More foreclosure fodder....

From the LA times comes another article about the coming foreclosure wave. I sure as hell hope it hurries up.

Mortgage defaults have surged to record levels amid rising unemployment and falling home prices. Lenders are expected to move quickly to clear up backlogs as moratoriums on foreclosures expire.

Reporting from Washington -- Just as the nation's housing market has begun showing signs of stabilizing, another wave of foreclosures is poised to strike, possibly as early as this summer, inflicting new punishment on families, communities and the still-troubled national economy.

Amid rising unemployment and falling home prices, mortgage defaults have surged to record levels this year. Until recently, many banks have put off launching foreclosure action on the troubled properties, in part because they had signed up for the Obama administration's home-stability plan, which required them to consider the alternative of modifying loans to make it easier for borrowers to make payments.

Just how big the foreclosure wave will be is unclear. But loan defaults are up sharply. And with many government and banks' self-imposed foreclosure moratoriums expiring, the biggest lenders indicate that they are likely to move more aggressively to clear up a backlog of troubled mortgages.

But rising foreclosures will depress home values, pushing more homeowners underwater. Mark Zandi of Moody's Economy.com estimates that 15.4 million homeowners -- or about 1 in 5 of those with first mortgages -- owe more on their homes than they are worth.

The rapid pace of layoffs is of particular concern. Employers shed nearly a half-million jobs in June. Homeowners who are out of work have little chance of having their mortgages modified. That puts many homeowners on a collision course with banks that are preparing to take a more aggressive stance.

"Absolutely," Chase Bank spokesman Tom Kelly said when asked about an impending surge in foreclosures. Since April 6, Chase has approved modifying 138,000 loans under Obama's program. But an undisclosed number of other Chase borrowers didn't meet modification eligibility, and many of those homeowners face possible foreclosure.

Bank of America, the nation's largest servicer of home mortgages, also did not release the volume of likely foreclosures. The bank said it had extended offers to modify loans to more than 45,000 borrowers under the Obama plan. Bank of America spokesman Dan Frahm said the company was projecting a "slow increase" in the number of monthly foreclosures, potentially reaching 30% above previous normal levels.

Much will depend on how quickly lenders can push the process along. It generally takes three months to a year from the time a borrower receives a notice of default to a foreclosure sale, in which case the lender usually takes title to the property.

Government and company reports show that the number of completed foreclosures nationwide slowed sharply late last year and into early this year, largely because of various moratoriums in effect during much of the first quarter.

But anecdotal reports indicate that foreclosure sales have started to climb again in the second quarter. And the pipeline is clearly getting fuller.

California accounts for an outsized share of mortgage loan defaults. A stunning 135,431 homeowners in the state were hit with notices of default in the first quarter, an increase of 11% from the earlier peak in the second quarter of 2008, according to real estate information service MDA DataQuick. Foreclosure sales in the state have been moderating after averaging a high of 26,500 a month last summer.

But just recently, said the 37-year real estate veteran, there's been a surge of requests for so-called broker price opinions, or appraisals that lenders often ask brokers to provide just before they put a foreclosed property on the market.

"I think it's going to be a very big wave," he said. "Just like what we saw through 2008."

Predatory lending....it's back!

Predatory lending is back, this time the predator is the government though. Our brilliant leaders have now decided that Obama's foreclosure prevention legislation did not offer enough help with it's 105% LTV refi limit. The brainiacs in Washington have increased the loan to value limit all the way to 125%. Bravo, it only took them 2 years to forget that programs like this is why we are in this mess. Not that 125% LTV will help many Calfornians. We will need 200% LTV before it helps.

Another government program designed to turn homeowners into debt slaves. Most homeowners are not that financially savy. That's part of the reason they are in the mess they are in. They didn't take the time to find out that they could never hope to afford a home that was 10x their yearly income. A broker or agent told them, "I can make your payments $xxxxx" and that was all they needed to hear. The same thing will happen with this loan program. A banker or broker will tell them "I can get you into a fixed rate loan for $xxxx/mo" and they will take it. They will then be trapped in a home, unable to sell for a decade or two. And the worst part is they will probably have traded a non recourse purchase loan, that they could have simply walked away from, for a recourse loan. A loan the bank can garnish their wages, take their car, their stocks and their beloved singing fish in order to satisfy when they default. And the banks are not going to tell them about that because they get fees from the refi and a nice big fat check from the government for every refi they do under this program.

Aint it grand, you and me get screwed twice by the same program. It will slow down the correction, AND our tax dollars to towards the payment the bank recieves from the government.

Updated 100 year chart

Still some altitude left to lose.....

Realtors lack math skillz

Looks like "somehow" the stunning increases in sales in San Diego were not so stunning after all. After reporting a 63% increase in April (from last year) and an 89% increase in May the California Association of Realtors have discovered a "slight" error. It looks like April will be revised to 20% and May to a paltry 6.5%. Oops!

Loan Mod Vs Walking away

I get asked on a regular basis about what I think of walking away from a house. 10 or 15 years years ago I had a different opinion than I have now. Back then I thought it was a cop-out, a terrible thing to do. I don't think that any more. Now I'm much more of a realist. My opinion is that you should do what ever is best for you and your family (as long as it's legal and walking away is in most cases).

From a financial standpoint, in today's market, walking away is going to be a much better choice than a loan mod for most families in the IE. A loan mod might make more sense if the home in question is only slightly underwater but that's hardly the case with most IE homes purchased in the last 6 or 7 years.

In the last real estate bust I stayed put while many of my friends walked away. I was never very far underwater though. However I would have liked to have moved in the mid 90's but couldn't because of still being underwater. I was trapped when some great opportunities presented themselves and unable to take advantage of them. Several of my friends that were foreclosed on in the early 90's did not have that problem. They rented for a few years, rebuilt their credit, saved up and when those opportunity arose they were able to buy. The end result is that they all ended up far better off than me 5 or 6 years later.

In this cycle I know a few people that are walking away, I know a couple of families doing a loan mod and I know one family that even managed to pull off a short sale. I can guarantee the families doing the loan mods will come out of this worse of than the others.

Let's take a look at what's likely to happen by doing a comparison. We will assume the market is bottoming, it will stay there for 5 years and then start going up at a normal 3% per year. I will assume interest rates remain low but not as low as today (let's say 7% in 5 years). I will assume each bought a home for $500k that's now worth $250k and will be worth the same in 5 years. For ease of comparison we will assume tax and insurance is $600/mo


Family 1, has a 500k ARM and wants to do a loan mod. They get a mod locking the rate at 4% for 5 years. Payments are $2400 plus tax and insurance for a total of around $3000 per month. In 5 years they will have paid $144,000 with little of that being principal. At the end of five years they will still owe $452k and the payments will reset to 7% taking it to $3007/mo, plus tax and insurance for a total of roughly 3600/mo. At the end of 5 years, family # 1 is still $200k upside down, trapped and unable to sell, and unless their income rose they still might be facing foreclosure.

Family #2 also has a $500k loan on a house worth $250k. They however choose to send the keys to the bank and move into a recently purchased foreclosure rental. They rent a similar home for $1800/mo. The net difference in total monthly payments between family 1 and family 2 is roughly $1200/mo. Family 2 saves this $1200/mo and after 5 years has $72k in the bank. After 5 years their credit is good and they can once again buy. They purchase a home similar to family one's home for $250k using 20% down (50K), they finance $200k at 7% for monthly payment of $1350 plus tax and insurance or roughly $1900/mo.

After 5 years both families own similar homes:

Family 1 owes $450k and has a payment of $3600/mo.

Family 2 owes $200k and has a payment of $1900/mo. That's $1700/mo less and they owe $250k less on the home. If they were to apply that extra $1700 to their monthly payments they would pay off the home in about 7 years!!

This comparison is not assuming the worst case. Homes could fall much farther than 50%, interest rates could go much higher than 7%. This is a simplistic comparison but it is probably fairly accurate. It gives a chilling indication of what the banks and the government are trying to do to the unsuspecting homeowners. Many of these people really do think the government and the banks are trying to "help them" stay in their homes. That's just not the case. The government and banks are simply trying to avoid a collapse of the banks. Helping the home owner is the last thing on their minds.

Most people are stunned when they do the math. I've given advice to quite a few people and most of them do see the light. The really amazing thing is that a couple of them still pursued loan mods. Their reasons for doing it were that they really thought the prices would come back. In both cases when I asked they said "they thought in 5 years that the prices would recover and they would be able to sell". Me thinks not....

Phantom inventory

Here's a perfect example of the so called "phantom inventory"

7413 Pebblewood Ct in Riverside. This 3000 s/f home was purchased at the peak for $665k. The lender got it back in August of 2008. They tried to get $417k at the trustee sale but there were no takers at that price so they bought it. The bank has owned this home since Aug 6th, 2008. It just hit the market at the beginning of June! The bank has had this house for 10 months, and are just now getting it on the market.

This makes no sense to me. They certainly would have gotten more for this home a year ago than they will get for it now. Plus the holding costs and misc other costs they have accrued will add to the total loss. It's just stupid for these lenders to hold back the homes. Especially now, the inventory is low and there are some buyers out there.

There's also a pretty good article in the Washington Post on the problem of Phantom Inventory.

Or this story about 15,000 foreclosures that got "lost"??huh.....

From $1.2M to $250K

This might be a record price drop, but then again there's little doubt that the $1.2M sales price of this gem in late 2006 was fraud. 3370 Orange St in downtown Riverside is just a block over from the Mission Inn. It was built over 100 years ago in 1904. It's a little craftsman house with 4 bedrooms and 1.5 baths. Decent looking but certainly nothing special. The location is also not great. It's right across the street from the convention center.

The sales prices of this home are all over the map. It sold in late 2004 for $445k. 2 years later is sells for $1.2 million. Yea, that sale just screams fraud. Less than a year later a $425k sale is listed. That could very well be the bank getting it back, since it was listed for sale again almost immediately. It languished on the market for nearly a year and finally sells again in Sept 2008 for $374k. Someone thinking they were gonna fix and flip possibly?? They listed it again only a month after closing. The price has been dropping ever since. It's currently listed for $248,500. That's $125k less than the sale last year. I really think this was a flip attempt. If so, they are taking a bath on it.

If anyone is doing the math, the current listing price is 80.2% off peak price. And it's 33% less than it was bought for in late 2008.

Loan Mods = Tomorrows foreclosures

• IR : Interest Rate - Current Interest Rate for the loan.
  
• SR : Start Rate or Initial Rate - Initial Interest Rate for the Loan
• RR : Reset Rate - Rate at which the loan will reset

Much of the drop in REO activity can be attributed to loan modifications. But the million dollar question is will the loan mods work. Considering the re-default rate is over 50% after 6 months I think the answer is obvious. Loan mods are not working. The ones that survive in the short term will very likely default a few years down the road. Unless of course the bubble prices return. Chances of that happening are about the same as for me marrying Salma Hayek.

Why wont the loan mods work? The only way a loan mod will work is if the principal balance is reduced to market value. Practically zero of the loans are getting principal reductions. And personally I don't believe any loan should get a principal reduction. Most of the loan mods are simply getting interest rate reductions or freezes at the start rate of the loan or some other favorable rate. A few loans are getting extended terms (this is idiotic). The end result is that the home owners are still stuck miles underwater. Sure they may be able to afford the payments but they are trapped and will never be able to sell. I suppose if the payments are similar to what rent would be, then you could justify it by saying "it's the same as rent". But renters can move!

Many of the loan mods are only freezing or reducing rates for 5 years. Then what? I don't think anyone with half a brain thinks prices will be any better in 5 years. Are the banks going to do another loan mod? We are just turning today's foreclosures into tomorrow's.

Still bleeding jobs

California's unemployment rate climbed to 11.5 percent in May, the highest in modern record-keeping, the U.S. Department of Labor reported Friday. The loss of another 69,000 jobs comes as a blow to the state after unemployment dipped slightly to 11.1 percent in April, according to revised figures. The California Employment Development Department said the government posted the largest job declines in the month, down by 14,200 jobs. Every other sector besides education and health services also saw losses.

Although the Labor Department reported that 48 states and the District of Columbia saw their unemployment rates rise in May, California's rate was substantially higher than the national rate of 9.4 percent for the month.

Only four states had higher rates: Michigan, Oregon, Rhode Island and South Carolina.

The West had the highest regional jobless rate in the nation, at 10.1 percent, and it was the highest rate since September 1983, when the nation was emerging from a deep recession.

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From The Press-Enterprise: The unemployment rate for Riverside and San Bernardino counties was 13 percent in May, up from a revised 12.7 percent in April and equaling the all-time high set in March.

A year ago, unemployment in the two-county area was estimated at 7.4 percent. This compares with an unadjusted unemployment rate of 11.5 percent for California and 9.1 percent for the nation during the same period. The unemployment rate was 13.1 percent in Riverside County and 12.8 percent in San Bernardino County.

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13% and climbing in the IE! Yikes.....

Is the wave here?

Mr Mortgage seems to think the newest foreclosure wave is finally starting to hit..

The wave is here even though it did not show up in the aggregate numbers released by RealtyTrac yesterday morning. In their report, CA aggregate foreclosure activity was reported down 4.46%. That is not accurate.

There are three stages of foreclosure, which we track religiously every day. Because each stage is separated by a period of up to 4-months, the mix can change dramatically causing the aggregate to move in the opposite direction of present conditions. Additionally, back in 2008 most servicers all did things the same way at the same time. Now, each bank and servicer has their own agenda so the monthly numbers are much more volatile, which can lead to misinterpretation.

In May, aggregate foreclosure activity was not down 4.6%, rather up 13.5%. On a more granular level, the takeaways are that Notice-of-Trustee Sales are up 100% from Feb to May and subsequent foreclosures are up 75% from March to May - these are significant events. Especially when considering that the housing market at the low end has been benefiting in part by the lack of inventory caused by the Q4 2008 - Q1 2009 moratoria.

So, why aren’t foreclosures up 200% - 300% from March and back to all-time highs, as the March through May Notice-of-Trustee Sales surge would indicate? It’s because of capacity and timing.

We know for a fact the GSE’s and several servicers came off moratorium around the time that Obama made public the Home Affordable mod and refi programs at the end of March. From there the servicers had to make the decision to participate, integrate the new borrower modification and loan decisioning and slotting technology and train staff. If this took 6 weeks, which would be incredibly fast, then in the second week of May they would have started re-qualifying and contacting the back log of distressed borrowers with the new loan mod, workout and refi offers. Then they have to give the borrowers a reasonable time to accept or deny. It is only June 11th — there simply has not been enough time. But early foreclosure numbers for June show the foreclosure ramp remains intact.

The Notice-of-Trustee Sales and foreclosures will continue to come. Notice-of-Defaults — the first stage of foreclosure and the earliest leading indicator of everything mortgage, housing and balance sheet related — have been hitting record highs since December.

The past 6-month NOD average is 45k…the 6-month average for the worst time in the summer of 2008 was only 43,500.

The subsequent foreclosures that come from this latest 6-month NOD surge will hit about the same time a mortgage mod re-default surge from the 2008 NOD surge does. At this point if new NOD’s have leveled out or even fallen by 50%, the re-defaults from bad loan mods made when mods were new and even more reckless than today will keep foreclosures as headlines through next Spring at least.

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So, is the next wave starting to hit? Only time will tell. I am still seeing a higher number of properties hitting the market in my target areas. That would seem to indicate the number of foreclosures are starting to increase. The inventory levels are still a little low and the better homes are still selling fast. The 4th quarter of the year should be very telling though.

I be back...... And here's the May numbers

X racing daughter #2 up the rock wall

Whew, man that was fun. Now I really need a vacation to recover! I can highly recommend the Mariner of the Seas if anyone is looking for something to do for a week.

The May numbers from DQ are out. They look pretty good. I was actually expecting a slight increase in the median but that didn't happen. Riverside stayed the same as April and San Berdu fell just a tick. The reason I was expecting an increase wasn't because prices are going up. I felt with the drop in inventory, especially at the low end that might push up the median a bit because of lack of low end sales. It didn't but it was close. The report also mentions this point as a reason for the better numbers.

	Sales Volume			Median Price
All homes	May-08	May-09	%Chng	May-08	May-09	%Chng
Los Angeles	5,445	6,521	19.8%	$422,000	$300,000	-28.9%
Orange	2,266	2,667	17.7%	$485,000	$410,000	-15.5%
Riverside	3,444	4,414	28.2%	$290,000	$180,000	-37.9%
San Bernardino	2,075	3,134	51.0%	$250,250	$137,000	-45.3%
San Diego	2,979	3,242	8.8%	$380,000	$295,000	-22.4%
Ventura	708	797	12.6%	$435,000	$355,000	-18.4%
SoCal	16,917	20,775	22.8%	$370,000	$249,000	-32.7%

Southern California home sales rose for the 11th consecutive month in May as sales of $500,000-plus homes started to come back. The median price paid increased slightly from the prior month for the first time since July 2007, the result of a shift in market activity where sales of deeply discounted foreclosures waned and mid- to high-end purchases rose, a real estate information service reported.

A total of 20,775 new and resale houses and condos closed escrow in San Diego, Orange, Los Angeles, Ventura, Riverside and San Bernardino counties last month. That was up 1.3 percent from 20,514 in April and up 22.8 percent from 16,917 a year ago, according to San Diego-based MDA DataQuick.

May’s sales were the highest for that month since May 2006, when 30,303 homes sold, but were 21.2 percent below the average May sales total since 1988, when DataQuick’s statistics begin.

Foreclosure resales – homes sold in May that had been foreclosed on in the prior 12 months – accounted for 50.2 percent of all Southland resales. That was down from 53.5 percent in April and from a peak of 56.7 percent in February. May’s figure was the lowest since foreclosure resales were 50.9 percent of all resales last October.

Last month’s median was the second-lowest for any month since it was $242,000 in February 2002, and it stood 50.7 percent below the peak $505,000 median reached in spring and summer of 2007.

“We appear to be in the early stages of the market gradually tilting back toward a more normal balance of sales across the home price spectrum. As more sellers get realistic, more buyers get off the fence and more lenders offer reasonable terms for high-end purchase financing, we’ll see a more normal share of sales in the more established, higher-cost areas that have been nearly comatose,” said John Walsh, MDA DataQuick president.

“Let’s not forget we’re into the traditional home buying season right now,” he continued, “meaning more people are purchasing for all of the normal reasons, such as a new job or to get settled before school starts. Many are concerned with finding the right home in the right area, not just the most deeply discounted home.” Indicators of market distress continue to move in different directions. Foreclosure activity remains near record levels, while financing with adjustable-rate mortgages is near the all-time low, as is financing with multiple mortgages. Down payment sizes and flipping rates are stable. Non-owner occupied buying has risen and is above-average in some markets, MDA DataQuick reported.

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X's thoughts on the foreclosure moratorium. I saw some chatter about the California foreclosure moratorium that went into effect June 15th. I've said more than a few times I don't believe this will have any effect on the foreclosure situation. Most lenders have already applied for immunity from the law. And they are going to get it. 38 lenders have already applied and received a 30 day immunity while their application is reviewed. 7 lenders have already received immunity. This law only affects lenders that don't already have a mortgage mod program in place. Most lenders already have programs in place that meet the requirements of the new law. This law is a lame duck. It may give a few people with small lenders or credit unions a few extra months but it's not going to help the vast majority of them.

Worst listing/picture contest

I'll be heading out to sea again tomorrow for a week long vacation with the family. We are off on the Mariner of the Seas to San Fran, Seattle and Victoria B.C.

Rather than silence while I'm gone. Why don't you guys start posting the worst listings you can find. There's plenty of em, so don't be shy. Feel free to post delusional prices, crappy pictures or just plain horrible listings.

You guys behave and have a happy Father's day. I'll be back on the 21st.