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.
Right on Sean!
As long as the housing market is ARTIFICIALLY supported by any form of Goverment stimuli. It undermines the true value of all homes. As much as that makes me sound like a total capitalist the reality is that lenders and the government are cooperating to keep the dam from bursting. One way or the other the dam will burst and only then will the American Homeowner be motivated enough to scream bloody murder to all their elected officials that don’t want to deal with the elephant in the room….. Thanks Sean!
Fannie Mae hired 24 new asset managers to work out of their Irvine office. They must be expecting an increase in volume?
Thanks for the data point David. I’ve been hearing asset managers say that the wave is almost upon us for over a year, yet it continues not to come. I think their shrill cries of “wave” may have more to do with job security then reality.
is there anyway to contact these asset managers?
May be they could offer properties directly to investors.
thanks
Follow up to the individual if there is any way to contact
the Asset Managers direct, as well as contacting the banks
direct before it reaches the asset managers?
Thanks alot
Gary Konowitz
415-453-8450
Well, there are two ways to think about “waves”.
The first is as a wave of simultaneous bank action – that is – in response to the epidemic of insufficient payments, they will act to evict all defaulters in as expedient a manner as the law will permit, and that they will then quickly put these properties up for sale and dispose of them swiftly at whatever price the market will bear.
I agree with Mr. O’Toole – this “wave” prediction is unlikely. The banks have many reasons, economic and political, to forbear from aggressively pursuing such a policy.
But the second wave is a possible rapid acceleration in the rate at which previously current homeowners begin to default – either because “strategic” or “ruthless” defaulting becomes culturally acceptable (or even popular and encouraged) or because of “payment shock”.
I refer readers to a recent post from CalculatedRisk where a graph of the payshock phenomenon is available. At a rough visual inspection – two obvious “waves” appear, one of the subprime reset disaster, which we just recently experienced, and another yet to come of Alt-A / Option-ARM recastings.
From the post, “Amherst estimates a large portion of the payments shocks will be in the 101% to 150% range – more than double.” If that proves to be the case, then it is hard to imagine most of those debtors will not default and eventually hand their properties back to their creditors.
Now, of course, the banks and legislators may continue to “cooperate” in their response to the emergence of such a new surge of defaults, and they may maintain the policy of drip-feeding / trickling out distressed properties to the market in order to avoid flooding it with more excess inventory listed at fire-sale prices.
This forbearance could indeed prevent the consequence of a “spike” or “wave” in foreclosures, but allowing people to live in properties payment free for extended periods not only forgoes cash flow but creates an additional risk of encouraging a cultural shift in normative behavior.
“Shadow Inventory” may turn out to be the “Shadow Stimulus”, by allowing defaulters to live rent free and save considerable amounts of money for period sometimes exceeding 18 months, but if the majority of underwater debtors – who are still currently making mortgage payments – start to feel like suckers and become tempted to try it out for themselves, then the banks will be in serious trouble.
In a way, the situation is analogous to the entertainment industry and online content piracy. When it appears to most people that there is a way to achieve a personal financial advantage in a manner that has become tremendously widespread and where negative consequences are highly unlikely – then after a long period it proves nearly impossible for the movie or music companies to turn back time or combat the behavior even with a few very-public “show trials”.
If strategic defaults threaten to become widespread, then the banks may have little choice but to reestablish ruthless consequences for “ruthless nonpayment”. Then, perhaps, we’ll see that wave everyone keeps talking about.
if you’ve been reading our blog, you’ll note we were the first to raise the concept of the “Stealth Stimulus” – we don’t disagree.
We also don’t disagree that there is a significant “swell” in the number of delinquencies, which continues to build, likely for some of the reasons you mention.
Sorry Sean I totally disagree. I have watched carefully to see what would happen after the first of the year and here it comes. In 14 different MLS systems from Bakersfield to San Diego I found that of all the new listings in the first 7 business days of 2010 the average ranges between 40-60% REO. If you don’t think that over 50% market share is a wave then I don’t know what is. Shadow or not multiple failed Loan Mod programs with a 40-60% redefault in less than 6 months coupled with the Short Sale shell game that the lenders, media, and administration are playing may fool the public and the media but they do not fool someone who is actually out here in the trenches.
One problem with your conclusion… they have to foreclose on the homes first – and they are NOT. We watch every foreclosure auction in 5 states every day. When we see a change, we’ll let you know.
I think your observation can be explained by the fact that regular folk don’t list their homes during (or right after) the holidays – unlike lenders people generally prefer to list their own home in Spring.
That said, I don’t disagree that games are being played – but those games continue to be very effective in holding off “the wave”.
Don’t through the baby out with the bath water!
I don’t see it either Sean. I believe the supossed wave will never come because it makes more financial sense for the banks to leave people in default. If someone doesn’t pay his $2500/mo. mortgage for a year…the bank’s loss is only $30K. It’s easier and more responsible on the part of the bank to hold on to a non-producing asset and only be out $30K than to foreclose and lose $100K-$300K.
Problem with that Mike is that it assumes they won’t ultimately lose the $100-300k anyway. That said, I’m not sure why you “don’t see it” – I clearly said I don’t think the wave is coming which seems to be your conclusion as well.
We have seen a significant increase in BAC assignments in the last 30 days, mostly 500k + values.
I don’t think a wave will come the banks are buying their own foreclosures, tacking on 10K to 40K for “admin or attorney” fees & doing Enron accounting, and sitting on them waiting for the market to come back. Don’t be fooled they’re in it for the long haul. On the other hand if the investor is a hedge fund they’ll take the write-off because they have so many other producing assets through last years bull market.
John – unless they take them back using a deed-in-lieu they still have to go to sale at the foreclosure steps for the banks to “buy them”. Those sales aren’t happening, so things are clearly delayed earlier in the process.
Interesting, but I still don’t get it. I see comments where it is mentioned that folks may get to stay in their homes for long periods of time without paying. Or maybe there will be more workouts. Whatever, but this all supposes that people still live in these properties. What about the properties that have been abandoned? You can’t do a workout with those people, and they are not coming back, yet these properties sit there, with no power, slowly sinking into a sad state of disrepair. At the very least, assign the vacant asset to an agent and let’s get the power on and the sump pump running so that maybe thousands of dollars don’t have to be spent fixing up houses due to neglect.
Obviously my limited experience is purely anecdotal, but I have witnessed this exact phenomenon on a few rare occasions, and all at the high-end. A few of these scenarios played out as follows:
1. Owner refinanced to nearly 100% LTV (where the “V” was based on a barely-sane appraisal at the peak of the bubble) to do some serious renovation, upgrading, etc…
2. First delinquent payment concurrent with the beginning of the deterioration in the overall market.
3. Put up for normal sale at debt-curing price – no takers.
4. Homeowner gets permission to do Short-Sale and/or Notice of Trustee Sale, delayed, delayed, delayed, canceled…
5. Short sale price lower but still too high – no takers (after extended period of nearly no payment).
and then, sometimes…
6. Owners vacate (for personal reasons, usually)
7. House disappears from market.
8. No MLS listing, no more agent or realtor, no trustee sale (sometimes), no rentals, and a gorgeous, valuable, but empty house with the lights and utilities off.
But it only seems mysterious and/or incompetent. The banks may indeed be flooded with more pig than their python can swallow at once, but they could just as easily be making an optimal business (and political) decision in a tough market.
*Eventually* (though perhaps at a trickle pace) these houses will be officially owned by the bank, cleaned up, put back on the market, and sold to somebody, and the total loss will be put on the balance sheet (which, hopefully, will be more able to absorb them in the future).
The lenders must be concluding simply that they’ll do better vis-a-vis their bottom lines, political relationships, and final sales-prices by holding, sitting, and waiting out the storm – in the same way that most people are encouraged to hold on to their stock investment portfolios. We’ll see if they’re correct, I have my doubts.
For the most part the “bank” does not hold the loan, they are simply the servicer and perhaps owner of a lower grade portion of the fund. Their actions may be very tightly limited by the securitization documents.
In addition to the problem of loans that are truly underwater, there’s the complimentary problem of those who are unable to maintain their loan payments due to increases from teaser rates, expiration of option payments and from reductions in personal income. Many of these people have been slowly bleeding liquidity and borrowing capacity to keep loans current. However, there is a finite capacity to do so.
The third leg is that, as others have noted, the government has been trying to support the housing market with homebuyer credits, artifically holding down interest rates through purchase of mortgages and promising relief(perhaps beyond their capacity to deliver) to homeowners.
I do believe we will be seeing substantially more inventory coming this first and second quarter. There is a reason (besides executive compensation and bonus regulation) that the banks have paid the feds back their TARP money. They want to be able to conduct business the way they deem they need to (ie capitalism and free market) PLUS they only have a certain amount of say in these loans that have been sold to investors. The government can try and force loan mods but I think we all get that it’s not the answer in most cases…and NO I am NOT a proponent of principal reduction unless they plan to reduce EVERYONE’s principal,,,,,yes that means even us stupid responsible people who have also suffered stock losses, depreciation of our homes and job furloughs.
Yes, things have been delayed due to moratoriums, loan modifications (the process STOPS with most banks if an owner calls to say they want to modify, just like in the short sale process), SB 1137 in California and federal pressure on the banks BUT banks have paid back their money, many owners have walked away and already left the home vacant or the bank has gone through the process and figured out they don’t qualify for a loan mod, OR they have modified the loan only to have the owner re-default. SB 1137 has served to delay the process further. So if you take B of A who only lifted their moratorium on May 31, 2009, you can easily figure out the extended period of time to get through all of these new hurdles……once you’ve gotten through the hurdles, these foreclosures WILL be coming. While we may not have the policital will to foreclose, having so many people live for free for extended periods of time is simply irresponsible and morally WRONG (not to mention whether that might be creating an economic mini bubble by increasing discretionary income temporarily) and principal reduction is a very sticky issue while the majority of our population continue to pay their mortgage….many who have difficulty doing so. Sorry, but it’s not the answer. It makes much more sense to move some of the balance (to make the payment affordable) to a silent second. Share the risk between owner and bank that the market will recover and silent second is due when the property is sold.
Don’t minimize the moral issues surrounding principal reduction……..if we go this route the fallout within our society will be much larger than simply financial. Losing a home is one thing that people can get through…inevitably, you are not homeless, you can still rent and live in a home. Take away personal responsibility in a society and you have nothing decent left.
I don’t buy the personal responsibility argument as you state it. Many came to America came to escape debtor’s prison and the tyranny of rentiers. No question that bankruptcy laws are part of what makes our country great… it allows us to take risk, innovate, and not have to live with the consequences forever if we make a mistake. Also puts responsibility on lenders and vendors to not burden customers with debts they can’t afford.
Given that lenders are today’s rentiers, should they really be entitled to your proposal of silent 2nds, not to mention bankruptcy protection? I’m not suggesting the homeowner should get off free, but the banks with their analysts and economists were in a better position to realize these loans were a mistake than the average homebuyer.
Paying back TARP likely provides some political cover, but it hardly gives the banks free rein. Don’t forget many were forced to take TARP in the first place. What says they can’t be forced to do other things?
So the question becomes,,,,when do you consider a homebuyer or an average citizen grown-up or intelligent enough to know what they are signing when they agree to a loan? It’s now the vendors and creditors fault that people are “burdened” by debt? Really??? Here’s a thought,,,,,,,how about the millions of people with “A” credit scores who don’t live on debt or have very minimal debt because they are intelligent enough to not overextend?
I don’t buy the argument that the banks were more aware than the common citizen…….if that’s the case then no-one should ever be allowed to buy a home or make any major purchase using credit unless they take some sort of class, offered by whomever, to educate them on the common sense and basics of debt and overall personal finance. It’s really not rocket science. Maybe that’s the new requirement….that way, the excuses can finally stop. Then it’s no longer the vendors fault that they “burdened” people with debt.
I agree the homeowner should not get off free but what do you think is happening right now? I’m in real estate, I see it all the time…….people taking advantage of the system after already having taken advantage of any equity they did have when the market was better. Our homes are not banks, they are homes and they are something that one should own with the intent of living in it and eventually owning it to give future financial freedom…..until that attitude changes people will continue to willingly walk away and (other than bad credit) be completely undamaged while the responsible people get shafted. Trust me, I know plenty of people who can make their house payments but CHOOSE to not…….and I guess that’s okay according to the new morals of our society. Plenty of these people took equity out and bought lots of fun expensive toys…….the ones they are still driving while not making payments on their home. They go right along with people who have lived in their homes for a year or two without making any payments…….wow. Wrong is the new right I guess.
How is the bank “entitled” to a silent second….how is that entitlement? It simply holds the owner of the home responsible for the entire loan amount (which IS what they legally agreed to) while reducing the payment to a manageable monthly amount…….I’m missing any argument for an entitlement to the bank.
Inevitably the larger concern here is the road to socialism. As our government starts to “force” free market enterprise to do things, we start to lose our freedoms as Americans.
Let the free market clean up what has happened and then instill regulations in our market that make sense (on both businesses AND individuals) so that BOTH parties are equally responsible and can equally be pursued if this happens in the future…..take a look at the Dutch mortgage and housing market…..very interesting.
Actually frugalone, all debtors have the option (perhaps even right) to default. It is a choice that is part of the deal from the very beginning. We don’t have debtors prisons in the United States, and anyone can default on their loan at any time. Sure there are consequences, but people and companies have been defaulting on debt for centuries, it isn’t a new concept.
And if we didn’t use taxpayer dollars to bail out creditors this market would self correct, and lenders would only make loans to folks they were pretty darn sure could repay. In fact if lenders hadn’t been able to shift risk to others by lifting long standing regulations against it (put in place after the great depression), I honestly don’t think we would have had this credit bubble in the first place.
Couldn’t agree more with your last paragraph, and yes, the dutch system is interesting.
How about third party sales on the courthouse steps? That’s a disposal stream. How many houses are turning over that way?
3rd Party Sales have grown tremendously, but still are only about 20% of total sales. Check out our CA Foreclosure Report for details: http://www.foreclosureradar.com/foreclosure-report.
Sean,
Why are many banks in CA still pursueing deficiency judgements on homeowners that short sale.In CA the law was changed to protect the distressed homeseller.
yet the banks continue to sell off the debt to third party debt collecters that can pursue the judgement up to 6 years.
Hi Sean,
A lot of interesting news yesterday. Chase is saying, yes we are losing money on loans. B of A saying for the umpteenth time we are going to start foreclosing. But a couple of interesting government tidbits.
HAMP is not working–duh, and Treasury is saying now–no more extensions.
HUD appears to have changed the rule on flipping (giving an out to investors at foreclosure sales?)
I find these things interesting and pose a hypothetical that the cap on Fannie and Freddie was taken away not for principal write downs but to finally start allowing losses on foreclosures and short sales.
Why now? Well, because “housing finally seems to have bottomed”. Enough folks are saying that the housing freefall has haulted, we know our bottom, we can evaluate our losses. There is pent up demand. If we sell now, we recoup as much as possible in the next 10 years, so let’s take the hit, things will be much better than if we wait for interest rates to start rising and then take bigger and bigger hits later on.
I still say a a short sale or foreclosure beats a principal write down in the short term because banks and investors get paid back immediately and now some other chump (ie. FHA) will be on the hook. In the long term, its worse because a flood will negatively impact values thereby creating a perpetuating downward pressure on pricing. But short term, with the current pent up demand for reasonable priced housing seems like a good way to go. This will also raise some doubt for someone currently paying who will just default in hopes of a principal write down.
I think that for the short term thinking banks and politicians it makes perfect sense to in the short term flip the foreclosure switch for the next 2-3 months, allow demand to wipe up the excess and then flip the off switch when losses start looking to high.
I’m asking you why this would not make sense (given our political and economic environment)
I think you make a lot of sense. Still if you are right and foreclosures do start to ramp I think you’ll see a pretty quick reaction by congress to slow it down (cramdowns perhaps)… as I still believe the overall political environment is anti-foreclosure (though the FHA rule change is very interesting).
I also still don’t believe that many of our major banks could survive this sort of shift of policy for long. Just the damage to their portfolio 2nds and helocs is likely enough to push them to insolvency — plus they originated most of the loans they service, and I don’t expect the underlying lenders to go quietly.