April 19, 2010

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The FDIC And Shadow Inventory

The following is the first in a series we are pursuing on the shadow inventory held by lenders. We start with questions sent to the FDIC.

1. Are there any laws, regulations, or rules governing the length of time that can pass between the mortgagor’s first default and the initiation of the foreclosure process?

2. Are there any laws, regulations, or rules governing the length of time that can pass between commencement and finalization of the foreclosure process?

3. Are there any laws, regulations, or rules governing the length of time that can pass between foreclosing and marketing properties?

4. Are there any laws, regulations, or rules preventing banks from colluding to manipulate the perceived market value of properties they own?

5. Are there any laws, regulations, or rules preventing banks from individually attempting to manipulate the perceived market value of the properties they own?

6. Is it acceptable to the FDIC for banks to stall the foreclosure process on nonperforming assets in an attempt to manipulate financial statements for regulatory purposes?

7. Is it acceptable to the FDIC for banks to stall the foreclosure process on nonperforming assets in an attempt to prevent the properties from coming to market, which would make true supply available to the public

8. Did the TARP money given to banks cause fewer properties to be liquidated/marketed?

9. If banks are purposely keeping properties off the market, then how can consumers know whether or not a house bought today will hold its value? Doesn’t the consumer need to know how many houses are in the pipeline to discern the direction of the market?

10. If consumers are buying houses today that are destined to slowly lose value over time (as the rest of the inventory inevitably comes onto market), then won’t many of these consumers be underwater in the future? Doesn’t this practice actually raise the probability of future foreclosures?

11. Does your agency have a plan to protect consumers and limit future foreclosures by ensuring that banks are not hiding nonperforming assets and accumulating a shadow inventory?

Here is the reply we received from Greg Hernandez with the FDIC Office of Public Affairs.

For questions 1-5: I would suggest you consult the laws of a particular state because the laws vary greatly.

For questions 6 and 7: The FDIC expects banks to follow standard reporting practices and policies.

For question 8: The FDIC has no way of knowing but would not think there would be such a cause and effect.

For questions 9-11: The FDIC does not agree with the premise of these questions. The FDIC tries to protect consumers, and it expects banks to accurately report according to accounting and reporting rules.

For additional information, I would suggest you consult the FDIC’s rule and regulations Web site, which has detailed information.


From Reuters. “Distressed transactions have a strong negative influence on home prices, according to First American CoreLogic, which noted the lows in prices for 2009 coincided with a peak in bank-owned property sales. The trend is worrisome to economists who have warned that federal home loan modification efforts and foreclosure moratoriums would result in a backlog of homes hitting the market, forcing prices lower and hurting the economy. This ’shadow supply’ late in 2009 was estimated at seven million units by Amherst Securities Group.

The 21st Century Version Of Gold Rush Fever

The Miami Herald reports from Florida. “During the real-estate boom, when dilapidated houses in bad neighborhoods sold for $400,000 in Key West, buying an affordable home was impossible for most of the tropical island’s backbone workforce. Then came the flooding of Hurricane Wilma, the real-estate crash and national recession that decimated tourism and led to foreclosures, short sales and plummeting prices. ‘Dreams do come true like in American Hollywood — even simple people from [the formerly] Communist Poland can buy a house in Key West,’ said hotel housekeeper Aneta Swiecick. Aneta and her husband Mariusz Swiecicki, a maintenance handyman who works two jobs, paid $157,000 for the foreclosure that an investor bought in 2004 for $370,000 and in 2006 was appraised for $463,000.”

” The Swiecickis came to the United States five years ago…when Key West was the priciest place in Florida and among the most expensive locales in the country to buy a 2,200-square-foot home, at a staggering $949,000, according to Coldwell Banker’s annual Home Price Comparison Index. By 2009, the median selling price in Key West for a single-family home had fallen to $400,000, or pre-boom level. Lumping together all residential properties — single-family homes, condos, townhomes, duplexes, mobile homes and three- to four-unit places — the number was $335,000, according to the Key West Association of Realtors. For the first quarter of 2010, the figures are similar.”

“‘We’re back to 2002 and 2003 pricing at this point,’ said Key West Realtor Barbara LeRoux. ‘If we’re not at the bottom, we’re darn close. Anything under the $400,000 mark is a real hot property these days.’”

“U.S. Navy petty officer second class Sylwia Kwiatkowska and her best friend Lindsay Douthitt, who was in the Navy six years and is now a nursing student, bought a two-bedroom, one-bath townhome with a view of the No. 8 tee at Key West Golf Course for $170,000. It was a foreclosure originally bought by an Ohio woman, who paid $243,000 for it as an investment rental property in 2003 on the same day she also bought another townhome at the golf course for $227,000.”

“A year later, the Ohio woman refinanced the townhome bought by Kwiatkowska for $298,000, and took out a $150,000 equity line of credit. The townhouse appraised for as high as $418,000. ‘That stuff is crazy for this tiny place,’ said Kwiatkowska, 28. ‘I was relieved the market dropped. This was the perfect opportunity for a first-time home buyer.’”

“‘When we started looking for a house, one day it was on the market and the next day it was gone,’ Aneta Swiecicki said. When she looked at the house on Pearl, the price was right but it was a neglected rental that had been vacant for months. ‘I said, ‘Oh my God, this house is horrible,’ Swiecicki recalled. ‘But they said if we didn’t buy, they had another person who would. The house is like a hot bagel.’”

The Sun Sentinel. “Sheila Ryan put down $239,900 in 2006 for what she thought was a gem, a one-bedroom condo near downtown Fort Lauderdale. Over the next two years, investor-owners walked away from nearly half of the 20 units in her complex. Taxes went up and condo association fees rose to $350 from $180 a month for the owners who remained. As Ryan paid more, the recession cut into her income as a massage therapist. ‘I remember being at a homeowners meeting and actually shaking because I knew I wasn’t going to be able to turn it around,’ she recalled.”

“Now in foreclosure, Ryan is trying to sell her condo for a quarter of what she paid: ‘It’s all out of control, and you just want peace of mind again.’”

“Jack McCabe, a real estate consultant in Deerfield Beach, figures 65,000 condos were built in Miami-Dade, Broward and Palm Beach counties during the boom, while another 63,000 apartments were converted to condos. McCabe also estimates that nearly a third of those new downtown Miami-Dade units are still on the market. Now, Moody’s Economy.com estimates it could be 20 years before housing prices reclaim their recent peaks. ‘A lot of people, if they think they are going to stay long enough to get what they paid for the condo or more, they’re going to end up carrying them out feet first,’ McCabe said.”

The Bradenton Herald. “Homebuilder Jesse Battle III, who left hundreds of Coast Bank borrowers with unfinished homes, will lose his certified general contractor license, a state licensing board decided. ‘The only place he should be working is the house of many doors,’ said Seminole resident Richard Masi, who filed a complaint against Battle after he said his house-lot package was ‘loaded’ with liens from subcontractors. ”

“Masi obtained a loan for more than $300,000 through Home Bank to sign a construction contract with Battle for a home in North Port. ‘It was a big mistake,’ Masi said. ‘He cost me a bundle of money.’”

The Herald Tribune. “No one can fully explain why it remains such a difficult task to complete one short sale. Sometimes short sales bring more cash than foreclosures, and vice-versa. Which one it is depends on a host of factors, not the least of which is whether a lender has an agreement with the Federal Deposit Insurance Corp. for reimbursement of most losses on a bad loan like those sold short.”

“Multiple liens on a house and fat home-equity lines of credit that must be dealt with first are easy explanations for why a short sale languishes. Another is that lenders — historically only handling a few cases each year — are now overwhelmed with hundreds or more in a month, a logjam that builds upon itself.”

“In the worst straits are those borrowers, usually through sub-prime loans, who have had their mortgage wrapped into an investment pool like those held by Citigroup and Bank of America, said Mickey Ross of National Quick Sale, a Jacksonville-based company specializing in short sales. About 25 percent of boom-time mortgages are contained in such securities. Few of those securities have even basic guidelines for short sales, he said.”

“‘They got into some pretty crazy financial gymnastics,’ Ross said. ‘If your loan is in one of those groups it could be very challenging to get a short sale approved.’”

“The process of bundling notes and selling them to investors as a security was a boom-time staple, said Irv DeGraw, a banking professor at St. Petersburg College. AIG, Citigroup, Lehman Bros. and others backed, or insured, these so-called ‘credit-default swaps.’ It was an absolutely maniacal problem,’ DeGraw said. ‘Nobody understood exactly what we were dealing with and then it exploded.’”

From TC Palm. “Riverside National Bank of Florida was seized Friday evening by the federal government. Linda Beavers, a regional ombudsman for the Federal Deposit Insurance Corp, said the federal Office of the Comptroller of the Currency closed Riverside on Friday ‘because the bank was unable to maintain adequate capital to operate in a safe and sound manner. The FDIC was made the receiver for the bank, which means we have the responsibility to ensure that the deposits are safe and the assets sold. Fortunately, there was an immediate buyer.’”

“‘This was a dead bank walking,’ Miami banking analyst Ken Thomas said of Riverside. ‘The question is why has the FDIC let them flail away for so long.’”

From PBS Newshour. “Ray Suarez: Some of the places where foreclosures are highest are markets that once soared, including Cape Coral in Southern Florida. Last night, economics correspondent Paul Solman showed the impact there. He visited Jason Welsh, a golf pro who bought this house a decade ago for roughly $100,000. He renovated it, added a pool, hiking his mortgage to $240,000. Today, given the decline in prices in that neighborhood, the house would sell for possibly $100,000. Welsh hasn’t made a payment in six months, while he’s asked the bank servicing the loan to lower it.”

“He made the banks an offer of $150,000, saying he would re-buy the house for more than it’s worth. But the bank refused, and Welsh faces foreclosure or a short sale. The bank plans to sell the house for far less than what Welsh is offering. Welsh: ‘I call. I try and get help. They just say I don’t qualify. And they’re willing to sell it to somebody else for $100,000 out from underneath me. It’s just upsetting that there’s supposed to be help out there, and there is none.’”

“Bert Ely, banking consultant: Well, I think part of it is that the nature of the problem has changed…As the recession has deepened, as the jobless rate has gone up, a lot of mortgages that were prime mortgages at the time they were made are now in default because of a loss of income in the — in the family and the accumulation of other debts. And people are just not able to — to maintain their mortgage payment. And this gets to what I think is another aspect of this problem. And — and that is, is the government actually solving problems through the approaches it’s taking, or are we just simply rolling a problem forward and prolonging the housing crisis?”

“Quite frankly, there are a number of situations where it’s in everybody’s interest for the homeowner to give up the ownership of the house, to become a renter again, so that the housing market can find its bottom and start to come back. We saw this in Texas in the 1980s, and we’re going to go through that same process again.”

The Anniston Star in Alabama. “Calhoun County foreclosures for the past three months hit an all-time high since the recession began in 2008 — a snapshot of a national trend experts say is being caused by persistent high unemployment rates and banks finally tackling backlogs of troubled home loans. Keivan Deravi, professor of economics at Auburn University Montgomery, said the recent spike in foreclosures has much to do with consistently high unemployment rates and not the collapse in sub-prime mortgages that caused the first jump in foreclosures during the beginning of the recession.”

“‘This is the aftershock,’ Deravi said of the current trend. ‘A lot of people who have lost income and lost their jobs can’t pay their mortgages.’”

“Deravi added that foreclosures are increasing now because banks are now dealing with more bad loans. ‘A lot of banks at first hesitated to put foreclosures on their lists and a lot of people were allowed to live in their homes because (the banks) didn’t want to put pressure on the market and acknowledge there was a problem,’ he said.”

“To Deravi, it will be some time before the housing market fully corrects itself. ‘It’ll be sometime after the labor market turns,’ he said. ‘I would say it could take a good three years for the housing market to clear all its inventory.’”

The Atlanta Journal Constitution in Georgia. “When Theresa Ballard and her husband moved from Florida to the mountains of North Georgia, they had millions of dollars in savings and a golden retirement planned. But that all blew away like last year’s leaves after the Ballards got swept up in the 21st century version of gold rush fever: building and selling vacation homes.”

“These days, a single two-bedroom cabin in Ellijay is all that remains of a real estate empire the Ballards once thought would be worth about $30 million. Now bankrupt, her husband, Doug, has returned to work in Florida. ‘Nothing’s forever, and when it’s all said and done, material things don’t mean a thing. Right now I’d be satisfied with hair,’ said Theresa Ballard, 55, who is still struggling to recover from an ordeal so stressful that she lost much of her hair.”

“While her husband was running the family’s propane distribution business in Naples in the 1990s, the real estate agent had become heavily involved in Florida’s booming real estate business. She would put 10 percent down on homes in new developments while they were still on the drawing board, then flip them perhaps a year later, sometimes for $100,000-plus profits. She sometimes owned up to 20 properties at a time.”

“Flush with such profits and the sale of the propane business, Ballard and her husband were still in their 40s when they retired to Ellijay in 2000. But within months, Ballard was itching for something to do. ‘I started buying land,’ she said.”

“Mark Chastain, who owns a land surveying company in Ellijay and is chairman of the Gilmer County Commission, (said) the second-home market really took off around 2002, when easy credit and the rising values of buyers’ homes in Atlanta and Florida made second homes affordable to more people. ‘What was always a dream became a reality,’ said Chastain. ‘Twenty-five-year-olds with a few years’ work experience were buying $400,000 homes.’”

“By late 2008, ‘things really started to slow,’ said Ballard. ‘We weren’t selling anything…It’s made me very humble,’ she said. ‘We’ll start over and see how it goes.’”