Wednesday, March 25, 2009
People tend to speak in shorthand when talking about foreclosures—saying, for instance, that homeowners “hand the keys over to the bank.” But that’s not really what happens. And once you understand why that isn’t what happens, you can begin to understand how foreclosures can help banks cover up losses.
Foreclosure Is An Auction. When a borrower defaults on his home loan, a bank can force him to sell it at auction. The auctions are typically open to all comers. In theory, the auction process would establish a market price for a home that would allow banks to know exactly the recovery value on the loan. If an outside party bought the house from the auction, the bank would receive the proceeds and could write down any losses—the difference between the full value of the mortgage and the price paid at the auction.
How Banks Use Foreclosures To Put A Floor On Losses. Typically a bank will put in a bid on a foreclosed property in order to limit the losses on the loans. In a market where housing prices are going up or are expected to go up soon, this move makes sense. It allows banks to avoid a big loss on a temporary housing downturn. But if you are in an environment when house prices are in free fall with no bottom ahead, this winds up creating an artificially high price—and therefore conceals the actual losses a bank may suffer from the mortgage default.
Marking to Model, Still. But it's far worse than banks just potentially overpaying for foreclosed homes. They may not only be overpaying. They may then be booking them at inflated prices.
Let’s take an example. Suppose a bank forecloses on a home purchased for $250,000 with a $200,000 mortgage outstanding. At auction, let’s say other bidders offer just $125,000 for the house and the bank buys the house for $175,000, taking a loss of $25,000 or 12.5%. Keep in mind that no money really changes hands. Basically, the bank buys the house and immediately pays itself back with the proceeds from the sale.
The bank has an asset—the house--that it now needs to price. It needs to decide if the house is worth $250,000, $200,000, $175,000 or $125,000. Which value does the bank get to use?
Since the asset was purchased in a distressed sale, the bank can use its financial models to figure out the worth of the house. These models are supposed to reflect outside markets but, as we’ve all learned, banks are very hesitant to truly book assets at market levels. One thing is almost certain, the bank won’t book it below the price they paid. In fact, it’s likely they will account for some additional recover—to say, $190,000—reducing their loss to just 5 percent. On the books, the loan has a recovery value of 95 percent.
Dropping Prices Mean Hidden Losses Mount. The bank’s purchase of the house may have put a floor on the immediate losses from the mortgage default but it doesn’t stop housing prices from dropping. If the housing market continues to deteriorate, the house now owned by the bank could be worth even less. The bank bought the house for $175K and booked it at $190K. But the market value of the house could be far less. If the value of the house drops to $150K, the bank is sitting on unrealized losses of 25% but has only booked a 5% loss.
How To Invent A Toxic Asset. Let’s conclude with the idea that this is exactly how a toxic asset is created. A bank buys something and books it at a value that winds up being far higher than the market value. It can’t sell the asset without realizing horrific losses. Investors and creditors of the bank know that it is holding these things at far above their real value, however, and discount the credit worthiness and profitability of the bank accordingly.
Dislocation Ideology. All of this is made possible by one thing: an ideological conviction that the national housing slump should have been impossible and therefore that housing prices are sure to recover shortly. That's what we call the "Dislocation Ideology"--the idea that housing markets are temporarily dislocated and will soon find themselves back on the old path onward and upward.
If a long term downturn were acknowledged, a conservative bank would avoid buying foreclosed houses and prefer to take the losses up-front, letting the outside buyers pick up the home and the downside risk of further price slides. But banks are still piling up housing, so they keep buying houses and booking them at inflated values.
Source: Clusterstock, John Carney (02/18/2009)
Friday, March 13, 2009
Not surprisingly, some cities whose residents struggle with lots of these issues also have high levels of suicide, clinical depression, divorce and violent crime.
BusinessWeek.com ranked 50 of the largest metros based on their misery and depression levels. The depression scoring is based on insurance reporting. The rest of the rankings come from the National Assembly of County & City Health Officials, FBI crime reports, the U.S. Weather Bureau and the U.S. Census.
While it’s not clear that the recession has made these social issues worse – most of these cities had these problems before the economy headed south – and economic woes certainly can’t be helping.
Here are the top 10 most depressed cities.
- Portland, Ore. --Always Raining
- St. Louis --High Crime Rate
- New Orleans --Hasn't Recovered From Katrina
- Detroit --No Work
- Cleveland, Ohio
- Jacksonville, Fla.
- Las Vegas --California Speculators Ruined it
- Nashville, Tenn. --Just has to be Country Music
- Cincinnati, Ohio
Source: BusinessWeek.com, Prashant Gopal (02/26/2009)
ZIP codes in California, Florida, Arizona and Nevada dominated the list, but there were also ZIP codes on the top 25 most-improved sales list from the suburbs around Detroit and Minneapolis and in the metro areas of Atlanta and Chicago.
Inventories are shrinking and prices are stabilizing in several markets, according to the survey. Here are the top 10 ZIP codes with improved home sales:
- 94533, Fairfield, Calif. (Fresno)
- 92376, Rialto, Calif. (Riverside-San Bernardino-Ontario)
- 91342, Slymar, Calif. (Los Angeles-Long Beach-Santa Ana)
- 92126, San Diego, Calif.
- 33914, Cape Coral, Fla. (Fort Meyers)
- 93065, Simi Valley, Calif. (Oxnard-Thousand Oaks-Ventura)
- 95123, San Jose, Calif.
- 85379, Surprise, Ariz. (Phoenix-Mesa-Scottsdale)
- 93722, Fresno, Calif. (Madera)
- 95624, Elks Grove, Calif. (Sacramento-Arden-Arcade-Roseville)
Source: BusinessWeek.com, Prashant Gopal (03/05/2009)
Tuesday, March 10, 2009
About 8.31 million properties were underwater at the end of 2008, up 9 percent from 7.63 million at the end of September.
Corelogic predicts about 2.16 million properties will be underwater if home prices fall another 5 percent.
The problem is the worst in Arizona, California, Florida, Georgia, Michigan, Nevada, and Ohio.
Nationwide, 68 percent of U.S. adults own their own homes, and about two-thirds have mortgages.
Source: Reuters News (03/04/2009)
The REO rental initiative will be managed by HomeSteps, Freddie Mac’s national real estate unit, and implemented through several national property management firms. Freddie Mac has about 8,500 properties in various stages of foreclosure.
Freddie Mac also will continue to suspend evictions through March 31 to ensure that former owners and occupants have an opportunity to explore new options available to them.
To qualify for a lease, the tenant or former owner must occupy the property and show they have adequate income to pay the monthly rental amount established by the property management company based on market rents for the area. Occupants must agree to allow HomeSteps to show the home to potential buyers during the lease period.
Source: Freddie Mac (03/05/2009)
Home owners who decide to rent out their properties have to stop thinking of themselves as home owners and instead consider themselves as running a small business, experts say.
Thinking like a businessperson means focusing on the monthly cost of maintenance, mortgage and taxes, as well as being aware of landlord-tenant regulations and avoiding liabilities.
Here are key issues to consider:
- Set a fair rent. Setting the right price will make it more likely that a landlord will be able to keep the place rented.
- Understand landlord-tenant rules. Running afoul of landlord-tenant regulations and rules regarding security deposits can be costly.
- Screen applicants. Eliminating potential tenants who can’t pay or who won’t take care of the property is very important.
- Lay out the rules in a lease. Widely available sample leases can help. If you have questions, ask an attorney.
- Consider a property manager. Despite the expense, turning the job over to experts can help a landlord come out ahead.
- Talk to the condo association. If the property is a condominium, be prepared to deal with a host of regulations.
Source: The Washington Post, Renae Merle (02/28/2009)
Wednesday, March 4, 2009
Under the legislation, loan limits in high-cost areas are increased to $729,750, the same as last year. They had dropped to $625,500 this year before passage of the legislation.
In a Mortgagee Letter released yesterday on the change, HUD says the new loan limit for an area will be based on market calculations from either this year or last year, whichever is the higher of the two calculations
Given current market conditions, many areas are staying at the 2008 mortgage limit.
The loan limits can be accessed in a searchable form on HUD's Web site.
Source: REALTOR® Magazine Online
Sunday, March 1, 2009
MAKING SENSE OF THE STORY FOR MY VIEWERS
- The CALIFORNIA ASSOCIATION OF REALTORS (C.A.R.) and the NATIONAL ASSOCIATION OF REALTORS® (NAR) are strongly opposed to this provision and are working to lobby lawmakers to oppose it as well.
- Based on an NAR analysis, the reduced mortgage interest deduction will not only negatively impact families who earn more than $250,000, but also will impact home prices and values across the board.
- Under this proposed budget, the middle class would see their home values reduced even further, which will hamper the economic recovery, raise foreclosures, and hurt banks’ abilities to lend, according to NAR.