA (which offers short sale and deed in lieu options) and revisions to HAMP (which address principal reduction) are improvements over previous programs because they begin to deal with the real problem: negative equity. But we’re not yet convinced that these programs won’t also fail. The potential losses are simply too great for lenders, let alone the nearly insolvent FDIC, to allow these programs to significantly reduce the excess debt created during the housing bubble.

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After reaching reaching the lowest level in a year last month, Notice of Default filings increased almost 20% in February. The number of properties scheduled for sale remain at record highs, yet foreclosure sales dropped and the disconnect between delinquencies and foreclosure sales continues to widen.

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We just posted our latest California Foreclosure Report: DOWNLOAD HERE

Highlights from this report:

• Notices of Default increase by nearly 20%
• Foreclosure sale decreased by 12%
• Auction discounts drop
• Percentage of trustee sales purchased by 3rd parties highest since we began tracking in 2006

Sign-up for our FREE monthly California Foreclosure Report by email

Video version: COMING SOON!

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While I’ve previously written about the confusion around the term shadow inventory, it is now increasingly used to refer to properties that are delinquent, or in foreclosure, rather than unlisted bank owned homes. Standard & Poors recently posted a well written analysis of shadow inventory, and has jumped to the conclusion it will likely “undo U.S housing price gains”.

They estimate that the current backlog of distressed mortgages will take just under 3 years to clear. They call that estimate conservative… I think it is likely optimistic given that delinquency rates are still climbing. Still it is a reasonable guess. Here in CA we have one million homeowners who are already delinquent, and we seem to be clearing about 25-30k a month based on foreclosures and short sales (which are the only “solutions” that are actually clearing the distress by eliminating negative equity). Divide one million by 30k, and you come to the same 33 month conclusion they reach.

Another interesting part of the report deals with recently cured loans… those no longer delinquent, primarily due to loan modifications. They suggest that these should be included in calculations of shadow inventory, as they have had a nearly 70 percent rate of recidivism – in other words, most become delinquent again because the loan mod failed to address the core problem of negative equity. Seems like a reasonable conclusion to me.

Where I take some issue with Standard & Poors assessment is there conclusion that liquidation will lead to lower housing prices. They come to this conclusion based on the simple idea that an increase in supply will lower prices. There is some truth in that notion. For example we certainly have seen some pricing strength recently due to efforts to slow foreclosures which have clearly constrained supply, while at the same time demand has been stimulated with low interest rates and tax credits.

But this simple supply/demand theory of housing prices fails to adequately consider the fact that housing is highly leveraged, and that price is primarily a function of income and loan terms, and only secondarily supply and demand. Worse, this over-simplistic supply/demand model has led many to believe that foreclosures cause price declines, when in fact it is exactly the opposite… price declines cause foreclosure.

Note that the foreclosure crisis started in earnest in late 2006, however, price declines did not start until lenders removed the ridiculous loan products that enabled people to over pay in August of 2007. At that point we had a precipitous drop in price… not due to foreclosures, but instead due to the fact that people simply couldn’t afford the prices reached during the bubble without those loan products.

Foreclosures and housing supply grew rapidly during the price correction, but those who think the correction was due to either these foreclosures or the growing supply are terribly mistaken. Instead it was simply a correction back to reasonable prices, that buyers could afford based on their incomes and the more traditional loan products that remained available.

Unfortunately the belief that foreclosures and supply caused those declines remains all too common as yet again evidenced by the conclusion of this report. It is a belief that is delaying our recovery as government works to artificially constrain supply by slowing foreclosures, leaving homeowners stranded in prisons of debt, and buyers with little available inventory to choose from.

The reality is that there is a bottom to housing prices. People need a place to live and are willing to spend a certain portion of their income on housing to do so. Investors need to find returns, and there is a point where buying homes as an investment make sense. In many parts of California we’ve returned to those prices levels. And in those areas that have already corrected withholding supply won’t return prices to prior levels… people simply can’t afford it. And contrary to Standard & Poors’ analysis increasing supply is just as unlikely to cause further price declines… people need a place to live, and investors are too desperate for reasonable returns.

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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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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.

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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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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.

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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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