The Rising Tide of Foreclosures 17 comments
by: Wealth Daily March 22, 2010 | about: IYR / RWR / RWX / XHB
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As sure as the two cardinals that are perched outside my window, I'm beginning to think that Lawrence Yun could use a lucky rabbit's foot or two.
Better yet, maybe he ought to consider spending the day combing through the grass in search of four-leafed clovers...
Either way, he can use all the help he can get this spring.
Because as any honest realtor will tell you, the next few months of activity are the ones that will set the tone for rest of the year. And given the ongoing free fall in housing, it is make-or-break time for the 2010 housing market.
As the NAR's chief economist is well aware, the open houses will either be on the quiet side this spring, or jammed with those buyers that Yun insists are still somewhere on the sidelines.
All I know is that after hanging his hopes on these mysterious folks for the last two years, Yun's sideline buyers have yet to materialize — even though all the king's horses and all the king's men have tried to lure them out of the woodwork.
The 2010 Housing Market Teeters on Edge
Meanwhile, the pain of those trapped by the fantasy of the bubble continues to grow as REOs and foreclosures add more supply to the bloated market.
In fact, based on data from the one of the nation's biggest mortgage servicers, nearly 7.5 million loans are in some stage of delinquency or foreclosure, while an additional one million properties are already bank-owned.
That's an 8.5 million "shadow inventory" of homes that needs to close just to clear the overhang of distressed properties alone. At present sales rates, that represents a nearly two-year supply.
Keep in mind, of course, that those are static figures. Three months from now, those figures will be even worse; 346,000 borrowers became delinquent for the first time in January, adding to the burden.
What's more, with nearly one-quarter of U.S. mortgages now "underwater," almost 11 million borrowers are now trapped in loans backed by assets, the value of which is dropping like a stone.
As a result, more and more homeowners are just simply walking away from their troubles — even when they can afford the payments.
For borrowers like Wynn Bloch, walking away was nothing more or less than a business decision, plain and simple. A retired psychologist, Bloch is a renter today after defaulting on her $385,000 2006 home purchase.
"There was not a chance that house was ever going to be worth anywhere near what my mortgage was," Bloch told the LA Times after finding out that comparable homes in her neighborhood were now selling in the $200,000s.
Hardly alone, these strategic defaults accounted for about 35% of the December 2009 defaults — up from 23% in March of 2009, according to Luigi Zingales, a professor at the University of Chicago's Booth School of Business.
Think of it as a "thanks, but no thanks" on a grand scale.
We're From the Government and We're Here to Help
As for the alphabet soup of government programs designed to stem the foreclosure tide, they might as well be trying to drain the ocean with an eye dropper. Like everything else in this bust, it is extend and pretend all the way; nearly 70% of all modified loans re-default within 12 months anyways.
Take HAMP, for instance: This is the Home Affordable Mortgage Program that was supposed to save millions of homeowners from foreclosure.
According to the U.S. Treasury, just 170,000 borrowers nationwide have had their loans permanently changed under HAMP. That's a mere 5% of the 3.4 million borrowers who are eligible under the program.
But even then, that's only half of HAMP's problems. The other is — for the most part — the majority of these "saves" have only delayed the inevitable. Take a look:
permods
Consider this: Even after receiving a permanent modification, the median HAMP borrower is still left with a debt-to-income (DTI) ratio of nearly 60%! That ratio is simply off the charts — and it's an improvement from their previous loan.
In fact, before the industry jumped the shark, a 41% DTI was considered high in a more rational time.
Just think about it... After paying the mortgage, installment debt, alimony, 2nd liens, and other fixed payments, these median borrowers are left with just $1,086.52 before taxes to pay for everything else.
That leaves about $200 a week to pay for groceries, utilities, insurance, repairs, and other expenditures.
And while that is better than the $125 a week they had before the modification, it's nowhere near enough to keep the majority of them from defaulting in the future. The numbers simply won't add up.
As a result, the foreclosure crisis will undoubtedly be with us for some time, weighing heavily on the housing market. And I haven't even brought up the prospect of the option arm debacle that will begin to bust later this year.
Meanwhile, the re-sale market continues to struggle.
Existing home sales dropped 7.2 percent in January after falling 16 percent in December — the biggest declines since comparable records began in 1999, according to figures from the National Association of Realtors.
And keep in mind that's with interest rates on a 30-year fixed rate under 5%. As the Fed pulls out of the mortgage market in the next two weeks, those rates have nowhere to go but up.
And according to my mortgage pals who have over 40 years in the business, this is the sum of all fears.
"Steve," they told me last week, "if rates go over 6%, you can stick a fork in it because at those levels, it's game over for housing." Already it is as bad as they have ever seen.
So maybe Lawrence Yun is just being optimistic when he says, "We will see weak near-term sales followed by a likely surge of existing-home sales in April, May, and June."
Personally, I think he would be better off rubbing Buddha's belly.
Disclosure: No positions
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Unique investment ideas, tips, strategies and insights from our team of editors: Brian Hicks (author of the bestselling book, Profit from the Peak), Steve Christ, Christian DeHaemer, Ian Cooper, Nick Hodge and Adam Sharp.
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o wrocnrob
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Is there a solution? The only way is to put more people into homes. Some kind of "rent-to-own" or equity participation agreement could get value from these assets, which need to bubble again. I don't understand why they feel the need to resort to 50 or 25 cents on the dollar.
It ain't a bubble till it breaks - rob
Mar 22 10:58 AM Reply
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o Malkiel
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I chose the screen name "Malkiel" as a sideways tribute to Burton Malkiel's beloved "Random Walk Down Wall Street". The book had been out forever and I found to my embarassment a couple of years ago that Mr. Malkiel was not only still alive and well, but young and chipper. I... More
I don't think buyers will find 6% a scary number if there are significant bargains out there--sales could be brisk if buyers feel like they're getting a great deal. That may be the crux of the matter--will sellers see the iceberg coming and head for the lifeboats in time?
Mar 22 11:03 AM Reply
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o tinytuna
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Now that I am retired and not earning wages' income any longer, I would like to learn more about investing income. I don't mind sharing a comment either. Seeking Alpha appears to be an excellent forum for both. Some of my own views on these topics can be found at:... More
The deal is irrelevant now and for awhile. When responsible people can feel confident about their income to meet 15 or 30 years of debt paymnets, then the market will chip away at the backlog.
Mar 22 03:30 PM Reply
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o circuitrider
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Malkiel, they are already in the lifeboat, and the ice berg is still coming. The popping bubble you will hear is the hot air and lies of our green shoots and great recovery.
Mar 22 11:24 AM Reply
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o chekurtab
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I'm a survivor of communism brainwashing (via escape from USSR) and capitalism greed (via marriage and divorce). Swear not to get trapped by another "ISM" or propaganda.
Good article. Foreclosures has been rising and still have a long way to go. Large segment of mortgage pie are adjustable mortgages that are set to adjust in 2010 all way into 2012. That can only make matters worse.
Don't forget about commercial real estate bubble. I'm afraid the real estate will take decades to recover.
Mar 22 01:58 PM Reply
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o Alex_G
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chekurtab,
I believe a large amount of those mortgages are in fact prime, conforming, 5/25's or 7/23's. Most of those will adjust to a spread to an average libor or CMT.
Mine is a perfect example: 12 month CMT plus 260 BPS. Current rate is 3.05%. Many of the loans you speak of will actually see a reduction in their payments, not an increase.
I know this doesn't stop the strategic defaulters, but it won't cause the payment shock that sub-prime borrowers experienced.
Mar 22 08:56 PM Reply
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o JIR11
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Alex_G:
I agree. Mine reset at 6 mo LIBOR + 225 bps. my current rate is 2.75%; however, I've seen 6 mo LIBOR tick up each week and is now close to 45 bps.
I think the sticker shock for people like us will come in short time, however, as inflation kicks in.
Mar 23 01:05 PM Reply
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o Alex_G
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I don't think we'll see short rates go up to where libor + 225 bps will exceed current 30 year rates in the next couple of years.
Mar 23 03:09 PM Reply
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o Griz
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Not buying the hype.
Unless we are talking about option ARM's where just about all borrowers were choosing the lowest possible payment. This particularly nasty instrument lets the borrower pay less than the full interest payment required, let alone not paying for any principle.
The pain really comes when these loans reset (possibly at a lower rate but more likely at a higher, non-teaser rate), and become fully amortizing. If the borrower was consistently paying the lowest payment possible for say 5 years, then his principle balance is probably 20 - 25% higher than when he started. Once a fully amortizing payment is required, paying a portion of the now larger principle and full interest likely at a higher rate, these borrowers could see their payments likely double or triple.
I think many of these folks are staying in their homes taking advantage of the low payments, full-well knowing that they are so far underwater that it won't be worth saving. As soon as that reset comes (both principle and interest rate), they will join those strategically defaulters as well.
Mar 23 01:40 PM Reply
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o BUZZER
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Retired laborer/ surveyor/ engineer/ musician/ entrepreneur/ venture capitalist still investing primarily in equities around the world. Born in Germany, emigrated to Canada as a child, English is my second language and I excelled at mathematics in school. Was employed for 6 years after... More
Should it surprise anyone that if you can sell furniture with no cash required for 2 years, that selling houses would be attempted using the same format?
Mar 23 02:03 PM Reply
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o Alex_G
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A lot of those option arm buyers have already defaulted. It would be interesting to see the numbers and charts updated to people current on their payments that haven't adjusted up yet to full amortization.
Mar 23 03:12 PM Reply
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o JPDX
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There may very well be some excitement and price stabilisation in the coming months. Some markets will probably even go up. The problem is that most people are sideline buyers that are stuck in houses they can't sell for several reasons. Walk-aways may be sideline buyers, but their credit will not allow them to buy so they'll end up renting for at least 3 years. It is really up to first time buyers. The low end houses are the ones that will sell, further driving down prices on better homes. This whole thing is going to suck for a long time I'm afraid.
Mar 22 04:03 PM Reply
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o ryanclarke
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As Uncle Ben refuses to let the U.S. economy transition to a non hydrocarbon transportation model ... GM has a better chance of getting South Korea to supply the lithium it needs for the new Volt by scavaging the bathrooms of all the bipolar pill poppers in America ... I have made the reluntant... More
Unless King Obama can convince the Saudis that $50 ( and not $80 ) per drum for oil is a fair price .. the consumer in the U.S. is going to be DEAD.
The big boy banks can hide debt forever ... given the FASB rule changes in March 2009 ... but Bernanke can't print more oil ... unless he can come up with new technology that allows the Fed printing press to do as such.
Mar 22 06:14 PM Reply
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o Robert Castellano
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Dr. Robert N. Castellano, president of The Information Network (http://www.theinformationnet.com/), received a Ph.D. degree in solid state chemistry from Oxford University (England). He has had ten years experience in the field of wafer fabrication at AT&T Bell Laboratories and Stanford... More
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Why are you blaming the Saudis? Blame the speculators and the refineries who are shutting down production to increase prices.
Mar 23 10:10 AM Reply
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o BUZZER
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Retired laborer/ surveyor/ engineer/ musician/ entrepreneur/ venture capitalist still investing primarily in equities around the world. Born in Germany, emigrated to Canada as a child, English is my second language and I excelled at mathematics in school. Was employed for 6 years after... More
I can't understand why the Chinese don't come in and offer 30% of the asking prices and buy up whole subdivisions to rent out to the former owners.
It makes a lot more sense than continuing to buy useless IOU's from the Treasury.
Mar 23 01:26 AM Reply
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o PainfullyAware
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I Am A Concerned Citizen As Well As A Manufacturing Engineer Heavily Involved In Distressed Real Estate. Points To Ponder: Debate Is The Distillation Of Reality. Reality Will Be Reality Whether Believed In Or Not. Pretending In Dire Circumstance Usually Results In Catastrophe. Complexity Favors... More
How Unfortunate That You Will See This Very Thing Across Many Asset Classes.
Just Before The Last Throws Of Contractual Construction, when Turmoil Becomes More Than Just Financial, "Governments" and their "Sovereign Backers" will "Purchase TANGIBLE Holdings, At Fractions, In Other Countries".
Where contracts survive => so will the centers of wealth, and the Instigators and Enablers that can escape the peoples wrath, from their respective origins.
Watch For It; The event will be slow to be seen but quick in the finality.
A Fundamental Change Will Occur Where "Value" Will Rule Over "Promissory" For All Nations.
Not Everything, Nor Every Point, Will Descend Into Chaos => Some Places Are Going To Get A Bit More "Dynamic", to say the least.
Mar 23 02:10 AM Reply
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o Scott Backus
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Biochemistry major working in the software industry with an outside interest in macro finance.
"And keep in mind that's with interest rates on a 30-year fixed rate under 5%. As the Fed pulls out of the mortgage market in the next two weeks, those rates have nowhere to go but up."
The fed may be pulling out of the mortgage market, but I bet they're prodding the banks to step in and buy the mortgages with all the fed cash on their books. The steep yield curve only helps.
Mar 23 01:26 AM Reply
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