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Hi Everyone,
Just wanted to introduce myself! My name is Rob and I am so glad I finally joined this site! I have been reading posts here for a while and everyone seems like a real knowledgeable bunch ! A little bit about me: I run a Website for Rent to Own Homes (Lease2Buy.com), and I've been in the field for over 10 years. It amazes me how much this field keeps evolving, and I am so grateful to see the larger market turning around!!
HLXH is on the move - 2.8 float housing stock, with solid 2011 financials expected next week.
Less Than 24 Hours After My Warning Of Extensive Legal Risk In The Banking Industry, The Massachusetts Supreme Court Drops THE BOMB!
Reggie Middleton
Jan 11, 2011
The day after I posted "As JP Morgan & Other Banks Legal Costs Spike, Many Should Ask If It Was Not Obvious Years Ago That This Industry May Become The "New" Tobacco Companies" http://boombustblog.com/reggie-middleton/2011/01/06/as-jp-morgan-other-banks-legal-costs-spike-many-should-ask-if-it-was-not-obivous-years-ago-that-this-industry-may-become-the-new-tobacco-companies/ wherein I made clear my opinion that the legal and litigation risks that the banking industry faces is woefully underestimated, the Massachusetts Land Court Decision that invalidates foreclosures based on post sale assignments was up held by the Massachusetts Supreme Court. This is permanent, and precedent setting, absolutely justifies and vindicates my post from the day before, which also contained links to other posts which any declared sensational just a few days before, ex., The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008! http://boombustblog.com/reggie-middleton/2010/10/12/the-robo-signing-mess-is-just-the-tip-of-the-iceberg-mortgage-putbacks-will-be-the-harbinger-of-the-collapse-of-big-banks-that-will-dwarf-2008/ and As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves. This is a very big deal since it actually unravels many thousands of foreclosures and sets precedent to be examined across the country (all 50 state's attorney generals are looking into fraudclosure issues) that will really cause material damage to the banks that are pursuing (have pursued) said foreclosures. As reported in the Massachusetts Law Blog:
Breaking News (1.7.11): Mass. Supreme Court Upholds Ibanez Ruling, Thousands of Foreclosures Affected
http://www.massrealestatelawblog.com/2011/01/07/ibanez-foreclosure-ruling-upheld-an-indictment-of-the-securitized-mortgage-system/#utm_source=feed&utm_medium=feed&utm_campaign=feed
Update (2/25/10) - Mass. High Court May Take Ibanez Case
Breaking News (10/14/09) - Land Court Reaffirms Ruling Invalidating Thousands of Foreclosures. Click here for the updated post.
None of this is the fault of the [debtor], yet the [debtor] suffers due to fewer (or no) bids in competition with the foreclosing institution. Only the foreclosing party is advantaged by the clouded title at the time of auction. It can bid a lower price, hold the property in inventory, and put together the proper documents any time it chooses. And who can say that problems won't be encountered during this process?... Massachusetts Land Court Judge Keith C. Long
"[W]hat is surprising about these cases is ... the utter carelessness with which the plaintiff banks documented the titles to their assets." -Justice Robert Cordy, Massachusetts Supreme Judicial Court
Today, the Massachusetts Supreme Judicial Court (SJC) ruled against foreclosing lenders and those who purchased foreclosed properties in Massachusetts in the controversial U.S. Bank v. Ibanez case...
... For those new to the case, the problem the Court dealt with in this case is the validity of foreclosures when the mortgages are part of securitized mortgage lending pools. When mortgages were bundled and packaged to Wall Street investors, the ownership of mortgage loans were divided and freely transferred numerous times on the lenders' books. But the mortgage loan documentation actually on file at the Registry of Deeds often lagged far behind.
In the Ibanez case, the mortgage assignment, which was executed in blank, was not recorded until over a year after the foreclosure process had started. This was a fairly common practice in Massachusetts, and I suspect across the U.S. Mr. Ibanez, the distressed homeowner, challenged the validity of the foreclosure, arguing that U.S. Bank had no standing to foreclose because it lacked any evidence of ownership of the mortgage and the loan at the time it started the foreclosure.
Mr. Ibanez won his case in the lower court in 2009, and due to the importance of the issue, the Massachusetts Supreme Judicial Court took the case on direct appeal.
The SJC Ruling: Lenders Must Prove Ownership When They Foreclose
The SJC's ruling can be summed up by Justice Cordy's concurring opinion:
"The type of sophisticated transactions leading up to the accumulation of the notes and mortgages in question in these cases and their securitization, and, ultimately the sale of mortgaged-backed securities, are not barred nor even burdened by the requirements of Massachusetts law. The plaintiff banks, who brought these cases to clear the titles that they acquired at their own foreclosure sales, have simply failed to prove that the underlying assignments of the mortgages that they allege (and would have) entitled them to foreclose ever existed in any legally cognizable form before they exercised the power of sale that accompanies those assignments. The court's opinion clearly states that such assignments do not need to be in recordable form or recorded before the foreclosure, but they do have to have been effectuated."
The Court's ruling appears rather elementary: you need to own the mortgage before you can foreclose. But it's become much more complicated with the proliferation of mortgage backed securities (MBS's) -which constitute 60% or more of the entire U.S. mortgage market. The Court has held unequivocally that the common industry practice of assigning a mortgage "in blank" -- meaning without specifying to whom the mortgage would be assigned until after the fact -- does not constitute a proper assignment, at least in Massachusetts.
This is a very interesting development, and I would like to make note that the buck stops here since this is Supreme Court. I normally do not excerpt or quote this much of another blog or news source, but since the content is legal in matter and this particular blog (Massachusetts attorney) appears to have put a strong legal analysis on the topic, I will continue. I urge others to visit the Massachusetts Law Blog for more info. Back to his write-up...
*
Despite pleas from innocent buyers of foreclosed properties and my own predictions, the decision was applied retroactively, so this will hurt Massachusetts homeowners who bought defective foreclosure properties.
*
If you own a foreclosed home with an "Ibanez" title issue, I'm afraid to say that you do not own your home anymore. The previous owner who was foreclosed upon owns it again. This is a mess.
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The opinion is a scathing indictment of the securitized mortgage lending system and its non-compliance with Massachusetts foreclosure law. Justice Cordy, a former big firm corporate lawyer, chastised lenders and their Wall Street lawyers for "the utter carelessness with which the plaintiff banks documented the titles to their assets."
*
If you purchased a foreclosure property with an "Ibanez" title defect, and you do not have title insurance, you are in trouble. You may not be able to sell or refinance your home for quite a long time, if ever. Recourse would be against the foreclosing banks, the foreclosing attorneys. Or you could attempt to get a deed from the previous owner. Re-doing the original foreclosure is also an option but with complications.
*
If you purchased a foreclosure property and you have an owner's title insurance policy, you have a potential claim against the title policy. Contact our office for legal assistance.
Here he puts in some self promotion, but hey... I'm one to talk. I actually appreciate the legal analysis and am glad to have him offer services in the arena.
*
The decision carved out some room so that mortgages with compliant securitization documents may be able to survive the ruling. This will shake out in the months to come. A major problem with this case was that the lenders weren't able to produce the schedules of the securitization documents showing that the two mortgages in question were part of the securitization pool. Why, I have no idea.
*
The decision, however, may not prove to be anywhere near the Apocalypse it's been hyped to be. The Court said that "[w]here a pool of mortgages is assigned to a securitized trust, the executed agreement that assigns the pool of mortgages, with a schedule of the pooled mortgage loans that clearly and specifically identifies the mortgage at issue as among those assigned, may suffice to establish the trustee as the mortgage holder. However, there must be proof that the assignment was made by a party that itself held the mortgage." This opens the door for foreclosing lenders to prove ownership with proper documents. Furthermore, since the Land Court's decision in 2009, many lenders have already re-done foreclosures and title insurance companies have taken other steps to cure the title defects.
I am not a lawyer and this is not my purview, but things may not be quite that simple. The securitized trust documents themselves have timing issues that may come into play. See the email chain conversation below for more on this topic.
*
The ruling may be limited only to Massachusetts and states operating under a non-judicial foreclosure and "title theory" laws. The Court was careful to point out that Massachusetts requires very strict compliance with its foreclosure laws. The reason for that is Massachusetts is a non-judicial foreclosure state-meaning lenders don't need a court order to foreclose-and that the state operates under the "title theory" which is a fancy way of saying that the bank is really the legal owner of your house.
*
Watch for class actions against foreclosing lenders, the attorneys who drafted the securitization loan documents and foreclosing attorneys. Investors of mortgage backed securities (MBS) will also be exploring their legal options against the trusts and servicers of the mortgage pools.
It appears as if he contradicted his statement above. I can practically guaranteed that this significantly increases the risk. volume and velocity of litigation. Think about it. If you were a REMIC investors, would you be sitting pat, or calling your attorney.
* The banking sector has already dropped some 5% today (1.7.11), showing that this ruling has sufficiently spooked investors. (But Merrill Lynch just went on a buying spree on the banking sector-showing that the real experts are betting that this decision and others which will follow will not substantially affect banks' profitability).
I have absolutely no idea what he means by Merrill Lynch going on a buying spree - actually using their (BofA's) balance sheet? I seriously doubt so. I also take umbrage to the assertion that Merrill Lynch constitutes a "real expert"(s) in terms of mortgage and real estate valuation and risk assessment, since they "experted" themselves into a near collapse over these very same assets.
Interested parties may download the actual ruling here: Ibanez-Case-JAN-2011. I actually engaged in an interesting email exhange with a BoomBustBlogger over this fraudclosure issue, and would like to share the email chain with the blog.
10/21/10
Reggie,
You see that the various large shoes we were discussing have begun dropping. Multi-billion dollar demands by non-agency bondholders for putbacks, and now the government is being forced to take action. I read elsewhere that a group of hedge funds is organizing for a similar demand. I view with interest the tiny levels at which the banks are reserving against these events in comparison with the present (and probable future) size of the put-back demands. Again, this is only ONE tentacle of the monster.
So far, the putback demands appear to be merely rep and warranty driven, i.e, the failing loans do not meet the underwriting requirements as represented in the prospectus. This does not implicate the REMICs' tax-exempt status. However, as claims for wrongful foreclosure based on the failure of loans to be properly deposited into trust are proved true -- or as the same facts are brought to light by 50 state attorneys general -- it will be implicated. This may produce a larger wave of claims by bondholders, both because of the loss of tax structure as represented and warranted, and because the knowing failure to properly deposit the loans (which will be inferred from the systematic extent of the failure) may support securities fraud claims. I will be very interested to see how you quantify the size of the problem for the banks.
1/1/10
Reggie:
... I assume you saw stories on the Mass. Court ruling in Ibanez. The obvious question was, "Why didn't they just back up and start over after getting the assignments done correctly?" The answer: They had no choice but to either litigate the homeowners into submission or pay the homeowners to go away. They chose the former strategy and it failed. Why did they have those choices? As you and I discussed awhile back: the REMIC. If the loans were not originally assigned to the trust by the deadline, the REMIC lost its special tax status, and the banks were forced into the argument that an after-the-fact assignment had the effect of an original timely assignment (so that, getting a state court to bite on this, they could then go argue the same point to the IRS, i.e., "no harm no foul"). The Mass. Court, to its credit, saw through the bullshit and upheld the rule of law.
The implications of this for the REMICs (actually, the banks that created and sold them) and homeowners going forward are huge. Homeowners can now see the light, and if there's any question about the ownership of the loan, stick a hot poker in that issue (demand proof of ownership, either directly before litigation or in discovery when litigation has started) until the banks cry uncle, meaning pay through the nose to buy off the homeowners and save the REMIC's tax status. The banks face the prospect of enormously increased costs, for any of: (a) litigation expenses as this issue becomes harder fought by the homeowners; (b) increased settlement costs as homeowners realize their advantage and demand more pounds of bank flesh to go away; or (c) payments to REMIC investors for losses caused by the banks' failure to properly assign the loans in the first place. Who's going to suffer the worst?
Again, JPM et. al. have been much too optimistic in reserving for these occurrences, as clearly detailed in my post As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves. The legal costs looked bad before this decision, as stated in As JP Morgan & Other Banks Legal Costs Spike, Many Should Ask If It Was Not Obvious Years Ago That This Industry May Become The "New" Tobacco Companies and it simply looks much worse now. To think, so called experts wonder why I am bearish on JP Morgan and the big banks...
... There is no chance for appeal in the Mass case; the decision came from the state's highest court. This quote from the court illustrates that this was not rocket science; the banks' lawyers never should have taken the risk of the appeal rather than settling and leaving the record with an unreported trial court decision of much less import:
"The legal principles and requirements we set forth are well established in our case law and our statutes. All that has changed in the plaintiffs' apparent failure to abide by those principles and requirements in the rush to sell mortgage-backed securities."
... I agree with everything in your post ["As JP Morgan & Other Banks Legal Costs Spike, Many Should Ask If It Was Not Obvious Years Ago That This Industry May Become The "New" Tobacco Companies"]. I noted someone's comment about BAC's settlement with Fannie and Freddie (paying about 2 cents on the dollar to eliminate hundreds of billions of putback claims, a bailout in disguise for which somebody should go to jail). Otherwise, I think the banks differ from the tobacco companies in a couple major respects: (a) they don't sell an addictive product which may be somewhat economically insensitive; and (b) they don't have access to overseas growth like the tobaccos do. By failing to adequately reserve and kicking the can, they're making the end only that much bloodier (or betting on TARP II, III and IV, which may not be a bad bet).
Actually, the banks did have an overseas growth model, the sales of securitized products. One would have thought that that model had come to an end due to the crash and burn effect, alas it has not and the reason is because the banks due sell what appears to be an addictive product.
1.
The reach for unrealistically high yields in the case of yield hungry institutional investors such as pension funds. As stated Reggie Middleton vs Goldman Sachs, part 1, For Those Who Chose Not To Heed My Warning About Buying Products From Name Brand Wall Street Banks, and "Blog vs. Broker, whom do you trust!," Goldman's peddling of products often spells doom for the consumer (client) and bonus for the producer (Goldman). Goldman is now underwriting CMBS under a broad fund our $19 billion bonus pool "buy" recommendation in the CRE REIT space reference Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off. Now, after all of the evidence that I have presented against the CRE space, who do you think would be better for clients net worth, Reggie's BoomBustBlog or Goldman? There is also the most recent evidence from just last week: Morgan Stanley Jingle Mail: Loses Properties To John Paulson Investment Consortium & Itself.
2.
The satisfaction of the get rich quick(er) urges to be had in their retail, HNW and UHNW clients. A perfect example is the Facebook offering, of which I am preparing an extra special analysis for my blog's subscribers to be released in a day or two wherein I will show how those Goldman clients are throwing their money into the Goldman bonus pool/Facebook working capital fund abyss - that is if I haven't demonstrated such already:
* Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!
* Here's A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure
* The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman's Facebook Fund Marketing Brochure Into Our Models
Now, back to the email exchange...
The limiting factors on the homeowner side are: (a) an imbalance of knowledge of their options as compared to the banks; and (b) an imbalance of resources ($) to pay lawyers to fight the banks. Although I think the internet and its democratic access to information changes the equation for the first issue, it's still like retailers selling gift cards - they make money because they know a large percentage of people will stick the card in the drawer and forget about it, and in doing so will have given the retailers free money. Many homeowners who are in position to challenge a foreclosure, and thereby squeeze a bunch of money out of the banks, never will. The $64 question is, how many will?
I have a very strong feeling that many distressed homeowners that read BoomBustBlog can be considered to be amongst that educated elite.
Now there's a state appellate court decision for every other state appellate court to look to for guidance. Stupid. This is like a case I had in federal court several years ago against the U.S. gov't. We obtained a ruling imposing estoppel against the gov't - which is nearly impossible to get. The gov't did NOT appeal that decision, only the decision granting us fees (which it lost). It avoided an appeal for the same reason - it did not want a Xth circuit decision upholding estoppel against it sitting out there for the rest of the world to model from.
The only logic that I see in the bank's decision to litigate was that if you pay off one homeowner, you create a pattern where you will end up having to pay off others until it get's to the point where you will have to litigate the issue to its ultimate conclusion anyway. Hard to say which route would have been more efficient and cheaper, but I do know that this is far from a desirable outcome for the banking industry.
http://www.safehaven.com/article/19615/less-than-24-hours-after-my-warning-of-extensive-legal-risk-in-the-banking-industry-the-massachusetts-supreme-court-drops-the-bomb
Case-Shiller Housing Chart
S&P Case-Shiller housing data was released Tuesday (report).
(check out this link for a full examination of the Case-Shiller)
http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldocumentfile&blobtable=SPComSecureDocument&blobheadervalue2=inline%3B+filename%3Ddownload.pdf&blobheadername2=Content-Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1245231571069&blobheadervalue3=abinary%3B+charset%3DUTF-8&blobnocache=true
Bottom line up front: The report noted a deceleration in home price growth rates in most of the areas surveyed. Take a look at the circled area in the chart below - notice anything? Hmm, could this be the beginning of another leg down for the housing market?
http://economicrot.blogspot.com/2010/10/case-shiller-housing-chart.html
Delinquencies May Be Down, But 4.3 Million Homes Are 90 Days Delinquent Or In Foreclosure
Calculated Risk.com
Dec. 31, 2010
LPS Applied Analytics released their November Mortgage Performance data. According to LPS:
* The average number of days delinquent for loans in foreclosure is a record 499 days
* Over 4.3 million loans are 90 days or more delinquent or in foreclosure
* Delinquency rates are down across all products as more loans entered foreclosure and new delinquencies declined.
* Foreclosure inventory increases are being driven both by elevated levels of foreclosure starts as well as a very limited amount of foreclosure sale activity.
LPS Data November
Image: Calculated Risk
This graph provided by LPS Applied Analytics shows the percent delinquent, percent in foreclosure, and total non-current mortgages.
The percent in the foreclosure process is trending up because of the foreclosure moratoriums.
According to LPS, 9.02% of mortgages are delinquent (down from 9.29% in October), and another 4.08% are in the foreclosure process (up from 3.92% in October) for a total of 13.10%. It breaks down as:
* 2.61 million loans less than 90 days delinquent.
* 2.16 million loans 90+ days delinquent.
* 2.16 million loans in foreclosure process.
For a total of 6.92 million loans delinquent or in foreclosure.
Note: I've seen some people include these 7 million delinquent loans as "shadow inventory". This is not correct because 1) some of these loans will cure, and 2) some of these homes are already listed for sale (so they are included in the visible inventory).
Two key numbers to watch in 2011 are:
* New delinquencies. With falling house prices, delinquencies could start to increase again.
* Foreclosures. With the end of the foreclosure moratoriums, foreclosure sales should increase - and the number of homes in the foreclosure process should decline. However REOs (Real Estate Owned) will increase unless the homes are sold.
http://www.businessinsider.com/delinquencies-may-be-down-2010-12#ixzz1A5mQMzrP
Housing Pain Pits Neighbor Against Neighbor in Florida
Dan Fitzpatrick
WallStreetJournal.com
Dec 31, 2010
Lauderhill, Fla.
Few things agitate Sid Schulman, who often shoots the breeze with other retirees and flirts with women friends at their condominium complex here.
But it galls him when neighbors stop paying their mortgages and maintenance fees, and leave the cost of community upkeep to others. "I am paying for these guys," said the 75-year-old sitting poolside, a diamond stud in his left ear.
Last year, he took matters into his own hands. Near the mailbox of each condo building he posted a list of residents delinquent on their maintenance fees, with the message "Pay up or move out" and the same in Spanish, Pague O Mudese. He also tried, unsuccessfully, to get the cable company to cut off service to nonpayers.
The public shaming angered some of those named. "You know where I live—come and tell me that to me face," said Lorena Garcia, 36, who lost her job and ability to pay.
The storm that struck the housing market has strewn many casualties—lenders, builders, real-estate agents, mortgage-bond investors.
Add to the list the comity of certain communities where residents live close together, some of them paying their mortgages and homeowner-association fees, and some not.
As banks slow foreclosures amid concerns about sloppy record keeping, some delinquent homeowners get to stay put even longer without paying. The delays are further inflaming some neighbors who consider that unfair.
The condo complex Mr. Schulman and Ms. Garcia share, called International Village, has installed a fingerprint-scanning device at its central clubhouse, to keep residents who are more than 90 days behind on their maintenance fees from swimming in the pools, playing on the racquetball courts and using the game room, where canasta and mah-jongg competitions are held.
In a particularly stark example of housing tensions found in many places to varying degrees, the International Village homeowners association responded to the banks' slowdown in foreclosures with an aggressive step: It began its own foreclosure process. Florida law permits that under certain circumstances. A nonprofit homeowners association can take temporary title of residential units from people who aren't paying monthly fees they agreed to pay.
The scene of these frictions is a 28-acre community in southeastern Florida's Broward County that spreads out on a peninsula, surrounded by a canal, a lake and an eight-foot stone wall. Oak trees shade the gated entrance to International Village, at the center of which is the Bavarian clubhouse, built with a 24-foot ceiling and stone fireplace. Three-story residential buildings, each with about 76 condos, are grouped according to their architectural roots, bearing names like Yorkshire and Bordeaux. In the morning, residents gather at the pool for "aquacise."
Early marketing brochures for the complex, built in the 1970s, lured well-off retirees and snowbirds by promising "seventh heaven for people who insist on living first class."
Later, easy lending during the housing boom put the condos within reach of lower-income buyers. According to Michael Schenkel, a real-estate professional who owns three units in the complex and manages others, average prices for its one-bedroom condos peaked at about $120,000 in 2006.
Then Florida's sagging economy started costing residents their livelihoods and ability to pay. Ms. Garcia bought a two-bedroom in International Village in 2005 for $190,000, but she lost her job. With her cash dwindling as she went through a divorce, she says, she stopped making her $1,500 monthly mortgage payments in 2008.
Special assessments pushed up the monthly maintenance fee she owed to the homeowners association. Ms. Garcia didn't pay that, either.
Now, owners of about 128 of the 832 units at International Village, just over 15%, are 90 days or more behind on their fees. Banks won't lend on residences in the complex until the percentage of fee delinquents drops below 15, according to Mr. Schenkel.
The problems feed on themselves: "Banks will not write mortgages in communities with high delinquencies," he said, "and property values will not increase until we get financing from major banks." He says the value of one-bedroom units has tumbled as much as 75%.
With the homeowners association unable to collect maintenance from so many units, the complex is showing the wear: torn screen doors, roofs in need of repair, carpets getting shabby. Earlier this year, the total of delinquent fees passed $1 million, equal to a third of the association's annual budget.
"The foreclosure process takes over two years," Mr. Schenkel said. "You can get away with living for free for two years, not paying mortgage and maintenance."
Larry Kornblith takes a dim view of that. "The ones who are delinquent are parasites," the 82-year-old bluntly declared, relaxing near the pool in a Fila shirt and white Nike tennis shoes. "If you can't afford it, get out."
There are divisions, too, among the people current on their payments, because they don't all agree on how the homeowners association should deal with those who aren't.
Doug Meyers, a resident who owns more than a dozen units and is up to date on his payments, voted on the association's board against installing the fingerprint scanner. He was skeptical it would work. He says some neighbors accused him of protecting residents who were delinquent.
"They make it personal. It bothers me, personally. It hurts me," said Mr. Meyers, 54, adding that he now tries to avoid some fellow residents.
Others wanted the association to get tougher. Among these was Michele Tersigni, a 53-year-old resident who works as an administrator at a doctor's office. She won a seat on the homeowners-association board early this year and in May became its president.
She quickly made changes, such as hiring security guards directly instead of through a service, to save money. And, responding to residents' complaints about people staying on in homes they were no longer paying on, she hired new lawyers who would be more aggressive.
After foreclosure problems such as "robo-signing" of documents erupted this fall, new applications for court approval of foreclosures in Broward County—which totaled 1,693 in September—tumbled to 224 in November and 137 in December through the 23rd of the month, according to Legalprise Inc., a data firm. Countywide, foreclosure applications on more than 38,000 residential units are awaiting a court's approval to proceed.
The homeowners association countered the delays. Acting under the Florida law, it took temporary title to two condos in October and another in November. It plans four to five more in January. The move enables the association to rent out the units and get them back to producing income.
If lenders eventually foreclose on the condos, the association can start proceedings against the lenders to obtain some past-due maintenance fees. Lenders that take over units are liable for maintenance fees as long as they own them.
Ms. Tersigni says something had to be done because maintenance was slipping. "I just want to give people who are paying the rights they deserve," she said.
The village is abuzz, she added, with stories of owners not paying even though they could afford to. Ms. Tersigni's predecessor as board president, Scott Samuels—who admits to not being aggressive enough in dealing with the delinquency problem—said some owners were letting their units go into foreclosure while renting them out to tenants not registered with the association.
"Owners are collecting money, and we are not getting our money," he said.
Ms. Tersigni said some owners "make the money—they just refuse to pay because they can get away with it. They will put money aside and buy something else."
Ms. Garcia says that was never true in her case. "Every house has its own problems. You can't judge people," Ms. Garcia said. The homeowners association, to her mind, is "taking advantage of people who really have problems."
In August, about two years after she stopped paying her mortgage, Ms. Garcia lost her apartment to a foreclosure by the lender, although she continued to live in International Village in someone else's unit.
On the day she and her husband were vacating their own apartment, two female neighbors openly celebrated while making their way to the pool. "Thank God they are moving out," said one, a blue ball cap pulled over her eyes.
The other, wearing an olive-green dress and sunglasses, said she couldn't understand why Ms. Garcia had been allowed to stay so long. "It takes so long to get them out," she said, and then listed others she said were behind on payments.
Some residents are troubled by the tensions, which are reflected in a sign put up near the clubhouse: "The prior leadership did not take a pro-active position with delinquents who failed to pay. We must not let this happen again."
"I feel like we are being singled out, like we're not part of the community," said one young resident, who added that he wasn't going to provide a fingerprint for access to the clubhouse because he knew he would be denied. "What do they want next, my DNA?"
Franck Noel, 32, said the homeowners association moved to foreclose on his unit even after he paid $1,753.79 in late fees. When he brought his situation up at a board meeting it got unruly. Someone called the police, who Mr. Noel says stayed out by the gate and didn't enter the clubhouse.
The police department says it was informed there was hostility inside the clubhouse relating to a foreclosure and there was a request that the subject be removed. But no police report was filed on the incident.
Mr. Noel said a resident dragged him out by his collar. Ms. Tersigni said he left without being forcibly removed.
She acknowledged that the move against his residential unit was an error and said the association eventually recognized this and dealt with it.
Mr. Noel, noting that some board members own multiple units, alleged that the association was eager to foreclose because some on the board "want to buy these units cheap and own them for themselves." Mr. Meyers, a board member who owns a number of units, dismissed any talk of his manipulating the system as "lies" and "slander."
Said Mr. Noel: "I don't trust anybody here."
http://online.wsj.com/article/SB10001424052748703326204575616340542578852.html?mod=WSJ_hp_mostpop_read
Deficit Commission: How Mortgage Deductibility Affects Housing Prices
The Market Flash
December 13, 2010
The Deficit Commission, chaired by Erskine Bowles and Alan Simpson, had many interesting proposals concerning deficit reduction. One can debate the relative merits and demerits of each proposal and the economic benefit to the country. However, our job as investors is to evaluate the impacts of what they propose and take advantage of any changes in valuation before the wider market discounts the changes. The proposal on the table is to limit mortgage deductibility only for mortgages of 500k or less.
The purpose of this article is to examine the effect of that proposal on houses that would have a mortgage of greater than 500k. Obviously it is not known whether the Deficit Commission's suggestion on mortgage deductibility will be implemented, but just the discussion of it can affect current prices.
First things first: The U.S. tax policy of mortgage deductibility is baked into the price of every house in the United States, whether that house has a mortgage or not. The U.S. has had mortgage interest deductibility since the 1950s or earlier. Each home in the U.S. is valued at what it can currently sell for to new buyers who generally have to get a mortgage to make the purchase. Any buyer who is purchasing with a mortgage, takes out a bigger mortgage than they would otherwise because mortgage interest is fully deductible on their tax return.
So all housing prices in the U.S. now, both at the high end and the low end, reflect the fact that interest on mortgages is tax deductible. There is some part of the value of every house that would fall if mortgage deductibility were taken away. There are many countries in the world that don’t allow mortgage interest deductibility so it’s not a constitutional right.
So let’s establish the price of houses that will not be affected by the Deficit Commission’s proposal. This is pretty easy. Mortgages up to 500k will still be deductible and just for the sake of simplicity let’s assume a bank would want 100k down on a 500k mortgage. So for houses of 600k or less, it’s business as usual in terms of valuation. If the 500k is not adjusted for inflation going forward that could raise or lower the price of houses near the top end of the range, depending on what the decision was.
The purpose of this article is to use some financial/mathematical techniques to guesstimate the affect of the Deficit Commission’s proposal on houses that have a greater value than 600k, just factoring in the deductibility of mortgage interest. Many things affect high end housing prices; elasticity of demand, how much down payment is made for a house in a certain price range, and the local employment market.
This article is going to focus only on the mortgage deductibility effect on housing prices of greater than 600k. The approach is to discount the present value of 30 years' worth of interest payments in a world where there is mortgage interest deductibility and a world where there is not. The difference between those two numbers should be a rough estimate on housing prices over 600k of having their mortgage deductibility taken away by the Erskine/Bowles commission. Present value is a financial concept that allows a single number in the present to represent the value of a series of future payments. Here our future payments are interest paid on a mortgage and the Present Value is the amount that can be borrowed to buy the house.
So let’s look at the effect of taking away mortage deductibility on mortgages over 500k. I am going to include the Excel® formulas used in the calculations so you can make your own calculations if you are interested in a different price range or want to use different assumptions. I am going to target a mllion dollar house. 600k of the value of the house is unaffected by the Deficit Commission's proposed change.
The amount over 600k I am going to break down into roughly 300k of borrowing and 100k more of down payment and the principal portion of the mortgage payment. So our borrower in the current world of unlimited mortgage interest deductions is willing to pay $1800 of interest required to buy the last 400k of the million dollar house. Keep in mind this $1800 is just the interest portion of the mortgage, not the entire payment. Assuming a 6% discount rate and 30 years of discounting, this provides 300k of present value to buy the million dollar house:
$300,225 = PV(.005,360,1800)
Excel uses non percentage interest rate numbers for the periodic interest rate so 6% would be .06/12 = .005. I chose a 6% discount rate because I thought it was a more representative rate over the next 30 years, and it converted to monthly compounding cleanly. Use a different discount rate if you think that’s more correct. Assume 30 years' worth of discounting 30*12=360. $1800 is the monthly interest in a mortgage deductible world. The = sign and to the right is what you put into any Excel cell.
Now what happens when Erskine/Bowles wipes out mortgage deductibility over 500k? We need a formula that shows what monthly interest a person would be willing to pay if the interest is not deductible. That formua is:
(1 – MarginalTaxRate) * PaymentWithDeductibility = InterestPaymentWithoutDeductibility
The highest marginal tax bracket proposed by Erskine/Bowles is 23%. So our borrower is indifferent between making an interest payment of $1386 in a world where there is no mortgage deductibility for mortgages > 500k OR paying $1800 a month, deducting an extra $21,600 ($1800 * 12 months) from his joint income of 350k, and paying $7128 (33% joint bracket) less in taxes because his mortgage was deductible. So now we plug this new lower interest payment into Excel and discount to the present:
$231,175 = PV(.005,360,1386)
So we see roughly 70k less present value ability on the part of borrowers, given that mortgages > 500k are not deductible. Proportionally, and to get to a round number, we will take another 30k of down payment and principal payments because we can borrow less, so 100k less to buy the house with. The rather stark conclusion of this exercise is that the price of every house in the U.S., ceteris paribus, will drop by one quarter of its value over 600k if the Deficit Commission’s recommendation on mortgage deductibility becomes law.
I am pretty sure most members of the Deficit Commission own homes worth more than 600k so you can’t say they were acting in their own self interest with this suggestion. I would argue that grandfathering the clause in (allowing existing mortgages > 500k to keep their deductibility) mostly doesn’t matter. Prices in the real estate market are set by the marginal (new) buyer, not by the people who already own homes, and as time goes on, existing mortgages will bleed off.
One could even argue my estimate is low. If the law changes, it changes for the foreseeable future. My assumption of 30 years is probably too short, given that mortgage deductibility is removed theoretically forever. Your buyer and your buyer’s buyer won’t be able to deduct the mortgage interest. But if you increase the discount periods to 720 (60 years) you will see it only makes about a 10k difference. Using a higher discount rate (12% for example) would make the price change greater than a quarter. Using a lower discount rate (1.2% for example) would make the price change less than a quarter.
This discussion reveals one of the problems with law and economics. Something may be a good idea but if you have huge existing pricing in the market built up around it, it becomes difficult to change. I personally don’t think the U.S. should have ever have had mortgage deductibility at any level. I would go so far as to say that the Financial Panic of 2008 would have been less severe, or perhaps not have happened at all, if there was no mortgage deductibility.
However, once bad policy is implemented, prices adjust and change becomes problematical. In this case, people who bought expensive homes more recently could get punished for making a decision based on the current state of the tax law.
The investing takeaways focus on home builders, mortgage REITs, and realtors. Of the homebuilders, NVR Inc. (NVR), D.R. Horton (DHI), and Toll Brothers (TOL), Toll Brothers seems to focus more on the high end market. Prices of new homes have to be greater than 600k to depress the stock. Mortgage REITs Annaly (NLY) and Anworth (ANW) could be affected if the size of mortgages fall, or mortgage volume falls. High end realtors would clearly be impacted. Sotheby’s (BID) had a large high end real estate broker network but I’m not sure what percentage of their net income is from the real estate group.
Taking long/short action now given the uncertainty of whether the Deficit Commission mortgage proposal could be implemented, is not warranted. If the mortgage deduction looked likely to become law or became law, the impact in the housing market is going to be large. As I mentioned above, even serious discussion of this proposal could cause high end housing prices to fall. I abhor chartism (looking at past prices to discern future prices) but I do look at past prices when I think I have an idea the market hasn’t discounted yet. In this case you would check the price of the stocks above or others you can think of over the last six months. If they are flat or opposite your guess you still have time to implement your bet that the market hasn’t discounted the ramifications of the ideas presented in this article.
http://seekingalpha.com/article/241447-deficit-commission-how-mortgage-deductibility-affects-housing-prices
Mortgage Rates for 30-Year U.S. Loans Advance to Seven-Month High of 4.86%
Prashant Gopal
Dec 30, 2010
Mortgage rates for U.S. loans climbed to a seven-month high, increasing borrowing costs for homebuyers in a sluggish real estate market.
The average rate for a 30-year fixed loan rose to 4.86 percent in the week ended today from 4.81 percent, Freddie Mac said in a statement. The average 15-year rate advanced to 4.2 percent from 4.17 percent, the mortgage-finance company said.
Rising home loan rates may limit homebuyer demand as housing remains a weak link for the economy. Home prices in October fell 0.8 percent from a year earlier, the largest year- over-year decline since December 2009, the S&P/Case-Shiller index of property values showed this week.
“Optimism is fading from the housing market,” Robert Shiller, an economics professor at Yale University and co- creator of the index, said on Bloomberg Television on Dec. 28.
Sales of new and existing homes rose less than economists estimated in November even as mortgage rates sank to the lowest levels on record, reports from the Commerce Department and the National Association of Realtors showed last week.
Pending home sales climbed more than forecast in November, a sign demand is recovering following a post-tax credit plunge, according to a report from the Realtors group today. The data are based on contract signings, while existing-home sales represent closings.
The rate for a 30-year loan has climbed for six of the past seven weeks amid speculation that President Barack Obama’s agreement to a two-year tax cut extension will boost economic growth and inflation. The rise pushed the monthly cost of a $300,000 loan to $1,585 from $1,462.
Borrowing costs are still near historic lows. The 30-year fixed rate averaged about 4.7 percent in 2010, the lowest on an annual basis since 1955, Frank Nothaft, Freddie Mac’s chief economist, said in a statement today.
http://www.bloomberg.com/news/2010-12-30/mortgage-rates-for-30-year-u-s-loans-advance-to-seven-month-high-of-4-86-.html
Pending Sales of U.S. Previously Owned Homes Rise
Bob Willis
Dec 30, 2010
The number of contracts to buy previously owned homes rose more than forecast in November, a sign sales are recovering following a post-tax credit plunge.
The index of pending resales increased 3.5 percent after jumping a record 10 percent in October, the National Association of Realtors said today in Washington. The median forecast in a Bloomberg News survey called for a 0.8 percent rise in November, and the gain was the fourth in five months. The group’s data go back to 2001.
Home demand is stabilizing after sales collapsed to a record low in July, as the effects of a tax incentive worth as much as $8,000 waned. A jobless rate hovering near 10 percent means foreclosures will remain elevated and any recovery in housing, the industry that precipitated the worst recession since the 1930s, will take time to develop.
The figures are “in line with an ongoing gradual pickup in existing-home sales in December,” Yelena Shulyatyeva, an economist at BNP Paribas in New York, said in an e-mail to clients. “Housing demand should continue its uneven recovery entering 2011 as housing oversupply should keep pushing housing prices down.”
A report today from the Labor Department showed claims for jobless benefits fell last week to the lowest level since July 2008, showing the labor market is improving heading into 2011. Filings decreased by 34,000 to 388,000 in the week ended Dec. 25, fewer than the lowest estimate of economists surveyed.
Business Barometer
Other figures showed the economy accelerated at the end of the year. The Institute for Supply Management-Chicago Inc.’s business barometer jumped to 68.6 in December from 62.5 in the prior month. Readings greater than 50 signal expansion and the level was the highest since July 1988.
Stocks fluctuated between gains and losses after the reports. The Standard & Poor’s 500 Index fell 0.1 percent to 1,258.23 at 11:17 a.m. in New York. The benchmark 10-year Treasury note declined, pushing up the yield to 3.39 percent from 3.35 percent late yesterday.
The projected increase in pending home sales was based on the median of 24 forecasts in the Bloomberg survey. Estimates ranged from a drop of 5 percent to a gain of 5 percent.
Two of four regions saw an increase, today’s report showed, led by an 18 percent jump in the West. Pending sales rose 1.8 percent in the Northeast. They fell 4.2 percent in the Midwest and 1.8 percent in the South.
November 2009
Compared with November 2009, pending sales in the U.S. were down 2.4 percent.
Even as the labor market is improving and manufacturing is growing, housing remains a weak link. NAR chief economist Lawrence Yun last week estimated there were about 4.5 million distressed properties that could potentially reach the market in coming months.
Average home prices as measured by the S&P/Case-Shiller indexes have begun dropping again after rising when the tax incentive was in effect. The group’s 20-city index fell 0.8 percent in October from a year earlier, the biggest year-on-year decline since December. It fell 1 percent from the prior month, and is down 30 percent from its July 2006 peak.
Reports earlier this month showed the housing market is stuck near recession levels. Housing permits fell in November to the third-lowest level on record, while starts rose for the first time in three months, the Commerce Department reported Dec. 16.
Home Sales
Sales of new and existing homes last month rose less than projected by the median forecast of economists surveyed by Bloomberg, reports from the Commerce Department and the National Association of Realtors showed last week. Existing home sales represent closings on the contracts captured by the pending sales gauge.
Hovnanian Enterprises Inc., the largest homebuilder in New Jersey, on Dec. 22 reported a fourth-quarter loss bigger than analysts expected as revenue fell 19 percent.
“The year can generally be described as one where we and the industry were bouncing along the bottom,” Chief Executive Officer Ara Hovnanian said on a conference call.
Even so, economists in the past two weeks have boosted projections for fourth-quarter growth, reflecting a pickup in consumer spending and passage of an $858 billion bill extending all Bush-era tax cuts for two years.
http://www.bloomberg.com/news/2010-12-30/pending-sales-of-existing-homes-rose-3-5-in-november-exceeding-forecasts.html
"Put It All Back" Gains Mainstream Credence
From Randall Wray @ Bengiza
(also writing at Huffington Post)
Dec. 31, 2010
It is time to push the reset button. All foreclosures should be stopped immediately. The REMIC trustees should be audited to see if they have properly followed the requirements of the PSAs and laws applying to REMICs. If they do not have the notes, the securities should be put back to the banks. If the banks cannot absorb the losses, they must be closed and resolved. The FDIC in turn will end up with the mortgage backed securities and underlying mortgages. Working with Freddie and Fannie, all of these should be modified, into new fixed rate mortgages—with a “clawback” to reset principle to current market value of the homes, and with new notes. Investors are going to take losses so there will be fall-out that government will have to address. There will be hundreds of billions of dollars of losses. Congress must find a way to mitigate effects on the economy as well as on investors in MBSs and other assets related to real estate. This is a big problem, but it is not insurmountable.
Yep.
From 2010-10-11:
It is time to take this edifice and throw it in the trashcan, after forcing its members to fix all the titles they have damaged - at their expense - and record true and correct assignment information.
Oh wait - that's a problem isn't it..... what if the assignments never actually happened, and the REMICs hold an empty box? Why that could get messy..... Hmmmm....
And before, in May of this year, I said:
I recently spoke with an attorney who is aggressively pursing these issues when his clients are faced with foreclosure, with some (and likely growing) success. He related to me that he spoke with the FCIC and was asked "Well, what is your solution? Are you asking that we nationalize all the (large) banks?"
If that's not an admission that FCIC knows the large banks were and are complicit in this and if forced to admit the truth in their financial statements would be rendered insolvent I don't know what is.
Note that the FCIC studiously avoided talking about this "wee problem" in their reports thus far, and now they're "done." Uh huh. That's yet more willful blindness folks.
What did I say at the time?
Now we're faced with having structuralized a $1.5 trillion annual budget deficit into the indefinite future while those who were "helped" by HAMP and similar programs are facing re-default a few months to a couple of years down the road. DTIs over 60% virtually guarantee that outcome. At the same time the holders of these notes were sold a bill of goods and eventually some of them will wise up to the fact that the so-called "bankruptcy remote trusts" that allegedly hold the paper (and thus immunize the banks that created them) are legally defective. Those holders, when (not if) they suffer actual principal and coupon loss, can be reasonably expected to pursue their remedies at law with the aim of voiding the trust and opening the assets of the creating financial institution to attack.
If this line of inquiry is pursued it is entirely possible that these trusts would in fact be voided, and the resulting exposure landing on the major financial institution balance sheets would render them insolvent.
You heard it here first.
http://market-ticker.org/akcs-www?post=175887
The Dead Sign Affidavits - Nationwide
Karl Denninger
Market-Ticker.com
Dec. 31, 2010
When are we going to see law enforcement actually enforce laws?
She died in 1995. Yet her signature later appeared on thousands of affidavits submitted by one of the nation's largest debt collectors, Portfolio Recovery Associates Inc., in lawsuits filed against borrowers.
Some regulators complain that the use of Ms. Kunkle's name reflects an epidemic of mass-produced, sloppy and inaccurate documentation in the debt-collection industry.
Complain? Sloppy? Inaccurate?
Perjury is a felony!
And using the signature of a dead person sure looks like perjury to me (can't swear to what you can't see because you're dead!) along with "uttering" - that is, forgery.
It has to be forgery since the person is dead, right?
"When you see corner-cutting like this, it's alarming," Minnesota Attorney General Lori Swanson said about the Kunkle case.
Corner-cutting?
The State Attorney General for Minnesota calls this corner-cutting?
I guess robbing a bank in your jurisdiction would be "corner cutting" when it comes to acquisition of money, right? It's just an easier way to get money than actually earning it honestly.
Law enforcement, including attorneys' general, sucking off banksters and their cohorts in the "debt collection" industry is an outrage. These are not "cut corners" they're apparent felonies and must be investigated and prosecuted as exactly that.
What The Attorneys General of this nation at both Federal and State level have proved, beyond any reasonable doubt, over the last three years is this:
There is no longer a rule of law in this nation and there are no longer law-enforcement agencies that will enforce the law when the party harmed is an ordinary citizen. None. Neither political party will bring a single felony-level charge against these jackals.
I leave to the reader's own determination what sort of response is appropriate in light of the continuing documentation that willful and intentional refusal to investigate and prosecute apparent felonious acts is not an isolated incident but rather has become the standard and expected procedure and response by alleged "law enforcement" at the highest levels of our government when it comes to those firms, including but not limited to banks and collection agencies.
http://market-ticker.org/akcs-www?post=176183
Real Estate Spin Continues by Mainstream Media
Greg Hunter
USA WatchDog.com
27 December 2010
The mainstream media was at it again last week–putting a positive spin on the awful real estate market. The USA Today headline on top of the “Money” section last Thursday read “Optimism for home sales adds up.” The story said, “The trend is starting to move in the right direction,” says Diane Swonk, chief economist at financial services firm Mesirow Financial. A string of new housing data is building optimism. Existing home sales in November rose 5.6% from October to a seasonally adjusted annual rate of 4.68 million, the National Association of Realtors reported Wednesday. Demand has steadily improved since bottoming in July following the end of the buyers’ tax credit.” (Click here for the complete USA Today story.)
The headline and the beginning of the story would lead you to believe everything is turning around and the worst of the housing meltdown is behind us. The article failed to include the true context of that whopping 5.6% rise in sales. Here’s how Marketwatch.com reported the exact same story, “Sales of existing homes rose 5.6% to a seasonally-adjusted annualized rate of 4.68 million, the National Association of Realtors said Wednesday . . . Even so, sales were still 27.9% below prior-year levels and below the 5.26 million in June when a homebuyer tax credit existed.” (Click here to read the complete Marketwatch.com story.) Yes, the spin from USA Today left out the fact home sales were still nearly 28% below last year’s levels.
This is despite the homebuyer tax credit program that doled out up to $8,000 for buying a home. USA Today buried the real headline and that was this little morsel, “Home prices, down almost 30% from their 2006 peak, will fall 5% to 7% more before potentially rebounding later in the year, says Patrick Newport, IHS Global Insight economist. Banks will repossess 1 million U.S. homes next year, on top of 1 million this year, says market researcher RealtyTrac.” How are back to back years with millions of “home repossessions” and declining prices of another “5% to 7%” not the lead in a story? What does “Optimism for home sales adds up,” mean? Optimism adds up to another million foreclosures and another price decline? This is just another attempt to put lipstick on a pig of a housing market.
The best road map of where housing is going in the next couple of years can be foretold by looking at this mortgage reset chart from Credit Suisse. (see below) Look at the tsunami of mortgage resets for all sorts of Adjustable Rate Mortgages that don’t fall off until the end of 2012. I know I have used this chart in the past, but when it comes to predicting the real estate market, this is the proverbial picture that is worth a thousand words!
In the latest report from Shadowstats.com, economist John Williams says the “housing crisis appears to be intensifying.” Here’s what Williams says the so-called “recovery” looks like on a graph when it comes to housing start data. Do you see any recovery there? Is that what a “move in the right direction” looks like?
The NAR and USA Today omitted an important fact about those 4.68 million sales of existing homes. Williams says, “Foreclosure activity remained a major distorting factor for home sales, with “distressed” activity accounting for an estimated 33% of existing sales in the NAR’s November reporting. . .”
That means 1/3 (1.56 million homes) of that 4.68 million total were foreclosure sales. There’s not much “optimism” for the million and a half families who lost their homes this year. There is just no good way to spin that American tragedy.
http://usawatchdog.com/real-estate-spin-continues-by-mainstream-media/
Banks Behaving Badly: Mistaken Foreclosures Roll On
Scott Van Voorhis
December 27, 2010
Imagine returning from a visit to grandma over the holiday weekend to find your house padlocked and your furniture and possessions cleaned out.
Then imagine your shock at finding out, after you called 911, the perpetrator was not some low-life burglar but your mortgage lender.
How could this be, you might ask, having never skipped a mortgage payment?
Well it's a question homeowners across the country continue to ask as the problem of "mistaken foreclosures" continues, despite months of negative publicity for some of the nation's top banks.
In one of the more recent cases, a Florida couple worked out a loan modification agreement and was making all their payments when they received a devastating letter from J.P. Morgan Chase. Their condo, Magaly Cervantes and Julio Bermudez, was told, had been foreclosed on and sold online.
A trip to the local courthouse led nowhere - the bank only began reviewing the case after some embarrassing attention from The Wall Street Journal.
Other cases are even more heart rending. A Pittsburgh woman who was not in default on her mortgage returned home from work one day last year to find her house padlocked, the utilities cut off and her parrot, Luke, gone.
Angela Iannelli finally got her parrot back, though the bank made her drive out of her way to pick Luke up. She is now negotiating a settlement with the bank.
Mimi Ash recently filed suit against the Bank of America after her ski chalet was cleared out and padlocked and her possessions - including her late husband's ashes - hauled away. She was behind on her payments, but had been trying to catch up
Others, while their homes have yet to be seized, have had to spend thousands on legal fees to fight off erroneous foreclosure filings by their lenders.
Warren Nyerges was particularly shocked to be hit with a foreclosure notice. After all, he bought his $165,000 Naples, Fla., home back in 2009 with cash.
But despite waiving a copy of the cashier's check in front of multiple bank employees, Nyerges was forced to hire a lawyer and go to court before the bank would back down, The Huffington Post reports in an excellent story detailing the growing number of foreclosure snafus.
There's a common theme here. Once you have been thrown onto the foreclosure assembly line, even if you are a victim of mistaken identity, it can be hard if not near impossible to get off.
Reading these stories is enough to make anyone fume. But the defense offered by the banks is even worse.
The line goes something like this: Sorry, we are struggling to process an unprecedented number of foreclosures and it's inevitable that mistakes will happen along the way. Anyway, such cases are rare and we are constantly upgrading our procedures.
How in the world is this defense acceptable?
It's akin to the airline industry saying, after a flurry of tragic crashes, that we all just have to accept that mistakes will happen and people will die occasionally. After all, ten million people made it to their destinations safely during the same time period.
You can just imagine what Congress, prodded by an angry electorate, might do when confronted with such an obtuse and insensitive defense.
Well this kind of lame-brain defense shouldn't fly either for the banking industry.
OK, we are not talking about the loss of life here. But certainly property rights - and the freedom from fear that your livelihood or home or possessions can be randomly seized by either a government agency or a corporate bureaucracy - is key part of what holds our free market, democratic society together.
No city or state government would last long in office if it began seizing the homes of upstanding citizens for nonpayment of taxes and then responded, when confronted by its errors, by dragging its feet.
So how does a key part of the private sector get away with behavior that would have made the Soviet bureaucrats of old crack a smile?
http://www.boston.com/realestate/news/blogs/renow/2010/12/banks_behaving.html
Faces of the Home-Foreclosure Crisis
The Tidal Wave of Defaults and Delinquencies That Began Four Years Ago Has Hit Individuals at All Levels of Society
WSJ.com
Dec. 30, 2010
The foreclosure crisis that erupted four years ago has claimed more than five million American homes—about 10% of all homes with a mortgage. It began in lower-income neighborhoods and has spread to some of the most exclusive addresses in the U.S.
The seeds of the crisis were planted a decade ago when banks, discovering the high returns from selling bundles of securitized mortgages, relaxed lending standards and originated millions of adjustable-rate subprime mortgages. Such loans were designed to allow just about anyone to get a home loan.
When interest rates on the adjustable-rate mortgages finally climbed, many borrowers began falling behind on their payments, leading to the first wave of delinquencies and defaults.
At the start of 2008, with the U.S. economy weakening and job losses multiplying, the defaults began to spread as millions of Americans with plain-vanilla prime mortgages also ran into trouble making their payments. In some cases, borrowers found they had paid inflated prices for homes they could no longer afford. Others got into trouble by or borrowing against the equity in their homes. According to the Federal Reserve, Americans withdrew more than $1.1 trillion of equity from homes in 2006 and 2007.
By the end of 2008, with home values plunging, one in six homeowners found themselves underwater—owing more on their homes than they were worth. Borrowers, even those with stable jobs, began to see such negative equity as a reason to stop making their payments. That triggered the third wave of the foreclosure crisis: the strategic default.
The Obama administration is working with banks to head off future defaults and stanch the foreclosure wave by modifying mortgages. The federal programs have so far disappointed. The Home Affordable Modification Program, for example, was launched in the summer of 2009 with the intention of modifying three million to four million loans. So far, it has provided permanent help to fewer than 450,000 struggling borrowers.
Here are six stories of people caught in the foreclosure crisis, by circumstance or choice—from those who fell victim to hard times to others who squandered equity on cash purchases.
The crisis looks set to continue. Another four million people are in danger of losing their homes, according to the Mortgage Bankers Association. And until foreclosures are cleared, the housing market is unlikely to recover.
The foreclosures have had a silver lining for one group of Americans: Many families locked out of the housing market during the boom can now afford to buy.
—Robbie Whelan
Loan Choice Proved Costly
When Ghislaine Apollon emigrated from Haiti to the U.S. in 1974, she dreamed of owning a home. In 1997, after years of scraping by, she bought a fixer-upper in the Queens section of New York City.
Her original $147,000 mortgage was affordable on her income of about $1,600 a month from working in a hospital linen department, she said. Ms. Apollon then made some costly choices. First, she refinanced several times and took out large amounts of cash, pushing her loan balance to nearly $400,000. And the last time she refinanced she ended up with an option adjustable-rate mortgage, which lets borrowers select from different payment choices. Ms. Apollon, like many borrowers, opted to pay the minimum, which adds to the balance.
Option ARMs have become the focus of state investigations and lawsuits by borrowers who believe they were misinformed about the loan's complicated structure.
Consumer advocates say such option ARMs have proven a problem nationwide. "Every option ARM that we've seen has been delinquent," said Farida Rampersaud, director of the Foreclosure Prevention Services Program at the Ridgewood Bushwick Senior Citizens Council Inc. in Brooklyn, N.Y. "In most instances, the homeowner doesn't understand the nature of the product."
Trouble for Ms. Apollon started almost as soon as she moved into the single-story home. The ceiling leaked; the basement flooded several times. She refinanced several times to fund repairs, ratcheting up her monthly payments each time.
Ms. Apollon refinanced a final time in 2007 with Countrywide Financial Corp., which was acquired by Bank of America in 2008. This time, she wasn't looking to pull out money, but to get into a mortgage with more affordable payments. Ms. Apollon said she was stunned when she realized the consequences of her decision to make minimum payments: After a few years, "my mortgage went up and up and up" to $1,700 a month.
Realizing she would have to pay much more than that a month to start reducing her loan balance, Ms. Apollon sought a loan modification. She is being helped by Neighborhood Housing Services of Jamaica, a nonprofit.She wants a plain fixed-rate mortgage that doesn't grow.
Lenders aren't granting nearly as many loan modifications as consumer advocates would like, but Ms. Apollon has a few things in her favor. Under a 2008 settlement with several state attorneys-general over charges of predatory lending by Countrywide, Bank of America agreed to modify the terms of certain subprime and option ARM mortgages.The bank said it reviewed Ms. Apollon for that program in August 2009, but "her financial situation did not support a modification."
She was denied a modification under a government program earlier this year and stopped making payments in October. Bank of America said it was reviewing her request for a modification.
Ms. Apollon -- who receives extra income by renting part of the home to a relative -- has been depositing $1,600 a month into an account to get her mortgage back on track if she's granted a modification and to show that "I'm willing to pay," she said.
—Dawn Wotapka
Lost: A Business, Then a House
Like other people whose fortunes were tied to real estate, Sidney Banner has suffered a one-two punch from the downturn.
In 2008, he lost his small, family-run commercial-mortgage brokerage business, when tighter lending requirements made it difficult to finance sales of commercial properties.
This month, the 84-year-old Mr. Banner and his wife lost their 3,200-square-foot home in an affluent section of Boca Raton, Fla. They've moved into an 880-square-foot rental apartment in a modest neighborhood of Palm Beach County, cutting their monthly housing expenses from $2,600 to $400.
Mr. Banner bought his house 22 years ago for $296,000. By 2007, the house was valued at $429,000. Like many other homeowners at the time, Mr. Banner tapped the equity in his home by taking out a $250,000 loan. He used the money to try to keep his business afloat as the real-estate market unraveled.
A year later, Mr. Banner defaulted on his first and second mortgages; the value of his home fell to $350,000. It is now scheduled for auction in January at a foreclosure sale.
"When things were good, making payments was easy," Mr. Banner said. "But now I've cut down to the bone, to the point that we can live on Social Security payments."
Many former mortgage brokers have been able to find new jobs working for banks and other companies. But Mr. Banner typifies one problem facing older Americans: the difficulty of finding employment. Only about 6.1 million of the 38 million Americans aged 65 or older were employed in 2009, according to the Bureau of Labor Statistics.
For two years, Mr. Banner and his wife received $1,200 a month in unemployment payments, in addition to their $3,200 social-security checks. The unemployment payments have now run out, so Mr. Banner said he was going back to work. He hopes to start a company brokering small commercial-real-estate loans to borrowers he finds through online advertising and Craigslist.
Mr. Banner said the foreclosure may have been a blessing in disguise: "My wife and I are both very much more relaxed now that we walked away from this enormous responsibility, and all these people calling us every day, looking for something they're not going to get."
—Robbie Whelan
After the Good Life Goes Sour
Like many Americans who saw their home values shoot up during the housing boom, Christine Carr found lots of ways to spend her equity windfall.
A decade ago, she and her husband paid nearly $180,000 for a three-bedroom home in Dallas, N.C., outside Charlotte. Their income easily covered the $1,100 monthly mortgage payment.
In 2006, after discovering the house's value had skyrocketed by $100,000, the couple took out a second mortgage and got cash. They bought a $70,000 camper, took a cruise to Alaska and vacationed in Belize. The new loan added $698 to the couple's monthly payment.
"We had a ball," she said.
Three years later, her husband moved out and stopped contributing to the mortgage payments, she said. Then she lost her job as a consulting firm's marketing manager. In April 2009, Ms. Carr put the house on the market for about $235,000. With no income, Ms. Carr, now divorced, didn't qualify for a loan modification, which would have lowered her mortgage payment.
In July 2009, she asked the lender, Bank of America, to let her hand over the home to avoid the foreclosure process. But the two sides couldn't come to terms.
With no interest from buyers, Ms. Carr stopped making payments that August. "It was a gut-wrenching decision," the 46-year-old woman said. "I was raised to live up to my commitments."
These days, she receives a monthly statement that details the swelling late fees and penalties for both of her loans. Although she found work in March this year, Ms. Carr said she had no intention of paying: She has moved to a rental and her Dallas home sits abandoned. The luxury camper was sold for "a lot less" than the purchase price, she said.
Ms. Carr said she felt guilty but was ready to move on. "It makes me sick to my stomach sometimes, just thinking about it," she said. "But once you make the decision, you stick with it."
—Dawn Wotapka
Housing Nightmare Is a Dream for Some
Last year, Bret Sands and his fiancee, Fysah Thomas, shared a cramped $600-a-month studio apartment. Today, they're living in a Seattle lakefront property with three bedrooms, hardwood floors and a spiral staircase.
"This is a freaking dream house," said Mr. Sands. still giddy months after purchasing the home in March.
If there's an upside to the foreclosure crisis, it is largely enjoyed by people like Mr. Sands and Ms. Thomas: They can now afford to buy. He's a surveyor of marine vessels and she's the lead vocalist in a band. Both watched the mid-decade housing boom pass them by, thinking they'd never be able to join.
Then the bubble burst. According to the Case-Shiller Home Price Indices, prices in Seattle through October were about 25% off their July 2007 peak—with single-family homes now selling at a median price of $481,000, according to the local multiple listing service.
In 2008, Mr. Sands, age 34, started to see the stock market falter and grew worried about his retirement savings account. He took $60,000 out of the account, and with an eye on plummeting home prices, he and Ms. Thomas decided to buy a house.
They never intended to buy a foreclosure but nothing else fit their budget.
After two months and about 30 tours with SeattleHome.com real estate broker Sam DeBord they found their house. It went into foreclosure when its owner's restaurant went belly up. Ms. Thomas saw it during a random web search. The couple paid $232,000 for a house that in 2007 had been appraised at $300,000. One of its main attractions: It sits among much larger, half-million-dollar homes along Angle Lake.
"We wouldn't have been able to afford a house if the market hadn't dropped," Mr. Sands said.
With help from friends and Ms. Thomas's carpenter father, they have embarked on renovations: paint, French doors, new bathroom, new kitchen.
Because the house needed so much work, Mr. Sands kept a lot of his cash to pay for renovations. He put about $9,000 down under a loan insured by the Federal Housing Administration.
"It should be an inspiration to any other people like us," Ms. Thomas said. "Being able to buy a home is one of the most important decisions you can make."
—Mitra Kalita
Falling Value Ruled Out Refinancing
Kelli Kobor and her husband thought they were making a safe investment in 2004 when they made a $350,000 down payment on the $1.3 million purchase of their five-bedroom Dutch colonial in Kenilworth, Ill., a wealthy suburb on Chicago's North Shore.
Ms. Kobor and her husband have no other debt. They never refinanced or took out a second mortgage. But like many other Americans, they ran into trouble making their mortgage payments last year after Ms. Kobor's husband lost his job and later found a new one that paid much less.
Their home had fallen in value, wiping out any equity and making it impossible to refinance. Ms. Kobor wasn't eligible for the government's loan-modification programs because her loan was too large; her mortgage servicer offered a six-month interest-rate reduction that tacked the payment shortfall onto their loan.
Tired of feeling "strung along," they ultimately surrendered the home to the bank in what's known as a deed-in-lieu of foreclosure, and moved out in August. They now rent a three-bedroom ranch-style home in Deerfield, about 10 miles away.
Moving her family was a "very difficult choice, a very difficult transition," says Ms. Kobor, 43. She still takes her son to play with his best friend and former neighbor. "Every time I drop him off," she says, "I have to look at my house." The home was listed for sale last month at $749,000.
While Ms. Kobor felt vindicated that "there was recognition by the bank that the value had dropped considerably," she says it was also maddening because the bank "wouldn't ever negotiate with us. They took this thing that we actually prized and they practically threw it away."
Ms. Kobor and her husband are saving to buy another home, although this time they'll approach home ownership differently. They will take out a smaller loan, one they can repay within 10 or 15 years. "We will never leverage up like that again," she says.
But the biggest surprise over losing her house is that "our lives are so much better now," Ms. Kobor says. "The relief of knowing that we are not in a bottomless hole that we'll never be able to climb out of—psychologically, it has been great."
More borrowers need to "wise up," she says, and realize that the government and the banks aren't likely to help them. "People who are in our situation, we're told, 'Save your house,' " she says. But the crisis has taught her that "what's much more important is saving your family, saving your sanity, saving your financial future."
—Nick Timiraos
Seeing the Allure of 'Can Pay, Won't Pay'
When Chris Hanson bought his $875,000 luxury condominium in Scottsdale, Ariz., four years ago, he could afford the $90,000 down payment.
He said he had no difficulty paying the $5,000 monthly mortgage on the three-bedroom unit, which has floor-to-ceiling windows and views of Camelback Mountain. The condo is in a gated complex with a gym and pool.
And, true to his word, he didn't miss a single payment—until last month. Concluding that the home, now worth about half of what he paid, won't recover its value for at least 10 years, Mr. Hanson decided to walk away.
"It's a no-brainer once you do the math," said the 27-year-old real-estate investor.
He plans to let the lender foreclose on the home and rent an even nicer unit in either the same complex or one nearby, which he figures will cost less than half of his monthly mortgage payment.
Borrowers like Mr. Hanson represent the latest—and for lenders the most troubling—wave of the foreclosure crisis. When the housing downturn began, economists and industry executives believed homeowners would walk away from underwater properties only after a financial shock—a job loss or divorce.
Mr. Hanson's case illustrates the growing risk that borrowers in hard-hit housing markets will "strategically" default, even when they can afford to stay in the homes. Nearly one-third of homeowners in Arizona, and half of those in Nevada, owe more than 125% of the value of their homes, according to CoreLogic Inc., a real-estate data firm.
Mortgage-finance giant Fannie Mae has threatened to withhold credit for up to seven years from people who carry out strategic defaults and to pursue their assets in states that allow for deficiency judgments.
Mr. Hanson said that he felt little moral obligation to make his payments because he felt banks' shoddy lending practices were primarily responsible for fueling the housing boom and bust. Financial institutions often have no problem defaulting on soured commercial real-estate investments, he said.
Mr. Hanson runs an investment firm that buys up foreclosed properties and resells them. He said the company buys two to three homes a week at prices ranging from $15,000 to $1 million; they've recently expanded into distressed multifamily homes. He said he realized months ago his home would take years to recover its value but decided only six weeks ago to stop making payments.
He worried that wrecking his sterling 800 credit score would make it harder to run his business. But, in the end, he said he decided it was worth the risk.
"It's actually really relieving," Mr. Hanson said.
—Nick Timiraos
http://online.wsj.com/article/SB10001424052748704610904576031632838153532.html
Housing Returns: Similarity to S&L Crisis Is Eerie
Tom Lindmark
December 29, 2010
A couple of days ago I put up a post that reviewed returns on homes for the past decade. Here’s a bit more recent history via a great graph from CalculatedRisk.com.
Pretty awful isn’t it? Basically, we’re going nowhere which shouldn’t be at all surprising. The similarity to the S&L real estate debacle is eerie. Then we spent four or five years playing around with all sorts of schemes to avoid the pain of realizing value and clearing the market. The buzzword then was “regulatory goodwill.” Today we talk about modifications and foreclosure moratoriums as we seek to evade the inevitable.
Take the losses and move the inventory and this chart will start to look different. Keep on trying to deny reality and housing is not going to start to recover. Do what you want to ease the pain for those who will lose their homes, but finally admit that lose them they must for recovery to commence.
http://seekingalpha.com/article/243925-housing-returns-similarity-to-s-l-crisis-is-eerie
Case-Shiller: Welcome to the Housing Double Dip
The Fundamental Analyst
December 29, 2010
As I noted back in August, I thought we would ultimately tip back into year over year declines in the Case-Shiller Home Price Indices, the latest report from S&P for data through October shows that is the case. On a non-seasonally adjusted basis, US home prices are down -0.8% from a year ago for the 20 city composite index. This represents the third straight month of declines and more importantly the rate of decline is increasing with the 20 city composite index dropping -1.3% in the October report, the biggest month on month decline since March 2009. The latest report, which is an average of August, September and October showed price declines for all 20 MSA’s.
In terms of levels, the 20 city index is now just 4.4% above the low set in April 2009. I don’t think it’s outrageous to suggest that we will see new lows early in 2011. 6 cities, Miami, Tampa, Atlanta, Charlotte, Portland and Seattle have already hit new lows since prices started falling in 2006/07. Talk of a housing double-dip is no longer necessary, we are in the midst of it. With Realty Trac predicting another record year for foreclosures in 2011 it’s difficult to envision anything but a difficult year for the US residential housing market.
http://seekingalpha.com/article/243954-case-shiller-welcome-to-the-housing-double-dip
2011 Predictions: Not the Time to Buy a House
The Housing Time Bomb
December 31, 2010
I finished up my predictions for 2011 during Thursday's Wall St snoozefest. As always, these are just my opinions and they shouldn't be used as investment advice.
Here we go:
1. The US dollar will strengthen in the first half of the year thanks to the European debt crisis. This trend will then reverse midyear and the USD will close down 10% from 2010 levels by the end of the year.
2. Treasuries will trade in a large range early in the year before selling off later on as the Fed turns off QE2 and/or the the bond vigilantes finally get their way. The 10 year bond will end the year at 4.5%.
3. Gold will trade violently between $1000-$2000 as it reacts to inflationary and deflationary panics based on various central banking decisions that are made around the world in 2011. Gold will end the year at $1700 due to increasing demand as fears around fiat currencies continue to rise.
4. China will encounter severe inflationary issues and will raise rates substantially in order to avoid social unrest and political turmoil. I think these efforts will fail and I wouldn't be surprised to see another " Tiananmen Square" type event by the end of the year.
5. Two of the PIIGS will default and leave the Euro in an attempt to get their arms around their solvency issues. Just so we're clear here: A debt restructuring/haircut will be counted as a default.
6. Stocks: Volatility will rule the day. Equities will rise early in the year as a result of a massive European capital flight to safety. This will also help the treasury market. The S&P will then sell off hard as bond yields begin rising and the markets slowly realizes that the "economic recovery" was the recovery that never came. The S&P will close down 20% from today's levels by the end of 2011.
7. Oil and other commodities will see violent volatility as inflation/currency fears battle huge drop offs in demand as the economy slows down dramatically. This will trigger a giant tug of war on price. Oil will trade in a range of $50-150 dollars during the year and will end the year at $70.
8. 1-2 states will default and will need restructure their debts.
9. President Obama's approval rating will fall below 30% as the economy fails to recover and continues it's downward spiral.
10. One TBTF institution will need to be bailed out for a second time. If Congress refuses to approve the bailout then 1 TBTF bank will fail (unlikely scenario).
11. Housing prices will steadily continue dropping throughout the year and will end up down 20% down from today's levels. I will end my last prediction with an important graph.
One only needs to look at the chart below to see where home prices are eventually heading. In case you are blind or can't read let me help you: Home prices will eventually head back to their 2000 pre bubble levels. This may take several years but all bubbles revert to the mean. Just look at where tulip prices are today versus the 1630's!
Anyone involved in housing needs to eat a huge piece of "Reality Pie" and realize that prices are never coming back. Rates are going to rise and things are only going to get worse.
The Fed has basically thrown everything but the kitchen sink at housing for 3 years and it has done NOTHING to stop the price declines. Take this chart, hold it as a reminder in your back pocket and make sure you look at it if you ever have any urge to buy a house.
Now is definately NOT the time to buy:
http://static.seekingalpha.com/uploads/2010/12/31/saupload_case_shillerdec28_10.jpg
Why Housing Is Due to Revert to Mean Price
Cullen Roche
December 31, 2010
I’ve long predicted that housing prices would revert to their mean. The popular chart that depicts this long-term mean is the Case Shiller inflation adjusted housing chart (see first or second chart below).
The logic here is not terribly complex. In addition to the supply/demand imbalance, housing prices must revert to their mean for the simple reason that prices tend to have a very high correlation with inflation rates. Inflation rates, by definition, tend to have a very high correlation with wages. Since house purchases comprise such a substantial amount of the household balance sheet it makes sense for this correlation to remain very tight over any given period of time.
It is practically impossible for housing prices to revert from their inflation adjusted mean for any significant period of time. This is taking a complex argument and simplifying it far too much, but Gary Shilling recently expanded on this mean mean reversion that is likely to continue in housing (via Business Insider):
This huge and growing surplus inventory of houses will probably depress prices considerably from here, perhaps another 20% over the next several years. That would bring the total decline from the first quarter 2006 peak to 42%.This may sound like a lot, but it would return single-family house prices, corrected for general inflation and also for the tendency of houses to increase in size over time, back to the flat trend that has held since 1890 (Chart 26).
We are strong believers in reversions to the mean, especially when it has held for over a century and through so many huge changes in the economy in those years—two world wars and the 1930s Depression, the leap in government regulation and involvement in the economy, the economic transformation from an agricultural base to manufacturing and then to services, the post- World War II population shift from cities to suburbs, the western and southern transfer of population and economic strength, the movement from renting to homeownership and the accompanying spreading of mortgage financing, etc.
Furthermore, our forecast of another 20% fall in house prices may be conservative. Prices may well end up back on their long- term trendline (Chart 26), but fall below in the meanwhile. Just as they way overshot the trend on the way up, they may do so on the way down, as is often the case in cycles. Furthermore, another big house price decline will spike delinquencies and foreclosures leading to more REO sales by lenders,whichwillfurtherdepress prices. Our analysis indicates that a further 20% drop in prices will push the number of homeowners who are under water from 23% to 40%, resulting in more strategic defaults, more REO, etc.
This month’s Dallas Fed Economic Letter also discussed the phenomenon of mean reversion in housing:
As gauged by an aggregate of housing indexes dating to 1890, real home prices rose 85 percent to their highest level in August 2006. They have since declined 33 percent, falling short of most predictions for a cumulative correction of at least 40 percent.[1] In fact, home prices still must fall 23 percent if they are to revert to their long-term mean (Chart 1). The Federal Reserve’s purchases of Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) government-sponsored-entity bonds, which eased mortgage rates, supported home prices. Other measures included mortgage modification plans, which deferred foreclosures, and tax credits, which boosted entry-level home sales.
The government has thrown everything it has at the housing price decline. But as the housing tax credit recently proved, there is little the government can do to stop this inevitable and entirely necessary market adjustment.
The Dallas Fed expanded on the difficulties that the housing market confronts:
Measuring the success of these efforts is important to determining the trajectory of the economic recovery and providing policymakers with a blueprint for future action. New-home sales data, though extremely volatile, are considered a leading indicator for the overall housing market. Since expiration of the home-purchase tax credit in April, sales have fallen 40 percent to an average seasonally adjusted, annualized rate of 283,000 units. This contrasts with the three years through mid-2006 when monthly sales averaged 1.2 million on an annual basis. Before the housing boom and bust, single-family home sales ran at half that pace. Because current sales are at one-fifth of the 2005 peak, new-home inventories—now at a 42-year low—still represent an 8.6-month supply. An inventory of five to six months suggests a balanced market; home prices tend to decline until that level is achieved.
One factor inhibiting the new-home market is a growing supply of existing units. The 3.9 million homes listed in October represent a 10.5-month supply. One in five mortgage holders owes more than the home is worth, an impediment that could hinder refinancings in the next year, when a fresh wave of adjustable-rate mortgages is due to reset. The number of listed homes, in other words, is at risk of growing further. This so-called shadow inventory incorporates mortgages at high risk of default; adding these to the total implies at least a two-year supply.[2]
The mortgage-servicing industry has struggled with understaffing and burgeoning case volumes. The average number of days past due for loans in the foreclosure process equates to almost 16 months, up 64 percent from the peak of the housing boom. One in six delinquent homeowners who haven’t made a payment in two years is still not in foreclosure.[3] Mounting bottlenecks suggest the shadow inventory will grow in the near term.
Notably, not all homeowners in arrears suffer financial hardship due to unaffordable house payments. Those with significant negative equity in their homes may choose to default even though they can afford to make the payments. Such “strategic default” is inherently difficult to measure; one study found 36 percent of mortgage defaults are strategic.[4] Though the effect is not readily quantifiable, the growing lag between delinquency and foreclosure provides an added inducement for this form of default.
The government has won the battle, but ultimately, they are destined to lose this war with the market. They have attempted to keep “asset prices higher than they otherwise would be,” however, the laws of supply and demand always reinforce themselves over the long-term.
By propping up markets the government has merely kicked the can. The mean reversion will occur one way or another. The government appears to be attempting to ease the markets lower. That is arguably more desirable than crashing prices, but does not mean they will ultimately win the war.
Mean reversion will occur. It’s only a matter of how long we want to drag it out…
http://seekingalpha.com/article/244287-why-housing-is-due-to-revert-to-mean-price
Housing in 2011: Will Prices Fall Further?
NewstraderFX
January 02, 2011
Nouriel Roubini and Peter Schiff recently posted articles suggesting that housing prices will fall by another 20% (see here and here). My suggestion is that whether this is correct or not is likely to have very much to do with inflation because as you will see:
1. The real, median price is above historical levels
2. If the Fed creates a higher inflation rate, as they apparently are trying to do, real prices in most areas are likely to fall even if they rise nominally.
According to the latest Case Shiller HPI report:
The S&P/Case-ShillerHome Price Indices for October showed a deceleration in the annual growth rates in 18 of the 20 MSAs and the 10- and 20-City Composites in October compared to what was reported for September 2010.
The 10-City Composite was up only 0.2% and the 20-City Composite fell 0.8% from their levels in October 2009. Home prices decreased in all 20 MSAs and both Composites in October from their September levels.
In October, only the 10-City Composite and four MSAs – Los Angeles, San Diego, San Francisco and Washington DC – showed year-over-year gains. While the composite housing prices are still above their spring 2009 lows, six markets – Atlanta,Charlotte, Miami, Portland (OR), Seattle and Tampa – hit their lowest levels since home prices started to fall in 2006 and 2007, meaning that average home prices in those markets have fallen beyond the recent lows seen in most other markets in the spring of 2009.
As the chart below shows, the median price when adjusted for CPI is still well above the historical range, suggesting that the real median price still needs to decline if the nominal gains made as a result of the housing bubble are to fully retrace.
What also is interesting about this chart is that it shows how steady the real median price was for over 50 years. Except to two periods in the early 1980's and 1990's (which adjusted back both times), from about 1947 until about 2000 the rise in nominal prices was almost entirely due to inflation alone.This is true because in order for real prices to remain constant, the percentage increase in nominal prices must be offset by the inflation rate.
The S&P CS HPI is indexed (year 2000 = 100) but price changes are reported on a nominal basis. The 10 city and 20 city indices are currently 159.03 and 145.32 respectively, meaning that prices are up 59.03% and 45.32% since 2000 before inflation. In CPI terms, the dollar's purchasing power has declined by 21.3% since 2000 ($100 today buys only $78.70 then). So, adjusted for inflation, the indices are up 37.7% and 24% respectively.
Taking inflation into account, when looking at each city's current index, a reading equal to 121.3 means that prices have exactly kept up with inflation since 2000.
Of the 30 cities making up both indices, 6 are currently below that level. Detroit has the lowest index at 68.86, meaning the nominal price is now 31.14% below where it was in 2000. But in real terms, price has declined by 52.4% since then (and obvioulsy by a much larger amount off the 2007 peak).
Minneapolis is exactly even with inflation and the remaining 23 are above. D.C. leads the way here, with prices up 86.67% nominally and by 65.37% in real terms.
So the question now is, what might happen going forward? The answer to that lies in part with how successful the Fed will be in its quest to create a higher inflation rate. If the overall median price is to return to its historical (pre-bubble) norm, any nominal price increases must be offset by a higher rate of inflation.
The 10 city composite had a nominal 0.2% YoY increase in Ocotober but in real terms, there was a 1% decline (October's unadjusted CPI-U was 1.2%). For the 20 city composite, the real YoY decline was 2%. Just 4 markets (D.C., L.A.,San Diego and San Francisco) had nominal increases greater than CPI, meaning they experienced real appreciation.
http://seekingalpha.com/article/244349-housing-in-2011-will-prices-fall-further
Housing Prices: Is There a Threat to Economic Recovery?
Mark Perry
January 02, 2011
In a post yesterday, I discussed Alan Reynolds' recent editorial in the IBD titled "Do Falling Home Prices Imperil Recovery?, where he points out that house price declines in a "few troubled cities in a few states [based on the Case-Shiller 20-city composite house price index] do not represent the entire nation." This was in response to a a recent front-page Wall Street Journal article ("Housing Recovery Stalls") that fretted about how "A new bout of declining home prices (based on the October decline in the Case-Shiller house price index) is threatening to hamper the U.S. recovery, just as consumers and the overall economy have been showing signs of healing."
Like the chart in the previous post, the chart above provides further evidence of the significant disconnect between the Case-Shiller Home Price Index (10-city composite above for Boston, Chicago, Denver, Las Vegas, LA, Miami, NYC, San Diego, San Francisco, and Washington D.C.) and the FHFA U.S. House Price Index. As Alan Reynolds pointed out, the FHFA U.S. House Price Index based on 50 states increased by 1.07% in the third quarter of this year vs. the previous quarter, the largest quarterly gain since the 1.30% increase in the fourth quarter of 2006. Based on the FHFA House Price Index, there's no threat to the U.S. economic recovery.
http://seekingalpha.com/article/244368-housing-prices-is-there-a-threat-to-economic-recovery
Case-Shiller Shows House Prices Are Double-Dipping
Wall St. Cheat Sheet
December 28, 2010
October Case-Shiller Home Price Indices came in down 0.8% — far below Wall Street expectations for a 0.2% drop. Behold the dreaded double-dip:
“The double-dip is almost here, as six cities set new lows for the period since the 2006 peaks. There is no good news in October’s report. Home prices across the country continue to fall.” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. “The trends we have seen over the past few months have not changed. The tax incentives are over and the national economy remained lackluster in October, the month covered by these data. Existing homes sales and housing starts have been reported for both October and November, and neither is giving any sense of optimism. On a year-over-year basis, sales are down more than 25% and the months’ supply of unsold homes is about 50% above where it was during the same months of last year. Housing starts are still hovering near 30-year lows. While delinquency rates might have seen some recent improvement, it is only on a relative basis. They are still well above their historic averages, in both the prime and sub-prime markets."
And now for the visual:
http://seekingalpha.com/article/243863-case-shiller-shows-house-prices-are-double-dipping?source=hp_latest_articles
Allstate Sues Countrywide Over $700 Million Investment
Bob Van Voris
Dec 28, 2010
Allstate Corp. sued Bank of America Corp. and its Countrywide mortgage unit over $700 million in residential mortgage-backed securities the insurer purchased, claiming Countrywide misrepresented the investments.
“Countrywide was singularly focused on increasing its market share, offloading the risk onto Allstate and other institutional investors that purchased securities backed by pools of Countrywide’s mortgages,” Allstate said in a complaint filed in federal court in Manhattan yesterday.
Allstate, based in Northbrook, Illinois, said in the complaint that the investments suffered “drastic and rapid loss in value” as a result of the poor quality of the loans underlying them.
In addition to Bank of America and Countrywide, the suit names as defendants former Countrywide officials including the company’s former chairman and chief executive officer, Angelo Mozilo. The suit seeks unspecified damages.
The case is Allstate Insurance Co. v. Countrywide Financial Corp., 10-cv-9591, U.S. District Court, Southern District of New York (Manhattan).
http://www.bloomberg.com/news/2010-12-28/allstate-sues-countrywide-financial-over-purchase-of-700-million-in-cdos.html
Housing Basics: Massive Supply, Faltering Demand
Charles Hugh Smith
(July 15, 2010)
http://www.oftwominds.com/blogjuly10/housing-supply07-10.html?source=patrick
The 'easy mortgage' era won't last
By Bill Fleckenstein
4/16/2010 5:30 PM ET
Along with easy money, the economy has gotten a boost from practices that let many homeowners stop paying their mortgages and use the 'extra' money elsewhere.
The real-estate market will soon see banks take a much more aggressive approach to foreclosures. It will be interesting to see how the economy is affected as rates are ratcheted up in earnest.
This story line, the focus of this week's column, draws its inception from the government's easy-money policies and the bank bailouts. To this point, the economy has gotten a substantial boost from homeowners who simply don't pay their mortgages and use the "extra" money for other things.
You needn't be a statistician to compile the evidence. Much work has been done for us, courtesy of an informal survey conducted by a reader of my daily column.
I have condensed his observations for Contrarian Chronicles:
Ignoring debt for fun and profit
Over the past six months, it has become more and more obvious to me (and others, I'm sure) that our government has a well-defined, unspoken policy (or plan, if you will) to increase consumer spending by reducing the debt of the very people with the highest propensity to spend.
As more and more people told me specific stories about others living rent-free, reducing credit card balances, walking away from $600k+ homes and then buying the same style house for $275k, I wanted to know more!
I started a little project to expand my sample size. Admittedly, it is nonscientific, and I wouldn't want to have to defend my methodology to a statistician, but I stand by the results. I asked people that I knew and that I could count on for accurate information. I then asked them to expand my horizon by doing their own research. We were looking for valid instances of debt repudiation, not anecdotal tales.
Almost everyone in my "survey" is aware of, or knows, someone living rent-free in their home for an extended period of time, having stopped paying their mortgage. Many of these free boarders are spending lavishly on non-essentials.
A friend owns a small manufacturing co. He tells me of one of his female employees who was saddled with a $450,000 home she purchased almost five years ago with no down payment. One year after her purchase, she pulled $75,000 home equity and purchased "fun stuff," including a boat. She recently walked away from the house (now saddled with $525K mortgage), purchased a new house for $200,000 (in her sister's name) and kept all the goodies purchased from the home equity withdrawal. With the much lower mortgage payment she just bought a new car.
My hard-working part-time assistant knows two different 35+ yr olds who have enjoyed over 9 months (one is up to month eleven) of rent-free living in very nice homes they purchased in 2004/2005! Both are employed and both enjoy a non-frugal lifestyle. My assistant wonders if he should do the same or have me pay him more so that he, too, can enjoy the "good life."
My sister is a nurse with 25+ years on the job. She told me of a young couple that she is good friends with that both work at her hospital making a decent joint income. They didn't like the fact that they grossly overpaid for their 3000 sq ft home in 2006. They stopped making hefty monthly payments six months ago and haven't yet been contacted by the bank. They have decided to wait until contacted and then walk away. In the meantime, they just returned from NYC from a week vacation in the Big Apple.
I can list numerous other, verified examples. And these are just from my tiny, tiny universe. I can't help but assume if I know of this many instances, there must be millions of similar stories across the country. And I am sure many of your readers have first- or secondhand knowledge of similar situations.
Continued: Forbearance and money printing
The net effect of all this: People who have stopped making home payments or those who are participating in short sales on homes they could actually afford -- in other words, the folks who have reneged on "underwater" mortgages because they can -- have extra money to spend.
I've seen recent estimates of as much as $2 trillion in extra money being available, which is a lot of juice for the economy. That helps explain some of the upside surprise that my good buddy Jim Grant of Grant's Interest Rate Observer has been looking for in the economy.
In essence, money printing has won, for now.
It's that money printing that allowed the government to absorb a lot of bad debt, especially through Fannie Mae (FNM, news, msgs), Freddie Mac (FRE, news, msgs) and the Federal Housing Administration, and which allowed the banks to mark assets to fantasy. The banks also make money on the backs of all the prudent savers in the world as they get their money for nothing (thanks to the Federal Reserve) and play the steep yield curve.
Think of the entire U.S. economy as a company. Though the balance sheet has become astronomically worse -- in the form of current (though postponed) debts, as well as future obligations -- the income statement has been boosted recently. Those folks who are upside down in real estate have been given a reprieve, and the real-estate market itself has been given a shot in the arm by tax credits (think: extend and pretend). So, the income statement -- for now -- looks OK, as does the economy.
In sum, company USA is "worth" a lot less than it used to be, but for the moment its operations are OK, at least on the surface.
Of course, none of this is fair -- as, to repeat, the prudent have been asked to bail out the reckless -- and it won't work over time. The do-over that the world was given during the financial crisis
, courtesy of the printing presses, will be paid for with higher inflation and ultimately higher interest rates.
At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column.
http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/the-easy-mortgage-era-will-not-last.aspx
HOME PRICES WILL DOUBLE DIP AND STOCKS ARE EXPENSIVE
Robert Shiller
April 18, 2010
Robert Shiller is out with his updated PE ratio and stocks are once again creeping into the very expensive zone
http://pragcap.com/the-market-is-historically-expensive
All Foreclosure Types Spike in March
By RealtyTrac Staff
April 15, 2010
FORECLOSURE ACTIVITY INCREASES 7 PERCENT IN FIRST QUARTER
New Quarterly Records for Scheduled Auctions and Bank Repossessions All Foreclosure Types Spike in March, Which Posts Highest Monthly Total for Report
IRVINE, Calif. – April 15, 2010 — RealtyTrac® (realtytrac.com), the leading online marketplace for foreclosure properties, today released its U.S. Foreclosure Market Report™ for Q1 2010, which shows that foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 932,234 properties in the first quarter, a 7 percent increase from the previous quarter and a 16 percent increase from the first quarter of 2009. One in every 138 U.S. housing units received a foreclosure filing during the quarter.
Foreclosure filings were reported on 367,056 properties in March, an increase of nearly 19 percent from the previous month, an increase of nearly 8 percent from March 2009 and the highest monthly total since RealtyTrac began issuing its report in January 2005.
“Foreclosure activity in the first quarter of 2010 followed a very similar pattern to what we saw in the first quarter of 2009: a shallow trough in January and February followed by a substantial spike in March,” said James J. Saccacio, chief executive officer of RealtyTrac. “One difference, however, is that the increases were more tilted toward the final stage of foreclosure, with REOs increasing 9 percent on a quarterly basis in the first quarter of 2010 compared to a 13 percent quarterly decrease in REOs in the first quarter of 2009.
“This subtle shift in the numbers pushed REOs to the highest quarterly total we’ve ever seen in our report and may be further evidence that lenders are starting to make a dent in the backlog of distressed inventory that has built up over the last year as foreclosure prevention programs and processing delays slowed down the normal foreclosure timeline.”
Foreclosure Activity by Type
During the quarter a total of 304,799 properties received default notices (Notices of Default and Lis Pendens), an increase of 1 percent from the previous quarter but down 1 percent from the first quarter of 2009. Default notices were down nearly 11 percent from a peak of more than 342,000 in the third quarter of 2009.
Foreclosure auctions were scheduled for the first time on a total of 369,491 properties during the quarter, the highest quarterly total for scheduled auctions in the history of the report. Scheduled auctions increased 12 percent from the previous quarter and were up 21 percent from the first quarter of 2009.
Bank repossessions (REOs) also hit a record high for the report in the first quarter, with a total of 257,944 properties repossessed by the lender during the quarter — an increase of 9 percent from the previous quarter and an increase of 35 percent from the first quarter of 2009.
Nevada, Arizona, Florida post top state foreclosure rates in first quarter
As it has for the past 13 quarters, Nevada continued to document the nation’s highest state foreclosure rate in the first quarter of 2010. One in every 33 Nevada housing units received a foreclosure filing during the quarter, more than four times the national average and an increase of nearly 15 percent from the previous quarter. Still, Nevada’s total of 34,557 properties receiving a foreclosure filing in the first quarter was down 16 percent from the first quarter of 2009.
Arizona foreclosure activity in the first quarter increased on a quarterly and annual basis, helping the state to post the nation’s second highest state foreclosure rate for the third consecutive quarter. One in every 49 Arizona properties received a foreclosure filing during the quarter — nearly three times the national average.
With one in every 57 Florida properties receiving a foreclosure filing during the quarter, the state posted the nation’s third highest state foreclosure rate for the second straight quarter. Florida’s Q1 foreclosure activity increased on a quarterly and annual basis.
California foreclosure activity decreased 6 percent from the first quarter of 2009, but the state still documented the nation’s fourth highest foreclosure rate — one in every 62 housing units receiving a foreclosure filing.
Utah foreclosure activity increased 75 percent from the first quarter of 2009, the highest annual increase among states with top-10 foreclosure rates and giving it the nation’s fifth highest state foreclosure rate. Foreclosure filings were reported on 10,756 Utah properties, a rate of one in every 88 housing units and an increase of 21 percent from the previous quarter.
Other states with foreclosure rates ranking among the top 10 in the first quarter were Michigan, Georgia, Idaho, Illinois and Colorado.
Ten states account for more than 70 percent of nation’s first quarter total
California alone accounted for 23 percent of the nation’s total foreclosure activity in the first quarter, with 216,263 properties receiving a foreclosure notice — the nation’s highest foreclosure activity total.
Florida’s total was second highest, with 153,540 properties receiving a foreclosure filing during the quarter, and Arizona’s total was third highest, with 55,686 properties receiving a foreclosure filing during the quarter.
Despite a nearly 5 percent decrease in foreclosure activity from the previous quarter, Illinois documented the fourth highest foreclosure activity total, with 45,780 properties receiving a foreclosure filing — still a 17 percent increase from the first quarter of 2009.
A total of 45,732 Michigan properties received a foreclosure filing during the quarter, the fifth highest state total. Michigan foreclosure activity increased nearly 11 percent from the previous quarter and was up nearly 38 percent from the first quarter of 2009.
Other states with foreclosure activity totals among the nation’s 10 highest were Georgia (39,911), Texas (37,354), Nevada (34,557), Ohio (33,221) and Colorado (16,023).
Report Methodology
The RealtyTrac U.S. Foreclosure Market Report provides a count of the total number of properties with at least one foreclosure filing entered into the RealtyTrac database during the month and quarter — broken out by type of filing. Some foreclosure filings entered into the database during a month or quarter may have been recorded in previous months or quarters. Data is collected from more than 2,200 counties nationwide, and those counties account for more than 90 percent of the U.S. population. RealtyTrac’s report incorporates documents filed in all three phases of foreclosure: Default — Notice of Default (NOD) and Lis Pendens (LIS); Auction — Notice of Trustee Sale and Notice of Foreclosure Sale (NTS and NFS); and Real Estate Owned, or REO properties (that have been foreclosed on and repurchased by a bank). For the quarterly report, if more than one foreclosure document is received for a property during the quarter, only the most recent filing is counted in the report. Both the quarterly and monthly reports check if the same type of document was filed against a property previously. If so, and if that previous filing occurred within the estimated foreclosure timeframe for the state where the property is located, the report does not count the property in the current month or quarter.
http://www.realtytrac.com/contentmanagement/pressrelease.aspx?channelid=9&itemid=8927
FIGHTING A FORECLOSURE
Bill Moyers Journal
December 18, 2009
(to listen to this transcript; http://www.pbs.org/moyers/journal/12182009/watch2.html )
ANNOUNCER: For the first ten months of 2009, lobbying money from the Finance Sector: $334 million. Lobbying money from the Health Sector: $396 million. Real Reform? Priceless.
BILL MOYERS: If the discussion you've just heard has not already raised your ire to the boiling point, consider this. According to the non profit Americans for Financial Reform, Wall Street is paying itself $150 billion in compensation and bonuses. They say that would be enough to solve the budget crises of every one of the 50 states, or prevent all foreclosures for four years, or create millions of jobs.
So what to do about this gross inequality? Well, for one thing, how about taking to heart the story of Steve Meacham and his merry band, City Life/Vida Urbana. In neighborhoods just south of Boston, City Life rallies people to fight foreclosures on their homes. As we end the year, we thought Steve Meacham and his friends at City Life deserve another hearing.
ROBERTO VELAZQUEZ: My name is Roberto Velazquez and I'm facing a foreclosure.
ABBEY COOK: My name is Abbey Cook, I'm near the foreclosure, not sure yet but we're in trouble.
UNNAMED MAN: I'm trying to see if I can save my house.
[STEVE MEACHAM AT MEETING]: The first meeting of the 1st Bank Tenant Association of Lynn is happening this Sunday. And it's going to be modeled after what you're doing.
STEVE MEACHAM: I work for a community organization called City Life. And I'm a community organizer there. You know, that's become a bit famous of late as a profession, but I've been doing it all my life.
MELONIE GRIFFITHS: Foreclosure and eviction are two totally different processes.
STEVE MEACHAM: On our Tuesday night meetings we get our squad of people in here who are residents of foreclosed buildings. We spend about the first half of the meeting with everybody in the room, explaining basic legal rights.
JAMES BROOKS: Can I ask again, how many people need to see lawyers?
STEVE MEACHAM: We have a group of volunteer lawyers who are here each Tuesday night. And they go into the back cubicles of our office and people go out and speak to lawyers independently. So it's a great combination of creative lawyering and community organizing.
JAMES BROOKS: Can you be evicted for not paying your mortgage? Yes or No?
CROWD: No!
JAMES BROOKS: Only a judge can evict you. So, if someone offers you cash for keys what do you say to them?
CROWD: No!
STEVE MEACHAM: A lot of what we do when people are coming in, is create the moral space for people to feel like they have the right to resist, because they're told by almost everybody that they don't. You know, their first reaction is, "There's nothing I can do because the bank owns the building now." And that is part of a disempowerment that goes far beyond that situation.
And part of the reason that people love to come here I think is that not only are we giving them solidarity and support in fighting the bank, but in so doing, it's like a, kind of upsetting this whole apple cart of disempowerment that they've been fed for years and years and years.
[STEVE MEACHAM AT MEETING]: When you're done with the attorney, please come back. We have a lot more to do in the meeting, crucial protests coming up.
[STEVE MEACHAM IN CAR]: Well Dorchester is kind of the epicenter of foreclosure crisis in Boston. You know, there's maybe as many as half of all the foreclosure deeds in Boston are filed in Dorchester.
I think at one point a single family house in Dorchester was probably going for $350 to $400,000 like, in 2005 and -6 at the height of the real estate bubble. And now those same properties are worth probably less than $200,000-- half that mortgage value or less. And that is the crisis in a nutshell right there.
STEVE MEACHAM: One of the unheralded things about this crisis right now is that there's an awful lot of owners who come to us who cannot afford their home at the inflated value, at the adjustable rate mortgage price. But they have plenty of income to afford their home at the real value at a 30-year fixed. And so why not just give them the property back at that amount? If they're foreclosed on, the best the bank that can do is sell the property at the real value. By definition, that is the absolute best.
If Deutsche Bank forecloses on Joe Schmoe the best they can do is to sell that property at real value. So if Joe Schmoe can afford the property at real value, why not sell it back to him? But the only reason the banks aren't doing that is because of what they call moral hazard. They say basically that homeowners should be punished because they signed these loan documents.
These are the same guys who have run our entire economy into the ground and who have been rewarded with billions in taxpayer bailouts and have used billions of that money to give bonuses to the very executives that drove their companies and the whole economy into the ground. And they are citing moral hazard as the reason why they can't resell that property to the existing homeowners at the real value. That is disgusting and hypocritical and in the extreme.
[MELONIE GRIFFITHS ON PHONE]: I kind of feel like you might want to have somebody look at your debt to income ratio too just to make sure you're in a comfortable loan, because something doesn't sound right. Especially if just losing a small part-time portion of your income causes you to not even be able to make those payments.
MELONIE GRIFFITHS: I heard about City Life when I knew I was kind of falling behind on my mortgage and I was coming close to foreclosure. And my, you know, there was no help.
[MELONIE GRIFFITHS ON PHONE]: Okay? Alright, thanks, Ada.
MELONIE GRIFFITHS: When you come here, you automatically get connected. It was the only place I came. I was kind of looked down upon everywhere else I went. So I automatically felt a connection.
[STEVE MEACHAM AT MEETING]: You know, this is all Dorchester basically here and Jamaica Plain, and Roxbury.
MELONIE GRIFFITHS: One of the things I loved about when I came to City Life and what kept me here. Was that they didn't really do for me, they helped me. They would direct me, but they never once did it for me and I liked that.
STEVE MEACHAM: You can fight it, you know. Somebody might want to give them a call from here whose not you.
[MELONIE GRIFFITHS AT MEETING]: Yeah. I know. I just want to be fighting all the time…
MELONIE GRIFFITHS: It's empowering. And I think that's what we do for our members. And it's kind of-- it empowers them to then take on a leadership role. Although I work for City Life, I have people in the group that are just as involved, just as committed and dedicated to this work and I think it's because of the approach that City Life takes.
[STEVE MEACHAM AT MEETING]: I'll look it over. I'll make some suggestions probably; we'll get to a final one. You sign it, I'll send it and fax it over to the lawyer.
STEVE MEACHAM: People who come to us generally don't get evicted. People who get into the room, who are a part of our organization, who get the legal help that's in the room, don't get evicted at a rate of maybe 95 percent they don't get evicted.
Exactly the opposite is true for people who don't get to us. They get evicted almost 100 percent. So, therefore, that dramatic difference means we got to get people here. And we do that through regular mass canvasses.
[MELONIE GRIFFITHS AT MEETING]: So is there anybody who wants to take part of Dorchester?
STEVE MEACHAM: We have a bunch of volunteers who come to the office here. And they visit foreclosed buildings and leave fliers and talk to people, and tell them don't move.
[MELONIE GRIFFITHS AT MEETING]: The last canvass we did one lady, she yelled at me, went crazy on me, and she called me two weeks later. So you know, these are really- and all I said to her was, "Okay, I'm sorry I'm just going to leave this…" and she was like "Get off my door!" and I was like "I'm just going to leave this bag." And she called me two weeks later to apologize and ask for help, and we've been able to help her, so…
LAUREN WOLINSKY: And they have meetings on Tuesdays that you can attend and they have a translator that comes and translates into Spanish the entire meeting.
STEVE MEACHAM: The basic message is: "Just because you're living in a foreclosed building doesn't mean you have to leave. Know your rights."
DEBORAH MASON: I'm thankful somebody left one of these on my door because I was panicking and trying to get ready to look for a place. And just didn't know what to do.
STEVE MEACHAM: And so through this mass canvassing that's going on constantly, that's how people find us and they come to the meeting. And once they get here, they don't get evicted.
I've been a community organizer or an organizer, in one way or another for… since 1972. So that's a long time now. That's 37 years. After some initial period when I was doing community organizing in Cambridge actually, I went to work in Quincy Shipyard as a welder. And the shipyard was both a grand place to work and a hellhole of a place to work.
I have a million stories, but there was one time that they started painting all the barges before we welded them, and they painted them with an epoxy paint and when you welded on them it turned into cyanide gas. And we actually had to wage a struggle so that we wouldn't be breathing cyanide.
So there was all these struggles going on there that made class in this country crystal clear. To the degree that class had been a kind of an understanding I had from thinking about it or reading about it or things I had experienced as a young person, as a child, now was something extremely visceral, you know. That moved it from my head to my gut. And it greatly influenced my subsequent organizing around housing.
[STEVE MEACHAM IN OFFICE]: These are all protest signs. We have a million of them, so I've got to pick out the ones that are useful for the Bank of America protest.
STEVE MEACHAM: We have a strategy at City Life that we describe at each bank tenant meeting that we call The Sword and The Shield, La Espada and El Escudo. The Shield is the legal defense and The Sword is a public relations, public protest offense. And we find that the two work extremely well in combination.
[STEVE MEACHAM IN OFFICE]: This is our Bank of America puppet, who doubles as our Deustche Bank puppet, and several other greedy people. But we have this sign that hangs on his teeth, that says 'Bank of America' and on the other side that says 'I want your bailout and your homes.'
STEVE MEACHAM: A legal defense is not enough because in Massachusetts the banks can evict you for no reason. And so for many people the strongest legal defense will simply slow the bank down. Slowing the bank down, however, can be very, very important because it gives us a chance to use the public protest to good benefit.
[STEVE MEACHAM AT PROTEST]: Hey, hey, ho, ho, greedy banks have got to go.
We're here in front of Bank of America because we are demanding that the bank take the rent of people who live in foreclosed buildings instead of evicting them.
STEVE MEACHAM: So if the bank is facing the prospect of a long, drawn-out legal procedure, even one that they might ultimately win, that is both time consuming and expensive.
[STEVE MEACHAM AT PROTEST]: Banks get bailed out!
CROWD: People get thrown out!
[STEVE MEACHAM AT PROTEST]: Banks get bailed out!
CROWD: People get thrown out!
STEVE MEACHAM: And if, at the same time they're going through that, they're being regularly protested by City Life or they have public officials calling them, asking them, why a bank that just got taxpayers' bailout money should be evicting people who are willing to pay rent, that is a public relations battle the bank loses every time. So faced with that combination of long, drawn-out legal defense and public protest, the banks are very often choosing to negotiate and settle with us.
CROWD: No foreclosures! No eviction! No foreclosures! No eviction!
STEVE MEACHAM: City Life, if it's known for anything, it's known for demonstrations. And we do a lot of them. The most famous of recent times are eviction blockades that are right in front of somebody's house being evicted.
[STEVE MEACHAM AT DEMONSTRATION]: Today we are witnessing a courageous woman taking a stand based on principle!
STEVE MEACHAM: And the point of that is pretty clear. We're trying to stop the bank from coming through our lines to evict the family. One reason we do the blockades is because they get a lot of publicity. If 50 or 75 people come and sit in front of a building and they're folks willing to be arrested, that is dramatic and it gets a lot of publicity.
CROWD: Shame, shame, shame.
STEVE MEACHAM: I think organizing is a lot about morality. A lot of ways in which people are oppressed is presented to them as normal. They may really get the fuzzy end of the lollipop, but it's presented to them as just normal. It's just, you know, I've had a big real estate corporation representative say to me, as they're evicting everybody, "Nothing personal, it's just the market."
And so a lot of our job is to say, is to apply a moral lens to this thing that you're not supposed to apply a moral lens to, which is the market. So that if you're evicting people in order to make profit and it's just extra profit, you don't need that money to run your building, then it is appropriate to say that's immoral. Or if you're a bank evicting people for no reason and you're going to cause untold suffering all over the city and the state and the country just because you don't think you want to be a landlord, that's immoral. And people have to bear the moral responsibility of their actions even if they're doing it through the market. And so bringing the moral lens to that stuff really helps our people and helps us organize the resistance.
As part of The Shield and The Sword method there is also a legislative part to our program.
[STEVE MEACHAM ON BUS]: Well, we're on this tour bus today with legislative aides and with press people to give people an understanding of what the foreclosure crisis is like in a hard hit neighborhood in Boston, the Four Corners neighborhood of Dorchester.
[STEVE MEACHAM AT DEMONSTRATION]: This is really criminal what's going on so it seems appropriate to put up on the building that this is a 'White Collar Crime Scene'. You know, this is a crime scene, a white collar crime scene. We're going to put it right here on the porch.
PRIEST: Right now in my rectory, I have two people staying in my living room because they're homeless. They've lost their house and they have no place to go. This is the problem we have.
UNNAMED WOMAN: We need to have our neighbors to be able to stay in their homes and to be able to live here and to keep it the thriving community that we've worked so hard to bring it to be.
STEVE MEACHAM: When a person comes to their first rally it is a very scary thing to kind of raise your voice in a public setting like that. And when you do it and you kind of overcome that and join in the chants or lead the chants or speak at a rally.
UNNAMED MAN: And it was to fight foreclosure and we were able to stop five times, I told them I'm not giving up.
STEVE MEACHAM: It's very transformative. People find their voice that way. And I've seen it happen a lot of times that people in moments of struggle become different people and they become better people.
[MELONIE GRIFFITHS AT DEMONSTRATION]: It seems like just yesterday that we stood in front of my property, almost in the same way, a lot of the same people, defending the same cause.
MELONIE GRIFFITHS: I don't know where that strength came from to do what I did. When I think back, like, the me that I know would've just moved out. I always say to people, I'm like, "Foreclosure was kind of like one of the best things that happened to me." And they're like, "Huh?" Like, but so much good came from it. I was able to help so many other people. I learned so much good information that if I'd had before, you know, but I can just turn it onto other people and help them not make the same mistake. And I kind of feel like it gave me my calling. It kind of put me where I needed to be.
STEVE MEACHAM: I think that the process by which people, number one, go from feeling like victims to being activists on their own behalf. And then they take a step beyond that and they become activists on other people's behalf, other people that were in the same situation they were in.
LOCAL TV REPORTER: Just a last question, what's it doing to the neighborhood? Just real briefly, what kind of an effect?
STEVE MEACHAM: And then they become activists on other issues besides housing. And pretty soon they're trying to change the system. And the process by which people go through all those stages is a vital part of community organizing. It's not only a 'community organizing' way of being, and not only builds organization, that it does. But if empathy is somehow the quintessential human emotion, the quintessential thing that makes us human, then solidarity is its expression.
[STEVE MEACHAM AT MEETING]: We close each meeting with a solidarity clap so if you wouldn't mind standing up.
STEVE MEACHAM: And I think that that experience of solidarity is something that feels so good that people come back just for that.
[STEVE MEACHAM AT MEETING]: We're going to beat back bank attack! We're going to beat beat back bank attack! We're going to beat back bank attack! We're going to beat beat back that bank attack…"
Banks Sit On Commercial R.E. Losses
Forbes.com
Peter C. Beller
Nov.19.09
Losses on commercial real estate have been the proverbial "other shoe" waiting to drop on bank balance sheets for months now. So far, though, loan losses on office buildings, shopping malls and real estate developments have been subdued. What's the holdup?
A troubling report from one analyst contains some clues. Banks are doing everything they can to avoid placing a firm value on buildings that have likely fallen sharply in price, writes Joe Morford, who monitors bank stocks for RBC Capital. This kind of "see no evil" asset management has so far spared investors much commercial real estate pain, but it can't go on forever.
Few doubt that commercial property prices are falling rapidly. According to the Moody's/REAL Commercial Property Price Index, prices dropped 40.6% between their peak in 2007 and the end of August, the most recent data available. Like the housing market, rent-producing real estate experienced a debt-fueled bubble in the early part of this decade that looks to end badly for investors who paid a bundle hoping to refinance later on. As Morford notes, banks have stopped lending to developers and would-be landlords and are refusing to refinance properties unless owners pony up the difference between their outstanding mortgage and a very conservative appraisal of what that property is worth today, the opposite of the once-popular "cash-out refinancing." Prices are "falling precipitously" in California, says Morford.
At a recent real estate conference in San Francisco Morford found that some banks are simply forgoing appraisals altogether unless the loan goes delinquent, a status that lenders can more easily control than the price their collateral would fetch on the market. Other banks are asking appraisers to value properties without leaving their desks. That's the kind of shady behavior that marked Washington Mutual and other subprime home lenders for an untimely death not too long ago.
Morford worries that investors won't know what the buildings are worth until the dam breaks and lenders are forced to dump their collateral on an anxious real estate market. When that happens, the news could be grim indeed. There will be a sudden and painful "marking to market."
Rents have yet to drop to reflect the glut of commercial space and vacancies are rising. Banks that are lending are giving themselves a huge cushion on their new loans. They're asking for a 35% down payment and assuming that vacancies could rise to 15%.
Regional banks could be the ones to suffer, since they have more of their loan portfolios in commercial property and construction than the big national banks do. Morford singles out WestAmerica Bank, a Bay Area lender, as one bank that might actually come out of the crisis better off thanks to solid lending practices. He also likes Wells Fargo and Bank of America.
Mortgage Delinquencies Hit Another Record in 3Q
Eileen Aj Connelly
AP Personal Finance Writer
November 17, 2009
The good news is that the pace at which people fell behind on their mortgages slowed during the summer for the third quarter in a row. The bad news is the overall delinquency rate hit another record.
For the three months ended Sept. 30, 6.25 percent of U.S. mortgage loans were 60 or more days past due, according to credit reporting agency TransUnion. That's up 58 percent, from 3.96 percent, a year ago.
Being two months behind is considered a first step toward foreclosure, because it's so hard to catch up with payments at that point.
The rate was up 7.6 percent from the second quarter. That's a much smaller jump than the 11.3 percent rise in the second quarter from the first, and the 14 percent leap seen in the quarter before that.
While the slowing growth rate is a positive sign, the increase shows there's still a lot of problematic mortgages out there, said F.J. Guarrera, vice president of TransUnion's financial services division. The company doesn't expect the figure to start declining until the middle of 2010.
Two things must get better before mortgage delinquency rates start reversing themselves, he said: home values and unemployment. "Until we see improvement in both of those areas, it's possible that it will take longer for delinquency to improve," Guarrera said.
The statistics, which are culled from TransUnion's database of 27 million consumer records, show that mortgage delinquencies remain highest in the four states where the crisis has hit the worst.
-- In Nevada, the rate reached 14.5 percent, up from 7.7 percent a year ago.
-- In Florida, the rate was 13.3 percent, up from 7.8 percent last year.
-- In Arizona, the rate hit 10.4 percent, up from 5.5 percent in 2008.
-- In California, the rate jumped to 10.2 percent, from 5.8 percent last year.
North Dakota remained the state where mortgage holders most often paid on time, with just 1.7 percent delinquency, up from 1.4 percent last year.
TransUnion expects delinquency to rise to just short of 7 percent for the fourth quarter, compared with 4.6 percent for the 2008 fourth quarter. The rate may reach 16 percent in Nevada. Those states with the highest delinquency and foreclosure rates will likely continue to see depressed housing prices.
The average mortgage debt per borrower nationwide edged up to $193,121 in the third quarter, from $192,287 last year. The District of Columbia had the highest average mortgage debt per borrower at $359,788. The lowest average mortgage debt per borrower was in West Virginia at $97,265.
FDIC's Bair: Bank Failures Will Peak In 2010
Michael S. Derby
DOW JONES NEWSWIRES
Nov. 10, 2009
NEW YORK (Dow Jones)--Federal Deposit Insurance Corp. Chairman Sheila Bair said Tuesday that more banks are set to fail.
"We do obviously have a lot more banks that will close this year and next," Bair said, adding the failures ???will peak next year and then subside."
Bair was responding to audience questions at an event held in New York by the Institute of International Bankers. Bank regulators have shuttered more than 100 banks this year as the financial crisis has exacted a heavy toll on the banking sector, a sharp rise from what's been seen over recent years.
The official also said she was disappointed about the state of bank credit right now, saying "none of the large institutions are doing a good job of lending right now." She added, "it used to be you take deposits and lent out money, and we???d like to see more of that."
But Bair recognized banks are under stress, and that they may need a "prod" from government officials to get them lending more.
In her formal remarks, Bair said she believes financial sector legislation under consideration by the U.S. Congress will be tweaked to eliminate government assistance for firms nearing failure and to prevent the U.S. from taking stakes in institutions.
Bair indicated her understanding that legislation proposed by Rep. Barney Frank (D., Mass.) regarding the treatment of firms deemed too big to fail will be strengthened "so that firms that fail are closed."
If You Thought the Housing Meltdown Was Bad
...wait until you see what's in the cards for commercial real estate.
Doug Hornig, Senior Editor, Casey Research
Nov 10, 2009
http://www.321gold.com/editorials/casey/casey111009.html
That's right, the next train wreck will be in commercial real estate. Couldn't be worse than last year's residential market crash? That remains to be seen. But it's coming soon, probably as early as the second quarter of next year, and there's nothing that can prevent it. The government will intervene, trying desperately to delay the day of reckoning, and may even succeed. For a while. But make no mistake about it, that train is going off the tracks no matter what.
Every part of the sector - from multifamily apartment buildings to retail shopping centers, suburban office buildings, industrial facilities, and hotels - has accumulated a huge amount of defaulted or nonperforming paper. It's an impossible, swaying structure that cannot long stand.
Just ask Andy Miller.
Andy is one of the most knowledgeable people around when it comes to commercial real estate. Co-founder of the Miller Fishman Group of Denver, he has spent twenty years buying and developing apartment communities, shopping centers, office buildings, and warehouses throughout the country. He's also worked extensively - especially lately - with asset managers and special servicers (those who handle commercial mortgage-backed securities, or CMBS) from insurance companies, conduits, and the biggest banks in the U.S., advising them on default scenarios, helping them develop realistic pricing structures, and making hold or sell recommendations.
It isn't easy. Commercial real estate sales are off a staggering 82% in 2009, compared with 2008, and last year was worse than '07. No one is selling at depressed prices, but it hardly matters as there are no buyers, either because they're afraid of the market or can't meet more stringent loan requirements. Two years ago, the value of all commercial real estate in the U.S. was about $6.5 trillion. Against that was laid $3-3.5 trillion in loans. The latter figure hasn't changed much. But the former has sunk like a bar of lead in the lake, so that now between half and two-thirds of those loans will have to be written down, Andy estimates.
"If the banks had to take that hit all at once, there wouldn't be any banks," he says.
And it's actually worse than that. As even average citizens became aware during the subprime meltdown, loans in recent years were bundled into exotic financial vehicles that could be sold and resold, a class generically known as conduits. These commercial mortgage-backed securities, while less well known than their cousins built upon home loans, are nonetheless ubiquitous.
Three guesses who were among the significant buyers of CMBS. If you said banks, banks, and more banks, you got it. Thus these folks are sitting not only on their own malperforming loans, but on a whole lot of everyone else's toxic junk, too.
This is how bad conduits are: A 3% default rate last year jumped to 6% in 2009 and is expected to double again, to 12%, in 2010. An entity that takes a 12% hit to its portfolio - and this includes countless banks, pension and annuity funds, international institutional investors, and others - is in deep, deep trouble.
The real tsunami is coming, probably in the second quarter of 2010, Andy estimates. Because that's when banks will have to start preparing for the wave of mortgages that were written near the market top and are maturing in 2011-12. Unlike home loans, commercial loans tend to be relatively short-term in nature (average 5-7 years), because - outside of apartment building loans backed by Fannie or Freddie - there are no government programs to subsidize longer-term ones. These guys mature in bunches.
According to a recent Deutsche Bank presentation, the delinquency rate on commercial loans as of the end of 2Q09 was greater than 4%. Of these, they expect that north of 70% will not qualify for refinancing. Imagine what will happen to the estimated $2 trillion in commercial mortgages that mature between now and 2013.
And even that is not the end of it. There's a second huge wave on the way in 2015-16.
Problem is, instead of trying to meet this inevitable challenge head on, asset managers have decided to believe in such phantoms as the tooth fairy, honesty at the Fed, and an economic turnaround powerful enough to bail them all out. De Nile is not just a river in Egypt.
To be fair, it's difficult to envision what an intelligent, aggressive response would look like, given the breadth and depth of the crisis, and the lack of resources available to deal with it. Miller recently met with a group of asset managers from a number of different, prominent banks. They reported that they're completely overwhelmed and can't even begin to cope with the sheer volume of problem loans on their calendar. It's so bad that they're now dealing with some borrowers who haven't paid a cent in a year and a half.
What do you do if, as Andy thinks is the case, 85-90% of the entire commercial real estate market is under water relative to its financing? What happens to a property when its value drops way below the loan, a seller can't get enough money to get out, a buyer can't raise enough money to get in, and the bank can't afford to foreclose? Simple. It just sits there, carried along on the bank's books at some inflated "mark to fantasy" price that makes the institution's balance sheet look passable. The industry even has a catchphrase for the situation: "A rolling loan gathers no moss."
In the case of a retail store, a bankrupt tenant walks away. Andy looked at just the part of Phoenix where his firm does business and found 90 vacant big box stores, with an aggregate floor space of 8 million square feet. If Christmas season is as lackluster as cash-strapped consumers are likely to make it, there will be many others to follow.
The hotel business is terrible. Overbuilding based upon travelers who went into debt to finance lavish vacations is taking its toll on tourist destinations. At the same time, business travel has seriously contracted. Flights into Las Vegas, which caters to both, have been slashed so much that even if every seat on every remaining flight were filled and visitors stayed for an average number of days, the hotels still couldn't break even. In industry parlance, banks are now engaged in "extend and pretend," i.e., giving hotels three- to six-month loan extensions in the hope that things will somehow improve in the near future.
Office space is doing okay in central business districts, but not faring well elsewhere. Some estimates tab the national office vacancy rate at over 16.5%, compared with 12.6% in January 2008. It exceeds 20% in parts of Atlanta and San Diego, and in many places in between.
Multifamily apartment buildings - and the very creaky Fannie and Freddie are carrying a load of them - may be the next to topple. As values deteriorate and landlords are faced with loans coming due, there is no incentive to fix whatever goes wrong. If, for example, you have a $10 million loan maturing in two years, and the property value has declined to $6 million, why would you spend half a million to fix leaky roofs? The question answers itself. Yet, as capital spending needs are not attended to, the apartments deteriorate. Which leads to working-class tenants replaced by meth labs. Which leads to even lower property values. And so on. In the end, when the banks are forced to take possession, they will be left with either expensive repair jobs, or the cost of demolition and a total write-off.
As the overall commercial real estate crisis escalates, the banks will do the same thing they did last year: run to the government, palms outstretched.
How will Washington respond? Good question. On the one hand, further bailouts will further infuriate the public. But on the other, the political sentiment will be that allowing the banks to fail will have even more dire consequences.
The Fed has already tried to let some of the relentlessly building pressure out of the balloon through TALF (Term Asset-Backed Securities Loan Facility). But that hasn't worked, because TALF only backs the most senior, creditworthy bonds in a CMBS pool. Those aren't the problem. The problem is the junior notes no one wants.
In order to increase market liquidity and get conduits moving again, the government will likely be forced to create a guarantee program similar to the FHA, Miller thinks, whereby short-term money (on the order of 5-7 years) is made available. Will that just push our problems five to seven years down the road? Quite possibly. But what is being purchased is time, the only thing left to buy. The hope, of course, is that it's enough time for the real estate market to stabilize, prices to return to more "normal" levels, and the world to turn all hunky dory.
Rock, meet hard place. Let all the troubled banks fail, and the consequences will range from some excruciating but short-term pain, to a plunge into full-bore depression. Prop them up with yet more newly printed fiat money, and anything from high to hyperinflation will inevitably result, along with the possibility of extending the problem well into the next decade.
Both are frightening prospects. We don't want either, but realistically, we're going to get one or the other. Let's be clear, it won't be the end of the world. However, it will be the end of the world as we know it. That makes it imperative to prepare for the new one that's coming.
The editors of The Casey Report, supported by real estate pro Andy Miller, have been warning of the coming commercial real estate debacle since September 2008. This one's rather easy to time - because they know when the loans will come due. And as subscribers can testify, accurately predicting big trends is the forte of Doug Casey and his expert team. To learn how you can profit from making the trend your friend, click here.
Distressed Homeowners May Be Able To Rent Their Homes
Mark Huffman
ConsumerAffairs.com
November 6, 2009
Fannie Mae launches new effort to prevent foreclosures
Fannie Mae has devised a creative way for some homeowners, desperately trying to stave off foreclosure, to remain in their homes, at least for a while. Under Fannie Mae's Deed for Lease Program, qualifying homeowners may transfer ownership back to the lender and then pay rent.
"The Deed for Lease Program provides an additional option for qualifying homeowners who are facing foreclosure and are not eligible for modifications," said Jay Ryan, Vice President of Fannie Mae. "This new program helps eliminate some of the uncertainty of foreclosure, keeps families and tenants in their homes during a transitional period, and helps to stabilize neighborhoods and communities."
The new program isn't for everyone. It's designed for borrowers who do not qualify for or have not been able to sustain other loan-workout solutions, such as a modification. Under Deed for Lease, borrowers transfer their property to the lender by completing a deed in lieu of foreclosure, and then lease back the house at a market rate.
To participate in the program, borrowers must live in the home as their primary residence and can't have any other liens on the property. Tenants of borrowers in this circumstance may also be eligible for leases under the program. Borrowers or tenants interested in a lease must be able to document that the new market rental rate is no more than 31 percent of their gross income.
Leases under the new program may be up to 12 months, with the possibility of term renewal or month-to-month extensions after that period. A Deed for Lease property that is subsequently sold includes an assignment of the lease to the buyer.
The new program may be a result of growing frustration over the slow pace of mortgage modifications. Consumers have complained bitterly that lenders appear either incompetent or indifferent, requiring the same documents to be faxed numerous times.
Fannie Mae officials made clear that the Deed for Lease Program is not part of the Obama Administration's loan modification program, but it serves a similar purpose. The objective is to keep homeowners in their homes, neighborhoods intact, and prevent escalating foreclosures.
The latest report on foreclosures by RealtyTrac, a foreclosure tracking firm, shows that government and industry efforts to reduce foreclosures have yet to produce much in the way of results. Foreclosures hit an all-time high in the third quarter, with 937,840 homes receiving either a default notice, auction notice or bank repossession.
http://www.consumeraffairs.com/news04/2009/11/fannie_lease.html
Goldman left foreign investors holding the subprime bag
Greg Gordon
McClatchy Newspapers
November 03, 2009
NEW YORK
Inside the thick Goldman Sachs investment circular were the details of a secret, $2 billion deal channeled through a Caribbean tax haven.
The Sept. 26, 2006, document offered sophisticated U.S. and European investors an opportunity to buy into a pool of supposedly high-grade bonds backed by residential, commercial and student loans. The transaction was registered through a shell company in the Cayman Islands.
Few of the potential investors knew it, but the ratings of many of the mortgage securities hid their true risks and, in some cases, Goldman's descriptions exaggerated their quality.
The Cayman offering -- one of perhaps dozens made through the British territory -- occurred as Goldman began to ditch the subprime mortgage business before the U.S. housing market collapsed under an avalanche of homeowner defaults.
In all, Goldman sold more than $57 billion in risky mortgage-backed securities during a 14-month period in 2006 and 2007, including nearly $39 billion issued from mortgages it purchased. Meanwhile, the firm peddled billions of dollars in complex deals, many of them tied to subprime mortgages, in the Caymans and other offshore locations.
Many of those securities later soured, but the sales allowed Goldman to become the only major U.S. investment bank to escape the brunt of the subprime meltdown.
One bond analyst who reviewed the 2006 Cayman deal dismissed it in a report to clients as "a not so cleverly disguised way for Goldman Sachs & Co. to unload its unwanted exposures to the subprime real estate market onto foreign investors."
Goldman spokesman Michael DuVally said that the firm "sold mortgage securities only to sophisticated investors" and disclosed "all the appropriate information available."
McClatchy also found at least two instances in which Goldman appeared to mislead investors. In one, the firm said that $65.3 million in securities were backed by safe "prime" mortgages when the same loans had been labeled a cut below prime in a U.S. offering. In the other, Goldman listed $10 million as "midprime" loans when the underlying mortgages had been made to subprime borrowers with shaky finances.
DuVally said that the descriptions were consistent with the standards set by Moody's, the bond-rating agency.
The secret Cayman Islands deals provide a window into one method that Goldman and other Wall Street firms used to draw European banks and other foreign financial institutions into investing hundreds of billions of dollars in securities tied to risky U.S. home loans.
Experts estimate that Wall Street investment banks sold 25 percent to 50 percent of these bonds and related securities overseas, resulting in massive losses in Europe and elsewhere when the market collapsed.
Last spring, the International Monetary Fund projected that global write-downs on "U.S.-originated assets" stemming from the subprime disaster could reach $2.7 trillion.
Underscoring the role of tax havens as a Wall Street marketing tool, a Treasury Department report found that as of June 30, 2008, $164 billion in U.S. mortgage-backed securities were held in the Cayman Islands and $22 billion more were held in Luxembourg, another tax-friendly zone.
Gary Kopff, a securitization expert who analyzed unpublished industry data, said that Goldman packaged or marketed offshore deals worth at least $83 billion from 2002 to 2008. These deals, called collateralized debt obligations, amounted to a $1.3 trillion global market, and Goldman reaped as much as $1.66 billion for assembling and selling them.
Some of Goldman's subprime mortgage securities wound up in the hands of financially struggling Eastern European governments such as those in Romania, Bulgaria, Slovakia and Slovenia, said a Wall Street expert involved in trading those types of securities who declined to be identified because of the matter's sensitivity. This person said that one Slovakian bank's multimillion-dollar investment wound up worthless.
DuVally said the company could find no record of marketing the bonds in those countries, but that the securities may have gotten there through the resale market.
Subprime-backed mortgage securities that were sold at the crest of the housing market in 2006 and 2007 have shown the most precipitous drop in value, with default rates on the underlying mortgages exceeding 30 percent. For many cash-strapped borrowers, it was easy to walk away from soaring monthly payments when their mortgage balances exceeded the lower value of their homes.
The 2006 Cayman deal was part of a flurry of Goldman activity in the hidden, unregulated parts of the securities industry. Goldman's traders also made huge bets that those securities would lose value by buying insurance-like contracts, called credit-default swaps, with private parties. Beginning early in 2007, they bought swaps on a London-based exchange.
Every Goldman bet on the exchange's subprime index, which was run by the London-based financial services company Markit, was on a basket of bonds that included a bundle of its own subprime-related securities.
Germany's Deutsche Bank, the trustee holding mortgages for scores of Goldman's bond offerings, also lists more than 50 private Goldman deals on its Web site. Of those, 42 were backed by risky mortgages.
In marketing exotic deals that typically include subprime mortgage-backed securities, Goldman and other Wall Street firms have long used the Caymans as a gateway to European investors, said an official of a German bank, who wasn't authorized to speak publicly and declined to be identified.
The 2006 Cayman deal was outside the reach of U.S. tax laws and free of U.S. regulation. Goldman circulated the deal under the names of Cayman-based Altius III Funding Ltd., and a sister firm registered in Delaware, both created for the sole purpose of facilitating the transaction.
The offering drew a scornful reaction from the bond analyst who warned investment clients to stay away. The analyst's report, a copy of which was obtained by McClatchy, described Goldman as "a single underwriter solely interested in pushing its dirty inventory onto unsuspecting and obviously gullible investors."
". ... In this case, it is a foregone conclusion that many relatively senior bondholders will suffer severe losses," said the analyst's report, which was made available on the condition of anonymity because the offering barred unauthorized disclosure.
McClatchy also learned of a second private Goldman deal, in which it sought in May 2007 via another Cayman company to sell $44.6 million in bonds related to subprime loans written by New Century Financial, a mortgage lender that weeks earlier had careened into bankruptcy after California regulators closed it.
For foreign banks, the lure was spelled "AAA." Under both public and private deals, experts said, 80 percent or more of the bonds carried top grades from financial rating companies, assuring investors that the securities were among the safest plays in the financial world.
The triple-A rating was "the clincher," said an official of another German bank, who also wasn't authorized to speak publicly and requested anonymity.
Few investors, however, knew that Goldman and other Wall Street dealers were paying the biggest U.S. financial ratings firms for grading the risky bonds.
Sylvain Raynes, a former analyst for Moody's Investors Service, the largest U.S. rating firm, likened the Wall Street firms' relationships with the rating agencies to hiring "a high-class escort service."
Typically, he said, an investment banker would meet with analysts for a ratings agency, describe a mortgage pool "and propose his dream result."
"The agency would call back after the meeting and intimate that they 'could get there' sight unseen," Raynes said. "Both parties understood what that meant, and the agency would be hired to rate the deal."
After bestowing untold numbers of triple-A ratings on subprime-backed bonds, Moody's and the second- and third-largest rating agencies, Standard & Poor's and Fitch, began to downgrade hundreds of pools of the securities in the summer of 2007, including the offshore deals known as collateralized debt obligations.
That set off a chain reaction that culminated in last year's Wall Street meltdown. Since then, both Moody's and S&P have downgraded slices of the Altius III deal several times.
U.S. pension funds that have lost money on subprime mortgage-backed bonds have filed suits accusing Goldman, Morgan Stanley and Merrill Lynch of failing to inform them of the bonds' true risks. (Merrill is now part of Bank of America.)
Many European institutions that lost money on the securities, however, have fewer legal options.
Few of them are pointing fingers at Goldman or other U.S. investment banks. McClatchy contacted several European banks about their subprime losses and got similar responses when the banks were asked where they'd bought them.
Germany's IKB Deutsche Industriebank, whose 2007 near-collapse from subprime losses awakened Europe to the impending financial crisis, has written off about $19 billion (in current U.S. dollars) related to U.S. mortgages. A spokeswoman for the bank declined to say which investment banks sold it bonds.
Several of Germany's seven regional "landesbanks," or land banks, also took a pounding. With $7.2 billion in aid from the state of Bavaria, Munich-based Bayern LB, Germany's sixth-largest bank, has reserved $8.95 billion for losses in its asset-backed securities portfolio, which includes subprime loans. A Bayern spokesman declined to say who sold the bank the risky bonds.
Spokespeople for the Royal Bank of Scotland, which bought a Dutch subprime subsidiary and has reported tens of billions of dollars in losses, and the French bank Societe General, which lost more than $6 billion, also declined to identify any U.S. investment banks as the source of their problems.
"Are we angry against the U.S. banks?" a German bank official said, requesting anonymity because of the matter's sensitivity. "We looked at the triple A's like the other banks, and we bought this, yeah. It doesn't help much to be angry."
(Tish Wells contributed to this article.)
(This article is part of an occasional series on the problems in mortgage finance.)
COMING TOMORROW
Goldman Sachs was among the last Wall Street giants to enter the lucrative world of subprime mortgages. However, it didn't take long before the elite investment house was cutting deals with highflying firms, such as California's New Century Financial, whose lax standards would prove disastrous. Perhaps no lender was more emblematic of the subprime mortgage industry's spectacular rise and fall.
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To see more stories from the McClatchy Washington Bureau, go to http://www.mcclatchydc.com/.
Copyright (c) 2009, McClatchy Newspapers
Distributed by McClatchy-Tribune Information Services.
http://www.americanchronicle.com/articles/yb/137282425
How Goldman Secretly Bet On The U.S. Housing Crash
Greg Gordon
McClatchy Newspapers
November 2, 2009
Goldman takes on new role: taking away people's homes
SAN JOSE, Calif. — When California wildfires ruined their jewelry business, Tony Becker and his wife fell months behind on their mortgage payments and experienced firsthand the perils of subprime mortgages.
The couple wound up in a desperate, six-year fight to keep their modest, 1,500-square-foot San Jose home, a struggle that pushed them into bankruptcy.
The lender with whom they sparred, however, wasn't the one that had written their loans. It was an obscure subsidiary of Wall Street colossus Goldman Sachs Group.
Goldman spent years buying hundreds of thousands of subprime mortgages, many of them from some of the more unsavory lenders in the business, and packaging them into high-yield bonds. Now that the bottom has fallen out of that market, Goldman finds itself in a different role: as the big banker that takes homes away from folks such as the Beckers.
The couple alleges that Goldman declined for three years to confirm their suspicions that it had bought their mortgages from a subprime lender, even after they wrote to Goldman's then-Chief Executive Henry Paulson — later U.S. Treasury secretary — in 2003.
Unable to identify a lender, the couple could neither capitalize on a mortgage hardship provision that would allow them to defer some payments, nor on a state law enabling them to offset their debt against separate, investment-related claims against Goldman.
In July, the Beckers won a David-and-Goliath struggle when Goldman subsidiary MTGLQ Investors dropped its bid to seize their house. By then, the college-educated couple had been reduced to shopping for canned goods at flea markets and selling used ceramic glass.
Theirs is an infrequent happy ending among the hundreds of cases in which subsidiaries of Goldman, better known for sending top officers such as Paulson to serve in top Washington posts, have sought to contain bondholder losses by foreclosing on properties and evicting delinquent borrowers.
Goldman spokesman Michael DuVally declined to comment on individual cases or on the firm's new role in bankruptcy courts.
Joining other Wall Street firms that bought millions of subprime mortgages, Goldman companies have gone to courts from California to Florida seeking approval to foreclose on the homes of middle- and lower-income Americans who couldn't keep up with their loans' soaring monthly payments.
Some borrowers were speculators or homebuyers who exaggerated their incomes on loan applications, thinking they'd always have an escape hatch because housing prices would keep rising. Others, however, were victims of fast-talking mortgage brokers who didn't explain that the loans' interest rates could rise to as high as 15 percent. Many borrowers who defaulted on their mortgages may never qualify for a home loan again.
In court encounters, Goldman and other Wall Street firms have faced the impact of their own wheeling and dealing. Many of the families being put on the street never would've gotten their big mortgages if investment banks hadn't provided a seemingly insatiable secondary market for millions of loans to marginally qualified buyers.
Subprime borrowers were supposed to provide a safe income stream for investors who bought mostly high-grade, triple-A-rated bonds from Goldman and bigger subprime players, such as now-defunct Lehman Brothers and Merrill Lynch.
Now, millions of these borrowers have defaulted on mortgage payments, contributing to a historic slump in home prices and depressing the bonds' value. Half the homes in some California neighborhoods have been subject to foreclosures or short sales, in which a home is sold for less than the mortgage balance, and either the seller or the lender takes a loss.
Earlier this year in Los Angeles, the Wall Street giant took possession of the home of Gladys Aguirre, a housecleaner who's married to a construction worker. Together, the couple listed monthly earnings of $7,480, including $3,480 from a job she'd held for two months.
Aguirre originally took a $444,000 subprime mortgage on Sept. 1, 2005, from Argent Mortgage Co., a subsidiary of big subprime lender Ameriquest Mortgage Co., which shut down in 2007. The adjustable interest rate sent her monthly payments zooming to $3,800 from $2,479, and Aguirre couldn't keep pace on that loan or a $119,000 second mortgage. She filed for bankruptcy protection.
Aguirre's Los Angeles lawyer, Eber Bayona, declined to discuss her case, but said that subprime loans amounted to "setting up the person for failure" because interest rate adjustments hit borrowers with "shock payments."
For example, he said, loan agents promised applicants that they could buy a $600,000 house for payments of $1,200 a month, and the buyers "never read the fine print ... (and) didn't know their interest would increase and that eventually they would lose their house and their money."
In San Fernando, Calif., Dina Alfero-Pacheo qualified for two mortgages totaling nearly $500,000, with monthly payments starting at $2,004. By 2007, the payments had grown to $3,761. In a bankruptcy filing early this year, Alfero-Pacheo said she was a bartender earning $3,800 a month. Goldman bought her first mortgage from Argent and recently got title to the house, which had sunk in value to $280,000 from more than $500,000.
In Orlando, Fla., Adela Mendez seems to be someone who would've known the risks when she took a $164,000 mortgage from Argent on her home in 2005 and a $75,000 second mortgage a year later. In a bankruptcy filing this year, she listed her occupation as a loan specialist for Washington Mutual, a leading subprime lender that collapsed last year.
Not only did Mendez fall 11 months behind on her mortgage payments, but her home's value also plummeted to $100,000. Goldman Sachs Mortgage, which bought the Argent loan, took the house — and at least a 50 percent loss.
Alfero-Pacheo and Mendez, whose cases are detailed in court records, couldn't be reached to comment.
The Beckers charged that in their case, Goldman engaged in years of obfuscation and resistance.
"In bankruptcy court, they tried to portray us as incompetent or deadbeats,' said Celia Fabos-Becker, blinking back tears as she sat with her husband in their living room, with boxes of mortgage-related documents surrounding them.
The couple thought they'd made a safe bet in 2000 when they opened a retail jewelry business in two San Diego County areas populated mainly by military personnel.
The wars in Afghanistan and Iraq, however, brought big military call-ups, sapping their market. After a wildfire ravaged much of the area in 2002, the Beckers refinanced their house to generate some $70,000 in cash to prop up their two stores. They wound up with an adjustable-rate, subprime loan from WMC Mortgage Corp., an arm of General Electric's GE Money unit, and a 10.75 percent second mortgage with the same lender.
A second wildfire in 2003 all but killed their business and left the couple reeling financially as interest-rate adjustments pushed the mortgage payments higher.
"We'd gotten to the point where I was cutting my own hair. I was cutting his on occasion," Fabos-Becker said.
"And trolling the Goodwills," Tony Becker said.
Tony Becker, an engineer, took short-term contract jobs amid the technology bust. Celia Fabos-Becker, meanwhile, found a provision in the mortgages that allowed the borrower to push payments to the end of the loan term in the event of a disaster such as the two fires.
When she wrote to Paulson, however, lawyers for Goldman denied that it owned the Beckers' mortgages. So did Germany's Deutsche Bank, a trustee that was holding thousands of subprime mortgages Goldman had converted to bonds.
To stall foreclosure, the Beckers wound up negotiating "forbearance agreements" with Ocwen Loan Servicing, a Florida company, that required the couple to pay several thousand dollars under the threat that their house would be auctioned off in a week or a month, Fabos-Becker said. Their monthly payments rose to nearly $3,300 from $2,650.
The couple already had taken Goldman and Morgan Stanley, another Wall Street firm, to arbitration over their $325,000 in stock market losses, accusing the investment banks of misleading investors about public offerings.
On the same day in June 2006, Goldman sued to end the arbitration, and Ocwen filed papers seeking to foreclose on the Beckers' home.
In desperation, the couple filed for bankruptcy protection. With no money to hire an attorney, they acted as their own lawyers.
As the months dragged on, Fabos-Becker finally found a filing with the Securities and Exchange Commission confirming that Goldman had bought the mortgages. Then, when a lawyer for MTGLQ showed up at a June 2007 court hearing on the stock battle, U.S. District Judge William Alsup of the Northern District of California demanded to know the firm's relationship to Goldman, telling the attorney that he hates "spin."
The lawyer acknowledged that MTGLQ was a Goldman affiliate.
That was an understatement. MTGLQ, a limited partnership, is a wholly owned subsidiary of Goldman that's housed at the company's headquarters at 85 Broad Street in New York, public records show.
In July, after U.S. Bankruptcy Judge Roger Efremsky of the Northern District of California threatened to impose "significant sanctions" if the firm failed to complete a promised settlement with the Beckers, Goldman dropped its claims for $626,000, far more than the couple's original $356,000 in mortgages and $70,000 in missed payments. The firm gave the Beckers a new, 30-year mortgage at 5 percent interest.
That lowered their monthly payment to $1,900, less than half the maximum $4,000 a month their subprime loans could've demanded.
Fabos-Becker, 60, said that the trauma has left her hair "a lot grayer." Much of the stress would have been alleviated, she said, if a law required lenders to identify themselves, especially to borrowers facing hardships.
"I take solace," Tony Becker said, "in knowing that I was up against the worst possible opponent — the biggest, strongest investment bank in the world."
(Tish Wells contributed to this article.)
http://www.mcclatchydc.com/100/story/77841.html
Commercial Mortgage Backers Face $1.6 Billion Loss (Update1)
Chris Bourke
Oct. 22, 2009
Bloomberg
Investors in the first U.K. commercial mortgage bonds to be liquidated since the financial crisis began may lose as much as 1 billion pounds ($1.6 billion) after values of properties backing the two deals collapsed.
Epic (Industrious) Plc issued bonds on 1,500 warehouses, which fetched 44 percent of their peak value in sales that completed this month. White Tower 2006-3 Plc packaged bonds against nine London office buildings owned by Simon Halabi, six of which went into administration this week.
Banks, insurers and pension funds that hold the bonds face losses from the 35 billion euros ($52 billion) in European commercial mortgage-backed securities that are set to expire over the next three years. Bank lenders have been willing to extend loans to help borrowers avoid default, while commercial mortgage bond issuers must repay investors by a set deadline.
“If they’re not nervous now, then they’ve been hiding under a rock,” said Hans Vrensen, interviewed in his role as head of European securitization research at Barclays Capital Inc, which he left last week.
Loans against hundreds of buildings were securitized throughout Europe, with more than 60 percent packaged near the market’s peak. They include Paris’s Coeur Defense, the largest office complex in Europe; London’s city hall; German apartment blocks; and British hospitals and care homes.
“There’s very little appetite among banks to recognize losses on their property loans, but CMBS doesn’t have that luxury,” said Jeffrey Rubinoff, a London-based real estate finance lawyer at Freshfields Bruckhaus Deringer LLP. “If maturity is looming, you’re up against a hard date.”
Banks, Funds, Insurers
Owners of European commercial mortgage bonds include Citigroup Inc., Merrill Lynch & Co Inc., DekaBank Deutsche Girozentrale, the fund manager for Germany’s savings banks, insurer Allianz SE, BlackRock Inc. and Banco Santander SA, according to Bloomberg data. Royal Bank of Scotland Group Plc, which manages the Epic bonds, owns 2.2 billion pounds of European CMBS, according to its half-year results.
By splitting the loans into layers of differing risk, the banks could sell them to investors and profit from the difference between the interest received from borrowers and its payout to CMBS investors. Other loans tied to the assets, but ranking beneath the bonds for repayment, were also sold.
Canada’s biggest pension fund manager, Caisse de Depot et Placement du Quebec, is likely to lose 285 million pounds as the holder of a loan subordinate to the White Tower bonds, two people familiar with the situation said in a Bloomberg story published Aug. 26.
Typical Deals
Epic and White Tower are similar to most CMBS issues, which packaged loans equal to about 80 percent of the properties’ value near the market’s peak in 2006 and 2007.
Property values have since slumped -- by almost half in the U.K., according to Investment Property Databank Ltd. -- shrinking the collateral needed for refinancing as loans expire or come near default.
British commercial property prices may not rise for at least five years, according to CB Richard Ellis Group Inc.’s derivatives unit. More than half of the 140 billion euros in European CMBS bonds outstanding are held against U.K. properties.
“The market’s very worried about the mountain of property loans to be refinanced post 2010,” said Michel Heller, head of strategy at CBRE-GFI. Property derivatives indicate an 8 percent fall in U.K. building values from 2010 to 2014, said Heller.
The losses won’t be shared equally. Senior bonds are the safest in a CMBS deal because they rank first for repayment. Holders of junior bonds and loans backed by the properties may lose all their money.
Varying Risk
Investors in Epic will lose about 60 percent of their money after the warehouses are sold, Standard & Poor’s said in an Aug. 11 report. Royal Bank of Scotland funded the purchase of the buildings in 2006 with a 585 million-pound loan, before securitizing most of the debt. The bonds defaulted last year.
The buildings were sold from July to October. Senior bondholders will get 51 percent to 70 percent of their 300 million pounds, Fitch said in an Aug. 6 report. Junior bondholders will lose all of their 173 million-pound investment, according to Fitch Ratings. Another 170 million pounds of loans tied to the deal rank beneath all bondholders for repayment.
Aoife Reynolds, a spokeswoman for RBS, declined to comment when contacted by Bloomberg. Nigel Woods, a spokesman for Epic (Industrious), also declined to comment.
“It’s just the tip of the iceberg,” said Vrensen, who was appointed this month as global head of research for DTZ Holdings Plc. “Most investors are expecting further defaults and further losses.”
Maturities Loom
About 6.5 billion euros of European commercial mortgage bonds are due to mature by the end of next year, according to Barclays Capital. That will rise to 16.5 billion euros in 2011 and 12.1 billion euros in 2012.
“The focus is increasingly shifting to loans maturing during 2010 to 2012,” Moody’s Investors Service Ltd. said in an August report. It will be difficult to refinance or repay most of those loans, the ratings company said.
The prospect of costly legal fees is deterring many investors from suing over their losses, according to Kevin Cooper, managing partner of Longbow Real Estate Capital LLP, a London-based CMBS investor.
“There’s a lot of noise about litigation, but who are you going to sue and what for?” said Cooper. “The structures don’t support the costs of litigation and it’s a brave call for an investor to fund their own costs.”
Tower Falls
White Tower packaged 1.15 billion pounds of bonds against nine London properties. The buildings, valued at 1.83 billion pounds at the time include offices leased by JPMorgan Chase & Co. at 125 London Wall and 60 Victoria Embankment. The bonds defaulted in June after the value of the offices fell by 50 percent. The properties would probably fetch about 900 million pounds on the market, Barclays Capital Inc. estimated in July.
Junior bondholders are likely to lose about 300 million pounds in a sale at that value, the bank said.
CB Richard Ellis Group Inc., the debt’s manager, has placed six of the buildings into administration. CBRE must liquidate White Tower within three years, said David Martin, a director of the broker’s real estate finance unit. The sale is likely to start next year, he said.
“The properties, or their holding companies, will eventually be sold,” Martin said in an interview. “Some interest is already being shown.”
New Phenomenon
Prior to Epic, the only European CMBS deal to be liquidated was HOTELoC, which in 2002 packaged mortgages of 28 U.K. hotels. The properties loss almost half their value by the time they were sold in 2007.
The securitization market shut down in the second half of 2007 as the credit crunch froze bank lending. The highest-rated CMBS bonds sold for as little as 70 pence on the pound this year, before recovering to around 85 pence as confidence grew that the worst of the slump had passed. Prices of BBB-rated bonds are at about 40 pence in the pound, the lowest ever.
Glastonbury Finance 2007-1 is a derivatives product that sold about 350 million pounds of notes secured against a pool of 19 CMBS transactions, according to its prospectus. Standard & Poor’s downgraded the most junior notes to junk status on Aug. 20, saying some creditors were unlikely to be repaid in full.
“Where an investor hasn’t been making realistic mark- downs, a crystallization of the position and an actual loss will come as a wake-up call,” said Paul Rivlin, joint chief executive of Palatium Investment Management Ltd, which manages Glastonbury.
http://www.bloomberg.com/apps/news?pid=20601206&sid=aoQezKhnSExQ
The Government and the Foreclosure Crisis
Michael Barone
The American Enterprise Blog
October 26, 2009
The latest figures for foreclosures for the third quarter of the year and for September are in on the RealtyTrac website.
Foreclosures were up 5 percent in the third quarter, and the figures indicate that the proportion of foreclosures resulting from recessionary stress is up and the proportion caused by the government’s inflating of the housing bubble and encouragement of subprime and Alt-A mortgages in fast-growing parts of the country is down.
Specifically, in the third quarter 54 percent of the foreclosures were in the four “sand states,” California, Nevada, Arizona, and Florida, and 4 percent in Michigan (which, with its 15 percent–plus unemployment rate, is a good proxy for recessionary distress). The corresponding figures for September are 48 percent and 5 percent.
The rates of foreclosure are still far higher in the sand states than elsewhere, however. In the third quarter the percentage of houses in foreclosure were highest in Nevada (4.3 percent), California (1.9 percent), Arizona (1.9 percent), and Florida (1.8 percent). The only other states above the national average of 0.7 percent were Utah (1.0 percent), Idaho (1.0 percent), Georgia (0.8 percent), Michigan (0.8 percent), and Colorado (0.8 percent). Note that all of these except Michigan have been high-growth states, thus vulnerable to the same government-induced boom-and-bust experience so visible in the sand states.
Here’s an interactive blog post from the Associated Press that shows you where the foreclosures have been concentrated between January 2004 and September 2009. It highlights the states where the foreclosure rate hit 0.4 percent a month, a troublingly high percentage. (The percentages in the preceding paragraph are for a three-month period and so not commensurate.) No state hit that troubled percentage until March 2007, when Nevada did. In August 2007 California was in the trouble zone, then snapped out of it only to reappear in December 2007, after which it has remained in that territory. In April 2008 Florida and Arizona appeared in the troubled zone and have stayed there ever since. A few other states have popped into the troubled zone more recently, Virginia for one month in May 2009, Utah for one month in July 2009, Michigan for one month in August 2009, and Idaho in August and September 2009.
In the absence of those government policies that encouraged and subsidized subpar mortgage lending, there would be many, many fewer foreclosures nationally. And of course in the absence of those policies, the banks and other financial institutions would not have filled their portfolios with mortgage-backed securities and other financial assets that turned out to be worth far, far less than the ratings agencies and others projected. And what were those government policies? A good place to start would be the work of my American Enterprise Institute colleague Peter Wallison, who has been warning us about these policies for years.
http://blog.american.com/?p=6521
Where Are All the Foreclosure Lawyers?
Tim Padgett
Time Magazine Online
Oct. 24, 2009
A foreclosure sign stands in front of a home in Miami Beach, Florida.
Home foreclosure isn't a legal abstraction for Yolanda Paschal, a recent graduate of the University of Miami School of Law. Her parents are facing foreclosure on the Miami house she grew up in. They're luckier than others, since they have another home to fall back on, but the experience has convinced Paschal how acute the crisis is in Florida, which now has the nation's highest mortgage foreclosure rate, at 17%. "I'm part of this community," says Pascal, 25. "I can't escape how deeply this is affecting not just my neighbors, but me as well."
Paschal plans to practice business litigation next fall once she joins the firm that hired her. In the meantime, she will put her legal education to use for South Floridians like her family thanks to a $10,000 "foreclosure defense fellowship" she received from the UM law school. The innovative new grant program has sent out eight recent grads this month to help local residents navigate one of the law's most labyrinthine arenas. (See pictures of Cleveland's struggle with the housing crisis.)
But as much as Paschal and her UM colleagues can help a little, they only represent a drop in the bucket: with foreclosures continuing to rise, the shortage of lawyers available to represent homeowners trying to save their most precious asset has reached emergency proportions. (See a video of Joel Stein exploring the foreclosures of Las Vegas.)
Unlike similar legal fields such as bankruptcy, foreclosure is rarely a full-time practice and is often handled by real estate attorneys or legal aid services agencies. Still, more than 3 million property foreclosures were filed in the U.S. last year; South Florida is expected to see more than 150,000 this year compared to fewer than 25,000 three years ago. And while mortgage modifications had been on the upswing in recent months, the Boston-based National Consumer Law Center reported this week that many large banks and other mortgage servicers have decided it's cheaper to foreclose than to offer more affordable loan terms. Making matters even worse, as many as 86% of foreclosure victims in hard-hit areas didn't have legal counsel last year, according to the Brennan Center for Justice at the NYU School of Law, which released a report earlier this month.
If those numbers don't draw more attorneys into foreclosure law, at least as a short-term specialty until the crisis subsides, homeowner advocates hope it will at least motivate more of them to shift more of their pro bono work in that direction. In hard hit counties like Miami-Dade, bar associations are responding by holding foreclosure defense clinics for local lawyers. Otherwise, the fear is that far more people than necessary stand to lose homes, possibly slowing economic recovery and clogging a civil court system already ravaged by states' budget cuts. (See a video of people facing foreclosure in Tampa.)
That specter of judicial paralysis helped spur UM law professor Michael Froomkin to create the foreclosure defense program. It places fledgling attorneys like Paschal with legal aid service organizations to help tackle the backlog of cases — more than 50,000 foreclosure filings so far this year in Miami-Dade County alone. Many homeowners don't know what legal defenses are available to them as they battle lenders to keep their properties — or at least make foreclosure less painful, and costly. "Potentially, one of the most significant [defenses] is that the lender, because so many home loans were securitized during the housing boom, often doesn't even know who owns the mortgage anymore," says Froomkin. That, he adds, could throw into question the lender's right to bring the foreclosure case in the first place.
Carolina Lombardi, senior attorney at Legal Services of Greater Miami Inc., which is mentoring some of the UM fellows, says foreclosure defendants also need attorneys to help them fend off all too frequent lender practices such as exorbitant escrow claims. "Homeowners who have lawyers are usually prevailing in those cases," says Lombardi. But she notes that unless homeowners fall below the federal poverty line ($22,000 for a family of four), they can't qualify for the free legal aid that agencies like hers provide. That creates an obstacle for most foreclosure defendants, who aren't impoverished but, due to job loss and other circumstances that brought them to the brink of losing their home, often can't afford a lawyer.
Another impediment is foreclosure law itself, a bureaucratically convoluted field worthy of a Dickens novel. "It's a labor-intensive area of practice," says Paschal. "It involves a ton of paperwork." Yet another is the relatively low pay attorneys usually reap from defending foreclosure clients. Melanca Clark, counsel at the Brennan Center and co-author of this month's study, urges Congress and state legislatures to create incentives, like more funding for foreclosure legal representation, that "level the playing field" against lenders and their comparatively well paid lawyers. Restrictions on government funding for legal services should be relaxed, she says, especially rules that don't let victorious foreclosure defendants collect attorney fees, as prevailing parties in most other kinds of civil litigation do. "We need structural reforms as badly as we need more [foreclosure defense] lawyers," says Clark.
A growing number of court jurisdictions are attempting to reduce the need for lawyers, as well as the glut of cases, by mandating mediation between lenders and homeowners. Courts that cover Miami-Dade now require such arbitration, as they do in cities like Philadelphia. But the efforts to modify mortgage terms or find other ways to avoid full-blown foreclosure don't always work, and many cases still end up in court. State bar associations like Florida's are also promoting pro-bono foreclosure work. The effort is helped, says Lombardi, by a new awareness among many lawyers who once deemed foreclosure victims foolish, lazy or unethical borrowers, but who now realize "this is often about decent, hardworking people who fell prey" to loans whose conditions weren't always clear.
Still law schools like Miami's may be one of the best untapped sources. Other programs, like the Yale Law School's ROOF Project, also send students into local communities to aid foreclosure cases; but UM's is one of the first to create a paid fellowship. It also makes sense, says Paschal, since so many law firms today are trimming costs by delaying the start date for new hires by a year or more. That gives law grads time to pursue this kind of work — whose complexity, Paschal adds, is ideal for cutting young legal teeth. Says Froomkin, "It's a great opportunity to give recent graduates some invaluable experience and help your neighbors through this enormous spike in foreclosures," if not help end it sooner.
http://www.time.com/time/nation/article/0,8599,1932075,00.html?imw=Y
The Latest Bubble Warning: Swedish House Prices
Edward Harrison
October 25, 2009
There is mounting evidence that bubbles are forming again everywhere across the globe as easy money makes itself felt in asset prices. The latest evidence comes from Sweden where Europe’s lowest home loan rates have pushed up the price of residential property.
At issue is the extremely loose monetary policy in Sweden that is an outgrowth of both recession in Sweden and a massive exposure by Swedish banks to the Baltics which are presently in depression. Sweden’s central bank, the Riksbank, has cut interest rates to near zero and is charging banks interest to keep reserves on deposit. Meanwhile, the bank has also embarked on a policy of quantitative easing in order to get credit flowing again.
In my July post, “Sweden: negative interest rates and quantitative easing,” when Sweden went negative on interest rates, I wrote:
Pretty aggressive plan, if you ask me. Will it work, though?
Well, first of all, most every major central bank in the world, certainly the biggest: the Americans, the Eurozone, the British, the Swiss, and the Japanese, have rates near zero and are printing money. The world is awash in money and the incentive to borrow is huge. So, is the Swedish announcement qualitatively different? On some level, it is not. Nevertheless, it is the most aggressive policy and the fact that they are charging negative interest rates for deposits is unprecedented. This does make events in Sweden something to watch.
So, if you have been watching, what you have seen is a financial sector which is still critically weak – so much so that the federal government has been having secret meetings with the banks to get together a game plan in a worst-case scenario in Latvia, the worst of the lot in the Baltics.
But, even so, while the real economy is in recession, one has to conclude that the aggressively expansionary policy by Sweden’s central bank is reflating asset prices in a major way. Experts are now sounding the alarm as house prices hit new highs.
Below is a translation of yesterday’s Dagens Nyheter article reporting on the warning.
Experts warn: Sweden risks housing bubble
Europe’s cheapest home loans, tax cuts and a continued housing shortage. These are some of the reasons house prices are rising to new record highs in Sweden – right in the middle of a raging recession. Now a growing number of experts warn of a new housing bubble.
Swedish mortgage customers are sitting pretty. The Riksbank’s key interest rate of 0.25 percent is unique in Europe. By comparison, the corresponding rate is 1.25 percent in Norway and Denmark, 1.0 percent in the euro area and 0.5 percent in Britain.
Variable interest rates in Sweden are currently about 1.6 percent. As DN Economics related a couple of weeks ago, short-term rates are 2-3 percentage points higher in countries such as Denmark, Germany and Britain.
Swedish low-cost mortgages are the main cause of the housing rally. House prices fell sharply after investment bank Lehman Brothers’ bankruptcy caused the financial crisis in September last year. But since the start of the year, they have risen again. Prices of flats are now 5 percent higher than a year ago. And house prices have gone up 2 percent.
Reduced income tax and the abolished property tax have also contributed to the housing rally. Likewise concerning the shortage of housing.
In 2008, there was construction of 21 500 apartments in Sweden, which was considered low. This year, new construction is expected to decline by one third, according to Swedish Construction Federation.
Six months ago many experts warned that rising unemployment could lead to falling prices in the housing market. Now they are warning of a housing bubble instead. Nordea Chief Economist Annika Winsth has repeatedly warned of inflated prices, and SEB’s CEO Annika Falkengren said recently that she felt that both house prices and the stock market have risen too fast in the past year.
In its monetary policy report last Thursday, the Riksbank wrote, "there is evidence that house prices at present are slightly above the level that is sustainable". It also speaks to the dangers of "over-optimistic expectations about interest rates" and "more expansive lending".
Despite the warnings the banks’ barometers tell of housing prices that will continue to rise in Sweden for many months to come.
I see this ending in a very bad way.
Read more: http://www.creditwritedowns.com/2009/10/the-latest-bubble-warning-sweden-house-prices.html#ixzz0V8j5tuIG
Huge Commercial Real Estate Lender May File Bankruptcy, Heightens Meltdown Fears
Daily Finance
Oct 25, 2009
Analysts have been warning for months that commercial real estate would be the next financial tsunami. Vacancy rates have hurt landlord receipts. Tenants are able to force lower rents in negotiations due to the rising vacancies. Some tenants are filing bankruptcy or walking away from leases completely.
Commercial real estate losses have already started to show up in the financial statements of the largest banks. Some of the 106 banks closed this year under the supervision of the FDIC had tremendous losses on their commercial real estate portfolios.
In the midst of rapidly falling commercial real estate values, one of the country's largest real estate lenders, Capmark, will probably file for bankruptcy in the next few days according to The Wall Street Journal. The paper writes: "In 2006, a group led by KKR & Co., Goldman Sachs Capital Partners and Five Mile Capital Partners acquired the lender GMAC LLC's commercial-real estate business and renamed it Capmark."
The news of Capmark's demise could heighten fears that commercial real estate losses among banks will cause another significant wave of writedowns at major financial firms that have already had to take one round of government aid. GE (GE) and Bank of America (BAC) posted large commercial real estate losses in their third-quarter earnings.
Mounting commercial real estate losses also mean that the FDIC's ability to cover deposits at failing banks will be stretched more than it already is. The agency recently suggested that it may bring in $45 billion by implementing an advance collection of fees that banks would pay to the FDIC between now and 2012.
http://www.dailyfinance.com/2009/10/25/huge-commercial-real-estate-lender-may-file-bankruptcy-heighten/
>nlightn, tough times ahead forever. Believe me, the resets ahead of us will be extremely damaging, the Bush tax cuts will expire at the beginning of 2011, the crazy Obama plans will tax us to death and the trump card, Peak Oil, will hit in 2012 or 2013.
Eventually the value of the dollar will be less than half of what it is now.
The life that we once knew and loved will come to an end, imo.
sumi
sumisu,...i hope it is not in the cards but by the look of it we've got a treacherous '10 coming to a neighborhood near all of us.
and another snapshot of the same graph,...
New wave of commercial foreclosures looms
STAFF PHOTOS / E. SKYLAR LITHERLAND Buy photo
Orion Bank foreclosed on the Pan American Professional Center in North Port in January.
By Michael Braga
Published: Sunday, October 25, 2009 at 1:00 a.m.
Last Modified: Saturday, October 24, 2009 at 9:53 p.m.
http://www.heraldtribune.com/article/20091025/ARTICLE/910251027/2107/BUSINESS&tc=email_newsletter#
Land at 5150 N. Tamiami Trail near the Sarasota-Bradenton International Airport was to be developed -- until the developer defaulted on the loan.
Banks have foreclosed on more than 400,000 square feet of office space, more than 400 hotel rooms, more than 1,250 condominum units, more than 100,000 square feet of warehouse space and more than 150 acres of raw commercial land in Sarasota and Manatee counties since November.
This is prime commercial real estate that about 80 investors bought and developed during the real estate boom with loans totaling nearly $300 million.
With those investors unable to make interest payments, the properties will soon be taken over by banks -- a prospect that few in the financial community look forward to.
Just as the housing market starts to recover and the national economy tentatively emerges from the deepest recession since the 1930s, banks across the country are bracing for another wave of foreclosures.
Nationwide, $1 trillion in commercial real estate loans comes due next year. Many borrowers are unlikely to be able to refinance, causing defaults that could lead to more bank failures and could even knock the economy back into recession.
The only hope of averting a wave of defaults: a resurgence of investor buyers. Most observers think those buyers are waiting for fire-sale prices before they jump in.
Paul Kasriel, Northern Trust's chief economist, predicts the new wave of foreclosures means the growth the U.S. economy saw in the third quarter will not be matched again until the last quarter of 2010.
"This tsunami will not be as big as the first one," said Kasriel, meaning the wave of residential foreclosures. "But it will wash over the financial system and cause a lot of damage."
Office and hotel defaults
The big office complex that Peter Shipps erected on Tamiami Trail in North Port is a symbol of overbuilding during the boom.
Thinking that Southwest Florida would benefit from a sustained population increase, bankers willingly lent money without developers having to pre-lease the space.
Shipps, a successful Venice builder and developer, approached Naples-based Orion bank with a plan to build five Class A office buildings. Orion lent him more than $10 million for the first phase.
But just as Shipps' first two buildings came out of the ground, the real estate market entered its prolonged slide. He was unable to lease enough space to make interest payments and defaulted on $7.3 million in January.
"They are great buildings in a great location," said Chad Maxwell, a North Port commercial real estate agent. "They just created too much space on the market."
The worldwide recession only made things worse, said Stan Rutstein, a commercial agent with Re/Max in Bradenton.
"Every doctor's office, every attorney's office, every imaging center and every dentist's office cut back," Rutstein said. "People have left the market, tourism is down and businesses have cut back staff. It's pretty bloody."
A large of amount of office space built is sitting empty. Vacancy rates hover around 14 percent in downtown Sarasota, 20 percent in Lakewood Ranch and 30 percent in Venice and Bradenton, according to Manatee and Sarasota counties' economic development organizations.
The fortunes of local hotel developers also plummeted.
In 2005 and 2006, there was a mini-boom in hotel acquisitions and developments. A group led by Harvey Birdman paid $10 million for the 178-room Holiday Inn on Tamiami Trail near the Sarasota-Bradenton International Airport in April 2005. Reliance Realty Partners out of Stamford, Conn., invested more than $30 million in a vacation rental and marina project on Holmes Beach. Bernard LeBlanc's family bought the 160-room Holiday Inn on the U.S. 41 bypass in Venice for $10 million in August 2006.
All three have since defaulted, on more than $50 million in loans.
Another beat-up segment is office condominiums.
During the boom, these 1,000- to 2,000-square-foot spaces sold as fast as they came to market at ever-increasing prices. Condos that started selling for $55 per square foot soared as high as $155, said Carl Wise, a commercial real estate agent who founded Sarasota's Preferred Commercial.
But their owners are now defaulting in large numbers.
"They're in a terrible place now," Wise said. "They are losing their shirts and will continue to do so."
Banks swamped
Banks that lent money to commercial developers and investors are suffering along with their customers.
"I talked to one banker back in June and he said he had a stack of foreclosures two feet thick in his office," said Jeff Button, a commercial agent with the Sarasota's Kleiber Group. "And that's just one bank."
Analysts expect Florida community banks to be hit especially hard because they tended to make a lot of commercial property loans. Southwest Florida already has seen five banks go under -- Bradenton's Flagship National Bank, First Priority Bank and Freedom Bank and First State Bank of Sarasota and Community National Bank of Venice. They may not be the last.
In the meantime, the problems will be felt in the broader economy.
Banks have the capital to make loans. It just makes no sense to chase after commercial real estate when values are dropping, said Bill Sedgeman, chairman of Community National Bank of Manatee.
"What's coming to us now are people who are underwater on their mortgages," Sedgeman said. "They owe more than the properties are worth."
The only way banks can refinance them is if customers are willing to bring cash to the closing table.
Their properties are now sometimes worth only a third of the value they had when the loans were made, so they will have to repay some of what they borrowed. But few borrowers can come up with the cash. So banks will have to foreclose and sell off the properties.
With more and more properties coming onto the market through foreclosures, commercial property values will continue to drop.
Until buyers start taking more properties off the market than are coming on, banks will not lend, Sedgeman said.
"We need to have buyers and we don't have buyers," Sedgeman said. "The reason we don't have buyers is that our economy is so construction-oriented. Until construction gets started again, we won't have jobs and without jobs there will be no tenants for commercial space."
Awaiting private investors
With banks out of the picture, cash-rich private investors and private equity funds will rule the day.
But those investors are unlikely to buy until prices fall to 10 to 20 cents on the dollar, said Rutstein, the Bradenton agent. That is when the powerful private equity money from the Related Companies, Steve Roth of Vornado Realty Trust and Granado Real Estate will get involved.
"Buyers are not going to adjust prices," Rutstein said. "There's no reason. There's more supply than demand and every week supply gets bigger. The most used word in commercial real estate these days is 'carry.' 'What will it cost me to carry this property and for how long?' These are unknown questions.
"The price has to be right and we really haven't come to terms with the right price at the moment."
Generational wealth
The only good to come of all this turmoil: "People who have money will be able to create generational wealth," said Chad Maxwell, a North Port commercial real estate agent. "They will be able to buy properties for far less than the cost of construction."
In Southwest Florida, the residential market will gradually strengthen, allowing home builders to begin construction again. As the economy improves elsewhere, retirees will show up in greater numbers. Those builders and their subcontractors will expand staff. Offices and warehouses will start to fill. The growing population and rising employment will boost consumption.
Once all that happens, commercial real estate lease rates will stop falling, analysts said.
But how long will it take?
"In the old days, you could make a reasonable guess," said Ian Black, a Sarasota-based commercial real estate broker. "Even now, investors are willing to come back in the market. But there is still a tremendous gap between what people are willing to pay and what banks will let properties go for."
"Slow" Banks May Point To Commercial Real-Estate Crisis
Daniel Carty
CBS News.com
October 7, 2009
U.S. banks "are slow" to absorb losses on commercial real-estate loans, according to a Federal Reserve analyst. That's stoking fears that banks will face a crisis similar to the one fueled by the collapse of the residential housing market.
According to a Wall Street Journal report ($) Wednesday, a Fed real-estate expert told banking regulators last month that "banks will be slow to recognize the severity of the loss - just as they were in residential."
Commercial property values are down along with rental payments, pummeling lenders. But instead of taking hits on bad loans immediately, many banks are "extending loans when they come due even if they wouldn't make those loans now," the Journal states.
"There's been an extend-and-pretend philosophy by banks to forestall hits to their balance sheets that might occur," Patrick Phillips, new chief executive of the Urban Land Institute, told the Journal.
A Journal analysis also finds that banks heavily exposed to commercial real estate are keeping less cash on hand to cover bad loans – setting aside just 38 cents in reserves for every $1 in loans during the second quarter. That's down from $1.58 in extra capital for every dollar in bad loans at the beginning of 2007.
According to the Fed presentation, commercial real-estate losses are expected to hit 45 percent next year.
http://www.cbsnews.com/blogs/2009/10/07/business/econwatch/entry5368683.shtml
Foreclosure Activity Remains Near Record Level In August
RealtyTrac Staff
October 9, 2009
U.S. Foreclosure Activity Decreases Less Than 1 Percent From Record High in July Activity Up 18 Percent From August 2008 Despite Year-Over-Year Drop in REOs
IRVINE, Calif. — September 10, 2009 — RealtyTrac® (www.realtytrac.com), the leading online marketplace for foreclosure properties, today released its August 2009 U.S. Foreclosure Market Report™, which shows foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 358,471 U.S. properties during the month, a decrease of less than 1 percent from the previous month but still an increase of nearly 18 percent from August 2008. The report also shows one in every 357 U.S. housing units received a foreclosure filing in August.
“The August report demonstrates that there is still an ample supply of properties filling the foreclosure pipeline even while the outflow of bank-owned REO properties onto the resale market is being more carefully regulated,” said James J. Saccacio, chief executive officer of RealtyTrac. “After hitting a high for the year in July, REOs dropped 13 percent in August, but we also saw a record high number of properties either entering default or being scheduled for a public foreclosure auction for the first time.”
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Nevada, Florida, California post top state foreclosure rates
With one in every 62 housing units receiving a foreclosure filing in August, Nevada continued to document the nation’s highest state foreclosure rate despite an 8 percent decrease in foreclosure activity from the previous month. A total of 17,902 Nevada properties received a foreclosure filing during the month, still an increase of 53 percent from August 2008.
Florida documented the nation’s second highest state foreclosure rate, with one in every 140 housing units receiving a foreclosure filing, and California documented the nation’s third highest state foreclosure rate, with one in every 144 housing units receiving a foreclosure filing.
A 10 percent month-to-month decrease in foreclosure activity helped lower Arizona’s foreclosure rate from the nation’s third highest in July to fourth highest in August. One in every 150 Arizona housing units received a foreclosure filing in August — still more than twice the national average.
Other states with foreclosure rates ranking among the nation’s 10 highest were Michigan, Idaho, Utah, Colorado, Georgia and Illinois.
Six states account for more than 60 percent of national total
Six states accounted for 62 percent of the nation’s total foreclosure activity in August despite decreasing REOs in all six states. California REOs dropped 32 percent from the previous month, but the state continued to post the highest overall total of any state, with 92,326 properties receiving a foreclosure filing in August. California’s total was down 15 percent from the previous month and was also down 9 percent from August 2009 — the first year-over-year decrease in California foreclosure activity in RealtyTrac’s monthly reports.
A total of 62,401 Florida properties received foreclosure filings in August, the nation’s second highest state total and an increase of more than 10 percent from the previous month despite a 5 percent decrease in REO filings. Initial default notices in Florida increased 12 percent from the previous month, and scheduled auctions increased 13 percent from the previous month.
A new law in Michigan requiring lenders to file a separate public notice of default before scheduling a foreclosure auction boosted overall foreclosure activity numbers in the state for August. A total of 9,789 of the new default notices were reported in August, bringing the total number of Michigan properties receiving foreclosure filings to 19,359 for the month — a 134 percent spike from the previous month and third highest among the states. Michigan’s foreclosure rate leapfrogged from 19th highest in July to fifth highest in August.
With 17,902 properties receiving foreclosure filings in August, Nevada posted the nation’s fourth highest total despite a 24 percent decrease in REO filings from the previous month, and with 17,807 properties receiving foreclosure filings in August, Arizona posted the nation’s fifth highest total despite an 11 percent decrease in REO filings from the previous month.
Illinois REO filings decreased 15 percent from the previous month, but the state’s total of 13,078 properties receiving foreclosure filings was still sixth highest among all the states in August.
Other states with totals among the 10 highest in the country were Georgia (11,947), Ohio (11,368), Texas (11,261) and New Jersey (8,316).
Three states dominate top 10 metro foreclosure rates
Foreclosure filings were reported on 14,940 Las Vegas properties in August, one in every 53 housing units — more than 6.7 times the national average and the highest foreclosure rate among metro areas with a population of at least 200,000. The city’s foreclosure activity was down 11 percent from the previous month but still up 48 percent from August 2008.
With one in every 86 housing units receiving a foreclosure filing in August, the Reno-Sparks metro area joined Las Vegas in the top 10, posting the seventh highest metro foreclosure rate.
Six California metro areas documented foreclosure rates among the top 10 in August. Stockton posted the nation’s second highest metro foreclosure rate — one in every 74 housing units received a foreclosure filing — followed by Merced at No. 3 (one in 78), Riverside-San Bernardino-Ontario at No. 4 (one in 80), Vallejo-Fairfield at No. 5 (one in 82), Modesto at No. 6 (one in 84), and Bakersfield at No. 10 (one in 94).
Two Florida metro areas documented foreclosure rates among the top 10: Orlando-Kissimmee at No. 8 with one in every 87 housing units receiving a foreclosure filing, and Cape Coral-Fort Myers at No. 9 with one in every 88 housing units receiving a foreclosure filing.
Report methodology
The RealtyTrac U.S. Foreclosure Market Report provides a count of the total number of properties with at least one foreclosure filing reported during the month — broken out by type of filing at the state and national level. Data is also available at the individual county level. Data is collected from more than 2,200 counties RealtyTrac’s report incorporates documents filed in all three phases of foreclosure:
• Default — Notice of Default (NOD) and Lis Pendens (LIS)
• Auction — Notice of Trustee Sale and Notice of Foreclosure Sale (NTS and NFS)
• Real Estate Owned, or REO properties (that have been foreclosed on and repurchased by a bank).
If more than one foreclosure document is filed against a property during the month, only the most recent filing is counted in the report. The report also checks if the same type of document was filed against a property in a previous month. If so, and if that previous filing occurred within the estimated foreclosure timeframe for the state the property is in, the report does not count the property in the current month.
U.S. Foreclosure Market Data by State
August 2009 Table
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http://www.realtytrac.com/contentmanagement/pressrelease.aspx?channelid=9&accnt=0&itemid=7381
The Housing Market is about to Become Even More Oversupplied
John Burns Real Estate Consulting, Inc.
October 2009
While both the media and stock investors believe that housing has bottomed, they are unaware of the massive supply of homes that are already in the foreclosure process that will certainly drive home prices down even further when they are sold. We have been projecting a "W" shaped recovery for some time, and we are becoming even more convinced that we are right. The shape of the second leg down is almost completely dependent on the level of government intervention that will take place.
For a number of reasons, banks have not been aggressively taking title to homes and selling them, which has resulted in very few distressed sales in comparison to the actual level of distress in the market. This delay in REO sales, along with historically low mortgage rates and an $8,000 tax credit, has helped to stabilize the housing market - temporarily.
It is very clear that price stabilization is temporary unless something is done. Here are some facts to help project what housing will be like in 2010:
• 13.54% of the 44.7 million mortgages tracked by the Mortgage Bankers Association are delinquent.
• 7.57 million homeowners are delinquent, applying the same percentage to the 11.2 million mortgages not tracked by the MBA (55.9 million total mortgages in the U.S.). That means that 10% of all homeowners in the country are delinquent.
• Based on historical trend analysis by Amherst Securities, 6.94 million homes that are already delinquent will be liquidated, which is more than a one year supply of distressed sales poised to hit the market sometime in 2010 and 2011. During Q1 2005, that figure was only 1.27 million.
• Defaults continue to grow at the rate of approximately 300,000 per month, assuring that the number of distressed sales will grow and will continue through 2012.
2009 Government Intervention
Government intervention to date has been extremely helpful in preventing an even more dramatic decline in home prices. As shown in the chart at right, housing demand has only fallen to "normal" levels and stabilized there. Without historically low mortgage rates, support for Freddie Mac, Fannie Mae and FHA, and an $8,000 tax credit, how far would sales have fallen this year and what would that decline in demand have done to pricing?
Conclusion
Demand needs to continue to be stimulated to bring down supply, particularly while the country continues to lose jobs. Without continued government intervention, home prices will plummet, banks and the GSEs will continue to lose money, and the economy has virtually no chance of increasing overall employment in 2010.
Economic Growth............................................................................D
Economic growth deteriorated this month as the economy remains very weak. Annual job losses continued, marking one of the worst losses in 60 years. The headline unemployment rate increased to 9.8%, after reaching 9.7% last month. Mass layoff events - defined as a cut of 50 or more jobs from a single employer - also increased this month, and are up nearly 43% year-over-year. Currently, it takes job seekers twice the normal length of time to find employment. The CPI (all items) decreased at a slower rate in August, recording a decline of 1.5%, while the Core CPI (minus food and energy) showed an increase of 1.4%. The final second-quarter GDP growth rate is at -0.7%, which is a significant improvement from the -6.4% decline in the first quarter.
Leading Indicators...........................................................................C-
Many leading indicators continue to improve, and suggest that the worst of the recession is behind us. The Leading Economic Index 6-month growth rate rose in August to its highest level since early 2004. The ECRI Leading Index - an indicator of future U.S. growth - has increased almost 21% since the beginning of the year - the largest growth rate since 1971. Stocks continued to rise through September and the four major indices now range from -10% to +2% year-over-year. The S&P Homebuilding Index rose in August, increasing 14% from the previous month, but remains down 5% year-over-year and down 72% from its peak in July 2005. The Net Employment Outlook turned negative for only the second time in the 20-year history of the index (the first was last quarter), as more employers that were surveyed foresaw staff levels decreasing than increasing. The average hours worked per week by Americans declined slightly in September, reaching its lowest levels on record, partly due to furloughs forced upon both government and private sector employees. The price of crude oil declined to a monthly average of $69.46 per barrel in September, representing a 2% month-over-month decline.
Affordability......................................................................................C-
Affordability improved this month as both mortgage rates and the median resale price fell compared to last month. Currently, our housing-cost-to-income ratio has fallen to 26.7%, which is near the lowest level since we began calculating the index in 1981. Due to the correction in home prices and low mortgage rates, owning a home is now essentially the same cost as renting, making it favorable for first-time home buyers to purchase a home. Household income has fallen 6% year-over-year to $52,856 as a result of job losses and furloughs. Despite the decline, the median-home-price-to-income ratio has fallen to 3.3, which is now equal to the historical average. The 30-year fixed mortgage rate fell again in September, reaching 5.04% by month-end, while adjustable mortgage rates reached 4.52% at September month-end. The Fed's overnight lending target rate remains at a range of 0.00% to 0.25%, which is the lowest level on record. The share of ARM applications increased to 5.6% in the last week of August, according to the Mortgage Bankers Association. However, the share of ARM applications remains extremely low when compared to peak levels above 35% of total applications in early 2005.
Consumer Behavior..........................................................................D-
Consumer behavior was mixed this month. Consumer confidence declined after increasing last month, falling to 53 - far below the historical average of 97. Consumer sentiment increased in September to 73.5, reaching its highest level since January 2008. The Consumer Comfort Index also increased in August to -46.4. The personal savings rate has fallen in the last two months after spiking at 6.9% in May. The U.S. net worth increased nearly two trillion dollars in the second quarter compared to the first quarter. This represents the first increase in net worth in almost two years, and is largely due to recent large gains experienced in the stock market. Despite the recent improvement, the second quarter year-over-year decline is the third worst on record in the 50-year history of this data point, losing $7.4 trillion of wealth in the past year. Both unemployment and inflation increased this month, resulting in a rising Misery Index (the sum of the two rates).
Existing Home Market.......................................................................D+
The existing home market remains weak yet seems to be stabilizing. Seasonally adjusted annual resale activity in August declined almost 3% from last month to 5.1 million homes, an improvement of 3% compared to one year ago, according to the National Association of Realtors (NAR). The rolling 12-month count of resale sales activity has increased for the second month in a row. The national median resale price fell to $177,500, and has declined 12% year-over-year. Weak consumer confidence and increased foreclosure sales continue to put downward pressure on resale prices. The Case-Shiller index, which tracks paired sales, fell 15% in the second quarter of 2009 compared to the second quarter of 2008. In August, the number of unsold homes declined sharply to 8.5 months of supply yet remains elevated compared to history. Pending home sales volume increased this month, and represents a 12% year-over-year gain. As of the second quarter, 32% of all homes with a mortgage were worth less than the original value of the mortgage.
New Home Market...............................................................................D
A few components of the new home market improved this month. Builder confidence increased in September to a Housing Market Index rating of 19 - the third consecutive month of an increasing index. The inventory of unsold homes continued to improve and has fallen to 7.3 months of supply. Seasonally adjusted new home sales are down 3% year-over-year and are down 69% from a peak of nearly 1.4 million annual sales in July 2005. The rolling 12-month count of new home sales was flat compared to last month - the first time since 2005 it hasn't declined from the previous month. The median single-family new home price dropped sharply to $195,200 in August from July's $215,600 median - representing an 11.7% year-over-year decline.
Housing Supply....................................................................................F
Seasonally adjusted total permits increased to 579,000 as a result of a large jump in multifamily permits, while single-family permits declined slightly. Seasonally adjusted total new home starts decreased in August to 479,000, due to a 3% drop in single-family starts, and are down 22% from one year ago.
U.S. HOUSING MARKET STATISTICS TABLE
Data Current Through October 6, 2009
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http://www.realestateconsulting.com/Newsletters.aspx?quicklaunch=true&newsletter=US/us200910
Anti-Foreclosure Programs Are Not Enough: Watchdog
Kevin Drawbaugh
October 9, 2009
WASHINGTON
Reuters
Government programs to fight the U.S. home foreclosure crisis look increasingly inadequate and should be reworked, expanded and supplemented with new ideas, a congressional watchdog said in a report on Friday.
With a foreclosure filing occurring every 13 seconds, the United States is mired in a housing slump that is destroying billions of dollars in property values and threatening to choke off the economy's recovery from a stubborn recession.
The foreclosure crisis has moved beyond subprime mortgages into the prime mortgage market, said the Congressional Oversight Panel for the Troubled Asset Relief Program, the $700 billion bailout launched under the Bush administration.
"Rising unemployment, generally flat or even falling home prices, and impending mortgage rate resets threaten to cast millions more out of their homes," according to the report, which focused on the Treasury Department's efforts to curb foreclosures.
"The panel urges Treasury to reconsider the scope, scalability and permanence of the programs designed to minimize the economic impact of foreclosures, and consider whether new programs or program enhancements could be adopted," it said.
The report was sharply critical of the larger of the government's two big programs designed to fight foreclosures.
It increasingly appears that the Home Affordable Modification Program, known as HAMP, which reduces monthly mortgage payments to help borrowers who are facing foreclosure keep their homes, is not equipped to deal with the changing nature of the housing crisis, the report said.
The government's other effort to stem foreclosures, the Home Affordable Refinance Program, or HARP, helps homeowners who are current on their mortgages but owe more than their homes are worth, get more affordable loans.
As of September 1, the watchdog report said, HAMP had helped arrange 1,711 permanent mortgage modifications, with an additional 362,348 borrowers in a three-month trial stage. HARP has closed 95,729 mortgage refinancings, it said.
The five-member watchdog panel -- sharply divided between Democrats and Republicans -- is headed by Elizabeth Warren, a Harvard Law School professor and outspoken TARP critic.
It issues monthly reports on a range of issues related to the program and the crisis it was meant to address. The October report was accompanied by a dissenting statement from panel member Representative Jeb Hensarling, a Republican from Texas.
"A fair reading of the panel's majority report and my dissent leads to one conclusion -- HAMP and the administration's other foreclosure mitigation efforts to date have been a failure," Hensarling said in the statement.
While Hensarling reached a similar conclusion to the panel's report, he differed on the recommended action. Rather than calling for expansion of the government programs, he urged more basic changes by the Obama administration to its economic policy.
DOUBTS ABOUT MEETING GOALS
Treasury hopes to prevent as many as 4 million foreclosures through HAMP, "but there is reason to doubt whether the program will be able to achieve this goal," the report said.
The problem is that HAMP is limited to certain types of mortgages and isn't prepared for a coming wave of foreclosures stemming from payment option adjustable rate mortgages (ARMs) and interest-only loan resets exceeding eligibility limits.
"HAMP was not designed to address foreclosures caused by unemployment, which now appears to be a central cause of nonpayment," the report said.
"It increasingly appears that HAMP is targeted at the housing crisis as it existed six months ago, rather than as it exists right now," it said.
HAMP's ramp-up has been outpaced by foreclosures. So even if the program hits its November 1 target of 500,000 trial modifications, "this may not be large enough to slow down the foreclosure crisis," the report said.
Finally, the panel said it was unclear if HAMP modifications provide long-term help to homeowners whose payments may rise later. "The result for many homeowners could be that foreclosure is delayed, not avoided," it said.
The report came a day after Treasury Secretary Timothy Geithner said more than half a million troubled homeowners are participating in the anti-foreclosure programs and that they were ahead of schedule.
(Editing by Leslie Adler)
http://finance.yahoo.com/news/Antiforeclosure-programs-are-rb-2222173672.html?x=0
Federal Reserve Buys More Than 100% of Mortgages Issued in 2009
by cmartenson
Monday, September 28, 2009, 11:13 am
What follows is a snippet from the most recent Martenson Report (Housing and Wealth: Part II).
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This is important information. What I've found and present below is that the Federal Reserve is not just supporting the housing market, it is the housing market.
Just as important as a person's desire to buy a home is their ability to gain access to mortgage funding.
The mortgage market is a gigantic beast with many moving parts, but it is pretty easy to understand from a high level.
The process works like this: A homeowner secures a mortgage from a bank or mortgage company. Then the mortgage is sold off to another company, with the cash generated by that sale now available to lend to other potential homeowners. Ultimately the mortgage may pass through several sets of hands but ultimately it lands with a terminal holder.
In that chain, the mortgage might get sold off several times, or perhaps sliced and diced by Wall Street wizards, but all that matters is that some company (with cash) is there at the end to buy the mortgage to keep the whole chain moving along.
Lately, the "terminal buyers" in that chain have increasingly ended up being the federal government (through the GSEs) and the Federal Reserve.
And not just by a little bit, but by a lot.
Here are the numbers:
So far in 2009 (through August), a total of 3.2 million existing homes were sold for an average price of $217,000, while 263,000 new homes were sold for an average price of $264,000.
Taken together, and assuming that we live in a world where 10% is the average down payment, we get this table:
That is, a total of ~$686 billion in new mortgages were issued in 2009 (through August).
Now let's look at how many Mortgage Backed Securities (MBS) and agency debt obligations were accumulated by the Federal Reserve on its balance sheet over the same period of 2009:
<a href=http://www.clevelandfed.org/research/data/credit_easing/index.cfm(Source)</a
It turns out that in 2009 (again, through August), the Federal Reserve has bought $624 billion of MBS and a further $98 billion of Agency debt, for a total of $722 billion in money injection into the housing market through Fannie Mae, Freddie Mac, and the FHLB.
In other words, the Federal Reserve alone bought $722 billion of mortgages and agency debt when only $686 billion in new mortgages were issued. So, through August, the Fed bought more than 100% of the entire supply of new (purchase) mortgages in 2009.
That's not a free housing market; that's a market bought, owned, and sustained by the Federal Reserve's willingness to print up three quarters of a trillion dollars out of thin air.
While the individual mortgages issued in 2009 may or may not be the exact same ones purchased by the Federal Reserve, that's immaterial. All the mortgage issuers care about is that when they issue a mortgage, a purchaser with money exists somewhere down the line. The chain needs a terminal buyer, and that buyer has become the Federal Reserve.
The impact of these purchases by the Federal Reserve is to both provide liquidity and to drive down the rate of interest for new mortgages. By lowering both the long end of the Treasury curve (which the Fed does by actively buying Treasuries) and providing more than sufficient demand for MBS and agency paper, long-term interest rates come down.
Without the Fed's activities, it is a rock-solid certainty that mortgage interest rates would be higher than they are, and possibly a LOT higher.
What all this means is that when (not if) the Federal Reserve begins to try and unwind itself from all of the magnificent interventions of the past year, it must contend with the fact that it is the housing market.
Where the Fed is hoping that it can gently release the soft chubby fingers of the housing market, which will then toddle off under its own power, it will discover that it is actually carrying a helpless newborn.
http://www.chrismartenson.com/blog/federal-reserve-buys-more-100-mortgages-issued-2009/28343
Mortgage demand falls despite lower rates
Lynn Adler
September 30, 2009, 9:05 am EDT
Reuters
U.S. mortgage applications fell last week despite the lowest loan rates in four months, the Mortgage Bankers Association said on Wednesday, in another sign that housing will likely recover slowly from its three-year plunge.
Home loan applications fell a seasonally adjusted 2.8 percent in the September 25 week, driven down by a 6.2 percent drop in demand for purchase loans and a 0.8 percent decline in refinancing requests.
Borrowing costs inched closer to record lows, with average 30-year rates dipping 0.03 percentage point to 4.94 percent.
The 30-year rates were the lowest since the week ended May 22, at 4.81 percent, after hitting an all-time low of 4.61 percent in March, according to the industry group. A year ago, before intensive government interventions, 30-year rates averaged 6.33 percent.
For a related chart of mortgage rates, right click on the code: and select "Related Graph."
Signs of life have emerged in both home sales and prices, helped by government stimulus programs including an $8,000 first-time home buyer tax credit.
The outlook for housing is split, however. Some in the industry predict another sales slide if the tax credit is not renewed and others say there will be a gradual recovery slowed by the usual winter sales malaise.
"We're going to see another leg down, and if we lose the tax credit it will be a significant leg down," said John Burns, president of John Burns Real Estate Consulting in Irvine, California.
The main concern is "shadow inventory," or the stockpiles of homes held by banks or those about to go into foreclosure but yet to be put on the market, he said.
"The one really positive surprise recently has been falling mortgage rates," and rates at 5 percent or less next year "could definitely help engineer a soft landing," said Burns.
Another concern is that the first-time buyer credit siphoned demand from next year's spring sales season, with buyers rushing purchases before the tax incentive disappears.
Existing-home sales in August fell for the first time in four months, but were at the second-highest pace in almost two years. Sales of new houses were below forecasts but up in August for the fifth straight month.
PRICES YET TO BOTTOM
Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh, does not expect another leg down in home sales but is not convinced that prices have hit bottom because of the large inventory of unsold homes.
Home prices rose in July for the third straight month, surpassing forecasts and bolstering the case for housing stability, based on the Standard & Poor's/Case-Shiller indexes reported on Tuesday.
"I'd rather be a home buyer than a seller right now because I still think the odds are in your favor of getting a good deal," and the freefall in prices is over, Hoffman said.
But caution is advised with the pending demise of the tax credit, rising unemployment and the possibility of more foreclosures, S&P said.
Home prices on average have toppled by more than 32 percent from their peaks in the second quarter of 2006.
"I would definitely characterize it as a slow recovery in housing out of a very deep hole," said Hoffman. "We've gone from the sub-basement to the basement, and maybe
http://finance.yahoo.com/news/Mortgage-demand-falls-despite-rb-2759660444.html?x=0&sec=topStories&pos=4&asset=&ccode=
House Price Fall Slows To Lowest Level In A Year
Elizabeth Judge
Times Online
September 28, 2009
The annual drop in house prices in England and Wales has slowed to its lowest level in a year.
The annual rate at which prices dropped in September eased to 5.6 per cent from 6.7 per cent in August, Hometrack, the property data company said, the slowest annual pace of decline since August 2008.
On a monthly basis, prices grew by 0.2 per cent, in the second consecutive monthly rise.
The data is the latest evidence of a pick-up in Britain's battered housing market.
Last month, Nationwide's monthly index revealed that property prices rose in August for their fourth consecutive month and are increasing at their fastest rate for two-and-a-half years.
The building society said that low interest rates had helped to make properties more affordable for first time buyers while the Government's injection of cash into the economy through its quantitative easing programme was also fuelling a mini-boom in the market.
Interest rates have been held at a historic low 0.5 per cent by the Bank of England since March.
Hometrack said a lack of housing for sale was bolstering prices while confidence had been boosted by talk of a general improvement in property.
However, Richard Donnell, Hometrack’s director of research, warned that the market remained fragile. "A fundamental imbalance still exists between supply and demand and question marks remain as to how long this situation can last and how resilient the market will be to changes in both levels of demand and sentiment."
As prices rise and sellers become more demanding, he said, the recent pick-up in activity could slow over the autumn.
The market could also receive a fresh hit, he said, from the potential impact of cuts to Government spending and any budgetary changes which could in turn affect households post tax disposable income.
The survey, which was based upon 6,237 responses from agents and surveyors across the country, revealed that the average time on the market for properties slowed from 8.7 weeks in August to 8.6 weeks while the proportion of asking prices achieved hit 92.4 per cent from 92.1 per cent a month ago.
It found though that price rises in the past two months had been concentrated in London and the South East.
Last month a survey from the National Housing Federation forecast that house prices could rise by 20 per cent from 2012 to 2014.
http://business.timesonline.co.uk/tol/business/industry_sectors/construction_and_property/article6851593.ece
Wall Street's Near-Meltdown Gave Rise to New Lies About the Economy, All Designed to Blame Anyone But Those Responsible
Nomi Prins
Wiley Press
September 29, 2009
To hear it from the big financial companies, the big crash started when poor people bought homes they couldn't afford. But that was at most 1% of the problem.
Editor's note: The following is an excerpt from Nomi Prins' new book, "It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street."
The Second Great Bank Depression has spawned so many lies, it's hard to keep track of which is the biggest. Possibly the most irksome class of lies, usually spouted by Wall Street hacks and conservative pundits, is that we're all victims to a bunch of poor people who bought McMansions, or at least homes they had no business living in. If that was really what this crisis was all about, we could have solved it much more cheaply in a couple of days in late 2008, by simply providing borrowers with additional capital to reduce their loan principals. It would have cost about 3 percent of what the entire bailout wound up costing, with comparatively similar risk.
Just as great oaks from little acorns grow, so, too, can a Second Great Bank Depression from a tiny loan grow. But so you know, it wasn't the tiny loan's fault. It was everyone and everything that piled on top. That's how a small loan in Stockton, California, can be linked to a worldwide economic collapse all the way to Iceland, through a plethora of shady financial techniques and overzealous sales pitches.
Here are some numbers for you. There were approximately $1.4 trillion worth of subprime loans outstanding in the United States by the end of 2007. By May 2009, there were foreclosure filings against approximately 5.1 million properties. If it was only the subprime market's fault, 1.4 trillion would have covered the entire problem, right?
Yet the Federal Reserve, the Treasury, and the FDIC forked out more than $13 trillion to fix the "housing correction," as Hank Paulson steadfastly referred to the Second Great Bank Depression as late as November 20, 2008, while he was treasury secretary. With that money, the government could have bought up every residential mortgage in the country — there were about $11.9 trillion worth at the end of December 2008 — and still have had a trillion left over to buy homes for every single American who couldn't afford them, and pay their health care to boot.
But there was much more to it than that: Wall Street was engaged in a very dangerous practice called leverage. Leverage is when you borrow a lot of money in order to place a big bet. It makes the payoff that much bigger. You may not be able to cover the bet if you're wrong — you may even have to put down a bit of collateral in order to place that bet — but that doesn't matter when you're sure you're going to win. It is a high-risk, high-reward way to make money, as long as you're not wrong. Or as long as you make the rules. Or as long as the government has your back.
The Second Great Bank Depression wouldn't have been as tragic without a thirty-to-one leverage ratio for investment banks, and, according to the
New York Times
, a ratio that ranged from eleven to one to fifteen-to-one for the major commercial banks. Actually, it's unclear what kind of leverage the commercial banks really had, because so many of their products were off-book, or not evaluated according to what the market would pay for them. Banks would have taken a hit on their mortgage and consumer credit portfolios, but the systemic credit crisis and the bailout bonanza would have been avoided. Leverage included, we're looking at a possible $140 trillion problem. That's right — $140 trillion! Imagine if the financial firms all over the globe actually exposed their piece of that leverage.
But for $1.4 trillion in subprime loans to become $140 trillion in potential losses, you need two steps in between. The most significant is a healthy dose of leverage, but leverage would not have had a platform without the help of a wondrous financial feat called securitization. Financial firms run economic models that select and package loans into new securities according to criteria such as geographic diversity, the size of the loans, and the length of the mortgages. A bunch of loans are then repackaged into an asset-backed security (ABS). This new security is backed, or collateralized, by a small number of original home loans related to the size of the security. Some securities, for example, might be 10 percent real loans and 90 percent bonds backed by those loans. Some might be 5 percent real loans. Whatever the proportion, the money the mortgage holders pay to lenders on their loans is used to make payments on new assets or securities. Those securities, in turn, pay out to their investors.
During the lead-up to the Second Great Bank Depression, the securities themselves were a much bigger problem than the loans. Between 2002 and 2007, banks in the United States created nearly 80 percent of the approximately $14 trillion worth of total global ABSs, collateralized debt obligations (CDOs), and other alphabetic concoctions or "structured" assets. Structured assets were created at triple what the rate had been from 1998 to 2002. Bankers from the rest of the world created, or "issued," the other 20 percent, around $3 trillion worth. Everyone was paid handsomely. In total, issuers raked in a combined $300 billion in fees. Fees can be made for all types of securitized assets, but the more convoluted they are, the riskier and more lucrative they become. Fees ranged from .1 percent to 0.5 percent on standard ABS deals and up to 0.3 percent for mortgage-backed securities (MBSs) and whole business securitization (WBS) deals. Fees were better for CDOs—between 1.5 and 1.75 percent for each deal, and higher for the riskier slices. All told, the $2 trillion CDO market alone netted Wall Street around $30 billion before CDO values headed south. Because U.S. investment banks were making huge profits from packaging churning loans and leveraging them, mortgage-and asset-backed security volume skyrocketed.
Investment banks, hedge funds, and other financial firms could use the $14 trillion of new securities as collateral against which to borrow money and incur more debt (leverage them). There is no way of knowing exactly how much was leveraged, because the players operated in an opaque system — that is, a system without proper regulatory oversight or enforcement to detect or curtail leverage. But a conservative estimate of the average amount of leverage is about ten to one, considering the roughly eleven-to-one leverage of the major commercial banks and the thirty-to-one leverage of investment banks. So, we're talking about a system that ultimately took on $140 trillion in debt on the back of $1.4 trillion of subprime loans. How insane is that? And, it happened so fast.
In 2005, the mortgage on some little home in Stockton provided the capital for two or three ill-advised loans that soon disappeared into an ABS. But it was the global banks, the insurance companies, and the pension funds — particularly in Europe — that purchased the related ABSs. Like their U.S. counterparts, European financiers bought boatloads of ABSs with borrowed money. 13 They also shoved them off-book into structured investment vehicles (SIVs) that required no capital charge and little reporting.
By the fall of 2008 those ABSs, CDOs, and all their permutations would be known as "toxic assets." They were considered by many to be the major cause of Big Finance's failures and losses. The push for TARP centered on ridding banks of these poisonous creatures. But make no mistake: toxic assets are not the same as defaulted subprime mortgage loans; loans are merely one of the ingredients that make up the assets. All the subprime loans in existence could have defaulted and the homes attached to them could have been devalued to zero (which didn't happen), but without the feat of securitization, the banks wouldn't have become nearly insolvent. Toxic assets became devoid of value, not because all the subprime loans stuffed inside them tanked, but because there was no longer demand from investors. If no one wants your Aunt Mary's antique gold-plated, diamond-encrusted starfish, for all intents and purposes, it has no monetary value at the moment. This basic supply-and-demand concept is something our government apparently didn't understand when it offered to take the toxic assets off the banks' books. And the Fed, as we'll see, doesn't seem to care that it took on trillions of dollars' worth of these assets.
Lazy Lending Legislation
The greedy predatory lending that fueled the Second Great Bank Depression could have been avoided. Back in 1994, there was actually enough popular pressure to introduce legislation that would have ushered in controls on lending and other banking activities. As is par for the course, a handful of consumer-oriented congresspeople and watchdog groups initially faced an uphill battle against a band of well-funded, well-placed politicians such as Florida's Bill McCollum, Texas's Phil Gramm, and Iowa's James Leach and Charles Grassley, who were carrying Wall Street's torch toward deregulation.
But a burgeoning predatory lending crisis reached a very public head in 1994 amid allegations that Fleet Finance Group had gouged hundreds of low-income and minority consumers. Busloads of irate anti-loan-shark-T-shirt-sporting citizens rallied through the halls of Congress to chronicle lending abuses.
In response, just before Newt Gingrich assumed power as Speaker of the House under Democrat president Bill Clinton, the House battled for the Home Ownership and Equity Protection Act of 1994 (HOEPA) to cap the most outrageous predatory loans. 37 It was the last piece of legislation that attempted to regulate appalling lending practices. Perhaps if lending had been better regulated, subprime loans wouldn't have been the fodder for the Second Great Bank Depression. Maybe something else would have been. But that wasn't the case.
HOEPA contained several provisions that curbed "reverse redlining," in which nonbank lenders target low-income and minority borrowers. But it didn't reinstate full interest rate caps, which had been deregulated during the previous two decades, or limit fees or tighten requirements to determine the ability of borrowers to repay their loans. As you can imagine, the industry and certain Republicans bitterly opposed the original House bill.
"Why can't the lenders police themselves?" Senator Richard C. Shelby (R-AL) asked. Sure, and while we're at it, why not let power companies determine what's pollution and what isn't? Why not let agribusiness make the rules about what farms can do? Why not put lions in charge of your gazelle sanctuary or hire a fox to guard the henhouse? Shelby, as you may reca ll, later sprouted an activist streak in 2009 and took the Treasury Department to task for lying to Congress about TARP.
Even with the best intentions, HOEPA's passage had dire consequences. First, it left a huge gap between the first and second tier of rates and fees a lender could charge. If lenders didn't want to hit the new caps, they had plenty of fertile ground to play on by extending loans with rates and fees just beneath the HOEPA triggers. Because lenders would make less money from each loan, due to the reduced rates and fees, they'd have to find more borrowers to make the same profits. Voil à , the quiet birth of predatory subprime lending.
During those early and middle years of the Gingrich revolution, there was no talk of regulation. The market zoomed, and even though a spate of corporate fraud was percolating, it didn't look broke, so no one in Congress fixed it.
As the late 1990s stock market boom headed into the new millennium, there were renewed legislative attempts to rein in the lending industry. Notably, in April 2000, the dynamic duo of Representative John LaFalce (D-NY) and Senator Paul Sarbanes (D-MD) introduced the Predatory Lending Consumer Protection Act of 2000 (PLCPA) to strengthen the Truth-in-Lending Act.
PLCPA would have brought down the HOEPA triggers and cut origination fees so that profit from home mortgages had to come from payments, ensuring that everyone in the chain had an interest in homeowners' ability to repay loans. Sarbanes and Senate staffer Jonathan Miller worked feverishly to line up cosponsors.
The industry attacked the bill and won, with help from McCollum and Connie Mack III (R-FL). What did pass, however, was Phil Gramm's Commodity Futures Modernization Act of 2000 (CFMA). That act ushered in tremendous growth of unregulated commodity trades through its "Enron Loophole," which allowed companies to trade energy and other commodity futures on unregulated exchanges.
It also sparked growth in the unregulated credit derivative trades that bet on defaults of corporations or loans, which became the main ingredient in the hot new Wall Street financial gumbo. Credit derivatives were a type of insurance contract written against not just one corporation or loan but on investments that scarfed up bunches of subprime loans and stuffed them into the unregulated CDOs that imploded and hastened the greater lending crisis. The problem was that they weren't regulated (even half-heartedly) like insurance policies were.
Meanwhile, the quixotic Sarbanes and LaFalce soldiered on, trying to avert lending disaster through appropriate regulation. They reintroduced their bill as the Predatory Lending Consumer Protection Act of 2001, but the mortgage industry and its mouthpieces were relentless. In July 2001, Stephen W. Prough, chairman of Ameriquest Mortgage Company, said at the Senate's Banking Committee hearings, "'Predatory' is really a high-profile word with no definition." In August 2001, Senate Banking Committee chairman Gramm concurred, "Some people look at subprime lending and see evil," he said. "I look at subprime lending and I see the American dream in action." The 2001 version of PLCPA also died.
Down and nearly out, Sarbanes and LaFalce tried to pass their act again in May 2002. It failed again and then again, for the final time, on November 21, 2003. Bush's ownership society ideology was in full swing by then, and the country was at war. Any hope for regulation or transparency in the lending or banking sector was basically dead.
The culmination of years of minor and significant acts of deregulation coalesced with mortgage industry sycophants beating back solid attempts at regulation or transparency. Loans that lenders pushed on homeowners were the perfect fodder for Wall Street, which eagerly packaged the loans and profited. House prices, in turn, skyrocketed.
How Lenders Created a Risk-Free Business
Meanwhile, lending practices had gotten really wild. Alan Greenspan had chopped rates dramatically to bolster the economy following the stock market plunge in 2001 and 2002. Lower rates meant that it was cheaper for banks to borrow more money from the Fed and from one another. It also meant that lenders had more funds to play with. Because prime loan rates fell in tandem, these loans weren't funneling as much profit to lenders. To make up for it, lenders extended riskier (nonprime) loans at higher rates to more borrowers.
With cheaper money, lenders were able to fund more mortgages for those riskier borrowers. If some loans didn't go well, it wouldn't matter. Lenders bet that they could either sell the underlying homes for higher prices, which would more than cover the defaulted loans, or convince the borrowers to take out equity loans backed by the homes' presumably rising value.
That increased the risk of default and, more so, the potential loss to the lender: the same house could now back two loans instead of one, so if its value fell and the borrower couldn't pay up, both loans were screwed. Super-low teaser interest rates lasted for two or three years and begged to be refinanced (for which lenders got extra fees) before they zoomed up. This added more risk to the system: loans couldn't be refinanced, and borrowers couldn't make the high rate payments. But as long as home prices kept rising as they had since at least the early 1960s, systemic loan defaults weren't a huge concern.
While rates remained fairly low, there was always more cash for lenders to dole out. Lenders pushed an ongoing cycle of refinancing and new home purchases, both of which could be classified as new mortgages on their books, which was good for stock prices. Between 2002 and 2005, the stock price of the once-largest independent mortgage lender, Countrywide Financial, had tripled — well before Bank of America agreed on January 11, 2008, to buy its remains. The firm created $434 billion in new loans in 2003, a 75 percent increase over 2002, securing a post in Forbes America's top twenty-five fastest-growing big companies for 2003. The number-three home lender, Washington Mutual, issued $384 billion in loans that year. (Emulating Countrywide's rapid descent later in the decade, Washington Mutual lost a combined $4.44 billion in the first and second quarters of 2008, before JPMorgan Chase swooped in to buy it, with the government's help, on September 25, 2008.) Wells Fargo, which hung on to buy Wachovia in October 2008, topped the charts in 2003 with $470 billion in new loans. That's a combined $1.3 trillion in new home loans created by the big three mortgage lenders in 2003.
As home prices spiked amid low rates, demand increased for securitized loans, and more loans were offered. In 2003, the securitization rate of subprime loans matched that of prime loans in the mid-1990s. From 2002 to 2006, subprime loan originations went from 8.6 percent of all mortgages to 20.1 percent.
The more subprime loans there were in the market, the more the securities piled on top of them became exposed to the risk that a larger number of loans than expected might default. Of course, this risk was hidden until home prices started to fall and defaults started to rise. Subprime defaults decreased to 5.37 percent in 2005 (nearly half of what they'd been during the 2001 recession), right before those seeds of risk between lenders and borrowers began to sprout like Audrey II, the alien plant in Little Shop of Horrors.
Consumer protections were simultaneously chucked. On April 20, 2005, President George W. Bush signed the 2005 Bankruptcy Abuse and Consumer Protection Act, sponsored by Senator Charles Grassley (R-IA), which worsened the quietly growing housing crisis for consumers. 55 Borrowers facing bankruptcy could no longer negotiate down the principal of their mortgages with their creditors if the market declined, meaning that they had no way to avoid foreclosure, even if they wanted to.
On September 1, 2005, two years after the final Sarbanes-LaFalce bill failed to gain traction, Office of Federal Housing Enterprise Oversight (OFHEO) chief economist Patrick Lawler said, "There is no evidence here of prices topping out. On the contrary, house price inflation continues to accelerate, as some areas that have experienced relatively slow appreciation are picking up steam."
Markets weren't yet constrained for credit. Because lenders were assured money through securitizations on Wall Street, they didn't have to worry about guidelines on individual loans. If rating agencies would certify trillions of dollars worth of collateralized packages of loans with the highest possible rating, AAA, Wall Street investment banks could sell them to a wider pool of investors, which included pension funds, university endowments, and municipalities. High-interest loan volume, which includes most subprime loans, soared to a combined $1.5 trillion between 2004 and 2006, representing 29 percent of home loans made in 2006. Home equity loans bulged simultaneously. It was a loan-lending fest until adjustable rates ultimately kicked in, and prices topped out. At the same time that housing values were faltering, borrower mortgage payments jumped by 25 to 30 percent as adjustment periods began. Then the foreclosures ramped up to levels last seen during the Great Depression.
The Cruelest Lie of All
There are those who blame lending, and certainly subprime lending was terribly predatory. Conservatives, however, toward the end of 2008, began to blame the people getting the subprime loans and the Democrats for pushing through the Community Reinvestment Act (CRA) in 1977, which sought to end discriminatory home-lending practices.
CRA "led to tremendous pressure on Fannie Mae and Freddie Mac — which in turn pressured banks and other lenders — to extend mortgages to people who were borrowing over their heads. That's called subprime lending. It lies at the root of our current calamity," the conservative columnist Charles Krauthammer wrote on September 26, 2008, in his nationally syndicated column. Translation: the Democrats allowed Poor People to do this. And innocent Wall Street paid the price.
Krauthammer continued, "Were there some predatory lenders? Of course. But only a fool or a demagogue — i.e., a presidential candidate — would suggest that this is a major part of the problem." 95 (Of course, maybe Krauthammer is just always reactionary. At the beginning of the Iraq War, he wrote, "Hans Blix had five months to find weapons. He found nothing. We've had five weeks. Come back to me in five months. If we haven't found any, we will have a credibility problem." 96 Credibility problem indeed.)
Since late 2008, plenty of fools and demagogues have argued and, in fact, proved Krauthammer wrong. But for a while, conservative stalwarts such as Fox News's Neil Cavuto and newspaper columnist George Will echoed the idea that it wasn't greed but a 1977 regulatory law that brought down the economy. 97 Given that the value of subprime loans in the market is overwhelmed by the amount of the full federal bailout by a factor of ten to one, that's not anywhere near reality.
The finance community's theory is one of selective Darwinism: Little people who take bad risks deserve the consequences. Companies that take bad risks are a welcome addition to the fallen competitor list. Banks that survive the chaos can reposition themselves at the top of the financial piles, and deserve all the federal bailout money, and assistance in growing even bigger, that they can get.
Indeed, after the Bear Stearns bailout, then treasury secretary Paulson said of his former competitor, "When we talk about moral hazard, I would say, 'Look at the Bear Stearns shareholder.'" 98 Blaming the bad apple and delivering some well-chosen words about America's destiny will usually mute the need for regulation. That's why current congressional packages tend to offer cosmetic financial solutions to long-term regulatory dilemmas.
No matter where the blame lies, as housing prices kept dropping and foreclosures kept rising, the feds jumped into gear late and indicted several hundred mortgage players, including former Bear Stearns credit hedge fund stars and current scapegoats Ralph Cioffe and Matt Tannin, and many lesser-known characters. The FBI and the Department of Justice targeted a slew of small and big firms after the fact, from Puerto Rico – based Doral Financial Corporation, unknown to most households, to more prominent names: AIG, Countrywide Financial, Washington Mutual, Bear Stearns, Lehman Brothers, UBS AG, New Century Financial, Freddie Mac, and Fannie Mae.
When all is forgotten and we've moved on to our next financial crisis, there will be certain fingers frozen in time pointing at the subprime loans as the cause of the calamity. Big Finance would prefer that. But the truth is that the subprime loan tragedy was merely the catalyst that exposed the mega-tiered securitizations of securitizations, the massive leverage chain derivatives attached to nothing concrete, and the ineffective regulatory restraints. All of which led us down the rabbit hole of the Second Great Bank Depression.
Nomi Prins is a senior fellow at the public policy center Demos and author of Other People's Money and Jacked: How "Conservatives" are Picking Your Pocket (Whether You Voted for Them or Not)
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I created this forum link so I could post various news articles on the coming Real Estate Bubble Burst and its affect on the Economy. There were so many articles and opinions that I wanted to have a place to collect them and watch the catastrophe unfold.
Encased in this catastrophe is a trickle-down effect that is now extending to the banking sector produced by irresponsible unregulated sub-prime lending practices. Those articles are also included in this forum.
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