On the 12th of Christmas my banker gave to meeee

OneWest FSB, born of the carcass of IndyMac and now proud owner of recently failed First Federal Bank of California had this little bit of holiday cheer for the soon to be foreclosed upon:

OneWest Bank, FSB today announced it is temporarily suspending all foreclosure sales and evictions to assist borrowers over the holidays. The moratorium, which goes into effect Saturday December 19th, 2009, applies to all single family residential loans it services through its IndyMac Mortgages Services division, and will extend until January 4, 2010. The Bank will implement the moratorium for First Federal Bank of California borrowers as well.

The temporary suspension will allow affected borrowers to remain in their homes through the holidays and provide additional time to work with the Bank

Since the 1st is a holiday and the 2nd and 3rd are weekends I count 12 days of moratorium from today through the 31st. How very spiritable of them.

New Records...

From the in-case-you-thought-the-worst-was-behind-us-already-department, the Mortgate Bankers Association reports:

The percentage of loans in the foreclosure process at the end of the third quarter was 4.47 percent, an increase of 17 basis points from the second quarter of 2009 and 150 basis points from one year ago. The combined percentage of loans in foreclosure or at least one payment past due was 14.41 percent on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey.

The percentage of loans on which foreclosure actions were started during the third quarter was 1.42 percent, up six basis points from last quarter and up 35 basis points from one year ago.

The percentages of loans 90 days or more past due, loans in foreclosure, and foreclosures started all set new record highs.

CR has some nice graphs showing the divergence in the delinquency and foreclosure rates, almost certainly attributable to banks dragging their feet on foreclosing while trying (fruitlessly) to follow the governments directive to modify more loans.

D4L

The pragmatist in me likes this idea, though it seems like there are enough restrictions on eligibility to make the program unlikely to have much effect in the grand scheme of things.

Fannie Mae is offering a way around foreclosure that will actually let some families stay in their homes (as renters) for at least a year. It's called Deed for Lease (D4L 4 short), and is a combination of Deed in Lieu (DIL) plus a rental agreement. If you're unfamiliar with DIL the quick synopsis is the homeowner simply gives the house back to the bank and the loan is forgiven, skipping foreclosure and short sale. This is sometimes colloquially known as "just walking away", but what if you don't actually want to leave? D4L is the answer--mortgage goes away, but you stay in the house, presumably at rent you can afford.

Even if that rent is substantially below the old mortgage payment the bank may come out ahead of the alternatives. Since all of the loan mod programs are proving to be utter failures and the appeal of ruthless defaults is rising many people are simply staying in their homes paying nothing until they've exhausted all of their tactics for delaying foreclosure (see e.g. the Kempffs' story).

Deed-for-Lease Program (efanniemae.com)

Now that's just all kinds of classy...

From the L.A. Times comes this lovely story. Can't find a protagonist in this crew, but I suppose you can just root against them all.

1. rich couple lose shirt in Madoff scheme
2. Wells Fargo forecloses on his fancy Malibu condo
3. exec in Wells Fargo foreclosure division decides instead of selling it to use it as weekend party pad
4. nosy not-quite-as-nouveau-riche-as-you neighbors and a spurned real estate agent rat her out to the press
5. Times reporter rings the buzzer and gets a bunch of "um no" answers from the mysterious female occupant

I'm probably going to hell for this post...

...but the fact that the subject of this story is a cancer patient doesn't excuse the mindless "banks are evil and prey on innocent homeowners" meme spouting sloppy journalism. I suggest you read the article before reading the rest of my post but here are the salient facts:

• The Kempffs are facing foreclosure after deliberately missing payments on their mortgage


• They bought their house in 2002 for $430,000


• They now owe $786,802

This means in 7 years they have extracted over $350,000 through cash out refinances. That's about $50,000 per year tax free, roughly equivalent to the spending power of $80,000 per year of taxable income. Nice work if you can get it.

So what crisis (other than the tragic disease) has triggered this? Per the article the "Kempffs' option adjustable-rate mortgage payment skyrocketed to $4,300 a month from $2,500". Yikes! Is their heartless bank jacking their interest rate to 20% or something? Um, no. They are simply requiring (as all Option loans eventually do) that the payments begin amortizing. Ever wonder what an amortizing payment on a $786,802 loan looks like? Well at a perfectly reasonable 5.16% rate it's, wait for it, $4,300. (That's slightly better than the current average for 30 year fixed conforming loans). So all the evil bank was asking for was that they actually pay principal and interest at what is historically speaking a pretty low interest rate. This cannot in any scenario be considered unreasonable, can it?

Did anything else contribute? Perhaps loss of income?

Lois is struggling to keep up her business as a piano instructor in the dwindling economy. "I went from having 40 students a week to 13 students a week, so my income just crashed," Lois Kempff said. "From October to May, I lost all those students."

What is unreasonable is that you can borrow the equivalent of an $80,000 salary every year for 7 years and expect that you'll never have to repay it. It's even more unreasonable to believe that you can repay it teaching piano lessons. Let's assume the statement is accurate and she really did have 40 students per week. At $20 per student for 50 weeks per year that's $40,000 per year. Her house was "earning" twice as much as she was. This debt was never going to be repaid by any means other than selling the house, and the house was probably never really worth that much (they now estimate it to be worth about $550K).

"70% of July home sales in Las Vegas were foreclosures"

From L.A. Land. Foreclosures are no longer a substantial part of the market, they are the market. Still unfair to include them as comps?

Incurable...

When a loan goes delinquent there are a number of possible outcomes. The good ones (from the bank's perspective this means anything other than foreclosure) are called "cures". The simplest cure is the borrower simply makes up the lost payments (e.g. after a temporary unemployment), but the other common cure is to sell the house (effective only if the price received is more than the balance of the loan). More elaborate "cures" include modifying loan terms, typically by adding missed payments to the principal balance and reamortizing the payments. If a loan doesn't cure it will eventually go into foreclosure. This means that the overall foreclosure rate is a function of the delinquency rate times one minus the cure rate. We are all well aware by now that delinquency rates have reached record territory, but what of cure rates? Well the news there is perhaps even worse than with delinquency rates. From the WSJ:

Fitch found that the cure rate for prime loans dropped to 6.6% as of July from an average of 45% for the years 2000 through 2006. For so-called Alt-A loans -- a category between prime and subprime that typically involves borrowers who don't fully document their income or assets -- the cure rate has fallen to 4.3% from 30.2%. In the subprime category, the rate has declined to 5.3% from 19.4%.

"The cure rates have really collapsed," said Roelof Slump, a managing director at Fitch.

For prime loans we've gone from almost 1 in 2 of delinquent loans curing themselves to about 1 in 16. Think about that from the banks perspective for a second--if you notice a borrowers going delinquent you now just have a tiny chance the loan won't need to be foreclosed on. Should you even keep trying to modify loans? Or should you kick it into high gear and foreclose aggressively? The government is arguing for keeping trying the modification route, but the numbers seem to indicate this is fundamentally fruitless. What's going to happen then? More foreclosures:

Because borrowers are less willing or able to catch up on payments, foreclosures are likely to remain a big problem. Barclays Capital projects the number of foreclosed homes for sale will peak at 1.15 million in mid-2010, up from an estimated 688,000 as of July 1.

We're shoveling as fast as we can...

Interesting post at Effective Demand on the flow of foreclosed homes into the market, primarily making the point there's not a huge "shadow inventory" of REO

The net difference between REO resales and Trustee sales since the beginning of 2008 is around 30,500 homes, about a months to a month and half supply at current REO absorption rate. This number can easily be explained as mostly homes in the pre-list stage getting readied for sale.

While I believe the situation is more nuanced than this particularly (there are differences region to region and may even be differences from bank to bank) the big backlog is in delinquent but not yet foreclosed homes. Banks simply cannot foreclose fast enough to keep up.

NODs Increasing, Foreclosures Decreasing

From CR a post that relates to the whole clogged pipe phenomenon, this time in San Diego. NODs Increasing, Foreclosures Decreasing.

"There ain't no such thing as fair"

Title of this post is something my grandmother often said to me or my brother when one of us cried "that's not fair" perhaps about allotment of cake or similar. I was reminded of this today while reading the Arizona Daily Star:

If you are trying to sell your home in this market, your biggest challenge probably is ... the foreclosure down the street. Not only do you have to compete in price with it, but that foreclosure is going to factor into your appraisal as a comp, possibly scuttling a deal. Is it fair? Probably not.

The key insight of this article derives from appraiser Edward Madson:

"The way the banks feel is, they want the lowest value possible," said Edward Madson, of Madson, Brown & Assoc. Real Estate Appraisers. "They are worried the statistics for Arizona (show) that it is a declining market."
Not only are lenders pushing appraisers to include foreclosures as comparable sales for non-foreclosures, but they are also limiting appraisers to finding sales within a one-mile radius and three months time, Madson said.

Banks don't have any agenda about low or high values, they want "accurate" and "conservative" values, because if the borrower defaults selling the house is how they get their money back. A tightening of appraisal rules was inevitable after the abuses of the past few years but even without that motivation in a market where more than half of all sales are foreclosures ignoring them as comps is simply nonsensical. I certainly didn't hear many RE journalists whining about including guaranteed-to-default-option-ARM-funded-8x-income purchases as comps during '05 and '06.

What's important about this phenomenon is that it can be a self-feeding cycle, just like inflated appraisals were on the way up. As more houses are valued based on foreclosure comps values will sink, equity will disappear, and more homeowners will be underwater, increasing the likelihood that they will also default. For cities like Tucson and Phoenix that saw huge bubbles (cf. Housing Doom) the result could be catastrophic. In January Tucson was already 19th on the list of top subprime foreclosure areas, this is unlikely to help tamp that down.

Wave after wave

And then the two
Dropt to the cove, and watch’d the great sea fall,
Wave after wave, each mightier than the last,
Till last, a ninth one, gathering half the deep
And full of voices, slowly rose and plunged
Roaring, and all the wave was in a flame.

--Alfred, Lord Tennyson, “The Holy Grail”

Matthew Padilla writes today on debunking the idea of distinct foreclosure waves, pointing to research that shows while completed foreclosures have been going up and down delinquencies are headed one way--up:

There is no second foreclosure wave coming, says Sam Khater, senior economist, First American CoreLogic.

“To say there is a second wave implies the (current) wave has receded,” Khater told me. “I don’t see that the wave has receded.”

I've been arguing for a while that any apparent abatement in foreclosures is due to the system becoming clogged. Based on this chart it seems there may even be a positive feedback effect--as delinquencies spiral out of control banks are less able to cope with work load and so fall even further behind on the process.

On a side note that Tennyson poem inspired the title of one of my all time favorite albums, Kate Bush's The Ninth Wave so here's a little musical interlude you can fire up while you catch up on the rest of EoL.

The real ticking time-bomb...

Subprime was just a warning shot. Option ARMs are the real thing, and they're starting to blow up now. The key thing to understand about Option ARMs was the main reason people chose them was they could not afford the house without negative amortization. The only non-foreclosure exit strategies for these loans were:

1. refinance to another Option ARM


2. substantial home price gains to create equity, substantial increase in income and then refinance to traditional mortgage


3. moderate home price gains to cover neg-am and then sell

The first one isn't really an exit, it just passes the problem to another lender. I think we can all agree that the second and third options are off the table. Now from the Wall Street Journal:

For the third straight month, option adjustable-rate mortgages are generating proportionally more delinquencies and foreclosures than subprime mortgages, the scourge of the housing crisis. ... "The realization of the issues related to option ARMs is just beginning," says Chris Marinac, director of research at Atlanta-based FIG Partners.

Known as Pick-A-Pays - a brand name popularized by Wachovia Corp. - the mostly adjustable-rate loans were typically issued to creditworthy homeowners, and allowed borrowers to make a range of monthly payments. The payment options include a partial-interest payment that adds the unpaid interest to the loan's balance. On many of the loans, balances have risen while values of the underlying properties have plummeted amid the nationwide housing crisis.

As of April, 36.9% of the loans were at least 60 days past due, while 19% were in foreclosure, according to data from First American CoreLogic, a unit of Santa Ana, Calif.-based First American Corp. (FAF).

By contrast, 33.9% of subprime loans were delinquent as of April, while 14.5% were in foreclosure.

The loans are heavily concentrated in the worst-hit regions in the housing market, including California and Florida, making option-ARM borrowers inordinately vulnerable to declining property values.

More on the backlog...

By way of Calculated Risk, more from L.A. Land on the concept of a clogged foreclosure pipeline: while the rate of mortgage defaults has nearly doubled in LA county in the past year, the rate of foreclosures has actually fallen slightly. The result is

the "foreclosure backlog" now looming over the housing market. It's caused by various government-mandated and voluntary foreclosure moratoriums, and possibly by lenders trying to manage the flow of repossessed homes entering the market.

My sense is this pattern is being repeated almost everywhere to some degree, with most government and private programs designed to reduce or prevent foreclosures simply resulting in delaying them.

"You can't control what you can't measure"*

By way of Calculated Risk comes a story from the Atlanta Journal-Constitution on just how widely reported foreclosure numbers vary:

When the most frequently quoted source of foreclosure information [RealtyTrac] released its April statistics, it estimated that 3,746 properties in metro Atlanta’s five core counties had been slapped with foreclosure sale notices. But a review of local legal advertisements – the only official source of Georgia foreclosure information – suggested a decidedly different number for April, with 7,462 properties slated for auction on the courthouse steps.

How can governments determine if any of their foreclosure prevention measures are working if they don't know how many are happening to begin with? The answer is they can't, and I agree with CR that this data would be extremely valuable. Read the rest of the article for some good quotes from researchers and officials on the issue.


*Title of this post is a famous quote in the software development world, originating with Tom DeMarco's seminal work Controlling Software Projects: Management, Measurement and Estimation.

What's in a headline?

Consider these two headlines out of Massachusetts today:

• Foreclosures in Mass. plummet 58.6% in May - Boston Globe
  
• New foreclosure proceedings jump in May - SouthCoastToday.com
  

Hurray! Oh noes! Surprised to learn they're reporting the same story? The Boston Herald takes a more balanced approach:

• Massachusetts foreclosures fall, but actions to seize homes rise - Boston Herald

In any event the drop in foreclosures seems significant, and the rise in proceedings seems in part to be a reflection of an artificially low number last year. From the Herald:

Timothy Warren, CEO of the Warren Group, noted that foreclosure petitions were “artificially depressed” in May 2008 by a state law that required lenders intending to foreclose to give delinquent borrowers 90 days to catch up on missed mortgage payments. ... In May, 582 foreclosure deeds - the number of homes that were actually foreclosed upon - posted a dramatic 59 percent drop from 1,405 in May 2008. Experts said the dropoff shows that lenders are modifying troubled loans with better terms.

Clogged Pipes

From ForeclosureRadar by way of L.A. Land comes the observation that only a very small percentage of potential foreclosures are getting all the way through the process:

ForeclosureRadar has more evidence of a foreclosure backlog in its monthly data, released today: In May, a record 111,824 California homes were scheduled for foreclosure sales, but just 16% were auctioned. By comparison, last May, sales were held for 49% of homes slated for foreclosure. Of last month's postponed foreclosures, 40% were delayed at the request of the lender; an additional 33% were postponed by agreement between the lender and borrower.

As mentioned in an earlier post, the foreclosure pipeline is clogged and cannot handle the flow. I'll keep an eye out for any more color on why a lender would request a delay without an agreement with the borrower (other than the obvious reason of not having time to adequately prepare for the auction).

CA announces 3 months free rent for defaulters

No they didn't actually word it that way, but that's what the new law will amount to in most cases where it applies. From the Sacramento Bee:

After more than 365,000 California foreclosures since early 2007, the state's long-awaited 90-day foreclosure moratorium law goes into effect Monday. But it doesn't mean foreclosures will stop. The law goes into effect as lenders are ramping up repossessions following expiration of earlier moratoriums, according to housing trackers.

Lenders can exempt themselves from the delay by complying with the Making Home Affordable Program a loan modification program that includes the eligibility requirement "You have income sufficient to support the new mortgage payments", so it's unlikely to benefit anyone who has either lost a job or relied on an unrealistic stated income to qualify for the original mortgage.

Foreclosure filings surpass 300K for the third straight month

From Bloomberg, May down a tad from April but still up substantially year over year. Amid the numbers I found this remark interesting:

"The foreclosure bucket is filling faster than it’s emptying," Jay Brinkmann, chief economist of the Washington- based Mortgage Bankers Association, said in an interview. "It will continue through next quarter at least."

This is important to keep in mind. The problem is so large its overwhelming the existing institutions and processes. About half of all real estate transactions in California right now are foreclosures, yet banks are still foreclosing faster than they can sell the houses and debtors are still defaulting faster than banks can foreclose. Not only will it continue through next quarter, at least in some parts of the country it will reach true crisis levels, and you may see the $1 house phenomenon spread beyond Detroid.

Not the upper middle class!

The foreclosure crisis is creeping its way up, and in the end I think this will be the real story. And now that it's not just the unwashed subprime masses even Business Week is showing empathy for the affected:

Consider the plight of Stephanie and Bob Walker, who bought a $799,000, three-bedroom home in Los Angeles with a view of the Hollywood sign in 2006 but are losing it because last year Bob stopped getting computer consulting work that used to pull in about $240,000 a year. Bob eventually landed a job paying $60,000, and Stephanie found work as a $13-an-hour temp, but it wasn't enough to cover their mortgage and credit-card debt, which was swelled by about $130,000 worth of home renovations.

So I actually work in the "computer consulting" industry, and can assure you no one is pulling in $240,000 net a year on a consistent basis, especially not anyone with a $60K/year fundamental skill set. $20K gross in a month is definitely doable but that's rarely repeatable so I expect this was a stated income loan and doubt if the Walkers were regularly claiming $240K on their income tax returns. But the nonreality of the specifics aside BW makes a salient point:

Unemployment is exacerbating the problems at the top of the market. The jobless rate for adults with a bachelor's degree or more [is] more than double the rate of 2% a year earlier. And many families in that segment of the population built their finances on the assumption of continuous full employment, so they can't cover the mortgage when even one spouse is out of work.

Even couples that didn't use exotic financing regularly pushed their debt-to-income ratios to the absolute limit to be able to compete with people who did. And that leaves no slack, both people must stay fully employed or they can't afford the home. This source of foreclosure may currently be quite small relative to 0 down Alt-A/subprime nonsense or speculative investors, but in the end it will be the kind that hurts the most, and leaves the most lasting scars on our national psyche: families torn away from their dream homes after pouring everything they made into them for years.

72% year over year growth, that's good, right?!

Here in Washington state we're a bit behind the curve as seen in California but the overall pattern seems similar. By way of The Tim at Seattle Bubble:

Notice of Trustee Sale summary for April 2009
King: 938 NTS, up 72% YOY
Snohomish: 483 NTS, up 90% YOY
Pierce: 652 NTS, up 48% YOY

In an upcoming post I'll get into exactly what a Notice of Trustee's Sale is.

From the half-baked-silver-lining department

From the Associated Press, FEMA may put storm victims in foreclosed homes:

The idea is still being developed, but FEMA would likely contact banks, other mortgage holders and their representatives to compile a list of available homes. The evacuees would then be assigned homes close to their own and FEMA would use a contractor, acting as its agent, to pay rent directly to whoever owns the home, said Jon Arno, FEMA's individual assistance branch director for Florida.

I suppose we can all just hope we never need to discover just how impractical this is. It also seems as if an unused prison would be more on point:

"When you have a diaspora that leaves the state it's very hard to get those guys back. You really want to prevent them from leaving the state," said Jeff Bryant, the Federal Emergency Management Agency's federal coordinating officer for Florida.

"every 13 seconds"

Foreclosure snark has reached New England, from boston.com:

Here are some foreclosure stats to brighten up your day.

There have been 1 million new foreclosure filings across the country – all since January.

And that number is expected to more than double by year’s end, according to a depressing new report released by the Center for Responsible Lending.

That’s a new foreclosure filing every 13 seconds.

Foreclosures hit record high

I suspect I'll be able to make this same post every month for a long time. From Bloomberg:

The U.S. delinquency rate jumped to a seasonally adjusted 9.12 percent from 7.88 percent, the biggest-ever increase, and the share of loans entering foreclosure rose to 1.37 percent, the Mortgage Bankers Association said today. Both figures are the highest in records going back to 1972. Fixed rates rose to 4.91 percent, Freddie Mac said, and an increase in bond yields earlier this week shows rates may continue rising.

Interactive foreclosure activity map from AP

Nationwide by county. All that red should be worth a sleepless night or two for foreclosure buffs.