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Banks Are Forestalling Rather Than Foreclosing

Posted by Larry Doyle on September 3rd, 2009 12:22 PM |

What happens when a bank forecloses on a home? It has to book a loss. How are banks dealing with the rapidly increasing rates of delinquencies and subsequent foreclosures? They are forestalling the losses by allowing homeowners to remain in the home for a protracted period. Are they doing this out of generosity? Don’t be that naive. The banks are utilizing the ‘hope’ hedge. That is, they ‘hope’ the economy and housing market will rebound so the values of these homes increase and the loss is mitigated.

Over many years of trading and investing, the ‘hope’ hedge is a recipe for further losses. Why? Please refer to my Rule #1 from yesterday’s “LD’s Rules of Trading”: The Market Goes in the Direction Which Hurts the Most People.

Homes that would otherwise be in foreclosure create a massive overhang of supply in the shadow housing inventory. Do banks believe that buyers do not appreciate this? That would be even more naive. The excess supply will keep a lid on home prices and consumer wealth which directly impacts retail sales.

High five to MC for sharing a recent report from American Banker addressing this phenomena. Kate Berry writes Postponing the Day of Reckoning, which I am able to access from Bank Investment Consultant. Ms. Berry shares some very sobering insights:

“The goal is to hold off on foreclosures and take losses as slowly as possible to keep balance sheets up,” said Deborah Voelz, the chief financial officer of National Asset Direct Inc., a New York buyer and servicer of distressed loans. “Everyone is looking at what the ultimate loss is going to be and whether it makes sense to hold off another year or two and mitigate the results.”

The foreclosure process — and it is a process — now takes, on average, 18 months to two years, up from 15 months a year ago, according to Amherst Securities Group LP. Backlogs in county courts and at servicing companies, along with local government moratoriums, have contributed to the delays. But plenty of signs indicate that the mortgage companies themselves are in no hurry to seize their collateral.

Rick Sharga, a senior vice president at RealtyTrac Inc., an Irvine, Calif., company that monitors foreclosure filings, said banks often start proceedings but then decide “they don’t want the property” and suspend the process indefinitely.

Of the 2.3 million homes that received foreclosure notices last year, one-third had been repossessed by yearend, according to RealtyTrac.

Banks also “are allowing borrowers to be delinquent for longer and longer periods of time before initiating foreclosures,” Sharga said.

These perspectives are totally consistent with those of John Lounsbury, my guest this past Sunday on NQR’s Sense on Cents with Larry Doyle. John pointedly detailed that only 10% of homes being sold currently entail ‘willing sellers.’

What are the implications for this forestalling?

>> Continued pressure on housing overall.

>> Continued pressure on bank earnings from these mortgages.

>> Continued underwhelming trends in retail sales by consumers.

>> Prospective home buyers, especially in the higher price ranges, can remain patient.

Regardless of what bank analysts or others may want to say, these forestalled homes are not going away.

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Posted in foreclosures, General, Housing Crisis | 3 Comments »

Home Foreclosures Continue to Surge. What Does It All Mean?

Posted by Larry Doyle on August 13th, 2009 8:22 AM |

Can we truly expect our economy to return to LONG-TERM health if the housing market remains under severe pressure? I think not. While Wall Street rebounds, Main Street continues to lose value. How so? Home foreclosures continue to run at breakneck speed.

Bloomberg reports, U.S. Foreclosure Filings Set Third Record-High in Five Months:

Foreclosure filings in the U.S. climbed to a record for the third time in five months in July as falling home prices and the recession left more homeowners unable to keep up payments or refinance.

A total of 360,149 properties received a default or auction notice or were seized last month, according to data seller RealtyTrac Inc. One in 355 households got a filing, the highest monthly rate in RealtyTrac records dating to January 2005, the Irvine, California-based company said in a statement.

“We’re in a deep hole,” Diane Swonk, chief economist at Chicago-based Mesirow Financial Inc., said in an interview. “There is a whole new wave of foreclosures tied to the cyclical dynamics of the economy.”

What is this ongoing foreclosure activity doing to home prices? It’s not good.

The median price of an existing single-family house dropped 15.6 percent to $174,100 in the second quarter, the most in records dating to 1979, the National Association of Realtors said yesterday. Almost one-quarter of U.S. mortgage holders are underwater, property data firm Zillow.com said Aug. 11.

What about the mortgage modification programs which were designed to stem this tide of foreclosures? In speaking with our friends at 12th Street Capital, who have canvassed a number of the large mortgage servicing operations, we have learned that successful mortgage modifications are typically only occurring with mortgages that are delinquent 30 days or less. After that, homeowners are increasingly inclined to ‘walk away’ from homes which are further underwater (mortgage balance exceeds home value). In fact, Bloomberg highlights:

“It has been more profitable to put a home in foreclosure than restructure the loan,” Swonk said. “The only thing that helps is forgiveness of principal, and there is little willingness to do that.”

The greatest surge in foreclosure activity remains in those states which have already experienced enormous problems. The top 5 being Nevada, California, Arizona, Florida, and Utah. That said, our entire economy is intricately linked and these markets (especially California) cover a large percentage of our population.

What are the implications for this ongoing foreclosure activity? (more…)

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Posted in foreclosures, General, Housing Crisis | 6 Comments »

Why the Economy Isn’t Improving Anytime Soon

Posted by Larry Doyle on June 26th, 2009 8:30 AM |

What kid doesn’t get frustrated with his father who dictates a line of reasoning with the tried and true, “because I said so.”

In similar fashion, the public at large should be equally frustrated with economists, market analysts, and the media who continually promote ‘unemployment’ as a lagging indicator. The simple fact is in the Brave New World of the Uncle Sam economy, I believe we should question the definitions and impacts of all our economic inputs. Today, let’s dive into the all important unemployment statistics.

Recall that under the most adverse scenario of the Bank Stress Tests, the unemployment rate was assumed to top out at 10.3%. Well, do not be surprised if we reach that rate by Labor Day with a strong chance we see 11% by year end. Last week, Obama himself acceded to likely double digit unemployment. Warren Buffett predicted as much in an interview aired yesterday.

The financial industry and government officials play down these statistics by stating that unemployment lags the economy. I beg to differ!! The Wall Street Journal provides strong evidence why unemployment is the preeminent leading economic indicator in writing, Unemployment Vexes Foreclosure Plan:

Rising unemployment is complicating the Obama administration’s effort to reduce foreclosures and stabilize the housing market.

The first wave of mortgage delinquencies was sparked by borrowers who took out subprime mortgages and other risky loans that became unaffordable, causing them to fall behind on their monthly payments. But the current wave is increasingly driven by unemployment or underemployment, economists and housing counselors say.

The Obama foreclosure-prevention plan was “built around the subprime crisis model, not the unemployment crisis model,” said Michael van Zalingen, director of homeownership services for the nonprofit Neighborhood Housing Services of Chicago.

The Obama program provides financial incentives to mortgage-servicing companies and investors to reduce mortgage-related payments to 31% of monthly income.

But many borrowers don’t have sufficient income to qualify for a loan modification under the plan. Mr. van Zalingen said roughly 45% of the more than 900 borrowers who sought help at two recent counseling events would fall into that category even if their interest rate were dropped to 2% and their loan term were extended to 40 years.

I wrote “The Most Critical Economic Statistic” a month ago to highlight the importance of mortgage delinquencies. There is a very strong correlation between unemployment, delinquencies, foreclosures, and subsequent defaults on credit cards and other personal debts.

The Obama administration and all of Washington are increasingly concerned–with good reason–about the impact of increasing unemployment and underemployment, which currently sits at 16.4% and may very well get to 20%!!

What might Washington do? When in doubt, throw more money at it. The WSJ highlights how and where that money may be delivered: (more…)

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Posted in foreclosures, General, Unemployment | No Comments »