How Many Foreclosures Will It Take?
Several readers suggested the topic of foreclosures. “We know foreclosures are on the rise, but how many will it take before lenders say 6.48% is not enough return to cover the risk we’re taking? As a personal investor, I wouldn’t loan anyone money to a home right now unless I was getting at least 10%. Nothing against the borrower, it’s just the market.”
“When/If the institution loan-pool buyers come to the same conclusion, the IR curve will steepen drastically and things will get even uglier.”
Another said, “Lenders aren’t generally ‘afraid’ of foreclosures in a rising market. They can foreclose the property, take it back if nobody wants it, then often times resell it for a profit. They aren’t afraid of foreclosures if the buyer put 20% down because there is a substantial equity cushion. Lenders are only afraid of foreclosures on loans made at a market top with the market headed south or if there is no equity cushion for them.”
“Those are the only scenarios where lenders face any meaningful risk. Even then, if the lender is adequately capitalized, they can simply hold the property through the downturn, and sell on the next upswing.”
“The structure of the MBSs is interesting in this respect. Most of the mortgages have been structured so there is an 80% first (with equity cushion) and a 20% second. It will take a market decline of more than 20% to jeopardize the first trust paper.”
And another added, “One of my big worries is knowing who holds all of this paper. I suspect lots has been sucked up into pension /annuity plans, etc. Anyone have good info on that?”
A reply, “Banks don’t hold the property for years, it’s not their policy to hold vacant properties for years. Banks and savings & loans sell as quick as possible for the market value, or whatever they can get.”
And another, “The first mortgage holder will slide from 80% to 100% very quickly. accrued interest, costs of foreclosure close the gap quickly. The second mortgage is vaporware, always has been. Then the first mortgage holder has to sell into a sagging market, a 15-20% discount is a must. and no, the lenders will not hold onto the real estate, they have to capitalize that.”
And lastly, “The 2nd mortgage will get eaten up not just by the equity slide, but by missed payments, property taxes, insurance, legal fees, and foreclosure fees. So the 20% equity cushion there is not really 20%. It will not take long to eat into the first mortgage.”
The Greeley Tribune in Colorado. “Last fall, Weld County was coming off its worst foreclosure year ever. It’s getting worse, and those in the industry expect the number of foreclosures to continue to climb. ‘We haven’t seen anything this ugly in easily 15 years in the sheer anemic nature of this market,’ said Matt Revitte, a broker wwho specializes in foreclosures.”
“As of this week, there were 1,086 foreclosures in Weld County, a 42 percent jump from the same time last year. In all, 2005 registered 1,500 foreclosures. There is one foreclosure for every 71 residences in Weld. Adams County, with 2,450 foreclosures as of June 30, with a foreclosure for every 50 homes. Arapahoe County tops the heap in volume with 2,570 foreclosures as of Thursday, but it comes out to one foreclosure per 77 residences.”
“Revitte said the Weld market is in a major correction at present. There’s an oversupply on the market. It also doesn’t help that the foreclosed homes are competing with homes that are on the regular market. Northern Colorado economist John Green added that such competition may keep sellers in limbo longer, making them walk way from loans they can’t service. ‘It becomes a self-fulfilling prophecy.’”
“Revitte agreed, adding, ‘This could be a house of cards that continues to implode.’”
“They aren’t afraid of foreclosures if the buyer put 20% down because there is a substantial equity cushion. Lenders are only afraid of foreclosures on loans made at a market top with the market headed south or if there is no equity cushion for them.”
My impression is that this is the normal situation for recent SoCal home purchases. Does anyone have the numbers handy?
20% down, really? In Netherlands for recent purchases (last 5 years or so), 20% down is the exception to the rule except for those where the 20% down is a free government subsidy (like for some starters, elderly people etc.). I would guess that over here, for the more expensive properties, -20% down (120% mortgage) is already more frequent than +20% down.
“Those are the only scenarios where lenders face any meaningful risk. Even then, if the lender is adequately capitalized, they can simply hold the property through the downturn, and sell on the next upswing.”
Lots of Japanese banks found themselves in that position circa 1990. And they are still waiting for the next upswing, too.
“Even then, if the lender is adequately capitalized, they can simply hold the property through the downturn, and sell on the next upswing.”
I always thought banks typically viewed property obtained through a forclosure as a liability, hence the public auctions.
Banks will sell properties for less than land value, if that’s what it takes to get them off the books.
Banks are LENDING institutions. Their corporate charter does not encompass real estate management. And federal bank examiners take a very dim view of holding property for more than a year.
They will never want to keep the property for long in a down market. Who will maintain the property, mow the lawn, protection against vandalism etc ?
Renting will show -ve cash flow, probably according to rules they will have to adjust the values in the books every year/qtr, causing that much deduction in their earnings. If they are smar , like CISCO, they will write down a huge inventory in one shot and get it off the books. subsequently add any sales income to cash flow, thus showing better results.
banks rarely hold REO for any length of time, which is part of way their loss given default is not all that bad, even in a crash (all that bad, of course, being a relative term). I’ll post again the back of the envelope calculation I’ve posted before. Say you have a 100% LTV loan (or you own both the first and second on an 80-20). With 40% loss given default (the FB defaults at 25% underwater, foreclosure costs about 5%, and the bank sees the property fall an additional 10% while holding the property), and a 30% foreclosure rate, the lender/investor needs about 12% in “excess interest” to be made whole (30% times 40%). With an average mortgage life of 5 years (and with prepayment penalties you can almost guarantee that) you only need a spread of about 2%. 40% is a very high loss given default, in good times it’s about 20% to 25%. And 30% foreclosure is enormous - that’s Houston for loans from the mid 1980’s. Not the US, not Texas, just the very center of the storm (OK, Anchorage, Denver, and Shreveport were nailed about as hard as Houston at that time, but San Antonio and New Orleans, for instance, made out much better). Most people, if they don’t lose their job, continue to pay month after month even when deep underwater. Will there be loans that lose more than 40%? Yes. Will there be neighborhoods that have foreclosure rates over 30%? Yes. But lenders are setting their rates based on averages that are at least regional. So I just don’t see credit spreads for bad loans in this business ever getting so high that the spreads alone will kill it.
have 30 yr conforming spreads changed at all YTD ?
What kind of default rate were you figuring into that scenario? I suspect it’s better for bank to see 1% defaults at 40% loss than 5% defaults at 25% loss. Better to get just a few REOs to mess with, even at deep discount, than a lot of them.
Banks also have high overhead costs, plus if they borrow short and lend long, those overnight rates will kill them. I think the MBS’s are screwed to as their value will decline. The margins on the bank are not that high once you factor in other costs. If they originated that line, then they had to pay commissions etc. If they bought it from someone else as a packaged MBS, then their are fees there as well. It’s not that profitable and doesn’t take much for the margins to be squeezed. Also think of their stocks. If even their earnings get nailed, which this has the potential to do and will do, then the stocks will drop compounding further losses elsewhere. The economy is slowing as we know it.
Overhead costs, MBS fees (somewhere around 10 bp on a Fannie Mae swap transaction, to provide some perspective) are already built into the spread between a 20% down 30 year fixed and a 10 year Treasury. None of that changes the fact that it would only take about an extra 200 bp to cover the risk of a really dire credit risk scenario.
Interest rate risk is a completely different topic than the credit risk from foreclosure. Most mortgages that banks hold in portfolio are ARMs, and when they do hold fixed they generally hedge the interest rate risk.
But, they aren’t making any more land. And so, no more houses. What do you mean there are more foreclosures?
Foreclosure homes for everyone.
Of course, we may be the only ones in a position to pick up some of these foreclosures at a fire sale price.
A reply, “Banks don’t hold the property for years, it’s not their policy to hold vacant properties for years. Banks and savings & loans sell as quick as possible for the market value, or whatever they can get.”
Doesn’t a bank have to pay taxes, insurance, and maintenance on REO? And face the risk of vandalism if a property sits unsold, or cover the cost of wear-and-tear and property management fees if it is rented out? Holding on until the market comes back sounds like no free lunch to me.
It was portfolios of foreclosed properties that sank many lenders in the oil bust. They made bad loans, sure, but the carrying costs of REO property was the real anchor, IMO.
and this 20% of USA wasn’t part of the last uptrend as they were tanked by 87
it is different this time
Stucco-
Yes, to answer your question. Along with other costs. They try to get them off the books as quick as possible. I had a lender client once who knew there were some illegal additions to a building. He sold it anyway. When we found out later after selling it to a client and then having building and safety condemn the additions. He just shrugged his shoulders and said it was more important to get it off the books and worry about getting sued later. The title company ate it. But still.
I thought most of the large banks no longer hold the mortgages. They sell them to a third party. It seems that our old mortgage was through one large bank and then our statements came from another.
Banks are not in the real estate business, they’re in the lending business. They will not hold properties until the “next upswing” for the reasons you have mentioned. Banking regulators will also get on their cases - you can’t be a bank and real estate investor. Note Donald Trump is not chartered by any government authority to accept deposits and make loans.
Banks sell the REO’s as soon as possible . I use to sell a bunch of them in the past by writing up the deals on napkins ,(long story ,don’t want to go into it ).
Mr. Incomestream
I enjoy your insights to the industry (as well as all the other posters here.) Thank you for sharing.
I was wondering if you might want to guess as to why in an up market banks might ask full market price (of a cared for property) for property that has been long abandoned and deteriorating.
We saw that several times when we were searching in our target town. New construction was everywhere so I was never sure who they thought was going to buy the “Monster House” at the non-reduced price. We always interpretted the price as the bank sending the message that they were not interested in making any deals. Did they think the market was so hot they could still nab some GF even with brand new shiny stuff all around that was only priced about $50-$70k higher?
The short answer is yes on your GF theory. Reality is a little different if you see`something like that in your area again and if your interested make an offer at 50 to 60 cents on the dollar. You maybe surprised at the results. Anything over 90 days on the books of a bank is a no no. Anything over 180 days is a nightmare for a R.E.O. manager especially if his superiors find out he has had any offers on anything that has sat that long and he hasn’t moved on it. Unemployment may be in his future.
If the R.E.O. agent is drinking the koolaid and giving you resistance. Mail your offer directly to the attn of the R.E.O. department. Be prepared for a call back but have your ducks in order for your rationale of making that offer. So you don’t appear as some looney bitter renter.
Not guarenteed but you may come away with a very nice deal.
When we talk about foreclosure, who actually does it? Is it the bank that bundled the loan or the servicing bank?
Jim A. asked
When we talk about foreclosure, who actually does it? Is it the bank that bundled the loan or the servicing bank?
Typically the servicing bank. But if a problem with the loan shows up when it goes delinquent the originating lender might be forced to buy the loan back from the pool, and then it could be the originating lender’s problem.
I smell liability…. with all of these liar loans and “hitting the numbers” pressure on appraisers, I predict good work for lawyers in the comming years.
Nope the same thing happened during the RTC fiasco. The lenders swallowed the bitter pill and kept moving. Your not going to see very many successful lawsuits unless the fraud was just blatent(ie: someone getting his poodle or three year old a 500k loan) . I really don’t think stated loans and appraisers hitting the number qualifies. But maybe it’s different this time.
Banks don’t want to hold illiquid assets in a declining market. They want them off the books and they want their cash back that they need to operate and also to get growing again to make them some money.
One of my accounts bought his house in the Riverside, CA area in 1995. He had a realtor friend who had catalogs full of bank-owned properties. He saw one he liked for $189K. He offered $109K. The bank countered with $129K. He took it on the condition of the bank bettering his rate by 1%. No less than these types of situations are coming our way…
good read
http://bigpicture.typepad.com/comments/2006/07/housing_downtur.html
‘If by characterizing the retreat in housing as “orderly,” Mr. Bernanke means that the downturn hasn’t yet reached the point of homeowners taking to the streets to vent their anger at plummeting home prices and inexorably mounting costs of owning a house, we won’t quarrel. But with the interest on trillions of dollars worth of adjustable rate mortgages vulnerable to “reset,” as the euphemism for sharp hikes goes, and affordability of buying a house becoming ever more vexing, all we can say to him is… “Wait.”‘
So far, the downturn has merely reached the point of priced-out renters taking to the blogs to vent their shadenfreude over plummeting home prices and inexorably mounting costs of owning a house.
the federal gov is only concerned with the average american.they could care less about joe bubble flipper in in overheated markets.ben b will keep raising rates till bubble no longer exists,they have to so we can begin to grow again.build it upknock it down.rinse and repeat.
“Revitte said the Weld market is in a major correction at present. There’s an oversupply on the market. It also doesn’t help that the foreclosed homes are competing with homes that are on the regular market. Northern Colorado economist John Green added that such competition may keep sellers in limbo longer, making them walk way from loans they can’t service.”
This major correction seems to be playing out nationally — too many new construction and used homes hitting the market at the same time. I still don’t buy the theory that builder profits will hold up against the headwind of a massive and growing supply glut. Instead, I expect builder profit streams to follow the course of a declining annuity, which shrinks to zero as rising building costs interact with falling prices. I guess time will tell…
Builders will keep building until forced into bankruptcy. All the execs cashed out their options last year, and will try to keep collecting paychecks all the way into bankruptcy. They will all make out very well. Shareholders on the other hand….
I have begun hearing snippits from non-blog people who vacationed in FLA about how there are so many construction cranes, and how the cheap mon’n'pop style motels are all being bought up. Comments to the effect of “This could be my last vacation in FLA with the cost of gas where it is and the cheap rooms disappearing.”
I think even people totally out of the blogsphere are beginnign to catch on, in their own way. It’s just getting too obvious.
Agreed. I think, also, that commercial real estate will be close behind. There is no shortage of commercial overbuilding and non-viable businesses that will become insolvent with the coming downturn.
Builder costs will also fall as the supply and demand for labor and supplies inverting. With a higher unemployment rate, people will be willing to work for anything in order to eat and feed their families.
Related questions: When will inventory start falling? And when will it stop?
I expect that we’ll see the people, who don’t need to sell, start taking their houses off the market fairly soon now. But that should be more than offset by flopping flippers putting new houses on the market as the ARMS reset. Next we should see REO inventory hit the market.
As discussed in the thread that led to this posting, the banks cannot hold REO for long. But we *could* see something like the Resolution Trust Corporation (from the last S&L implosion) spring up to hold the foreclosed properties off the market until either the economy recovers or inflation wipes out the nominal prices. That would result in a delayed release of properties, driving up inventory one more time in a sort of “echo bubble”.
I don’t know of any historical reference for the current situation, but I do know that a lot of folks would like to buy homes at some point in the future. The question is, how do we know when all the knives have hit the floor, other than waiting to read “RE: The Worst Investment of All Time” on the cover of Time magazine? And for the benefit of folks who are preparing to buy near the bottom, how long should this take?
Anyone care to speculate?
The best time to buy is when the bull is again on his feet. You don’t have to bottom fish. Wait until people grudgingly give up the flexibility of renting… “take a gamble” on buying simply to save on living costs… figuring that if they can at least break even in 3 years when they sell that the risk was worth it.
That was my thinking in 1998-99 anyway. I did buy, but memories of co-workers that could not sell in 1995-96 was still on my mind. I had to overcome that “risk factor” of being stuck with property I might no longer want.
Mozo,
Good point. After the crash, the housing market could bounce along the bottom (build a base) for an indefinite period of time, depending upon what the rest of the economy is doing. In your case, you could not have known in 1998-9 that the Fed would push real rates far below zero a few years later. But buying during a period of base-building is usually a low-risk proposition, if you are buying for consumption rather than speculation.
You bought at the right time as it turns out . But, I understand what you mean by overcoming the negative of the market for the years before you bought .
I have a friend who got a good deal on a condo in a good area in 1997 and she had no competition on the place ,(she even made the sellers paint the place ). This cheap condo went up 300% in the years that followed .
The tendency here is to assume that the housing market exists in a vacuum. That is, all other facets of the economy will function exactly as they are now. This is not 1929, 1979, 1995, or 2001. I would like to suggest that we are about to see something that we have not seen before…
YES YES YES! The dominos are lined up, and the first one is falling…
yes, this fits the experience from the last housing crash in my country around 1980. Before the crash, there was a +/- 100% price increase within about 5 years. Suddenly the bottom fell out of the market, buyers disappeared and median prices dived by 40% within 1.5 years. If you shopped around, you could easily buy nice properties with more than 50% discount.
However, that bottom was only the best time to buy if you really wanted a certain property that came on the market. Interest rates were high (around 10%) and homeprices went nowhere for the next 10 years or so. If you could find a nice place to rent and waited with buying until 10 years after the crash you were financially better off.
I think one might want to assess the health of their industry as well as the likelihood of finding another position w/in commuting distance to their home in the event of lay-off when purchasing any home in the future.
We have small children and live on my husbands income. We live out in the boonies 1/2 hour to husbands job but Syracuse is not so overflowing with opportunity either. Luckily his industry looks strong for now. But there are rumbles.
As I’ve previously posted, we chose a home that if we both worked at McDonalds we could still get our mortgage paid (while living on Spam and Ramen noodles of course) Course, that was based on prices of utilities and taxes when we purchased….I’m not so sure McDonalds would cover everything now as in 4 years, heat/electric has doubled and taxes have gone up 25% (That’s $2500/yr more for just those 2 bills in only 4 years!). And of course forget health insurance. It would be living on a prayer. Get my jist here?
I think we get a recession first, then a slow recovery. I’m guessing in 5 years I’ll want to buy RE again. Probably when its cheaper to buy than rent?
any chart wizards out there ?
like to see an overlay of 1988 t0 1994 vs 2005 to ?
I thin we are on a steeper slope
these foreclosure numbers are not much compared to 1991- stay tuned
Yeah, even the headlines of “Foreclosures tripling” doesn’t mean much right now. Foreclosures were barely a trickle the last few years, in the hot markets.
It commonly takes about 6 months of missed payments before a lender gets serious about foreclosing. Then about 3-4 more of paperwork and process before the auction takes place and a trustee’s deed recorded. Than another month or two to evict the debtors, clean up the property, and list to resell.
We won’t see bulging inventories of REOs for a while yet.
We need a modest price decrease and then the foreclosure sells will begin in volume. Wait and see, it is coming soon.
same story in the Netherlands; foreclosures (and bankruptcies) have been doubling every year or so for the last 5 years, but the numbers are still relatively low.
On the other hand, in certain areas a large chunk (sometimes over 50%) of the more expensive properties should have been foreclosed because the mortgages are underwater and people are no longer able to pay. The banks often decide to wait a few years and hope that inflation solves the problem. When we start seeing real price declines (median price still climbing over here) I think we will see a huge jump in foreclosure numbers.
On Foreclosure.com I noticed the FSBO was an option. Can anyone explain more about that to me? Does that always come first or is that option circumstancial?
Diane.Wedner@latimes.com
someone is going to post article appearing in LATimes sunday paper titled
Hold off on that panic attack. What she says is not to worry. Los angeles is different and 200k to 300,000 come to southern California
every year! makes you wonder.
All illegals might be 200 to 300k. I talked to someone on the phone last week who referred to something called “White Flight”. I asked him what that meant and he said it means all these people leaving and moving to places like OK, TX, ID, NC, TN, SC etc… because of all the illegals and how Southern California is changing into a vastly different place from what it once was.
The vast majority of Californians showing up in Colorado seem to be middle and upper-middle class whites. The ones I’ve talked to almost always cite rising crime and deteriorating quality of life, especially in neighbors and schools. The causative factor that comes up over and over is the uncontrolled influx of illegal immigrants, not just from Mexico, but from the most primitive and violent hamlets of places like El Salvador and Guatamala. They are at or near the tipping point, where Third World corruption and criminality are so pervasive that any Anglos who have the option of leaving will do so over the next few years.
Used to live in TX and there were plenty of illegals. Took my daughter to summer camp up in NC this summer. Was shocked at the number of Mexicans in the Asheville area Wal-Mart!!!!!! Things have changed there! Don’t know about the other areas, but when the Asheville Wal-mart is 50% mexican, makes you wonder what it’s like everywhere else.
Illegals are everywhere that low paying jobs can be found. They are in the Northeast, the Midwest, places that you would not think have been inundated.
I was in Greeley, CO last week. The thing I noticed right off is the number of homes for sale, and the number of new homes under construction. Seems like the new home construction should be slowing down. Plus, Greeley is not the best smelling place I’ve ever been.
OT but relevant
Also on another article a poster was remarking about buying a boat next year when panic sets in…
For big-boat buyers, fuel prices no object
By Keith Darcé
UNION-TRIBUNE STAFF WRITER
July 22, 2006
If Will MacIntyre were a car salesman, he’d probably be in trouble.
The 44-foot-long yacht he was showing yesterday at the San Diego Summer Boat Show burns about $80 worth of diesel fuel per hour, nearly double what it cost to run the boat a year ago.
Despite a sharp surge in fuel prices that has hit boaters and motorists alike, MacIntyre said his well-heeled customers are buying boats in the $250,000 to $2 million range at near-record levels.
“Fuel is about the least significant expense for our buyers, and I don’t mean that tongue-in-cheek,” said the manager of H&S Yacht Sales on Harbor Island.
Spirits seemed as high as the temperature at the third annual boat show put on by the Southern California Marine Association at Sheraton San Diego Hotel & Marina, also on Harbor Island.
The show, which runs through Sunday, is expected to attract about 25,000 people, nearly 2,000 more than last year. The event is open to the public and tickets are $10 each.
About 200 yachts and sailboats crowded the marina while 100 more boats, including deep-sea fishing vessels and inflatable dinghies, filled a shoreside exhibition area. The show is a mix of business and entertainment, with some people buying boats on the spot and others simply window shopping.
Large boats such as the ones on display at the show can be fuel guzzlers, burning as much as 19 gallons of diesel per hour when engines are running. The cost of running a boat can add up quickly with diesel prices as high as $4.20 a gallon at local marinas. Boat fuel prices tend to be higher because it costs more to pump the fuel from storage tanks on land to pumps at the end of docks than it does to gas stations.
But vendors at the show appeared to be escaping the overall slowdown in recreational boat sales, one that is being felt mainly on the lower end of the market.
Americans bought 864,000 new boats in 2005, down from the 870,000 they bought in 2004, according to the National Marine Manufacturers Association, a Chicago-based industry group that hosts San Diego’s other boat show every January at the San Diego Convention Center.
Brunswick, the world’s largest maker of recreational boats, slashed its earnings outlook for 2005 following dismal second-quarter sales. The Lake Forest, Ill., company said this week it will cut back production during the last half of the year.
Industry observers blame the downturn on the rising cost of boating, driven in part by higher fuel prices and consumer anxiety over the future of the economy.
The National Marine Manufacturers Association expects another dip in new boat sales this year as consumers hold back on “extraneous” purchases, said James Petru, the group’s spokesman.
Boat dealers at the San Diego show told a different story, with some reporting backlogs on new boat orders as long as 11 months.
A buyer would have to wait six months or more for delivery of a yacht like the vessel that Hamid Partow was showing off for Newport Boats of Marina Del Rey.
The 64-foot, $2.2 million boat made by Azimut Yachts in Italy, features high-end cabinetry, a dishwasher and three staterooms with sleeping room for six.
Partow said his typical customer – a technology executive in his mid-50s – is willing to wait for a vessel that embodies his level of success and status. “It’s intended for someone who wants to stand out in the crowd,” he said.
Not everyone at the show was looking to make such a bold statement.
Chris Ivy of Tucson, Ariz., said he wants to buy a sport fishing boat in the 50-foot to 60-foot range that also would serve as a vacation home.
The real estate developer is among a growing number of people from nearby states who are buying boats and keeping them in San Diego, said Dave Geoffroy, executive director of the Southern California Marine Association in Orange. “Instead of buying a condominium near the water, they are buying a yacht on the water,” he said.
Ivy’s wife, C.J., isn’t quite sold on the idea. “He would like to live on it. I would like to visit it,” she said.
Equiity locuts from Arizona will drive up San Diego boat slip fees….the NEXT BUBBLE! Get em now before you’re priced out forever!…They’re not making anymore water you know!
Are any of those boats large enough to build a condo on them?
same story in the Netherlands … especially in the highend range (over 10 million $) there are LONG waiting lists and business is booming for the few companies that make those luxury yachts.
Some of these go to foreign customers (including US) but a large percentage is for the home market - probably the small group of high level officials in government and business who get 20-30% higher income and huge bonusses every year.
The two happiest days of a boat owner’s life are the day he buys the boat and the day he sells the boat.
Or said another way.
If it floats, flies or f@cks rent it.
yes, it’s similar to the current situation in the housing market
a friend of mine often rents a big yacht during the summertime for two weeks, cost +/- 1500 euros. You can purchase such a yacht for +/- 200K euro. Do the calculations and the choice is easy: even if you want to rent it for several months a year renting is cheaper…
To address the top ic this thread: When foreclosures are endemic, they actually become the market.
Most foreclosures are damaged and beat up… but when there are enough clean and presentable homes, buyers begin to see them as a better value than owner-occupant listings.
This drags down comparables and then everyone is on a more level playing field. This absolutely gives appraisers and loan officers fits… in a bad enough market, there may actually be NO owner-occupant sales to compare with.
I know a guy who got a foreclosure for 32K ,on a 2b2bath house ,in California ,in a decent area , about 11 years ago at 7.50 fixed rate 5% down . The house wasn’t even beat up . The prior owners were young people who got a divorce ,so they just walked . Anyway , the guy who bought the place was retired ,so he couldn’t afford much ,but he found it .
wonder what % of buyers put 20% down since 2004?
2004 prices are just a few months away
I know the national median downpayment made in 2005 was 2%.
Ben,
Here is a GREAT VISUAL PRESENTATION, from a WSJ article, presented by Calculated Risk, another great blog spot.
Check it out:
http://calculatedrisk.blogspot.com/
Next year, I think that inventory map will look like a carpet bombing campaign.
That is an outstanding graphic. It looks like there are lots of rather large local inventory bubbles — pretty much in every major US MSA.
Notable exceptions: Salt Lake City, Dallas, Houston, and New Orleans.
A good question to ponder is ” Will the Fed’s next round of easing result in a Japanese style “Zero interest rate policy” and deflation. We came close a couple years ago. A chart of the Fed funds rate for the past 25 years shows a clear trend to zero. Every time the econmy sputters the Fed drops rates progressively lower than the past, forestalling for the future the necessary pain and cleansing of recession. Their running out of ammo. With the already high debt load and low savings of the average american the next downturn could get nasty. Deflation is like the Grim Reaper finally catching up with the characters cheating death in the movie “Final destination”. The Feds desire to avoid the short term pain of normal economic cycles may in the end produce a much more painfull and protracted result.
The fed hasn’t touched it’s “ammunition”. There are essentially no reserve requirements these days, so a bank can lend out 100% (or more!) of it’s deposits. This is the big cannon. Can you imagine the screaming and sputtering if banks are required to hold 10-20% of all their deposits, instead of lending them out? This is how it used to work, but not any more. It’s called infinite credit, the fractional reserve system on overdrive. The reserve requirements were there to prevent runs on banks, and to control credit. Now there are no reserve requirements. You buy/sell anything, the money eventually ends up at a bank, and that’s was the reserve requirement was meant to control.
The feds can also start buying/selling long term bonds (usually Govt bonds), and thus manipulate the long term bond market. Easy to do when you can just print more money. Maybe they are doing it now, I don’t know, but the yield curve has been inverted or flat for a long time. This is the second biggest cannon.
When the fed raises or lower short term interest rates, they do it by buying/selling very short term notes - interbank loans. This is the lowest caliber cannon the feds have. People see the short term interest rates in the Prime Rate, because it’s tied to the fed short term rate. Banks make their money by raising interest rates on loans very quickly (like instantly), and oh, gee, it takes a few weeks or months to lower those rates.
The feds have to inflate, since the US govt (and r/e specuvestors) can’t possibly pay back what it has borrowed, and has promised in the future. Just inflate it away, slow, painful - anyone who saves $$ is getting burned, and those that borrow $$ are being rewarded, plain and simple.
A good ‘ol fashioned bank examination (which they can do at any time without warning) is another cannon.
How many banks could be shut down right now, if the Fed was serious about solvency and reserves? Odds are, the 20/80 rule is alive and kicking. 20% of the banks will be 80% of the busts.
I believe the reserve rate is 10% in the U.S. on transaction deposits.
I respectfully disagree with the posters who think that banks will slash REO prices in a wholesale fashion. CEO’s are just as human as everyone else and they have people (investors, auditors) watching their moves too. If they suddenly slash prices without at least trying to maximize their return, they are realizing losses. They don’t want to do that any more than the regular old FB’s do. It affects the stock, their bonuses, etc., etc. They will follow the market down in approximately the same percentage as the general population does.
The huge number of REOs this time around will overwhelm any bank’s ability to “follow the market down”.
Banks aren’t going to “slash” REO prices. They are just going to sell at market (like any other seller). The difference is that they are serious about selling, so they are not going to ask above market. They are not delusional like so many FB’s.
Banks are trying to maximize their return by aiming for a quick sale in a falling market. They know perfectly well that if they don’t, they will get even less. Banks cannot control the entry rate of REO’s into the market and must accept the market price like anyone else.
That’s still assuming that the REO staff know what they’re doing. Remember, it’s been thirteen years since there’s been any serious down market. Banks have fired or replaced almost all of their middle management with high school students (and not necessarily graduates) who input data on computer screens. I am deeply troubled by the idea that the REO departments are being given credit for having more skill and knowledge than seems likely. I really see no evidence that they are prepared for any major REO inventory or sales push.
I have several years experience dealing with financial institutions i.e. banks in Northern California and I know from experience that they try to drop OREO’s as fast as possible.
We talk alot here about rising interest rates and their effect on monthly payments. Traditionaly, the two main limitations in ability to buy a house were the monthly payment and the downpayment. Of course significant downpayments have pretty much disappeared for first time homebuyers. In an 80/20 situation, even though most of the money is in the first, most (theoreticly an infinite amount) of the downpayment leverage is in the second. When things start unwinding, and super duper risk gets priced into second mortgages making them unaffordable for most, how will the return of downpayments affect house prices. Downward yes, but how much of the downward spiral in prices will be due to the fact that people will need to go back to needing downpayments as opposed to problems with monthly payments. Keep in mind that in a falling market, “move upers” will have a difficult time coming up with a downpayment because they won’t have tons of “free” equity from their old house.