Laying A Road Mine That Will Explode Later
On Friday I proposed the following: “There is something going on right now regarding the “shadow inventory” and lender-owned foreclosures. I suggest an initiative to counter this and expose it for what it is; illegal. It should be something like this: To use public pressure and legal avenues to stop the collusion within the real estate industry, lenders and the government to manipulate the housing market to the detriment of consumers.”
“I invite any and all input in this endeavor, especially ideas on what legal actions we might take. A few things are clear; the government has no mandate to set housing prices. The agents and lenders are breaking the law if they are colluding to manipulate inventory. Let’s get to the bottom of this and if we find that this sort of thing is happening, we should do something about it.”
It was related to this article in the desk clearing post: “(In the 1980’s) President of Buffalo Federal Savings and Loan at the time was Bill Perry, and Bjerke said Perry was adamant in his opposition to forcing an immediate sale of all of those homes. At the time they were getting pressure to market them immediately from bank regulators.”
“The company held a meeting with local realtors, put all the properties in a hat and let them ‘draw’ for the rights (listings) to sell those homes as they could without placing prices under the current market values. This was done to avoid driving down property values in Buffalo and to reduce losses to Buffalo Federal Savings and Loan.”
There is plenty of evidence this is going on. San Francisco Chronicle, April 2009: “A vast ’shadow inventory’ of foreclosed homes that banks are holding off the market could wreak havoc with the already battered real estate sector, industry observers say. Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. ‘We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market,’ said Rick Sharga, vice president of RealtyTrac. ‘California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You’d have further depreciation and carnage.’”
“In a recent study, RealtyTrac compared its database of bank-repossessed homes to MLS listings of for-sale homes in four states, including California. It found a significant disparity - only 30 percent of the foreclosures were listed for sale in the Multiple Listing Service. The remainder is known in the industry as ’shadow inventory.’”
“For the 26 months from January 2007 through February 2009, banks repossessed 51,602 homes and condos in the nine-county Bay Area, according to DataQuick. Yet in the same period, only 30,823 foreclosures were resold, leaving about 20,000 bank repos unaccounted for.”
“‘There is a real danger that there is much more (foreclosure) inventory than we are measuring,’ said Celia Chen, director of housing economics at Moody’s Economy.com. ‘Eventually those homes will have to be dealt with. If they’re all put on the market, that will add more inventory to an already bloated market and drive down home prices even more.’”
The Press Democrat, June 2009: “Home sales remained strong in May and supplies continued to shrink, signs that Sonoma County’s housing market could be starting to stabilize, according to a new report. But a new wave of foreclosures is looming on the horizon. The market is dominated by foreclosure homes and short sales, where owners owe more than the price they hope to get. While buyers are snapping up distressed homes, the supply could swell again if banks put more on the market, said Chris Smith, a CPS agent in Santa Rosa who sells foreclosed homes.”
“‘The fact that the banks held foreclosures off the market from the foreclosure agents dried up the supply,’ he said.”
“Some banks held off selling foreclosed homes this spring after President Obama launched an effort pushing lenders to help owners stay in homes, Smith said. Banks also didn’t want to help drive prices lower by flooding the market, he said. After receiving a handful of foreclosure listings the past two months, Smith received six in the past week.”
“‘I think we’ve got another wave of foreclosures that is about the same size as the first wave that we had,’ Smith said.”
And the same article points out a familiar problem from the boom days; frenzied speculation: “‘People know that properties are priced to buy. They’re afraid of missing out,’ said Kris Anderson, a broker with Allstate Mortgage Company, in Santa Rosa.”
“Buyers also have been motivated by mortgage interest rates that have risen the past several weeks, but remain near historic lows. The monthly loan payment for a $350,000 home purchased with a 10 percent down payment and a 30-year loan is $1,789 today, down from $1,940 a year ago, Anderson said. ‘They sense that now is the time to buy’ she said.”
And as we learned during the bubble, what do speculators do when the bet turns bad? Head for the exits. The Herald Tribune, November 2009: “Foreclosure filings in the Sunshine State last month dropped for the first time since July 2006. The fickle nature of the region’s foreclosure activity in recent months is the result of the push-and-pull of varying factors, said Bill Geller, president of the Sarasota Association of Realtors. There are investors buying up deals, first-time home buyers rushing to take advantage of the government’s recently extended and expanded tax credit coupled with lenders who have different strategies on how and when to release their bank-owned properties into the market.”
“‘Those investors on the sidelines with the money have been much more active in the last few months because they have realized prices are going to increase,’ Geller said. ‘The tax credit, especially now that it has been expanded, definitely has an impact on the market.’”
“Some banks are releasing their inventories of reclaimed homes in batches, hoping not to flood the market and to keep prices relatively higher. Others are holding on until prices rise while still others are getting foreclosed homes off their books as quickly as possible. The total number of foreclosures may remain about the same until the end of April, when the tax credit expires. Then, who knows, Geller said.”
“‘Next May, are there going to be more foreclosures? That is a question I cannot answer,’ Geller said. ‘I would love to say the inventories are being absorbed and there won’t be more foreclosures coming on to the market, but I can’t say that. We’ll have to wait and see.’”
From Realty Check, November 2009: “I’m back on the foreclosure bandwagon again, especially after getting the Treasury’s Home Affordable Modification Program status report this morning, and its glaring omission of any information as to how many borrowers are actually keeping up with the payments on their trial modifications. Even more distressing was a report I received today from Lender Processing Services, which is a huge mortgage data aggregate.”
“Foreclosure inventories continued their upward climb. The nation’s September 2009 foreclosure rate stood at 3.12 percent - a month-over-month increase of 2.6 percent and a year-over-year increase of 88.9 percent. Among individual states, Florida posted the most troubling results with 10.4 percent of loans in foreclosure, and more than 22 percent of loans reported as non-current.”
“LPS’ October Mortgage Monitor also cites large ’shadow’ foreclosure and REO inventories. The number of loans deteriorating further into delinquent status is now more than twice the number of foreclosure starts, indicating another major wave of troubled loans in an already clogged loan pipeline. Nearly one-third of foreclosures remain in pre-sale status after 12 months - twice as many as the year prior. The six-month average deterioration ratio has risen the past two months to 300 percent, showing that for every loan that improves in status, three more deteriorate further.”
“So you’ve got all this excess inventory, and then you’ve got another problem, or two or three, eloquently laid out by mortgage guru Howard Glaser: ‘What I am most worried about is March and April of next year. What happens to a housing market that seems like it is finding its footing at that point? Because several things will happen simultaneously: You’ve got the option ARM resets beginning to kick in, you have the home buyer tax credit expiring, maybe for real that time, and you have the Federal Reserve maybe running out of money to buy mortgage-backed securities. If we add on top of that, banks beginning to release some of this inventory ,which they have been holding on to for a long time, those three items are potentially very destabilizing to the marketplace. So I’m concerned. I think buckle your seatbelts for Spring of next year.’”
And December 2009: “Foreclosure inventory will be a lot higher than some predict. Shadow inventory should be seen not just as homes the banks are holding on to or that are still in the foreclosure process, but homes where borrowers have stopped making payments and have not heard from the banks.”
The Staten Island Advance: “A new foreclosure tactic, whereby lenders or debt collectors holding second mortgages freeze bank accounts or garnish pay checks of already struggling homeowners, is emerging and making it even more difficult for people to hold onto their homes.”
“Lawyers for troubled Staten Island homeowners say they are beginning to see examples of clients who go to the bank to take out money and find that their accounts have been frozen or wiped out by other banks or debt collectors — the entities holding second mortgages on houses already in default on the first and primary mortgage. Some are learning the lender or debt collector has already gone to court and secured a judgment to garnish paychecks.”
“It’s a move more in line with the traditional debt collection industry, which typically targets credit card debt, and it’s dragging the house and what little cash reserves people often have into the foreclosure battleground. Experts say it’s an end-run by second lien holders around the traditional foreclosure process, which involves only the first mortgage holder and provides important legal protections for the homeowner.”
“George Apolinaris of Graniteville said his longtime companion, Maria Gil, got an unwelcome surprise when Ms. Gil tried to withdraw some money for groceries from two small bank accounts totaling $6,000 that the two maintained. The accounts were frozen and in the red for $250,000 — twice the $126,000 owed on their second mortgage. Apolinaris said the couple never received any notice about the court action that froze the bank accounts.”
“The couple acknowledges their own financial missteps — the kind that helped fuel the housing crisis. Apolinaris bought a house in Clifton in 2004 as an investment, refinanced several times and then fell behind on payments after his tenant stopped paying rent and he was forced to evict. That house recently entered foreclosure.”
“Apolinaris said he used some of the money he took out of that house during those refinancings to buy the two-family home in Graniteville with Ms. Gil. At the time, he said, both were working and making money and the housing market was booming. The couple bought the home for $520,000 early in 2006 with an adjustable rate subprime loan from IndyMac bank, which was shut by the government last year. Less than a year later, they said, they refinanced to lower their interest rate and took out $20,000 to pay off credit card debt.”
“As part of the refinancing, they took out a mortgage in the amount of $464,000 from HSBC bank with an interest rate of 6.8 percent, and a simultaneous second loan from Citimortgage for $126,000. The latter loan came with an interest rate of 9.5 percent. In all the refinancings, the couple never used an attorney.”
“Josh Zinner of the Neighborhood Economic Development Advocacy Project in Manhattan said some lenders or trusts for banks that went out of business are selling off second mortgages today to debt collectors for pennies on the dollars. Those debt collectors are then going after the homeowners’ bank accounts or pay checks to recoup whatever money they can.”
“‘The backdrop to that is there are real fundamental problems in the debt buyer industry,’ said Zinner. ‘The combination of the second mortgage problem with all the abuses in the debt collection industry is toxic, and could really create havoc for homeowners who are trying to avoid foreclosure on their primary mortgage.’”
And then there is the overbuilding, (also a form of speculation) which is only made worse by higher prices. Arizona Republic: “Arizona’s economy may take four more years to fully rebound, an Arizona State University economist said Wednesday. Lee McPheters, director of the JPMorgan Chase Outlook Center told a lunchtime audience that the state’s economy will return to prerecessionary growth levels but not until 2013 or 2014.”
“The state has lost more than 265,000 jobs since the recession began in December 2007, according to the U.S. Labor Department. For the first time in recorded Arizona history, personal income is expected to shrink. In 2009, it will drop by 1.5 percent. Phoenix and Riverside, Calif., are tied for second place behind Las Vegas with the most homes underwater, in which owners owe more than their homes are worth. He called those cities a Bermuda Triangle.”
“‘We were all through 2008 and into 2009, the first half, drowning in 30 feet of water. Now, we’re only drowning in 20 feet of water, but we’re still drowning,’ he said.”
“Scottsdale economist Elliott Pollack contends that about 75,000 too many single-family and condo units were built in the 2003 to 2006 boom years and that there are still about 50,000 units too many. That doesn’t include what he calls a ’shadow supply.’ Many of the investors who have been buying fix-up and vacant homes probably plan to put them back on the market over the next few years.”
The Dallas Morning News. “The latest ruckus about home foreclosures makes for great political theater. And that’s about all it is. The somber truth is that most people who can no longer afford to make their mortgage payments will lose their homes. And no amount of programs out of Washington will change that.”
“Indeed, so-called loan modifications or workouts are much less likely to succeed today than when we first heard about them a couple of years ago.”
“Short of giving people their houses outright, there’s nothing the mortgage company can do. Almost a quarter of Americans with loans now owe more than their houses are worth. I credit the mortgage companies for holding off foreclosure for as long as they have in many of these cases. But that could backfire as the housing market slowly recovers.”
“Almost half of this year’s home foreclosure filings in North Texas are loans that have been posted and reposted for forced sale while lenders work with the borrowers. That adds up to more than 25,000 foreclosure filings. What happens – as soon as early next year – when the mortgage companies decide to bite the bullet and take back all of these houses?”
“What will happen to local residential values when a new wave of distressed houses hits the market?”
“Does postponing the foreclosures until the economy and housing markets are on the mend really help anyone? Or are the mortgage companies just laying a road mine that will explode later in the recovery?”
What is clear? This is definitely happening; all the experts, anecdotes and statistics indicate this to be the case. Given that our system rewards all players for recklessness and short-sightedness, it isn’t surprising. But what is also clear is that this is could make this so-called financial “crisis” a true disaster. There will be MORE foreclosures as a result of these actions, not less. Also we can expect more overbuilding and higher loan losses. And, it is more than bad policy; it is probably illegal and/or in violation of regulations, not to mention a harm to consumers and even the stockholders of the lenders. IMO, somebody has to stand up and make a ruckus about this and unfortunately it may be up to us.
by Ben Jones
