January, 19 2012 | Mark
People are brainwashed to think foreclosures are a bad thing for the housing market. Perhaps four years ago when a million loans all went into default & Foreclosure at the same time but not today. Today, 1st timers and investors — with an insatiable appetite for foreclosures, REO resales and short sales — are the bedrock of this housing market. I do not believe we can have a healthy housing market until the mistakes of the bubble years are undone and the can kicking comes to an end.
I don’t follow the logic of “Foreclosure prevention” as a positive for housing, particularly mortgage mods or bulk REO-to-rent schemes. Both are just another form of can-kicking that will hurt and housing and mortgage markets on pay back. There are always unintended and unseen consequences.
On an REO-to-Rental Scheme…
Before I begin with the facts…
Ask yourself one question… Would you pay more for a house next door to a slightly rehabbed REO turned rental? Or, for a house next door to a former REO purchased by an investor then fully rehabbed and resold to an owner occupant who actively maintains the property?
Ask yourself another question… given your house value depends on comparable sales, of choices a) and b), what increases your house value more?
a) An REO next door to you bought by a large institutional investor for a steep discount who then rents it? (this produces a much lower comparable)
b) A REO that was previously bought for a steep discount then rehabbed and sold at the highest price in the neighborhood. (this produces a lower comparable then a sky high comparable. Plus it permanently solves the problem)
c) Which brings in higher tax revenue to the community?
The answers are clear. You never want to buy next door to a rental if you can help it. And a fully rehabbed REO resale lifts all prices in the neighborhood.
Perhaps this is all a part of a big plan…perhaps this whole institutional investor REO-to-rent scheme is being put into place as a backstop in order to manage an avalanche of Foreclosures ready to hit in 2012 from the mountain of late stage defaults and modification redefaults presently in the pipe. If this is the case, it is long-term positive mortgage and housing, as the bubble toxic loans left over would be clearing sooner, but obviously more negative house prices and alike while the flush was occurring.
For the purposes of this note, let’s pretend they are not that forward looking and the REO-to-rent scheme is because they really think Foreclosures are bad for the housing market (and they really want to help out the builders).
1) Few realize that:
a) Foreclosures and distressed sales INCREASE neighborhood house values and create a positive economic benefit when investors buy low, rehab and resell higher. Moreover, rehabs create jobs and the resale makes for TWO existing home sales transactions, commissions etc in a short period of time. Lastly, they make for a substantial increase in property tax revenue on rehab and final resale.
b) Foreclosures and distresses sales BENEFIT the neighborhood and local area economy when they are sold to an owner-occupant who purchased in the open market and then rehabs, maintains and occupies.
c) Foreclosures and distressed sales LOWER neighborhood house values and create little economic benefit when they are sold to professional investors at below market prices who turn around and rent them. Moreover, rental houses are always the worst maintained in the neighborhood and decrease the values of houses in their immediate area. Lastly, these transactions are a huge drag on property tax revenue.
d) Due to epidemic effective negative equity (not having enough equity to pay a Realtor and put a down payment on a new house) the repeat buyer cohort has been cut in half since 2007. They are now make up the minority of national resales. Investors and 1st time buyers ARE the real estate market. Investors and 1st timers want REO and short sales. Anything done to prevent the flow of distressed property will hurt the volume of existing home sales and all of the economic benefit that comes along with them. An REO-to-rent program will bring about record lows in monthly Existing Home Sales volume. And volume precedes price.
e) Various house price indices that measure prices with and without distressed sales that SEEM to prove REO brings down house prices are inaccurate. That’s because when measuring the “organic” sales this cohort includes REO that was purchased 6 to 9 months earlier then fully remodeled and resold at top dollar. Because the investor to final buyer transaction looks like an organic sale they include it in their measure skewing higher the organic cohort. If these house price indices removed all houses associated with any type of Foreclosure in the past 36 months from their “organic” the delta between the house price index that includes REO and the one that doesn’t would be different.
Moreover and perhaps most important, if these indices only measured investor rehabbed REO resale prices (REO bought by investors then rehabbed and sold for top dollar) you would clearly see how Foreclosures are responsible for the highest comparable sale prices in neighborhoods around the nation.
f) Lastly, there is more than enough demand for distressed real estate by 1st timers and investors to absorb multiples of the supply presently on the market. The back-log in REO is not about demand, its more about financial institutions willingness to accept losses, can-kicking, and the lack of understanding how rehabbed REO lifts all house prices due to higher comparable sales. If banks would have been releasing REO to the market as they acquired it instead of holding onto it there would be no REO back-log.
2) Bulk REO-to-rent housing market and macro negatives:
a) 1st timers and investors now make up the foundation for the housing markets most in need to help (i.e., AZ, CA, FL, NV etc). They will go away if distressed inventory goes away or if they have to compete / dig through the leftovers of big, institutional investors. Without 1st timers and smaller investors, vital real estate markets around the nation will die (i.e, 65% of all sales in the Sacramento CA region are distressed)
b) 1st timers and investors want distressed properties (REO and short sales) at low prices. They underpin the market. REO and short sales are what is in demand
c) 1st timers and investors will not pay more for houses if distressed inventory goes away…in the new era housing market, particularly at the low end, house prices are more a function of local area incomes and not the property, house or rental returns
d) Organic (repeat buyers), who throughout history have controlled the market, will not come back for years due to epidemic effective negative equity preventing them from being able to sell (pay a Realtor 6% and put a 10% to 20% downpayment on a new property) and rebuy.
e) Foreclosures and distressed sales INCREASE neighborhood house values and create a positive economic benefit when investors buy low, rehab and resell higher. Moreover, rehabs create jobs, increase the municipal tax base, and the resale makes for TWO existing home sales transactions, commissions etc in a short period of time
f) Foreclosures and distresses sales BENEFIT the neighborhood and local area economy when they are sold to an owner-occupant who purchased in the open market and then rehabs, maintains and occupies.
g) Foreclosures and distressed sales LOWER neighborhood house values and create little economic benefit when they are sold to professional investors at below market prices who turn around and rent them. Moreover, they negatively impact the municipal tax base.
h) Institutional bulk REO-to-rent investors will not spend the time and money improving properties to the same extent a private investor looking to resell or rent will. Moreover, rental houses are always the worst maintained in the neighborhood and decrease the values of houses in their immediate area
i) There is more than enough demand for 3x the distressed sales that presently occur on a house by house basis through the Realtor network but the banks and servicers meter the asset sales so as to manage losses
j) Existing home sales will plummet to record low levels without distressed resales. In fact, a private investor that buy REO to rehab and resell account for two existing sales transactions on the same property within a short period of time. I can’t imagine that NAR is in favor of an REO-to-rent plan
k) HALF of California existing home sales would disappear without distressed inventory and sales. That would be an economic disaster
l) If distressed sales (REO + Short Sales) make up the majority of sales in these markets, any plan to do away with them will do away with THE marke
m) Smaller investors who have been buying distressed property to rent for the past few years will be sellers all at once knowing big, institutional investors buying bulk REO to rent will drive their rental returns much lowe
n) What happens in 3 to 5 years when all these institutional investors want to sell all these beaten up rentals at the same time?
o) Based on our research, 12 to 15mm foreclosures and short sales will occur from bubble years lending. To date there has been less than 5mm. The market has only begun the clearing process and demand is there for a much greater volume of loans and houses to clear over the next three to ten years. A bulk REO-to-rent program prevents the natural clearing process that is well underway.
3) The best, easiest and quickest way to clear foreclosures is for the servicers to price them to sell at the courthouse steps.
That’s because when a house sells at the steps they don’t count as comparable sales for the purpose of appraisal valuation. Moreover, investors who buy these generally fix up and resell bringing surrounding house values up in the process. The courthouse steps auction process has been in place forever and has gone from 5% of all Foreclosures to nearly 30% in CA over the past few years. This works. It seems to me that a law mandating that servicers can’t hold foreclosures for longer than 90 days would prompt them to use the courthouse steps as a primary method of liquidation. Lastly, courthouse steps 3rd party foreclosure sales make for a substantial increase in property tax revenue on rehab and final resale.
4) An example of how distressed sales ARE the market in CA.
If all the distressed sales (red) were to go away the real estate market — and all ancillary sectors — would grind to a virtual stand-still.
5) But, then again, a bulk REO-to-rental scheme is most likely a non-starter anyway
Finally, let’s put all of this into perspective using my proprietary default & Foreclosure database because based on the massive volume of distressed in the default & Foreclosure pipe ready to hit the market in 2012 bulk REO-to-rent is really a non-starter.
So, the media and investors are all giddy by big named investors chattering about buying a whopping $1 billion bulk REO buy. If a $1bb deal like this was closed tomorrow that leaves $64bb in real estate valuation in Q4’11 in the state of CA alone jammed into the default & Foreclosure pipe to be absorbed.
In Q4’11 in CA alone…
a) $43.1bb in house valuations were issued a legal Notice-of-Default or Notice-of-Trustee Sale (investors can’t make a dent in this)
b) $6.9bb were taken back as REO (investors could dent this. In fact, the NOD/NTS to REO ratio being so large (REO Small relative to defaults) shows the extent of can-kicking and how the can has been kicked right into a huge brick wall)
c) $2.4bb were sold to investors at the courthouse steps waiving cashiers checks (the ultimate solution for Foreclosures)
d) $14.8bb were kicked down the road via new-vintage, higher leverage worse than Subprime loans (otherwise known as mortgage mods) of which 80% will come back around within 24 months.
Best Regards,
Mark Hanson
DISCLAIMER: This message and attachments are for the sole use of the addressee and are privileged, confidential and exempt from disclosure. If you are not the addressee, copying, dissemination, or distribution of this communication is strictly prohibited. You must delete the e mail and destroy any copies. In publishing research, Hanson Advisors and MAHA, Inc (the Company) is not soliciting any action based upon it. The Company’s publications contain material based upon publicly available information, obtained from sources that we consider reliable. However, the Company does not represent that it is accurate and it should not be relied on as such. Opinions expressed are current opinions as of the date appearing in the Company’s publications only. All forecasts and statements about the future, even if presented as fact, should be treated as judgments, and neither the Company nor its partners can be held responsible for any failure of those judgments to prove accurate. It should be assumed that, from time to time, the Company and its partners will hold investments in securities and other positions, in equity, bond, currency and commodities markets, from which they will benefit if the forecasts and judgments about the future presented in this document do prove to be accurate. The Company is not liable for any loss or damage resulting from the use of its product. The Company is CA Corp registered in the state of CA.
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November, 21 2011 | Mark
As a quick note, I am pleased to announce that we began a Canadian Housing, Finance & Credit coverage model in October and Australia kicks off this week.
This note below is of what I believe to be extremely important mortgage and consumer debt metrics that are often forgotten, or ignored completely, (definitely not understood as long-term structural) but that matter in a significant way when analyzing housing, MBS, banks, and the consumer particularly if the consensus “muddle through” economy in 2012 turns out to be wide eyed. This is nothing tradable per se, but things I always weigh heavily in risk/reward analysis, as they are such powerful macro consumer headwinds. This plays a very important role in our MBS analysis and strategy.
Mark Hanson
1) Banks, MBS investors, and MI companies pinning their hopes on the success of loan modifications will be sorely disappointed
I have harped on this for years in research reports and notes to clients but every time I see data that support my contrarian view I am taken aback…that the primary driver of loan default is not negative equity rather too high of debt-to-income levels, about which far less that can be done to permanently solve the problem. In part, the latter in the reason why the puppet masters want you to believe that negative equity is the primary driver of loan default.
Most analysts point to negative as the primary driver of loan default, but I think that is misguided. This is because none have current income, debt and asset documentation so by default they point to negative equity, which is present in most defaulted loans. I would concur that the success rate for modifications on two different borrowers with identical DTI might come down to the severity of negative equity. But it’s not the “driver”.
Point being, it’s much easier to point at negative equity as the boogieman than concede there are 10s of millions of legacy mortgage loan holders who are economic zombies due to debt-to-income levels that have all but removed them completely from the US housing, finance, and macro economic equation.
Median Monthly HAMP Mod Applicant Monthly Debt Payments Over 100% of Net Income / Near 100% Post-Mod
(*It is important to note that a borrowers DTI is calculated only using debt reported on the credit report plus housing related taxes and insurance. It does not include any other cost of living expense such as auto or health insurance, apparel, clothing, entertainment, food, fuel, retirement and pension allocations, savings, travel, or vacation.)
To most borrowers with sub-40% DTI’s (industry maximum was 36% for decades leading into 2000), who can save, shop and vacation, negative equity is more of a nuisance. It’s certainly not something over which most would strategically default. But to those with a 65%, 75% or 80% % DTI — before taxes – default is a given eventually; the debt load is just too high at 100%+ of net earnings. This is regardless of the severity of the negative equity. Some with sky high DTI’s have greater savings or a moral compass that points to a mortgage as being the same as a promises to country, mom, or God. They can live in debtors prison longer than others, but eventually most will break.
I think it’s safe to assume that the average earner with a DTI of over 50% DTI before taxes and all other monthly expenses not listed on a credit report (max DTI for Subprime full doc loan originations during the bubble years was only 55% by the way) needs relief. Stopping the mortgage payment is the easiest way to get that relief.
When you look at DTI as the real driver of loan default you get a much clearer picture of why loan mods don’t work — and why they will never work — and how insurmountable the problem really is…people need full debt portfolio mods not just ‘mortgage’ mods.
Bottom line, the 78.3% median pre-modification DTI across all HAMP mod applicants is most likely a fairly accurate portrayal of the typical bubble-years borrower, in default or not, that the government, banks, and MI companies have spent years so desperately trying to prevent from defaulting through increased leverage via new-vintage, high-leverage, worse-than-Subprime loans (i.e., mortgage mods). Thus, our forecast stands…after two years we believe at least 75% of mods across all mod program and loan types will experience a 30-day redefault.
(*Note how we quote “30-day redefaults” and not 60-day like everybody else. That’s because 60-day redefault rates are notably lower due to servicers having modified borrowers on a short leash and many being re-modified before the 60-day late occurs. It is my opinion that when a loan experiences a 30-day redefault the odds are greater than 90% it will ultimately lead to foreclosure status.)
In order to make these borrowers active members or our consumption driven economy once again, mortgage mods resulting in a 61.5% DTI (Sept HAMP median) is not enough relief. They need debt elimination BK’s with mortgage balance cram downs, which will never happen. Or, they need principal forgiveness to a level that brings their DTI in line, which in most cases would take their LTV way below 100%, again which will never happen.
The chart below is from the latest HAMP monthly report. The most important two metrics in my mind are circled in red. This is such a glaring example of zombie can-kicking it amazes me they publish the data.
- pre-mod, the median applicant has a PRE INCOME TAX DTI of 78.3% (half are above!)
- post-mod, the median recipient has a PRE INCOME TAX DTI of 61.5%, which is still far too high to be considered a long term solution.
When thinking about this, it is important to stress that two different borrowers — both with a 65% DTI but one with 110% LTV and one with a 150% LTV — are in the exact same position. That is neither can sell, re-buy, refi, save, shop or vacation. They are debt prisoner renters in their own home.
Principal Balance Reduction Program No Good
And even if a principal reduction program is rolled out broadly it will most likely only bring LTV’s down 115% LTV (higher CLTV when including 2nds), which doesn’t mean much. Moreover, it will require that borrowers accept a market rate or higher 30-year fixed rate loan – much higher than the ~2,5% teaser rates on a HAMP mod – meaning median DTI’s will remain sky-high.
Essentially, a widespread principal program will still leave the borrowers underwater, over-levered renters, who are unable to refi, sell, rebuy, save, shop or vacation.
2) Total Home Equity approaching Record Lows again. US housing stock debt to equity ratios at record highs.
Another tidbit in plain view most do not factor into their housing and consumer focused research is net homeowner equity. This is very important with respect to the repeat buyer, which over the past four years has seen at least half of it’s cohort disappear due to epidemic effective negative equity, sentiment, wealth effect etc. Remember, in order to sell and rebuy most homeowners need 16% to 26% equity (6% Realtor fee on the sale and 10% to 20% downpayment on the new property).
Most sell side and gov’t research likes to quote the drop in the total value of the US housing stock going from $23tt down to $16tt-ish because it doesn’t sound as bad.
But on net, it’s catastrophic particularly because the house is the largest asset of most productive members of the economy. These data show clearly how painful the house price decline really was on homeowner’s net worth and the ability to sell and re-buy. Even if lending guidelines were still as easy as 2006 – with net equity as lows as we have today – we would still be in a mortgage and housing depression.
Note, that the current estimated LTV’s of Freddie’s portfolio shown in the chart below DO NOT include second liens, which with respect to refinancing, selling, and rebuying, are just as much of a lien as a first mortgage.
Bottom line, homeowner’s equity is down 55% from the 2006 peak to $6.2tt and quickly approaching the record lows of Armageddon 2009.
3) Shown another way by Freddie, while the value of the housing stock is only down 30%, equity is down 55% and total debt is only down 3%.
Bottom line, the US housing stock is back to an Armageddon high debt-to-equity ratio.
No matter how you slice it, this puts pressure on the consumer in more places than at the margin.
Best Regards,
Mark Hanson
DISCLAIMER: This message and attachments are for the sole use of the addressee and are privileged, confidential and exempt from disclosure. If you are not the addressee, copying, dissemination, or distribution of this communication is strictly prohibited. You must delete the e mail and destroy any copies. In publishing research, Hanson Advisors and MAHA, Inc (the Company) is not soliciting any action based upon it. The Company’s publications contain material based upon publicly available information, obtained from sources that we consider reliable. However, the Company does not represent that it is accurate and it should not be relied on as such. Opinions expressed are current opinions as of the date appearing in the Company’s publications only. All forecasts and statements about the future, even if presented as fact, should be treated as judgments, and neither the Company nor its partners can be held responsible for any failure of those judgments to prove accurate. It should be assumed that, from time to time, the Company and its partners will hold investments in securities and other positions, in equity, bond, currency and commodities markets, from which they will benefit if the forecasts and judgments about the future presented in this document do prove to be accurate. The Company is not liable for any loss or damage resulting from the use of its product. The Company is CA Corp registered in the state of CA.
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October, 23 2011 | Mark
An excerpt from various past client notes…
Banks not wanting to lend is a myth. It’s a trendy thing to blame the banks for not wanting to lend, but it’s not reality. Don’t get me wrong…many other problems in housing and finance might be able to be blamed on them, but not this. This is what makes the problem in mortgage and housing so fundamentally grave. It’s just not as easy as lowering rates, doing a mass refi event, or pulling Foreclosures off the market.
After nearly 5 years, if there was an easy fix (HAMP mods, HARP loans, HAFA short sales, printing trillions of dollars in order to try to create inflation) housing would be experiencing a v-shaped recovery already. Housing and mortgage are in a generational downturn for which the only cure is time. Anything done to prevent the market from clearing extends the duration and ultimately, the severity.
Below is a list of headline mis-perceptions and recently proposed intrusions — and my greatest pet peeves — aimed at mitigating the damage from various disasters lying directly ahead. Like everything else to date, they are poorly thought out ideas (mostly proposed by those in gov’t or the private sector that stand to benefit the most from them) that will only loosely patch the gaping hole in the side of the ship via kicking the can or adding leverage to a sector in natural de-leveraging mode.
The ‘fixes’ are aimed at artificially supporting house prices through increased debt, leverage or both; keeping refi money churning in order to temporarily drive bank earnings, lowering the household debt service burden so they can increase spending or increase/pay down other debt; ridding banks of pesky legacy rep & warranty (putback) risk; protecting the banks from resi whole loan and MBS price discovery; giving something to millions of delinquent borrowers for nothing; and getting votes. None of these things alone or combined will promote a sustainable recovery in housing. The only true fix for this housing market is time, jobs, income growth and debt reduction. And this reality always leads to disappointment.
1) Mortgage rates are officially under 4%. Contrary to popular opinion, mortgage liquidity is abundant. Underwriting standards — while not easier than 2003 to 2007 (which is against what everybody benchmarks them in the most recent “movement” for further stimulus in the sectors) – are certainly the least volatile and most consistent today than at any time since 2007. If you have a job, income to meet credit obligations, and a credit score that shows you repay debt on time, you can easily get a loan. One of the primary differences between the bubble years and now is not the loan parameters; rather now you have to prove what you put on the loan application.
In fact, even with an LTV to 125% you can get a loan through the HARP program. That was unheard of during the bubble years. In the near-term, my guess is that they will soon expand this program by eliminating the maximum 125% LTV requirement in addition to the rep and warranty liability on the banks. They will call it ‘housing stimulus’. What it really does is keeps refi revenue flowing, which isn’t a bad thing; prevents, or puts-off, some strategic defaults at the margin. also not bad; but the greatest impact this has is on the banks, which will be rid of billions in legacy putback risk to the GSE’s when they refi this cohort of high risk borrowers with new risk free money.
In addition to sky-high LTV refi’s never before available, right now a good borrower can do a loan with a debt-to-income ratio of over 60% through Fannie Mae. That pretty damn aggressive when Fannie will issue a loan purchase approval to a borrower paying in excess of 60% of their gross income out to total debt.
2) Because 95% of all loans are sold Fannie and Freddie or insured by FHA, “banks not wanting to lend” is a myth, at least in the residential sector. It’s not even the bank’s decision by and large. Obviously, the ultimate credit decision belongs to the banks because they warranty the loan. But for the most part, the banks just provide armies of loan officers & underwriters and servicing for the GSE’s. Banks input the loan data, press a button and the GSE’s say yes or no.
Portfolio lending — such as super jumbos — is a different story but that makes up such a small portion of overall lending those complaining about not being able to get a $2mm loan according to their personal terms probably shouldn’t be getting one in the first place. And if you are a credit worthy affluent borrower, there is no problem getting aggressive super jumbo financing. Again, lending is much “tighter” compared to 2003 through 2007, but certainly better than in 1990 or 2000.
3) The lack of refi activity is a demand problem, not supply. In short, without being able to fudge income, assets and house values (like in 2003 – 2007) — i.e., lending to anybody with a heartbeat — half the eligible borrowers in the US suddenly disappeared.
Obviously, when half of your potential customers suddenly die, a business is going to have a rough time of it. But changing the rules in order to lend to zombies is not the answer.
Those that can easily refi do it each time rates drop. But on this recent drop to 4% the benefit is too thin – relative to the Q410 QE2 drop to 4% — to make sense. Moreover, a large percentage of Main Street is still in recession, critically over-levered, or have become poor credit risks for one organic reason or another over the past four years.
Bottom line, we will never do the lending volume of 2003 to 2007 for years and years. Thus, benchmarking today’s mortgage and housing activity to the bubble years for the purposes of analysis or justifying stimulus is idiotic.
Trying to artificially create another 2003 to 2007 housing and lending environment through government intervention will lead to severe disappointment and push out the true bottom in mortgage and housing from a decade to several. Giving weak credits something for nothing — the same rates and terms through an insta-refi program as borrowers who really qualify for them — will do the same.
4) On Preventing (and Renting) Foreclosures
Preventing Foreclosures, another cry getting much louder as we go into election season, is another short sighted initiative that will set the ultimate housing recovery back years. It will stagnate housing related capital flows and make it so supply actually increases.
This is because in the hardest hit states — also states that matter significantly to national GDP such as CA, FL, AZ and NV — Foreclosures and short sales (both are liquidations that remove borrowers from their houses) make up 50% to over 70% of all transactions. THEY ARE THE MARKET. Organic repeat buyers now make up a minority due to epidemic effective negative equity.
I use the term “effective” to mean those without enough equity to pay off the first (and 2nd) lien, pay a Realtor 6% to sell their existing property and put 10% to 20% down on the new property. For example, when you lower the negative equity threshold to 75% (6% Realtor fee + 20% down on new house purchase) in order to quantify the pool of potential Jumbo repeat buyers in CA, over 60% of all homeowners with mortgages are effectively underwater.
Bottom line, sales volume precedes price. With rates at historic lows, house sales volume anemic, and first timers and investors still active in the market, anything done to prevent the flow of their desired target properties — Foreclosures and short sales — further prevents an ultimate clearing of the market. In fact, it is forcing some first-timers into new home communities in recent months meaning even more supply.
Foreclosures are the answer, not the problem. Since the crash began the common theme from gov’t, the banks, media and everybody else is that Foreclosures are the enemy. Timelines to Foreclosure are now past 600-days and total time from first payment default to final liquidation of a property runs up to 40 months. Foreclosures are down substantially yoy and from the peak as a result. Still, Case-Shiller hit new lows just a few months ago…how’s this been working for ya?
Remember, one definition of insanity is repeating the same process over and over again expecting different results.
5) Another call for the GSE’s to rent hundreds of thousands of Foreclosures will also cause much more harm than good.
First, it cannibalizes the first timer buyer cohort and second it competes directly with smaller independent investors who have been supporting the market since 2007, many of which buy to rent. Who wants to buy a Foreclosure as a rental property investment knowing the government is going to pound your market with 10s of thousands of rental units.
Also, many of these investors buy with mortgage loans meaning less loans, bank revenue and related jobs, as over 125 individuals work on a purchase transaction on the real estate and mortgage sides.
Moreover, these rentals will always be shadow inventory. At some point the investors who buy this GSE REO will be allowed to get out – or have to get out — and then it becomes supply. Every time they have kicked the can hoping for a better market in the future it has backfired creating a need for even greater can-kicking.
Lastly, renting hundreds of thousands of Foreclosures to their former distressed owners — most of which are probably still distressed making for not so great tenants — will crush the multi-family market, which is the only real estate market that has been able to excel over the past few years.
Bottom line: Let Foreclosures flow, get the houses out of weak hands and into strong hands, de-lever the system, and force servicers to focus on the courthouse steps. There is more than enough demand at the low-to-low mid price bands to absorb Foreclosures for resale and rental. At the mid-to-high end, that’s a different story…in fact, that will be the big story of 2012.
With respect to large, institutional investors buying and renting REO to the former, distressed borrower, it sounds like a noble idea. That’s until you realize that these properties are already run down and institutional investors will not deploy the capital necessary to bring them up to date; the old owners (present renters) will not care for the houses the way they used to when they had an interest in them; REO remodel jobs, Realtors, mortgage lenders, building material purchases et al that would have been needed to rehab and resell/rent the propertiesd, won’t be needed to the same extent; demand in the rental market will get crushed; and existing home sales volume will suffer, which runs the risk of hurting macro sentiment.
Be careful what you wish for…over history, first timers and investors have been known to disappear from the market literally overnight. If that happened now, housing would spiral lower in an uncontrollable fashion.
6) Third-Party Foreclosure Sales at the Courthouse Steps is a Solid Answer
3rd Party Foreclosure Sales at the courthouse steps are at record highs in CA. This shows two things…a desire by servicers to price opening bids at a level that will liquidate and a strong demand by private investors. Best about the 3rd Party Sales at the courthouse steps is that (unlike REO resales) they do not count as comparable sales (investor buys at steps and fixes up to rent or sell). In fact, upon resale they generally will help to support or increase house prices in neighborhoods. Bottom line, 3rd Party foreclosure sales at the courthouse steps are the best way possible to liquidate for the highest price possible, yet banks and servicers have all but disregarded this valuable channel.
7) If borrowers don’t have good income, credit or equity then they can just default and get a loan modification. The rates are better than the present ~5% for less than perfect borrowers anyway. Mortgage modifications are nothing more than the post-bubble years, exotic, high-leverage refi’s.
This is what is such a joke about the benefits of an insta-refi program. Right now millions and millions are not making any payments at all or are in 2% loan mods. There is your refi boom. There is your stimulus. But now that the 2009 – 2011 mod bubble has deflated, pressure is building again and the market needs more juice. So, all of a sudden the old ideas come back out with different names.
8) Principal balance reductions are another farce. While they would help with strategic defaulters at the margin, I don’t think they would be much help because enough principal could be forgiven to make it matter to the homeowner.
Remember, whether the borrower is at 200% Loan-to-Value or 115% LTV they still can’t sell, refi or rebuy. They are stuck. And because Debt-to-income ratios are so high — yes, even with principal reduction mods because generally the borrowers get market rate (or above) fixed rate, fully-amortizing loans — it won’t bring down borrower’s payment rates much if at all. Right now the average HAMP mod ends up with a DTI of 65%…that’s 65 cents of every PRE-TAX dollar a HAMP mod recipient earns going out to debt, of which the mortgage makes up the lion’s share.
Because of this, borrowers with principal forgiven will still be highly levered renters in their own houses unable to save, shop or vacation.
Bottom line, those thinking principal reductions are a panacea have never originated a loan, done the street level research, and do not really know the borrowers behind their data. More than likely it would create a far greater number of new strategic defaulters than the number it would legitimately save from Foreclosure.
I can promise one thing…there are millions of pissed off homeowners out there who have never been late wanting their sump’n, sump’n. A wide spread principal balance reduction program would give many a great reason to default for the first time.
In Closing…
it is always important to remember that ever since the mortgage and housing crisis began every last time a “movement” to artificially stimulate mortgage and housing gains momentum with the media, sell side, banks, NAR, builders and government it is to prevent a disaster lying directly ahead with a quick fix to patch the gaping hole in the side of the ship.
Invariably, the “solutions” involve kicking the can through increased debt or leverage; artificially supporting house prices; keeping refi money churning in order to temporarily drive bank earnings, lowering the household debt service burden so they can increase spending or increase/pay down other debt; ridding the banks of pesky legacy rep & warranty (putback) risk; protecting the banks from resi whole loan and MBS price discovery; giving something to millions of delinquent borrowers for nothing; and getting votes. None of these things alone or combined will promote a sustainable recovery in housing. The only true fix for this housing market is time, jobs, income growth and debt reduction. And this reality always leads to disappointment.
The most recent ‘movements’ to legislate easier bank lending standards; giving everybody in America with a mortgage something for nothing in the form of an insta-refi; principal balance reduction modifications in hopes of avoiding foreclosures and freeing up homeowners to re-buy (won’t help); and continued foreclosure avoidance through things such as bulk REO sales with usage provisions and the GSE’s renting REO (crushing the independent investor and cannibalizing the all important first time buyer cohort) — will end in disappointment as well. Heck, without distressed sales over a third of activity would disappear making macro housing even weaker.
This confluence of panic-bred stimulus lunacy is a perfect recipe for a disaster in the mortgage and housing sectors that will push out an ultimate bottom longer than anybody, including us, is forecasting.
Mark Hanson
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May, 10 2011 | Mark
This week the monthly negative equity headlines made the rounds (CNBC story copied below) with Zillow reporting a sharp jump to 28.4% of all houses with mortgages presently underwater. But this does not scratch the surface of the extent to which homeowners are underwater in real life.
1) Remember, these stats rarely include second mortgages or firsts that were refi’d after the purchase where cash out was pulled and the loan amount was increased, as most negative equity estimates are based on original purchase price of the house itself. Zillow, quoted in the story below, is one that uses original purchase price.
2) With respect to negative equity as it relates to the housing market and repeat buyers — the much needed but missing ingredient to a magic housing fix — effective negative equity is far greater. This is because to rebuy a homeowner has to sell, which means paying off the first (and second) mortgages, paying a Realtor 6% and putting 10% to 20% down on the new purchase. When you lower the negative equity thresholds to real life, effective negative equity is epidemic and will keep the organic buyer — especially at the mid-to-high end — at bay for a generation.
Mark Hanson
Homeowners Drowning in Negative Equity
If you have no desire or need to sell your home, then falling home prices are just on paper and likely temporary, right? Depends on how you look at it.
Falling home prices put more borrowers in a negative equity position, that is owing more on their mortgage(s) than their homes are worth. We call that “underwater,” and for good reason, because for some borrowers that sense of drowning in debt has profound implications.
Today Zillow.com reported a new high in negative equity: 28.4 percent of single family homes with a mortgage (remember, 32 percent of all homeowners do not have a mortgage).
That’s a national average, but the numbers are far worse in some of the nation’s big metros. Atlanta, for example, has a 55.7 percent negative equity rate. Denver, 41 percent, Chicago nearly 46 percent. This is on top of all the foreclosure hot spots like Phoenix, where close to three quarters of all borrowers are underwater.
Why should we care if it’s all on paper?
“Higher rates of negative equity are creating a lot of latent vulnerability in the housing stock, where if the household then encounters some economic shock, like the loss of a job or divorce or death, then that household is much, much more likely to go into foreclosure,” notes Zillow’s Stan Humphries. “So it just means that higher rates of negative equity, we’re going to see elevated rates of foreclosure for the next two to three years.”
But higher rates of foreclosure put increasing pressure on home prices, causing them to fall further, which in turn puts even more borrowers underwater. One begets the other begets the other. Humphries thinks this is a bigger deal than the “walkaway” issue (or strategic default); that’s where borrowers see no chance of ever having equity in their homes, so they walk away rather than becoming permanent pseudo-renters, responsible for the high cost of the home’s upkeep but reaping no equity benefit.
“The best research that’s been done right now seems to suggest that negative equity impact on strategic defaults really kicks in at very high rates of value to loan ratio, so that means when people are more like 30-40 percent underwater does it start to create proactive behavior where they want to walk away from the mortgage. And even at those rates of loan to values, you’re still seeing strategic defaults be a relative…not a majority behavior,” says Humphries.
Well there are certainly plenty of large metro markets, as I cited previously, where negative equity is that high. And here’s a little more food for thought: What about mobility? As the economy improves, and we see those jobs numbers rise, as we did last Friday, we have to consider the fact that many people taking these jobs may be required to move for said jobs. Those same borrowers may not be able to take the loss on the home that’s required to sell it. What then?
What is the fate of the nation’s credit quality. It’s already tough enough to get a good mortgage when you have good credit. Home buyer confidence and demand are the only remedies right now for the housing/foreclosure crisis.
Sadly, we have neither.
http://www.cnbc.com/id/42957613
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