According to Radar Logic, the federal government is currently holding about 46 percent of the entire body of REO properties in the country[1]. This includes properties held by Fannie Mae, Freddie Mac, HUD and VA loans. The company also predicts that due to a glut of “non-performing” homes that are not yet in foreclosure but clearly headed that way, the stake that the federal government has in the housing market is only going to go up for a predicted total of 3.1 million homes ultimately in the federal government’s possession.
While this massive property backlog is of concern no matter how you view our current administration or government in general, it is particularly disconcerting since these homes are marketed and maintained through the use of taxpayer dollars. The same analytics company predicts that the book value of the homes in question could reach $614 billion, which is particularly troubling when you factor in that the government, just like most other sellers today, will end up selling REO inventory at a loss. Factor in the average discount today (40% below book price) and that is a loss of $246 billion before you even factor in the properties that are discounted before they reach foreclosure status via short sales.
It seems like these massive property holdings could hold the key to the survival or the downfall of the housing market. What do you think the government should do with this plethora of distressed property?
According to Lender Processing Services' (NYSE: LPS) newly released Mortgage Monitor Report, stabilization of the nation's home loan delinquency and foreclosure rates remain largely neutralized by the more than 7 million loans in distress.
According to the Mortgage Monitor report, the number of loans 90 or more days delinquent (including pre-sale foreclosure) declined 112,184 from 4,186,627 to 4,074,443 between March and April. The total number of non-current U.S. loans plus REO just over 7.3 million.
Conversely, deterioration ratios remain high, with two loans rolling to a "worse" status for every one loan that has improved and the overall volume of loans moving from delinquent to current status declined to a three-month low supported primarily by "artificial cures" associated with HAMP modifications.
In addition, newly delinquent loans (current at year-end and 60 or more days delinquent as of April) have declined from the 2009 levels but still remain extremely high from a historical perspective, particularly within prime product.
Other key results from LPS' latest Mortgage Monitor report include:
Total U.S. loan delinquency rate: 8.99%
Total U.S. foreclosure inventory rate: 3.18%
Total U.S. non-current loan rate: 12.17%
States with most non-current loans:
Florida, Nevada, Mississippi, Arizona, Georgia, California, Illinois, New Jersey, Michigan and Rhode Island
States with the fewest non-current loans:
North Dakota, South Dakota, Wyoming, Alaska, Montana, Nebraska, Vermont, Colorado, Iowa and Minnesota
Foreclosures are going upscale across the Bay Area. Nearly 1,000 homes valued above $730,000 were repossessed by banks in the nine-county region in each of the past two years, according to a Chronicle review of public records compiled by MDA DataQuick, a San Diego research firm. Back in the real estate boom year of 2005, just 42 Bay Area homes valued above $730,000 went into foreclosure; in 2006, the number was 80. Even more striking is the growth of mortgage defaults - the first step in the foreclosure process - in affluent ZIP codes. Mortgage distress has moved upstream in part because of economic conditions such as unemployment and stock losses. Also in play is a different type of risky loan called option ARM (adjustable rate mortgage) that's just beginning to cause problems.
Experts emphasized that the foreclosure numbers don't fully reflect the extent of distress at the high end, because for expensive homes, banks are more likely to pursue short sales, in which the homeowner stays put while marketing the home for less than is owed on the mortgage. "Banks take the time on the high end to short-sale properties because they get a higher return and better valuation," said Pat Lashinsky, CEO of Emeryville's ZipRealty, a nationwide brokerage. Buyers of high-end homes during the real estate boom years often relied on option ARMs, which allowed them to start off paying just the interest - or even less than the interest, thus adding on to their mortgage balance. Most option ARMs had an initial period of five years before loans recast, causing payments to soar.
A growing number of the people whose homes are in foreclosure are refusing to slink away in shame. They are fashioning a sort of homemade mortgage modification, one that brings their payments all the way down to zero. They use the money they save to get back on their feet or just get by. It’s a Force me out if you can attitude. Any moral qualms are overshadowed by a conviction that the banks created the crisis by snookering homeowners with loans that got them in over their heads. “I tried to explain my situation to the lender, but they wouldn’t help,” said Mr. Pemberton’s mother, Wendy Pemberton, in foreclosure on a small house a few blocks away from her son’s. She stopped paying her mortgage two years ago after a bout with lung cancer.
Foreclosure procedures have been initiated against 1.7 million of the nation’s households. The pace of resolving these problem loans is slow and getting slower because of legal challenges, foreclosure moratoriums, government pressure to offer modifications and the inability of the lenders to cope with so many souring mortgages. The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics. While there are no firm figures on how many households are on their way to passive resistance, real estate agents and other experts say the number of overextended borrowers taking the “free rent” approach is on the rise. More than 650,000 households had not paid in 18 months, LPS calculated earlier this year. These “free riders” are “the unintended and unfortunate consequence” of lenders struggling to work out a solution, Mr. Kyle Lundstedt, managing director of Lender Processing Service’s analytics group.
Federal Reserve policy makers say full employment means a long-term jobless rate between 5 percent and 5.3 percent. Some of the most influential economists say they’re wrong. Bondholders “must worry that if the natural unemployment rate is up to 7 percent, then there’s the danger that the Fed will keep piling on more stimulus money as if they didn’t have to worry” about joblessness, Phelps, 76, a professor at Columbia University in New York, said in an interview. Joblessness has stalled above 9 percent since May 2009. Maki 45, said in an interview from his New York office, that the natural rate -- the level that neither accelerates nor decelerates inflation -- will remain high because there’s a mismatch between available jobs and the skills of the unemployed. People whose homes are worth less than their mortgages also may be reluctant to move for work, and the extension of unemployment benefits deters some people from accepting employment with lower pay because a portion of their lost income has been replaced.
“If you knew for sure that the natural rate was 5 percent, then it might make sense for the unemployment rate to hit 7 or 7.5 percent before you start tightening at all. But it can become a very risky strategy when the natural rate has risen, because you could be sitting at a zero percent Fed funds rate at full employment and not realize it,” said Maki. Central bankers may be loathe to keep raising their estimates because it’s politically unpopular to say more Americans should be out of work to create equilibrium in the economy. For the central bank to increase its benchmark rate to a “neutral” level of at least 4 percent a year ahead of the economy’s return to potential, possibly as soon as mid-2013, the Fed would need to alternate increases of 25 basis points and 50 basis points at each meeting between January 2011 and June 2012, “unless it starts sooner,” Deutsche Bank economists said.
The timing couldn't be worse; real estate has declined by as much as 65 percent in many of these areas including the Florida panhandle, with official unemployment rates well into the double digits. Not only is the BP oil spill dramatically impacting tourism, the oil industry and the local ecology...the main sources of income for an already struggling region...but this crisis is expected to have profound impact on the economy for years - if not decades - to come. Already nearly 70 percent of the $40 Billion dollar summer bookings have been cancelled, resulting in one of the most severe losses in recent history for a state that is facing severe fiscal shortages...without a drop of oil even having reached the shores yet.
Unfortunately, the worst may not be over. As BP continues to encounter difficulty in sealing the leak, weather patterns and the gulf stream are expected to make matters even worse. As the hurricane season officially begins, the weather service is calling for an above average years in terms of storm related activity; activity that could easily worsen an already fragile situation by distributing oil over an even larger area of land and sea. Of even more immediate concern is the observation that the oil spill is now reaching the gulf stream which circulates ocean waters from the gulf around the bottom of the state and then north via the eastern coastline potentially impacting more than 75% of the Florida's coastline. With BP's most recent announcement suggesting the spill may continue running until at least August, experts are bracing for the worst even while hoping for the best.
According to a study released Friday by NeighborWorks America, 58 percent of homeowners who’ve received assistance through its national foreclosure counseling program reported the primary reason they were facing foreclosure was reduced or lost income.
NeighborWorks was created by Congress in 1991 as a nonprofit organization to support local communities in providing its citizens with access to homeownership and affordable rental housing. In January 2008, with the foreclosure crisis raging, Congress implemented the National Foreclosure Mitigation Counseling (NFMC) Program and made NeighborWorks the administrator.
The organization says that over the course of the NFMC program, the percentage of homeowners who’ve cited wage cuts or unemployment as the primary reason they were facing foreclosure has steadily increased.
In November 2009, 54 percent of NFMC-counseled borrowers reported reduced or lost income as the main reason for default. Six months earlier in June 2009, it was 49 percent; in February 2009, 45 percent; and in October 2008, 41 percent.
These steady increases parallel the nation’s unemployment rate, which until the November 2009 employment report, had marched upward since October 2008.
“With unemployment numbers not likely to dip below nine percent in 2010, our report proves what many already believed to be true. Unemployment and reduced income are having a devastating effect on our nation’s homeowners,” said Ken Wade, CEO of NeighborWorks America.
The administration recently announced changes to its Making Home Affordable program to provide assistance to unemployed homeowners by temporarily reducing or suspending mortgage payments for a minimum of three months. The initiative becomes effective July 1, 2010.
The federal government has also awarded additional funding to states where unemployment is high to support localized mortgage relief programs for homeowners who are out of work.
Lawmakers too are on a push to help homeowners who’ve lost their jobs. Congress’ financial reform package includes a measure that uses $3 billion from the Troubled Asset Relief Program (TARP) fund to make loans of up to $50,000 to unemployed homeowners to be used to make their mortgage payments for up to 24 months while they are looking for a new job.
Wade said, “While Congress and state governments have stepped up and extended unemployment benefits to help families survive this tough economic climate, it’s time for mortgage servicers and investors to make meaningful accommodations for homeowners facing foreclosure. If they don’t, we’ll see even more empty houses and devastated neighborhoods in our communities.”
NeighborWorks also noted in its report that 62 percent of all NFMC clients held a fixed-rate mortgage, and 49 percent were paying on a fixed-rate mortgage with an interest rate below 8 percent.
Nearly one million families have received foreclosure counseling as a result of NFMC Program funding. According to NeighborWorks, NFMC clients are 60 percent more likely to avoid foreclosure than homeowners who do not receive foreclosure counseling.
With distressed borrowers increasingly turning to short sales as an alternative to foreclosure, the proportion of damaged foreclosure properties, otherwise known as REO, sold during April plunged, according to the latest Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions.
The survey found that short sales represented the largest portion of the distressed property housing market in April, accounting for 17.9 percent of all transactions. And as short sales surged, the portion of damaged REO transactions fell to 12.8 percent in April from 15.4 percent in March.
In addition, the survey found that first-time homebuyers started to desert the housing market in April, ahead of expectations. While first-time buyer participation grew
at a rapid rate from January to March, April’s data represented a clear reversal in that trend.
According to the survey, first-time buyers accounted for 43.4 percent of April’s home purchase transactions, a significant drop from March’s figure of 48.2 percent. This early departure was unexpected, as these buyers had until the end of April to sign a home purchase contract to qualify for an $8,000 tax credit.
“We were surprised to see the early decline in first-time homebuyer participation,” said Thomas Popik, research director for Campbell Surveys. “When the tax credit was expected to expire last November, we saw a peak of first-time homebuyers in October. Now, the first-time homebuyer peak appears to have occurred not one month, but two months early.”
As first-time buyers began their departure from the housing market in April, existing homeowners picked up the slack. The survey results revealed that these buyers expanded their share of the home purchase market from 33.5 percent in March to 38.7 percent in April.
But a National Association of Realtors practitioner survey showed a different story. According to this survey, first-time buyers purchased 49 percent of homes in April, up from 44 percent in March. The survey also found that investors accounted for 15 percent of transactions in April, down from 19 percent in March, and the remaining sales (36 percent) were to repeat buyers.
The foreclosure tide is still rising. RealtyTrac reported Thursday that foreclosure filings were brought against nearly 1 million properties during the first three months of 2010. That’s a 7 percent increase from the previous quarter, 16 percent higher than a year ago, and equates to one in every 138 homes in the United States.
Altogether, foreclosure filings – including default notices, scheduled auctions, and bank repossessions – were reported on 932,234 properties from January to March of 2010. According to RealtyTrac, the number of scheduled auctions and bank repossessions hit new quarterly records.
All foreclosure types spiked in March. Filings were reported on 367,056 properties last month, an increase of nearly 19 percent from the previous month and the highest monthly total since RealtyTrac began issuing its report in January 2005.
“Foreclosure activity in the first quarter of 2010 followed a very similar pattern to what we saw in the first quarter of 2009: a shallow trough in January and February followed by a substantial spike in March,” explained James J. Saccacio, RealtyTrac’s CEO. “One difference, however, is that the increases were more tilted toward the final stage of foreclosure,” with REOs increasing in the first quarter of this year, compared to a decrease during the same period last year, he said.
“This subtle shift in the numbers pushed REOs to the highest quarterly total we’ve ever seen in our report and may be further evidence that lenders are starting to make a dent in the backlog of distressed inventory that has built up over the last year as foreclosure prevention programs and processing delays slowed down the normal foreclosure timeline,” Saccacio said.
During the first three months of this year, RealtyTrac’s data shows there were 257,944 properties repossessed by the lender – an increase of 9 percent from the previous quarter and an increase of 35 percent compared to the first quarter of 2009.
As it has for the past 13 quarters, Nevada continued to document the nation’s highest state foreclosure rate in the first quarter of 2010. One in every 33 Nevada homes received a foreclosure filing during the three-month period, more than four times the national average and an increase of nearly 15 percent from the previous quarter. Still, Nevada’s total of 34,557 properties receiving a foreclosure filing in the first quarter was down 16 percent from the first quarter of 2009.
Arizona’s foreclosure activity increased on both a quarterly and annual basis, helping the state to post the nation’s second highest state foreclosure rate for the third consecutive quarter. One in every 49 Arizona properties received a foreclosure filing during the quarter – nearly three times the national average.
With one in every 57 Florida properties in some stage of foreclosure, the state posted the nation’s third highest state foreclosure rate for the second straight quarter. Florida’s Q1 foreclosure activity also increased on both a quarterly and annual basis.
California foreclosure activity decreased 6 percent from the first quarter of 2009, but the state still documented the nation’s fourth highest foreclosure rate, with one in every 62 homes receiving a filing.
Utah’s foreclosure activity increased 75 percent from the first quarter of 2009, the highest annual rise among top-10 states, giving it the nation’s fifth highest foreclosure rate. Foreclosure filings were reported on 10,756 Utah properties, a rate of one in every 88 housing units and an increase of 21 percent from the previous quarter.
Other states with foreclosure rates ranking among RealtyTrac’s top 10 in the first quarter of 2010 were Michigan, Georgia, Idaho, Illinois, and Colorado.
U.S. consumer spending was unexpectedly flat in April, a government report showed on Friday. The Commerce Department said spending was the weakest since September, when it fell 0.6 percent, after increasing by an unrevised 0.6 percent in March. Analysts polled by Reuters had expected consumer spending, which normally accounts for over two-thirds of U.S. economic activity, to increase 0.3 percent last month. Spending adjusted for inflation was also flat in April after a 0.5 percent increase the prior month, the Commerce Department said. Personal income rose 0.4 percent, the report showed, after rising by the same margin in March. Markets had expected income to rise 0.5 percent last month. The saving rate rose to 3.6 percent from 3.1 percent in March. Savings rose to an annual rate of $398.5 billion. The report also showed the personal consumption expenditures price index, excluding food and energy, rising 1.2 percent in the 12 months to April, the smallest rise since September. The index, which is a key inflation gauge monitored by the Federal Reserve, increased 1.3 percent in March.
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