• 90% of Riverside is underwater with an average LTV of 165%. Ouch.
• 23% of prime borrowers are delinquent
• 50% of sub-prime are delinquent
• For borrowers >90 days behind, the cure rate is less than 1%.
• Thanks to all these homeowners who are no longer making a mortgage payment, GDP is being artificially jacked up. Given that this trend is the same nationwide, one wonders what the consequences are?
• 60%+ of loan mods a re-defaulting
• When people don’t move, they don’t buy new stuff. This will suppress consumer spending going forward
• 80% of Riverside and San Bernardino sales are distressed
• If the Gov’t (via fannie and freddie deed-in-lieu) end up owning millions of homes (which they could choose to sell at any time), how can investors accurate predict the market’s direction enough to go “all in”?
• Eventually, replacement cost will drive the price of used inventory up to 90% of new inventory. The question is when?
• Reductions in unemployment will lead into state migration by about 4 years and then some time after that, prices will start to rise. We’re a ways off from this happening.

Rosy picture, huh?

Ok, I admit it, I changed the name from “First Look” to “Worst Look”. Color me bad. Read on and you’ll see why. My comments are embedded in red.

Trent

Neighborhoods across the country are riddled with empty bank-owned homes and unoccupied foreclosures that erode neighboring property values and open the door for blight and, in some cases, criminal activity.

It’s already a challenge for lenders to put these properties back into the hands of responsible homeowners (since when are knowledgeable investors not responsible??), and the situation is only expected to get worse. Foreclosures are on the rise again, further adding to already engorged REO inventories, market demand is waning, and the homebuyer pool is shrinking.

The nation’s glut of vacant REO properties took center stage in Washington Wednesday. HUD announced a new nationwide REO “First Look” program, in partnership with the nation’s largest mortgage lenders, and it was the first of a two-day summit hosted by the Federal Reserve to examine the community impacts of foreclosed and vacant properties.

HUD Secretary Shaun Donovan called the National First Look Program an “unprecedented agreement” that will allow state and local governments, and nonprofit organizations first crack or first right of refusal to purchase foreclosed homes from top lenders before the banks make these properties available to private investors. With their extensive real estate expertise, I’m sure these non-profits will excel as landlords.

HUD says the institutions participating in the program represent 75 percent of the REO marketplace. They include: Bank of America, Chase, Citi, Deutsche Bank, GMAC, Nationstar Mortgage, Ocwen Financial Corporation, Saxon Mortgage Services, U.S. Bank, and Wells Fargo, as well as Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA).

These companies have agreed to give communities participating in HUD’s Neighborhood Stabilization Program (NSP) an exclusive opportunity to purchase their bank-owned properties in targeted neighborhoods ahead of non-owner occupant speculators (speculators? who are they talking about? How about all those investors who want to buy and hold??), so these homes can either be rehabilitated, rented, resold, or demolished.

HUD says its NSP grantees often find themselves competing with private investors for REO properties, which can hinder their efforts to stabilize neighborhoods with high foreclosure activity. Hinder? Really? if the investors like me could getter better financing, we’d buy everything in sight and hold it for the long-term with great tenants in place. I’m really not sure how that hurts a neighborhood. Perhaps someone could explain this to me?

Under the new program, NSP participants will be immediately notified when a property becomes available and will have 24-48 hours to express interest in pursuing a specific property. The First Look period will then last approximately five to 12 business days. If no NSP purchase is made, then the home can be listed on the open market.

The participating lenders have also agreed to allow NSP purchasers to buy their REO properties at a 1 percent discount off the appraised value. Congress has allocated $7 billion to the NSP program to help nonprofits and municipalities purchase the homes.

A few streets over from the NeighborWorks America office where Secretary Donovan unveiled the new First Look program, the Federal Reserve commenced its two-day summit aimed at helping communities and practitioners better understand the barriers, practices, and local variables that play into neighborhood stabilization and the disposition of REO property.

“A foreclosure not only hurts the person who loses their home, it hurts their neighbors and their communities,” said Federal Reserve Governor Elizabeth A. Duke, one of the summit’s featured speakers. “As delinquencies and foreclosures continue to increase, we must think creatively and focus our research, outreach, and community development efforts on ways to help these communities recover.” How’s this for thinking creatively…let people buy their house with no money down and proper income qualification, then, if they default, let another buyer simply bring the existing loan current and they become the new owner. This one step would eliminate foreclosure and stimulate massive buying from the 25-35 yr old crowd, all without a dime of government money.

In conjunction with the event, the Federal Reserve has published an extensive volume of papers that explores regional market differences and presents perspectives from various industry players involved in REO disposition.

The FDIC said Tuesday that the number of banks on the agency’s so-called “Problem List” has risen to 829, up from 775 at the end of the first quarter of 2010.

The number of troubled institutions now under the FDIC’s watchful eye is the highest it’s been since March 1993, when there were 928 and the savings and loan crisis was in full swing. It’s a dire comparison, but the FDIC notes that the second-quarter additions represent the smallest net increase in “problem” banks since the first quarter of 2009.

During the April-to-June quarter of this year, 45 insured institutions went under. The failed-bank tally for the year currently stands at 118.

The FDIC does not release the names of the banks on its watch list, for fear that the stigma attached would cause a run on those banks. The agency says a “vast majority” are able to get back on their feet.

The total assets of “problem” institutions declined from $431 billion to $403 billion, despite the increase in the number of names on the list.

The elevated number of bank closings since the nation’s housing crisis and recession set in have severely depleted the FDIC’s deposit insurance fund, but the agency said Tuesday that the fund’s balance has increased for the second quarter in a row.

The net worth of the fund improved from negative $20.7 billion at the end of March to negative $15.2 billion during the second quarter. The FDIC explained that the improvement stemmed primarily from assessment revenues and from a reduction in the contingent loss reserve, which covers the costs of expected failures. The reserve declined from $40.7 billion to $27.5 billion during the quarter.

The FDIC’s liquid resources – cash and marketable securities – stood at $44 billion at the end of the second quarter, a decline from $63 billion at the end of Q1. The decline in cash balances reflects previously anticipated outlays, primarily related to three bank failures in Puerto Rico on April 30th, according to the agency.

“As we expected,” FDIC Chairman Sheila Bair said, “demands on cash have increased this year. But our projections indicate that our current resources are more than enough to resolve anticipated failures.”

More banks may be deemed as “problem,” but the FDIC says the banking sector overall enjoyed its best quarter since the start of the recession.

Commercial banks and savings institutions insured by the FDIC reported an aggregate profit of $21.6 billion in the second quarter of 2010, a $26 billion improvement from the $4.4 billion net loss the industry posted in the second quarter of 2009. This is the highest quarterly earnings total since the third quarter of 2007.

Chairman Bair says the Q2 results are evidence that the banking sector “is moving along the road to recovery.”

“Nearly two out of every three banks are reporting better year-over-year earnings,” Bair said. “As long as economic conditions remain supportive, most institutions should maintain profitability and increase their capacity to lend.”

The primary factor contributing to the year-over-year improvement in quarterly earnings was a reduction in provisions for loan losses. While quarterly provisions remained high, at $40.3 billion, they were $27.1 billion (40.2 percent) lower than a year earlier.

The FDIC also noted signs of improvement in asset-quality trends as the amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) fell for the first time since the first quarter of 2006. Insured banks and thrifts charged off $49 billion in uncollectible loans during the quarter, down $214 million (0.4 percent) from a year earlier.

Today the banks are in the witness box and the public (as well as the administration) isn’t ready for the truth.

Let me explain…

Suppose you were doing a calculation of your net worth. How would you do that? Assets minus liabilities, right? Of course. Ok, lets see… the house is worth $800,000, we owe $700,000, so our net worth is $100,000. (for this example we’re going to ignore other assets and liabilities for the sake of simplicity).

Where’s the problem? Well, the problem is that you aren’t telling yourself the truth. Based upon the sale of houses that are comparable to yours, your house is no longer worth anywhere close to $800,000. If fact, its now worth about $450,000, which makes your net worth -$250,000.

In other words, the truth is that you are insolvent.

Now consider the banks and their REO assets. On their books, they are still showing these houses as being worth the amount that was owed to them when they took the house back in the foreclosure process. Smell a rat here? You bet.

The truth is that by doing so, they are able to “pretend” to be profitable. Wall St loves this. The executives (who are still going to get their bonus) love this, and the administration loves it, too.

The reality is something quite different, and this is what this “mark to market” conversation is all about. The banks reluctance to sell their assets for what they are really worth is why there is so little REO inventory today. Sell too much of it and you have to record all those losses on your books (in accounting lingo, you must now mark it to market)!! Dole them out slowly and you can “manage your earnings” to make everybody happy.

Guess what Mr Banker. You can’t handle the truth.

Your comments are always welcome,

Trent

Another terrific dose of reality. My comments are embedded.

-Trent

The Mortgage Bankers Association (MBA) offered the industry a ray of hope when it reported Thursday that foreclosure starts were down nearly 10 percent in the second quarter, but the brightness quickly faded when Lender Processing Services (LPS) released its own dataset.

MBA’s numbers were based on data through the end of June. LPS reports that by the end of July, foreclosure starts had jumped back up by 24.5 percent month-over month, with rebounds in the private markets compounding the recent acceleration in GSE foreclosures and leading to a significant jump in new actions. It’s the fourth highest level ever recorded by the company.

The Florida-based firm says GSE foreclosure starts have already been accelerating in line with trial cancellations from the Home Affordable Modification Program (HAMP), with most of the increase and volume concentrated in the 6-plus-month delinquency category.

LPS says for the first time, new foreclosure starts exceeded the number of new 90-day delinquencies, which dropped by more than 100,000 loans during the month of July alone as these homeowners went into foreclosure.

Cure rates – bringing a past due loan to current status – for loans six or more months delinquent declined in July, according to LPS. Only 60-day cures increased for the month. This means that you shouldn’t expect new NOD filings to decrease anytime soon. That, combined with the GSE stepping up their new foreclosure actions, is going to continue to apply downward pressure to pricing. As an example of that in my own market, I track houses for sale in the <$250,000 price range (first time buyer properties) and over the last few weeks, I’m seeing a slew of price reductions and long days on the market.

The company reports that the industry’s total foreclosure inventory surpassed 2 million loans in July, up 2.6 percent from June and 5.8 percent higher than a year ago.

Based on LPS’ data, total non-current loans, including delinquencies and foreclosures, came to 13.08 percent of mortgages outstanding.

The company says approximately 895,000 loans were current at the beginning of January but were at least 60 days delinquent or in foreclosure as of July month-end.

Monthly default rates in July declined for first mortgages, but a larger number of homeowners fell behind on their second lien payments, according to data released jointly by Standard & Poor’s and Experian.

The two companies’ credit indices show that defaulting balances on first mortgages were 3.2 percent last month, down from June’s 3.3 percent, demonstrating continued improvement in the performance of first lien home loans.

However, second mortgage default rates increased to 2.8 percent in July, compared to 2.4 percent the month prior.

David M. Blitzer, managing director and chairman of the Index Committee at Standard & Poor’s, pointed out that the rise in late payments on second mortgages nationally follows consecutive declines in recent months.

“While it is too soon to tell if this is a momentary aberration or a major shift, combined with [recent] economic news these data do raise concerns,” Blitzer said.

Consumer credit defaults overall – which the report measures collectively as past dues on first and second lien mortgages, as well as auto loan and credit card delinquencies – varied across major cities and regions of the United States.

Among the five major metropolitan statistical areas (MSA) included in each month’s study, New York had the largest increase in defaults in the last month at 6.99 percent.

Los Angeles was the only one to experience a decrease in July of 3.46 percent. The sharpest decline in the last 12 months continues to be in Miami with 46.21 percent.

The indices are calculated based on data extracted from Experian’s consumer credit database, which is populated with individual consumer loan and payment data submitted by lenders every month.

Experian’s base of data contributors includes leading banks and mortgage companies, and covers approximately $11 trillion in outstanding loans sourced from 11,500 lenders.

The Mortgage Bankers Association (MBA) is scheduled to release its highly anticipated second-quarter mortgage delinquency report on Thursday.

July home sales in the state of California were down 19.9 percent from June and 21.9 percent from a year ago, MDA DataQuick reports.

In the Bay Area, home sales for that month dropped sharply to their lowest level in 15 years, down 22.8 percent from July 2009. Southern California was also pummeled with its biggest year-over-year drop in more than two years, down 21.4 percent from last year.

“There’s been a pause in the market,” said John Walsh, MDA DataQuick president. “Some potential buyers – including those who held off until the tax credits expired – will take their time to assess market conditions, searching for signs of renewed price cuts. Depending on the economy and other factors, that might be what some of them find, especially in areas with a growing number of homes for sale – particularly distressed properties.”

An estimated 35,202 new and resale houses and condos were sold statewide last month – 6,773 in the Bay Area and 18,946 in Southern California.

On the positive end, the median price paid for a home last month in California was $268,000, a 7.2 percent increase from July 2009. Following 27 months of year-over-year decline, this year-over-year increase was the ninth in a row. Bay Area home prices are up 1.8 percent, and Southern California prices are up 10.1 percent from a year ago.

The number of transactions involving foreclosures has also decreased. Of the existing homes sold last month, 35.6 percent were properties that were foreclosed on during the past year, down from 43.5 percent in July 2009.

While foreclosure activity is off peak levels, it still remains historically high, according to MDA DataQuick.

According to a new report from state attorneys general and bank supervisors from across the country, more than 60 percent of homeowners with seriously delinquent loans are still not involved in any form of loss mitigation with their servicer.

The ratio is disconcerting considering the group also found that one of servicers’ primary loss mitigation options today, loan modifications, are resulting in significant payment reductions with fewer redefaults.

The State Foreclosure Prevention Working Group says loans modified in 2009 are 40 to 50 percent less likely to be seriously delinquent six months after modification than loans modified at the same time in 2008.

“This improvement in loan modification performance suggests that dire predictions of high redefault rates may not come true,” the group said in a paper released Tuesday. “This positive trend suggests that increased use of modifications resulting in significant payment reduction has succeeded in creating more sustainable loan modifications.”

The consortium of state regulators and chief attorneys also found that recent modifications that significantly reduce

the principal balance of the loan have a lower rate of redefault compared to loan modifications overall, suggesting that servicers should strategically increase their use of principal reduction modifications to maximize prospects for success.

Principal writedowns, though, have been slow in finding their way into the mod equation. The group’s study shows that only one in five modifications reduce the loan principal, and in fact, some 70 percent actually increase the loan amount by adding servicing charges and late payments to the loan balance.

The government’s Home Affordable Modification Program (HAMP) recently introduced a principal reduction alternative to its standard waterfall to give servicers the option of prioritizing the reduction of principal, but the state group says “the optional nature of this alternative and its inapplicability to GSE loans will likely significantly limit its impact in the HAMP program.”

Three years into the foreclosure crisis, with just over a third of distressed homeowners working with their servicer’s loss mitigation departments, the State Working Group says it anticipates hundreds of thousands of foreclosures will occur later this year unless improvements are made in foreclosure prevention efforts.

“The report certainly indicates there are positive developments with regard to loan modifications,” said Neil Milner, president and CEO of the Conference of State Bank Supervisors and a member of the Foreclosure Prevention Working Group.

Milner added, “However, there is still a tremendous amount of work to be done to prevent unnecessary foreclosures. Servicers must continue to perform meaningful outreach to those homeowners who are seriously delinquent and to perform modifications with significant principal reduction.”

My comments are embedded in brackets below…

Trent

Sales of previously owned homes in the United States plummeted 27.2 percent in July compared to the previous month, according to data released Tuesday by the National Association of Realtors (NAR).

The market was bracing for a noticeable falloff as payback for the homebuyer tax credits that pulled sales forward into the spring months, but the reality was worse than projected – reportedly nearly double the decline analysts were expecting.

The July plunge pushed existing-home sales down to an annual rate of 3.83 million units, compared to the 5.26 million pace recorded in June. The latest sales numbers are 25.5 percent below July 2009, and are at their lowest level since May of 1995.

Lawrence Yun, NAR’s chief economist, warned that a hiatus for home sales is likely to last through September, despite extremely affordable housing conditions and rock-bottom mortgage rates.

He remains optimistic, however, that these factors could propel a quick sales recovery provided the economy adds jobs. That boost could be farther away than it is near, though, given the deep erosion of the nation’s employment picture and recent increases in jobless claims. (I would say that 9-10% unemployment is going to be with us for quite some time yet because in order to make up for the $8M jobs that have been lost, plus the 125,000/month in population growth, we’re going to need to create an average of 250,000 per month for the next 5 years to get back to 5% unemployment and I can’t see how that is going to happen)

Yun did note that “even with sales pausing for a few months, annual sales are expected to reach 5 million in 2010 because of healthy activity in the first half of the year.”

With the poor sales showing, total housing inventory at the end of July increased 2.5 percent to 3.98 million existing homes available for sale, which represents a 12.5-month supply at the current sales pace. That’s up significantly from an 8.9-month supply in June, however raw unsold inventory is still 12.9 percent below the record of 4.58 million homes in July 2008.

Price points for pre-owned homes were the one bright spot in NAR’s report, holding steady despite the drop in sales. The national median existing-home price last month was $182,600, up 0.7 percent from a year ago.

Yun credits the homebuyer tax credits for keeping home values stable for the past 18 months despite heavy job losses. He says home values are now back in line relative to income, and he doesn’t expect any measurable change in prices going forward. (I disagree. I believe prices have 5-10% more downside in specific markets. There is just too much inventory and demand is far too soft – not to mention qualifying for a mortgage is nearly impossible for many borrowers)

According to NAR’s market data, distressed home sales accounted for 32 percent of July’s transactions; they made up 31 percent in July 2009. First-time buyers purchased 38 percent of homes last month, down from 43 percent the month prior. Investors accounted for 19 percent of sales, with all-cash purchases rising from 24 percent in June to 30 percent in July.

Nigel Gault, chief U.S. economist for IHS Global Insight, commented, found the latest existing-home sales numbers disconcerting.

He said, “The most worrying feature of the recent housing data is the absence of evidence of any underlying improvement in sales. All of the action earlier this year appears to have been driven by the tax credit. Mortgage applications for purchase have been moving sideways since June even as 30-year mortgage rates have headed into the low 4s….[A] sustained upturn will depend on an improvement in the jobs market, which at the moment is slowing down rather than gathering pace.”

Despite the continued efforts of mortgage giants Fannie Mae and Freddie Mac to find sustainable workouts for delinquent borrowers – and the fact that their loan modification activity has indeed increased significantly this year – the analysts at Standard & Poor’s (S&P) expect the GSEs’ foreclosure inventories to continue to swell.

The two companies have each already completed about 40 percent more workout volume during the first half of 2010 than they did in all of 2009 by S&P’s estimates. Still, the ratings agency says annualized loan workout activity (as a percentage of existing delinquent loans) remains less than half at both institutions. (in other words, loan DQ is still massively on the rise)

In addition, S&P reports that foreclosure alternatives, such as short sales and deeds-in-lieu, have declined to about 15 percent of the workouts, compared with the low 20-percentile range of 2009.

“We believe that the slow and arduous single loan-by-loan workout process, persistently weak national economic conditions, and high unemployment will likely lead to higher foreclosures, resulting in a foreclosure pipeline that we believe will continue to grow well into 2011,” S&P said in report issued last week.

S&P adds that timelines for delinquency and default are being lengthened by policies currently in place and the GSEs’ mandate to prevent avoidable foreclosures. The growing workout pipelines will “result in actual realization of embedded credit losses during the next three to five years,” the agency’s analysts said.

S&P is holding to its downbeat outlook when it comes to the GSEs’ foreclosure numbers even though the ratings agency says credit quality is stabilizing for Fannie and Freddie.

The firm’s analysts concede that better underwriting is likely to support stronger performance of the more recent 2009 and 2010 vintage mortgages, but both Fannie Mae and Freddie Mac are expected “to continue to record significant credit losses” from their 2005-2008 loans.

On a combined basis, the companies have a $4.7 trillion single-family guarantee portfolio, of which 23 percent is from the most problematic 2006 and 2007 vintages, S&P points out. These vintages have significantly higher delinquency rates, and also generated about two-thirds of the 2010 total credit losses (year to-date) at each company.

The GSEs have already recorded significant losses as they work out their large inventories of defaulted loans, and S&P says the deficiencies will likely keep on coming, as evidenced by the fact that both companies continue to carry “a sizable reserve for embedded losses in pre-2009 portfolio vintages.”

According to S&P, Fannie Mae recorded $120 billion in credit-related expenses (loan-loss provisions plus foreclosure expenses) between the beginning of 2008 and the second quarter of 2010. Freddie Mac recorded $57.9 billion in credit-related expenses during the same period.

S&P did note, however, that each of Fannie and Freddie’s second-quarter losses narrowed and credit showed some signs of stabilization through slightly lower serious delinquency rates. Fannie Mae’s seriously delinquent rate was 4.99 percent in Q2. Freddie Mac’s came in at 3.96 percent.

But S&P says, “Despite one quarter of stabilization in the seriously delinquent rate, foreclosure pipelines are large and continue to grow, and modifications have not been very successful to date.” (why not just say, “loan modification programs have been a horrible failure”)

For every one foreclosed property Fannie disposed of in Q2, S&P says the GSE repossessed 1.39 homes. Freddie’s ratio was one disposition to 1.32 new REOs.