The article abstract., penned by Timothy Dunne, VP at the Federal Reserve Bank of Cleveland, and Kyle Fee, a research assistant, based this statement on the “observation that states that experienced boom-bust housing cycles in the past (such as Texas, Oklahoma, Massachusetts, and California) had elevated foreclosure starts for years after the peak in foreclosure starts and inventory, and these previous boom-bust cycles were small in comparison to the current cycle.”

Other findings that the article reveals include the fact that typically high foreclosure rates precede high rates of

unemployment. In terms of the current downturn, the bank found that the foreclosure rate “began to rise sharply before the unemployment rate rose and well before the onset of the recession in December of 2007.” The bank attributes this to the fact that the nation also saw a decline in home prices and a weakening of loan quality, before the true recession began. These additional factors help to explain the earlier appearance of high foreclosure numbers.

Breaking down this data further, the article reported that the trends varied slightly for traditional prime, fixed-rate mortgages, which more closely followed the timing of the rise in the unemployment rate. The authors reported that, “For this group of loans, loan quality is generally higher, and the subsequent rise in the foreclosure start rate is more closely linked to economic weakness and job loss.”

According to the bank, this group of loans represents approximately 53 percent of first-lien mortgages prior to the start of the housing crisis. To back up this finding, the bank cites the government’s making Home Affordable Program, which stated that “60 percent of the program’s permanent mortgage loan modifications are the result of the loss of income.”

Following this logic, the bank found that “the obvious corollary is that the foreclosure start rate for loans other than prime, fixed rate mortgages, including subprime loans, led the cycle,” and that this group of loans saw higher foreclosure rates well before the unemployment rate began to rise and before the nation entered in recession.

To illustrate the disaster that is potentially pending, 34% of the loans guaranteed by the FHA in 2007, have already gone into default only two years later.

Does anyone see a problem here?

Lets review the ingredients to what is sure to be a double-dip recession:

1. Unemployment is still rising
2. The banks are sitting on thousands of foreclosures with thousands more homeowners predicted to go into default in the next few years
3. Gov’t bailouts are piling on debt faster than you can say “Uncle Sam is on Crack”

The variable in all this that remains out of our collective control is the politics. If this were a “normal” market, I’d say that hell was about to break loose any day. However, its most definitely not “normal” and FHA first time buyers are having a feeding frenzy…for now.

Like other stimulus programs, this one too has its long term consequences and one day, the tax payer is going to have to pay the piper. To see what I mean, read this.

Your comments are always welcome,
TRD

As of September 2009, roughly 10% of all RMBS loans and 25% of all subprime loans received at least one modification. A year ago, servicers modified only 3% of all loans, and 7% of subprime loans, according to the report.

Fitch estimated a “conservative” projection of 65% to 75% of subprime delinquencies of 60 days or more that will re-default after 12 months post-modification.

“As in prior statements, market pressures to allow more aggressive [modifications], continued home price declines, and the economy’s effect on job losses factor into this projection,” according to Fitch analysts.

The projection includes re-defaults on loans that received a second and third modification after the first one failed. Roughly 11% of all modified RMBS loans received a second modification, and of the modifications done in Q308, 17% were re-modified, according to the report.

The monthly modification volume dropped from the peak in the middle of 2009, because loan modifications under the Home Affordable Modification Program (HAMP) are not considered complete until a three-month trial finishes.

Through HAMP, the US Treasury Department allocates capped incentives to servicers for the modification of loans on the verge of foreclosure.

HAMP’s first modifications did not begin to complete the trial period until early July and are not included in the January through June 2009 results, according to the report. But cumulative modifications increased during the first half of 2009 as servicers continued non-HAMP modifications.

“Initial indications suggest the conversion from trial mod under HAMP to actual finalized
modification status has been disappointing,” according to Fitch analysts.

Through September 2009, there has been no “pick-up” in modification activity stemming from the completion of HAMP trial modifications.

According to[1] a report from the Congressional Oversight Panel (COP), which reviews actions taken by the Treasury, only 1,711 of the 360,000 trial modifications started passed out of the HAMP trial period and into permanence as of September 1.

The increase was driven by high demand for REO or bank-owned properties, according to transaction data reported by survey respondents. Nationally, the average price of damaged REOs rose from $106,700 in August to $124,500 in September. The average price of move-in ready REOs rose from $178,500 in August to $199,300 in September. In September, damaged REOs accounted for 15 percent of home purchase transactions and move-in ready REOs accounted for 16 percent of transactions.

The average price for non-distressed properties remained nearly constant between August and September. In August, the average price for non-distressed properties was $267,900; in September, the average price for these properties was $268,200. Non-distressed properties made up 55 percent of home purchase transactions in September, with short sales accounting for another 14 percent.

Average home purchase transactions per survey respondent, a proxy for overall market transactions, grew at a rate of 16 percent from August to September. In most years, home sales decline from August to September.

Strong demand for moderately priced REOs caused time-on-market for these properties to decline markedly. In August, damaged REO stayed on the market an average of 9.4 weeks; by September, time-on-market had declined to 7.0 weeks. For move-in ready REOs, time-on-market declined from 8.0 weeks in August to 5.9 weeks in September. In contrast, average time-on-market for non-distressed properties rose from 13.0 weeks in August to 14.2 weeks in September.

First–time homebuyer demand for properties continued to be strong in the month of September. First-time homebuyers accounted for 42 percent of home purchase transactions in September. For the first two months of 2009, before the enactment of the first-time homebuyer tax credit, first-time homebuyers made up 32 percent of home purchase transactions. Survey respondents reported that first-time homebuyer traffic—an indicator of future transactions–grew sharply in September while traffic for current homeowners and investors was level or declining. The majority of move-in ready REO is purchased by first-time homebuyers.

“Our survey statistics are indicating a mini-boom in the housing market,” commented Thomas Popik, research director for Campbell Surveys. “There’s a confluence of positive factors: historically low interest rates, high demand from first-time homebuyers before the expiration of the tax credit at the end of November, increased affordability, lower inventories of foreclosed properties, and a perception among homebuyers and real estate agents that the market has turned.”

The survey obtained hundreds of comments from real estate agents regarding current market conditions. Many agents indicated an REO buying frenzy in local markets, especially California. “Entry level REO’s are taken by the storm! Many multiple offers!” exclaimed a California agent. “Low inventory and high demand are resulting in 20-60 offers on most properties in the entry level to moderate price points. First-time homebuyers have difficulty competing with investors and high down-payment buyers,” reported another real estate agent located in California. “Banks and listing agents are pricing these REO’s at liquidation prices to encourage a bidding war and it’s working,” wrote a real estate agent located in Florida.

Despite reporting strong increases in both average prices and number of transactions, real estate agents responding to the survey gave a hint of looming problems caused by rising unemployment. For the third month in a row, the survey’s inventory index showed rising inventories of short sale properties, while inventories of REO properties were flat or declining. Because of a typical time period of 12 to 18 months between the first missed mortgage payment and foreclosure auction, REO properties come on the market long after borrowers experience financial distress. In contrast, many homeowners decide to attempt short sales soon after job loss.

“REO time on market is falling fast. However short sale inventory is increasing rapidly to 54% of inventory,” reported a California agent. “We are seeing more and more short sale listings in every area but very few REO properties are currently on the market,” reported a Florida agent. Another California agent stated, “Large numbers of short sale homes dominate the current inventory.”

The Treasury has announced new “capital cushion” requirements for financial institutions to reduce excessive risk and prevent taxpayer bailouts. Seems sensible enough. Perhaps the Administration will even impose those safety and soundness standards on federal agencies.

One place to start is the Federal Housing Administration, the nation’s insurer of nearly $750 billion in outstanding mortgages. The agency acknowledged this month that a new but still undisclosed HUD audit has found that FHA’s cash reserve fund is rapidly depleting and may drop below its Congressionally mandated 2% of insurance liabilities by the end of the year.

At a 50 to 1 leverage ratio, the FHA will soon have a smaller capital cushion than did investment bank Bear Stearns on the eve of its crash. (See nearby table.) Its loan delinquency rate (more than 30 days late in payments) is now above 14%, or from two to three times higher than on conventional mortgages. Its cash reserve ratio has fallen by more than two-thirds in three years.

The reason for this financial deterioration is that FHA is underwriting record numbers of high-risk mortgages. Between 2006 and the end of next year, FHA’s insurance portfolio will have expanded to $1 trillion from $410 billion. Today nearly one in four new mortgages carries an FHA guarantee, up from one in 50 in 2006. Through FHA, the Veterans Administration, Fannie Mae and Freddie Mac, taxpayers now guarantee repayment on more than 80% of all U.S. mortgages. Sources familiar with a new draft HUD report on FHA’s worsening balance sheet tell us that the default rates have risen most rapidly on the most recent loans, i.e., those initiated or refinanced in 2008 and 2009.

All of this means the FHA is making a trillion-dollar housing gamble with taxpayer money as the table stakes. If housing values recover (fingers crossed), default rates will fall and the agency could even make money on its aggressive underwriting. But if housing prices continue their slide in states like Arizona, California, Florida and Nevada—where many FHA borrowers already have negative equity in their homes—taxpayers could face losses of $100 billion or more.

So far Congress has pretended that these liabilities don’t exist because they are technically “off budget.” They stay invisible until they move on-budget when a Fannie Mae-type cash bailout is needed. The Obama Administration is at least finally catching on to these perils and last week proposed some modest reforms. These include appointing a “chief risk officer” at FHA, tightening home appraisals, requiring that FHA lenders have audited financial statements, and increasing the capital requirement of FHA lenders to $1 million up from $250,000. The scandal is that these basic standards weren’t in place years ago.

Unfortunately, Washington won’t touch more significant reforms for fear of angering the powerful nexus of Realtors, mortgage bankers and home builders. As we’ve written for years, the FHA’s main lending problem is that it requires neither lenders nor borrowers to have a sufficient financial stake in mortgage repayment. The FHA’s absurdly low 3.5% down payment policy, in combination with other policies to reduce up-front costs for new homebuyers, means that homebuyers can move into their government-insured home with an equity stake as low as 2.5%. The government’s own housing data prove that low down payments are the single largest predictor of defaults.

Private banks know this. Burned on subprime mortgages, they are back to requiring 10% or even 20% down payments. Congress should at least require a 5% down payment on loans that carry a taxpayer guarantee. If borrowers can’t put at least 5% down, they can’t afford the house.

As for rooting out fraud that contributes to high loss rates, the obvious solution is to drop the 100% guarantee on FHA mortgages. Why not hold banks liable for the first 10% of losses on the housing loans they originate, a reform that has been recommended since as far back as the early Reagan years? No other mortgage insurer insures 100% loan repayment. Alas, while offering its minireforms, the Obama Administration reassured its real-estate pals that FHA insurance will continue to carry “no risk to homeowners or bondholders.”

Which means all the risk is on taxpayers. David Stevens, the FHA commissioner, nonetheless declared this month: “There will be no taxpayer bailout.” That’s also what Barney Frank said about Fannie and Freddie.

The article reports that prices have been on the rise as of late, and while I don’t dispute that, I believe the trend is going to be short lived. Why?

Shadow inventory.

For example, Bank of America has 20,000 REOs on their books in San Diego County alone. These houses are not yet for sale, and therefore are not reported in the “months of unsold inventory” statistic that you can find on this site. My contacts at BofA tell me that these properties are going to be brought to market in Q4. In the interim, foreclosures continue to pile up due to the huge volume of Alt-A mortgage resets that are now taking place.

Given the dire employment situation, and the data noted above, how can price increases be sustained? If you have ideas, I’m all ears.

Your comments are always welcome,

TRD

More than 20 other lenders and loan servicers, including Wells Fargo and JPMorgan Chase, have received a temporary exemption while they wait to learn if it will become permanent.

Here’s what Mathew Padilla wrote previously on the law:

The California Foreclosure Prevention Act, or Assembly Bill X2 7, which Governor Arnold Schwarzenegger signed in February, is meant to push banks and loan servicers into lowering mortgage payments of homeowners in financial trouble. It reflects a similar federal plan.

Several companies have already applied for exemptions, said Mark Leyes, a spokesman for the state’s Department of Corporations. The department must grant or refuse an exemption within 30 days, during which companies need not comply with the moratorium. The law impacts loans made from 2003 to 2007.

A lender or servicer gets an exemption by demonstrating it already has a loan modification program in place, including lowering owner payments to a target of 38 percent of their income going to housing. Methods of choice are lowering the loan’s interest rate or extending its term to 40 years.

The bill, however, seems to lack teeth. The 38 percent debt-to-income ratio is merely a target.

And the bill says it does not require a servicer to violate contracts for “investor-owned loans.” The most troubled loans are generally those investment banks packaged and sold, and if the servicing contract says foreclosure is preferable to a loan modification, nothing in the law stops foreclosure.

Exemptions are granted by the three agencies that regulate companies that make, service or broker loans.

• See the California Department of Corporations exemptions list HERE.
• The Department of Real Estate list HERE.
• And Department of Financial Institutions list HERE.

Finally, the Sacramento Bee has a good story on the issue HERE.

Your comments are always welcome,

TRD

By LESLIE BERKMAN
The Press-Enterprise

With foreclosures representing a smaller portion of home sales, median home prices in Southern California rose slightly in May, showing the first month-to month price increase since July 2007.

The one-month gain was not reflected in Inland Southern California, and analysts hesitated to say prices wouldn’t fall further. In Riverside County the median home price — where half sold for more and half for less — was unchanged from April at $180,000, while in San Bernardino County the median price slid by $1,500, from $138,500 in April to $137,000.

More sales of expensive homes in coastal counties and fewer sales of cut-priced foreclosures in the Inland counties caused the price elevation in Southern California, according to MDA DataQuick, which on Wednesday released its May housing report.

DataQuick spokesman Andrew LePage said it is uncertain whether the leveling of home prices means they have hit a solid bottom. The median home price has dropped more than 45 percent in San Bernardino County and nearly 38 percent in Riverside County in the past year.

“It is still a pretty nasty recession, and we know more foreclosures are coming, but we just don’t know how many,” said LePage. “The uncertainty over foreclosures and the depth of job losses makes it very tricky to call a bottom right now.”

Chapman University Economist Esmael Adibi said the most promising trend is a surge in sales, as first-time home buyers and investors have jumped in to buy bargains. Home sales were 28 percent higher last month in Riverside County than in May 2008 and 51 percent higher in San Bernardino County than a year earlier.

“Sales are reducing the inventory and laying down a foundation for prices to go up,” said Adibi. He predicted that if the job market improves as he anticipates, in a year the Inland counties will see median home prices that are higher than today’s.

Sue Acker-Bare, an agent with Century 21 Showcase in Highland, said she has seen first-time buyers drawn into the market by a $8,000 federal tax credit and low home prices. Also an increase in interest rates — from about 4.5 percent a month ago on a fixed-rate conforming loan to nearly 5.9 percent Wednesday — has convinced some not to wait any longer, she said.

“I think it is a good time,” said Mayra Gomez, 24, who with her husband and two children moved a week ago into a three-bedroom house on a golf course that they bought from a bank for $254,000 in Riverside.

Gomez said they’re overjoyed to buy a house with a Federal Housing Administration loan that required only a 3.5 percent down payment. When they first went house-hunting 18 months ago, she said, lenders wanted 20 percent down, and houses cost a lot more.

Real estate agents say because the number of foreclosed properties on the market has declined substantially this year, buyers are forced to bid against one another for what is available, with successful offers frequently above list price.

“Just about every property now has multiple offers. The market is looking more and more like a sellers’ market,” said Mike Teer, broker-owner of Teer One Properties in Riverside

Ed Leamer, director of UCLA’s quarterly Anderson Forecast, said an unknown is the impact of mortgages that were extended often without income documentation and with alternative payment plans to home buyers and homeowners who refinanced a few years ago. These mortgages are scheduled to reset to higher monthly payments in coming months.

Homeowners with such mortgages may not be able to refinance because of lower property values and could decide to let their homes go to foreclosure, said Leamer.

Leamer said he believes the number of such mortgages that fail will be fewer than the subprime mortgage failures that fueled the initial wave of foreclosures. Also he said this second round of foreclosures would not be as concentrated in the Inland counties.

DataQuick noted that with fewer foreclosed houses for bargain hunters, sales have begun to rise for higher priced houses. In Riverside County between April and May sales of homes priced less than $100,000 remained the same, but sales of homes priced more than $400,000 rose 5 percent.