Allan S. Glass on Realtor.com

In a surprise move late Friday afternoon, HUD Secretary Shaun Donovan announced a temporary policy expanding the reach of FHA loans allowing for quick resale of distressed properties to FHA borrowers.  Commonly known in the industry as the “90 day flip rule”, CFR 203.37a(b)(2) prohibits, with few exceptions, the ability of private investors to resale a property to home-buyers who use an FHA loan to finance their purchase within 90 days from the previous acquisition.

Many investors who buy distressed assets in dilapidated conditions found themselves holding vacant homes for after rehab for an additional 30-60 days risking vandalism and effectively shutting out FHA buyers desperately looking to buy homes.  In the HUD press release FHA commissioner David H. Stevens acknowledged, ” FHA borrowers, because of the restrictions we are now lifting, have often been shut out from buying affordable affordable properties.  This action will enable our borrowers, especially first-time buyers, to take advantage of this opportunity.”

The temporary waiver will begin February 1, 2010 and will remain in affect for one year unless otherwise expanded by the FHA Commissioner.  Hoping to curb fraud and and other predatory practices the waiver will be limited to transactions able to meet the following conditions:

• All transactions must be arms length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.
• If the resale value is 20 percent or greater than the previous acquisition, the waiver will only apply if the lender takes additional steps.  These include a second appraisal that notes and justifies the price increase through sufficient and legitimate repairs and renovation, and lender ordered property inspections from non-interested parties covering all the major building systems from roofs, foundations, to electrical and plumbing.
• The waiver will only apply to forward mortgages (new loans) and will not apply to Home Equity Conversion Mortgages (HECM).

Many in the private investment community have viewed the 90 day rule as unfair and unwarranted,  suggesting that the rule is unequally applied, per previous exemptions granted to banks, HUD, non profit institutions, and other government sponsored enterprises.  Many real estate agents who specialize in representing FHA buyers have been equally frustrated by sellers who refuse to accept offers from their clients due to these same restrictions.

As noted in the waiver itself, the FHA findings suggest that this move should help address the foreclosure crisis by quickly moving distressed inventories through the system and back into the possession of qualified homeowners.  It should further enhance the FHA’s opportunity to dispose of single family REO properties in a way that maximizes returns to the FHA mortgage insurance fund.  Also mentioned, the waiver should greatly enhance the FHA’s opportunity to fulfill its mission by helping many homebuyers find affordable housing by providing insured mortgage financing to those otherwise locked out of the mortgage markets due to the tightened credit standards.

This move should also provide greater opportunity for private investors who buy REO property, short sales and third party buyers at trust sales.  Allowing for a faster turn around means that more homes can be purchased by these groups and newly renovated homes can find their way back into the hands of capable and willing home owners sooner rather than later.

Northern California based Foreclosure Radar.com <http://www.foreclosureradar.com/>  has released their January Report on California foreclosures , reflecting December 2009 numbers.  Of note this month are the dramatic declines in foreclosure activity across the board.  Much of the drop can be attributed to “holiday gifts” to delinquent homeowners as bankers look to avoid comparisons to Ebenezer Scrooge.  However the report suggests that 61.9 percent of the cancellations last month can be directly attributed to some form of workout, either short sales or loan modifications.  Home values continue to hover below 2004 levels and the majority of defaults have occurred on loans originated between the 2nd quarter of 2006 and the 1st quarter of 2007.

The report also provides beneficial insight to the goings on at the court steps.  Third party sales decreased month over month by 26.5 percent overall and by 41.8 percent on a daily average basis.  This drop is likely attributed to fewer discounts on the opening bid amounts set by the bank.  Also, the opening bid amounts on properties that went back to the bank as newly minted REO properties were on average 27.5 percent higher than current fair market value.

Other findings in the report are summarized as follows:

• NOD’s – an 17.50 percent decrease from November to December month over month vs 32.50 percent decrease by daily average.  25,130 total filings, which is an 42.85 percent decrease from December 2008
• Notice of Trustee Sales – a 5.98 percent decrease from November to December vs. 23.00 percent decline on daily average.  26,481 total filings, which represents a 6.92 percent decrease from December 2008.
• REO’s – a 11.99 percent decrease from November to December vs. 28 percent decrease on a daily average basis. 12,437 total sales ended up in the banks REO portfolios.
• Third Party Auction Sales -  down 28.89 percent from November to December, however and a 41.80 percent decrease when looked at at on a daily average basis.
• Cancellations - November 2009 posted large numbers of cancelled foreclosure sales with 13,243 cancellations, a 26.50 percent month over month decrease from November 2009 and a 105.48 percent decrease from December 2008.
• Number of Homes Scheduled for Foreclosure -  December 2009 posted a 2.64 percent decrease of homes scheduled for foreclosure vs. November 2009, a 117.52 percent decrease from December 2008.  Overall statewide there are 147,570 properties currently in some stage of default.
• Lender Discounts at Auction - averaged a 33.7 percent discount to the defaulted loan balance, down from the average in 2009 of 40 percent.  Third party bidders experienced an average 18.6 percent discount to fair market value by buying at the court steps.

Before we get too excited anticipating the end to foreclosure activity, it should be noted that seasonally foreclosures slow during the month of December.  Therefore a slowdown, although not to this magnitude, was expected by many experts.  Further driving the slowdown have been government pressure to stem foreclosures and internal moves by major lenders to complete loan modifications and/or short sales.  Many of these postponed sales had surpassed the one year mark, forcing banks to cancel and restart the foreclosure process altogether per California Civil Code 2924f.

If there is a sign of things to come in this report it’s that foreclosures and REO sales won’t likely dominate the resale markets like they have in the past two years.  I’d suggest we all sharpen our short sale skills and get ready for moves by banks and government regulators that allow for distressed assets to move through the system without the need to complete the costly and emotionally draining foreclosure process.

–>–>Popular opinion and personal viewpoints are mutually exclusive ideas.  There are times when the two overlap but a true personal perspective is driven by real life, personal circumstances and is not always at the behest of popular or even rational thought.

Popular opinion relates to generalities.  As a framework, what moral guidelines should we follow as a society to establish order and maintain peaceful coexistence?  Personal views tell us if, in the heat of the moment, with the additional emotional burden of personal experience added to the situation, our answer would be the same?

The issue of Strategic Defaults creates such a  moral dilemma. Most agree that it is morally reprehensible to blatantly disregard commitments or contracts.  Regardless of whether it’s a nickel on the playground or a million dollars in the boardroom our social contract is that both parties are bonded by trust and an expectation that each will follow through on their pledge.  To that end most would generally agree that Strategic Defaults are wrong.

But what if it were you?  What if you came to realize similar behavior was acceptable from someone other than you?  What if your choice directly impacted the comfort and well being of your children?  What if walking away from an upside down mortgage was socially acceptable? How would you decide what to do?

Calculated Risk – Why Banks Lend

Let’s first consider why banks lend at all.  Business.  They want to make money.  Simply put they have identified a need in the market (capital) and have devised a way to benefit (profit) by delivering their product (money) to the marketplace.  They provide a fundamental service to our capitalistic system and without it we would fail.

If you were to buy any type of real estate other than your primary residence you would notice that your lender would require a larger down payment and likely charge you a higher interest rate.  The reason for relaxed standards when buying your primary residence is two-fold.  First, the federal government has decided that widespread homeownership is a social benefit to society.  Second, the banks understand that shelter is a basic need. Thus if things go bad, you are less likely to walk away from your home than any other real estate asset.

Throughout most times in recent history, banks would not lend to everyone.  Interest rates were related to the banks cost of funds, and a borrowers credit worthiness.  However in the past decade lenders threw caution to wind.  Loans were given to borrowers without requiring proof or documentation supporting the stated income on their loan applications and haphazard policies were in place to insure the banks were lending against collateral that could support the loan.  Unadulterated appreciation is the elixir that makes every loan look safe, every investor look like a genius, and allows every homeowner to feel safe in their decision to pay just a little bit more than they could afford.

In moderation these cycles of growth do no harm and are always followed by periods contraction allowing market fundamentals to catch up with values.  However unabated for too long, we find ourselves unable to absorb losses without devastating impacts across the economy.  Someone is always left holding the bag.  From the banking perspective, good banks absorb bad banks, certain lending practices come to an end, losses are taken and passed along to shareholders or the taxpayers, and the whole cycle of calculated risk is started again.

Taking the Loss – When it’s Time to Walk Away

In the business world knowing when to cut your losses is not just an admirable trait, it is critical for survival.  From the smallest start up to the largest conglomerate the idea of not throwing good money after bad is commonly followed and the primary determinant of success or failure.

In his article, “The Way We Live Now, Walk Away From Your Mortgage” New York Times columnist, Roger Lowenstein cited several good examples of this practice.  From private equity firms deciding it’s a better financial decision to close the factory than keep it running, hedge fund managers leaving to start fresh with new funds and new investors after their existing investments turn sour, Sam Zell allowing the Tribune Company to file for bankruptcy, to banks themselves deciding to complete strategic defaults when their own real estate investments go bad.

In another recent article for Bloomberg News, Dan Levy quotes Morgan Stanley spokeswoman Alyson Barnes describing an “orderly transfer” of five San Francisco office buildings the bank purchased at the height of the market; they paid $6.7 billion in 2007.  Ms. Barnes goes on to explain “This isn’t a default or foreclosure situation,” rather she suggests “We are going to give them the properties to get out of the loan obligation.”  Doesn’t that sound just like a strategic default?

This bank practice of cutting losses and maximizing returns is not limited to commercial investments.  This past Friday I had to personally inform one of my clients that the bank felt it was in their financial interest to foreclose rather than allow a short sale on their personal residence.  I presented Litton Loan Servicing with an all cash offer, which would have allowed for a full payoff of the first trust deed on which they were foreclosing.  I requested an extension so my client could negotiate with the lender on the 2nd and 3rd trust deeds.  I explained that the seller was willing to sign a promissory note with the second to avoid the foreclosure and further clarified the non-contingent; all cash offer would fully satisfy the debt owed to Litton Loan Servicing.

Their response:  It’s in our financial best interest to foreclose on this property.  Tell your investor to go to the court steps and buy it there.

Artificial Support – The Consequences of a Bailout

In a recent policy white paper published by Luigi Zingales, along with colleagues Paola Sapienza, and Luigi Guiso, the trio asserted their belief that a public policy aimed at helping people in arrears with their mortgages could have devastating effects on the incentives to strategically default of people who can afford to pay their mortgage if it is perceived to bail out people unjustly and thus undermine the moral commitment to pay.

They point to moral norms in society, which prevent people from defaulting in most circumstances but caution that “the effectiveness of moral rules, in turn, may be affected by economic policies that may undermine a sense of fairness.”

The Kellog School paper by Mr. Zingales, et. al was followed by another white paper from University of Arizona professor Brent T. White, suggesting that many homeowners continue to make payments even when they are significantly underwater, not because it’s in their financial best interest, rather because of social impacts like fear, shame and exaggerated anxiety over the perceived consequences of foreclosure.  Mr. White goes on to suggest that government policies and other “social control agents” encourage homeowners to stay in potentially bad financial situations.  He states, “Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility”  (see my two examples above).

So how can we seek to work through the estimated $4 Trillion in excess housing debt encumbering residential property across the nation?  Clearly, the burden cannot be placed solely on the shoulders of the borrowers without risking a backlash when it’s no longer socially taboo to default on your mortgage.  Equally, allowing the banking system to collapse by forcing the full load upon them would have far reaching consequences from which it could be difficult to recover.

Band aid approaches and government programs that do not address the root of the problem simply prolong the pain and unequally distribute the relief by placing income limits on participation and targeting only those who have already defaulted on their obligations.

Clearly, we will not see a full housing recovery until the majority of excess debt is removed from the system.  Loan modifications, short sales, deeds in lieu, and foreclosure are the four most common ways to deal with the problem.  The most devastating and costly impact on everyone results from a foreclosure.  Short sales are a viable alternative for some but still force owners to leave their homes.  Further, banks continue to treat the process as a temporary menace remaining understaffed and inconsistent in their policies and procedures; deed in lieu even more so.

Loan modifications simply don’t work without including a principal reduction, so far an elusive task for both the government and banks.  Even Barney Frank who has long pushed for “cram down” legislation forcing banks to write down principal balances with the help of bankruptcy court judges realizes this is an unrealistic possibility.  Yet, the New York Fed, in a December staff report No. 417, recognized that loan modifications that reduce loan balances are far less likely to re-default.

Nick Timiraos at the Wall Street Journal highlighted this point in a piece he wrote last week.  In his article he refers to the fed study noting, “modifications that write down loan balances can double the reduction in re-default rates achieved by payment reductions alone.”

If we are to keep people in their homes and/or avoid mass foreclosures, we must make short sales more efficient and reduce principal loan balances as part of the loan modification process.

The Fallout – Less Credit, Tighter Standards

All of this will clearly come at a cost to the American borrower and taxpayer.  Business concerns burned once typically learn from mistakes and seek to avoid such pitfalls in the future. If borrowers who can still make their mortgage payments “strategically default” because it’s in their financial best interest, we can all be assured that qualifying for loans will be more difficult in the future and costs will be far greater.

In light of our current circumstance, I don’t see too many no-documentation, negative amortization, 100 percent loan to value loans in our immediate future.  Ultimately fewer Americans will be able to achieve the dream of owning their own home and will remain renters.  Additionally, fewer lenders will be around to provide loans for the masses.

Another possibility is that fewer borrowers will attempt to fit a square peg into a round whole.  What I mean by that is, if a borrower’s income cannot support buying in a market they desire, perhaps they will consider seeking a purchase in an area that fits their budget rather than “fibbing” on their loan application and getting in over their heads to stay local.  Perhaps house values won’t rise beyond reason and without support from the sound economic principles.  Finally, perhaps banks will become more financially sound and make more prudent decisions, reducing their risks and ultimately providing good loan products to capable borrowers.  That doesn’t sound too bad.

We all learned on the school playground that we should honor our promises.  Currently, most people still see strategic defaults as morally reprehensible, but I wonder for how long?  It seems not too long ago short sales were a foreign and unacceptable concept.  Regardless, as some of our banking leaders suggest, sometimes an orderly transfer is warranted to get out of a loan obligation and sometimes it’s simply in our financial best interests to let a home go to foreclosure.

–>Congratulations.

You, the real estate professional of the vintage 2010 are living and learning through the most challenging and important real estate market of the past generation.   You have survived an almost immediate halt to business as usual and have re-geared and re-grouped finding yourself poised to benefit from the greatest real estate opportunity of the millennium.

Your ranks have thinned and your camps have separated; yet there is much to do in the months that follow.  Success, going forward, will require skilled labor, determination, a clear and focused strategy, and above all purpose.  The wounded will require your compassion and your colleagues need uplifting leadership.  Are you up for the challenge?  Do you know how you will lead in 2010?

Find the Fun

Leaders love what they do.  They don’t dread Mondays and hold out for Fridays.  Our challenge for 2010 is to dig deep and enjoy the process.  Engaging leaders embrace their challenges with unbridled passion.  Passion comes from finding what you truly love and making that your life’s work.  In a 2005 TED conference author, speaker and self-described average guy Richard St. John outlined 8 Secrets of Success; among them fun and passion.   Here’s to your opportunity to become a “work-a-frolic.”

Know Your Story

Aimless wandering rarely leads to success and never describes a leader.  Make 2010 the year you find your focus.  Continually practice your craft and hone your skill sets into a purpose.  Craft this purpose into your story.  Of course there are no wrong choices if those you make are true to your heart.  Edward R. Murrow was quoted as saying, ““To be persuasive we must be believable; to be believable we must be credible; (to be) credible we must be truthful.”

Find yourself this year, then attach yourself to a purpose that drives you to lead.

Engage

It has never been easier to find people who share your interests.  The Internet and it’s social media darlings beg for your participation.  Join in!   Make 2010 the year you write a blog, join the Twitter nation, find a cause that drives your purpose or simply:

Start a movement.

Always Learn

Be good at what you do.  If you’re already good be better. Take a class, earn a certification, or just read a book.  Whatever your purpose find yourself the opportunity to serve others something of value.  Don’t forget to serve yourself in the process.  Leaders are constantly seeking wisdom wherever they can find it and relish in the opportunity to share it with others.

Challenge yourself

In another of my favorite TED talks William Kamkwamba shares with us his tale of triumph as a 14 year old boy challenged by hunger and poverty in search of an education.  His parting gift, “Trust yourself and believe.  Whatever happened don’t give up.”  There is always more to do and more to learn.  Push yourself to be better in 2010 and challenge yourself to improve the status quo.

Accept and push past your mistakes

One of my early mentors had a favorite quote he’d share whenever things didn’t go our way.  “I never see failure as failure. It’s a learning experience, take adavantage.”  The current reale estate market is littered with failed real estate projects, bad loans, and lost investments.  If you are a part of one, push past your mistakes and see the learning opportunity in front of you.  If you find the opportunity to help solve a problem, leave judgement behind and help another find the lesson.  Success is one step past failure.

Whatever you do strive for greatness and remember great acts come in the smallest of actions.  I hope our 2010 is filled with success.

Now go relax, the fun starts tomorrow.

For most involved in the real estate world 2009 was a year to remember, or in some cases one many hope to soon forget.    The year brought with it record foreclosures, a complete erosion of equity, the continued collapse of banking institutions at record pace, and job losses beyond all imagine.

2009 also introduced new terms into the lexicon of real estate, like “extend and pretend” and new acronym’s which quickly became household names like TARP, and HAMP.   Distressed assets moved beyond the realm of seasoned investors in 2009 to become mainstream fodder for reality television.  That’s right, short sales have infiltrated the lives of the Housewives of Orange County.

Yet as we close the book on the first decade in the 21st century, all eyes turn towards the new year wondering what will be in store for the real estate industry in 2010.  Although I seem to have left my crystal ball in the office, I can suggest a few items which should influence that outcome.

1. Employment, or lack thereof.  Before there is anything else there is income or there is foreclosure.  It’s that simple.  Unless we can do something to fight the tide of rising unemployment and find a way to put more people back to work, there cannot be a housing recovery.  In August the California job market was worse than any seen in my father’s lifetime.  The statewide unemployment rate in November was 12.3 percent.  Although, slightly better than October, this factor more than any other will determine the direction of the housing market.
2. HAMP.  Loan mods & short sales for the win.  It was a commendable effort done for the right reasons, but loan modifications simply are not working.  Of 700,000 temporary loan mods completed in the HAMP program, 31,382 became permanent.  The two main reasons cited for their failure, unemployment and negative equity.  As I mentioned above, unless you have income to pay the mortgage there is no loan mod that can save your home.  Second, if your home has lost 30 percent or more in value and you put 0 to 10 percent down, it makes little sense to stay; enter the short sale.  An efficient plan that eases the glut of REO’s dumped on the market will alleviate downward pressure on home values.
3. Tax Credits, sanctioned down payment assistance.  If a seller raises the price of a home and gifts back money to the buyer at closing it’s called loan fraud.  If a non-profit does it to facilitate that same transaction it’s called down payment assistance, also now illegal.  If the federal government does it it’s called a tax credit.  The problem with short term and temporary solutions is, they end bringing with it false hope and turmoil.  Home sales in California this fall and winter have been brisk compared to recent standards.  The main reasons are incredibly low interest rates and $8,000 in tax credit that new home buyers can use as a down-payment when buying their first home.  May 1, 2010 the deal ends.
4. FHA lending standards, tightening the screws.  Reduced seller concessions for borrowers (from the current 6 percent max down to 3 percent max), implementation of a minimum FICO score standard, increased minimum down payments (from the current 3.5 percent), and increased mortgage insurance premiums are a prudent move by HUD.  However, this will likely mean a smaller pool of buyers in 2010.  Particularly, if interest rates start to rise (see #10, hint, hint).
5. Appraisal Standards, coping with HVCC - Fair and unbiased appraisals are a good thing for the banking industry.  HVCC and unqualified appraisers are not.  The market is flooded with war stories of deals homes that had several offers in one price range and appraisals that somehow came in much lower.  To make matters worse, the plan which was intended to save borrowers money more often ends up costing more as duplicate appraisals are ordered at the expense of the homebuyer.  HVCC is driving down values, recovery won’t happen until that is fixed.  You can voice your opinion on HVCC and hear more about it impacts by visiting this site.
6. Reaching the bottom.  Just what is a mean reversion?  Housing values are typically tied to income.  Historically, Americans bought homes with the intention of living in them, paying down their mortgage with an amortized loan, and moving when necessitated by life (eg. growing families, job transfer, etc).  The early 2000’s created a world of make believe as the economics of home buying found a state of suspended animation.  We are now paying for the games we were playing.  If you believe in the theory that suggests prices and markets tend to fall back towards their norms, then look for the bottom to be found when 1/3 of the median income supports the median home values for a particular area.  If this isn’t a bold statement to how locally driven the real estate market is, I don’t know what is…
7. Mortgage Delinquencies and the Godfather III - “Just when I thought I was out; they pull me back in.”  Foreclosure cancellations are up as short sales and loan mods have saved some delinquent borrowers from the grips of foreclosure.  At the same time, new defaults are mounting as more and more borrowers face that same grim reality.  It all seems to point back to #1 above.  We aren’t out of the woods until new defaults begin to subside.
8. High End Foreclosures.  How the other half lives (with too much debt).  To my point above (#7) mid year 2010 will bring a large number of interest rate resets on Alt-A and Option ARM loans.  Many of these loans were given to good credit borrowers with no documentation loans.  Most of these loans are secured by higher end homes in the nicer neighborhoods of your town.  These borrowers owned companies that are now defunct, held high paying jobs that no longer exist, or simply took advantage of the easy money available by “fudging” on their loan app.  Unfortunately, most of these borrowers will not be able to pay their mortgage when they have to pay higher interest rates and/or both principal and interest each month.  If these borrowers enter default en masse mid year we could see another dip in pricing.
9. The day of reckoning for the commercial markets.  Extend and pretend will ultimately come to an end in 2010.  Commercial debt is coming due, vacancy rates are rising and commercial rents are laden with concessions.  On the other hand it seems as though every money manager and commercial financier has raised a fund to pursue distressed commercial debt and real estate assets.  The efficiency of these pending exchanges will ultimately decide the depths to which the commercial markets will fall.  Most experts I’ve spoken with in the Southern California markets expect to see an uptick in transactions around the second or third quarter.  Watch to see who will be first in.
10. The Fed’s exit, aka the Bernacke Backstroke.  To keep loan rates low, the Fed has been buying Treasury’s, mortgage-backed securities, and debt issued by Fannie Mae and Freddie Mac to the tune of $155 billion dollars since early 2007.  Unless they step gingerly to exit the markets when the program ends next March, we could see a spike in interest rates and another downdraft in the housing market.

2010 may be a tumultuous year, but one of action.  I expect transactional volume to outpace 2009 and the expectations of buyers and sellers should begin to collide.  If you are a home buyer, there are incentives I believe make it worth jumping in now.  Low interest rates and tax credits should offset any potential and temporary drops in value over the coming months.  Investors should continue to see deals that pencil on current income, however remain cautious if your plans are to quickly flip properties.  Appreciation will not be your friend.

Our friends at Foreclosureradar.com have released the December foreclosure report reflecting figures for November 2009 indicating continued pressure on the flow of distressed assets through the system.  Although trustee sales have seen significant declines, new borrowers entering the foreclosure process  seem to be picking up steam.  Cancellations show a 40% jump in November as temporary loan modifications under the Obama administrations HAMP program become permanent (temporary loan mods continue as defaulted properties until they convert to permanent loan mod status) this falls right in line with administration reports that 31,382 of the 728,408 trial modifications became permanent.

Month over month numbers are somewhat misleading in the report as October had only 18 days of sales in California vs the 22 days in the month of November.  Therefore to get the real picture daily averages will be included in our analysis.  The majority of defaults are from 2007 vintage loans and although prices in California have fallen to roughly 2004 levels few loans originated prior to 2004 are in the foreclosure process.

You may read the full California Foreclosure Report, or scan the highlights below:

• NOD’s – an 18.98 percent decrease from October to November month over month vs 1 percent decrease by daily average.  29,597 total filings, which is an 35.41 percent increase over November 2008
• Notice of Trustee Sales – a 29.14 percent decrease from October to November vs. 13.4 percent decline on daily average.  27,321 total filings, which represents a 4.03 percent decrease over November 2008.
• REO’s – a 12.2 percent increase from October to November vs. 2.4 percent increase on a daily average basis. 14,119 total sales ended up in the banks REO portfolios.
• Third Party Auction Sales -  down 7.43 percent from October to November, however an increase of 8 percent when looked at at on a daily average basis.
• Cancellations - November 2009 posted large numbers of cancelled foreclosure sales with 10,469 cancellations, a 19.77 percent month over month increase from October 2009 and a 40 percent increase when viewed on a daily average basis.  Expectations are for cancellations to continue their increase as short sales become more prevalent and the Obama loan mod push continues.
• Number of Homes Scheduled for Foreclosure - despite the rise in cancellations and drop in NOTS filings the “foreclosure wave” continues as more and more homeowners fall behind on their mortgages.  November 2009 posted a 135.96 percent increase over November 2008.
• Lender Discounts at Auction - averaged a 48.7 percent discount to the defaulted loan balance.  Third party bidders experienced an average 19.9 percent discount to fair market value by buying at the court steps.

True, unbiased foreclosure data continues to be hampered by HAMP and moratoriums imposed by banks or the federal government.  Similarly the market itself is being fueled by temporary tax incentives and exceptionally low interest rates driven by the Treasury’s bond buying spree.  Reality in the current marketplace, at least in Los Angeles and Orange County, is that well priced homes find no shortage of potential buyers.  Many of these buyers are investors with bundles of cash or truly well qualified buyers with significant down payments and pre-approvals on full documentation loans.

We are not “out of the woods” by any stretch of the imagination.  However this is an exceptional time to buy with interest rates low, values depressed and tax incentives giving you the extra boost.  From an investment point of view, larger numbers of renters enter the market on a daily basis as previous homeowners go the way of foreclosure or short sale.  Once we get the unemployment issues behind us, monthly payments and rent will not be the hurdle to a full housing recovery and investors purchasing now should continue to prosper.

For those of you who sat out the past 5 years of crazy appreciation wondering, “when will I ever get my chance?”  Merry Christmas.  Your time has come.

Foreclosureradar.com has released the November foreclosure report reflecting figures for October 2009 indicating foreclosure figures befitting of a Halloween fright-fest.  More suspenseful than blood and guts, scheduled foreclosures (up 131.36 percent from the peak July 2008) continue to grow as homeowners and their banks wonder how this mess will ultimately be sorted out.

October marks the first month in the past four where actual foreclosure sales, which send properties back to banks as REO, have increased.  Yet the 22.24 percent increase from September 2009 and 20.95 percent increase from October 2008 are still 42.56 percent below peak levels (July 08).  The report suggests a “foreclosure limbo” where some homeowners hope for loan modifications, some pursue short sales, while others simply wait for that knock on the door letting them know it’s time to leave.

These extended foreclosure periods may also have another effect on the overall economy, a Stealth Stimulus if you will.  As homeowners await their fate, not paying the mortgage or rent, some families are finding the discretionary income for additional consumer purchases.  Consumer electronics, dining out, a night at the movies and deluxe cable packages are just a few of the consumer items for which defaulted homeowners are now finding the discretionary funds.

You may read the full California Foreclosure Report, or scan the highlights below:

• NOD’s – an 7.47 percent decrease from September to October.  35,323 total filings, which is an 103.46 percent increase over October 2008
• Trustee Sales – a 13.02 percent increase from September to October.  37,421 total filings, which represents a 41.74 percent increase over October 2008. Indicating the impact of SB 1137, passed in September 2008
• Auction Sales Back to REO – a 22.24 percent increase from September to October. 16,081 total sales.  A 20.95 percent increase year over year.
• Cancellations - an increase of .94 percent totaling 8,741 previously scheduled sales.  This represents a 22.52 percent decrease from October 2008.
• Third Party Sales - properties sold to investors at the court steps increased 16.42 percent in October 2009.  A total of 3,971 properties sold to investors or junior lien holders.  Still a small percentage of total sales, third party sales continue to increase as does competition forcing discounts lower.

What’s been lacking since the bubble burst was an efficient flow of information and a delivery system to decisively move distressed inventories through the market and back to retail buyers at corrected prices.   Internet technology, electronic trading platforms, independent information sources like blogging sites, social networking like twitter, and business networking sites like Linkedin, will be key elements in resolving this issue.

As information expeditiously moves through the real estate community, most parties involved in this downturn can rely on quicker access to information, easier deployment of resources, and more on the spot awareness of conditions.  Homeowners, for the most part, know how long they can wait and when they can increase consumer spending.  Tenants realize when they can stop paying and what they can get for leaving after foreclosure.  Investors can more readily spot inefficiencies, gain access to capital, and share insight and investment strategies.

What’s left is the banking system.  A bloated, slow moving industry weighted down by regulation, outmoded systems, and overwhelming financial constraints, the industry stalwarts seem to large to change course.  The saving grace is that banks are driven by the financial bottom line.  Although heartless, it remains essential that banks pursue their course of action with a pure capitalistic mindset.  We may all want help with our defaulted loans, but we also firmly grasp onto the security of our bank deposits.  The banks are the last piece of this puzzle, when they get on board we we begin to see our path out of this mess.

The United States Senate has passed the $10.8 billion home-buyer tax credit extension and expansion plan this evening with overwhelming bi-partisan support by a vote of 98-0.  The House is expected to approve it within days delivering it to President Obama’s desk within a week.

Expanding on the first time home buyer tax credit which cost tax payers $8.5 billion over the course of last year, the new credit would increase income limits, sales price limits, and include move up buyers who already own a home.   The new parameters would begin after the expiring plan ends November 30, 2009, and would continue through April 30, 2010 to sign contracts allowing for an additional 60 days to close.  Highlights of the plan are summarized below:

• First time buyer tax credit would remain equal to 10 percent of the home’s purchase price up to a maximum of $8,000.
• Existing home buyer tax credit would equal $6,500 and be available to homeowners who “move up” by selling their existing home to buy new.
• To qualify for the existing home buyer tax credit you must have lived in the home you are selling for 5 of the last 8 years.
• The credit is available for homes purchased on or after December 1, 2009 and before April 30, 2010.
• The credit does not have to be repaid.
• The credit has income limits of $125,000 a year for individuals, $225,000 a year for married couples.
• Persons earning up to $145,000 individually or up to $245,000 jointly would get a smaller credit that decreases as income rises.
• The tax credit will apply to home purchases of $800,000 or less

Reviews of the tax credit and the need for an extension have been mixed.  In a recent article for TIME magazine Janet Morrissey writes, “About 1.4 million households used the credit between February (when the program was launched) and September. And from 350,000 to 400,000 of those transactions involved purchases that would not have been made without the credit, says Lawrence Yun, chief economist with the National Association of Realtors (NAR)”

Ms. Morrissey goes on to also suggest the existing tax credit has been a “fraudster’s dream” referring to Treasury Department reports identifying 167 cases of fraud and over 100,000 potential civil violations.   These reports were delivered to Congress by inspector general Eric Thorson this past September.

Several economists assert the credit will have much less an impact on sales and home prices going forward, while also suggesting “this doesn’t mean that the credit is useless, only that it is inefficient.”  Most trade groups in the beleaguered housing industry are expected to hail the extended plan as a much needed stimulus to a still suffering market.  Only time will tell if they are correct.

Northern California based Foreclosure Radar.com has released their October Report on California foreclosures, reflecting September 2009 numbers.  Of note this month is the new feature tracking bank owned (REO) inventory.  Specifically, the report suggests that banks currently hold an inventory of 90,365 REO homes in California, which translates into a 4.77 month supply of REO inventory.  Asserting that banks typically take 7.33 months to sell an REO property from the the date of auction, the inventory numbers just don’t add up given the foreclosure volume over the past year.  The conclusion, “There is no “shadow” inventory of bank owned homes being intentionally withheld from the market.”

The report also provides beneficial insight to the goings on at the court steps.  Third party sales increased month over month by 3.27 percent.  More impressive, the increase represents a 215.38 percent increase year over year as cash investors continue to reap discounts averaging 20.5 percent to current market value.  On the flip side, it remains clear why third party sales don’t account for a larger volume.  Properties that go back to the bank at auction are, on average, priced 23 percent more than current market value.

Other findings in the report are summarized as follows:

• NOD’s – an 1.08 percent increase from August to September.  37,417 total filings, which is a 123.44 percent increase over September 2009.
• Trustee Sales – a 5.10 percent decrease from August to September. 32,457 total filings, which represents a 64.97 percent increase over September 2008.
• Cancellations – a 13.47 percent decrease from August to September. 8,639 total cancellations occurred in September.
• Auction sales that went back to the lender reached 13,123, representing a 8.61 percent decrease month to month and a 40.61 percent decrease from September 2008.
• Auction sales sold to investors at the court steps increased 3.27 percent from August to September and a whopping 215.38 percent over September 2008.
• Lenders have discounted opening bids at trustee sales an average of 50.4 percent lower than the loan balance and 20.5 percent below current market value on properties sold directly to third party investors.

Other observations from this months report, the HAMP Program seems to be having little to no impact on foreclosure losses as homeowners complete the 3 month trial period.  Expectations were a strong increase in foreclosure cancellations, the actual result has been less than stellar (down 13.5 percent) indicating the program is having no significant impact.

With current market values hovering around 2004 levels it isn’t surprising to see the majority of foreclosure activity (nearly 91 percent) on loans of the 2005-2007 vintage.  It is also worth noting that few loans made after banks began tightening credit standards have fallen into default.

A long way from being “out of the woods,” it’s seems less likely we will be in for an REO inventory avalanche from suspected shadow properties.  On the flip side increased defaults suggests that investors and brokers working the short sale markets should stay in business for some time to come.

In case you missed the news, the government wants to keep you in your home; like it or not.  They’ve employed several programs to carry out the task, each seemingly more aggressive than the next.  Personally the whole thing reminds me of a bad pot of soup.  Chef Obama and his sous chef Mr. Geithner keep adding salt and pepper until the whole mess is inedible, all the while wasting the remaing ingredients in the kitchen leaving cupboards bare and guests unfed.

The latest push comes in the form of the Home Affordable Refinance Program or HAMP.  Per the Treasury press release, the $75 Billion program aims to prevent foreclosures and help responsible families stay in their homes.  The program will do so by partnering directly with the lenders carrying non-performing loans, via the GSE’s (Fannie and Freddie), FHA, and the FDIC.

How does it work you ask?  HAMP will reach from 3 to 4 million at-risk homeowners using a five prong strategy.  Here are the highlights:

Five Prong Strategy

1. Create clear and consistent guidelines for loan modifications
2. Require that banks use the US Treasury guidelines when modifying loans
3. Allow judicial modifications during bankruptcy when borrowers have no other options
4. Require strong government oversight at banks to monitor compliance
5. Strengthening FHA programs by providing support for local communities

Who is Eligible for the Program

• At risk homeowners suffering from serious financial hardship.  These hardships includes financial shock from temporary loss of income, those experiencing increases in monthly expenses, and/or those suffering from payment shock resulting from an interest rate adjustment or reset on their mortgage.  The at risk definition also applies to homeowners deemed “underwater” (with a combined mortgage balance higher than the current market value of the house).
• Homeowners facing imminent default of their mortgage.  You are not required to be behind on your mortgage payments to be eligible for a loan modification.  Quite the opposite in fact.  Studies show that modifications are actually more likely to succeed when done by borrowers before they miss payments.  Therefore regardless of whether you are current or behind on your mortgage, you may call your lender to request a loan modification.
• Owner occupied homeowners ONLY! No flippers - The government calls this a “common sense restriction.”  If you are a speculator, which I assume is their broad term for investor, and/or a house flipper you are out of luck when it comes to the HAMP program.  This isn’t to say banks won’t modify your loan too, rather the incentives from the HAMP program will not apply.
• FHA conforming loans ONLY! No jumbo mortgages - Another of the so called “common sense restrictions” the HAMP program does not help homeowners who needed jumbo loans when purchasing their home.  The incentives in the program are targeted towards helping buyers within the FHA loan limits.  To clarify, it does not require that a homeowner have an FHA loan, simply that the loan balance fall within the loan limits of the FHA program guidelines.
• High debt level borrowers who agree to enter HUD certified consumer debt counseling - This is a special provision for individual homeowners who also meet the other provisions of the program.  If their back end debt, which includes all monthly expenses in addition to their mortgage, is equal to 55 percent of more of their total income, homeowners will be required to enter debt counseling to receive a loan modification.

How it Works

The simple goal of the program is to keep homeowners paying on their mortgages.  The theory is that most defaults are not a result of homeowners choosing to walk away because they owe too much on their home, rather a belief that these defaults occur because the borrower cannot meet the monthly financial obligation.  By adjusting monthly payments, fewer defaults will occur and housing markets will be stabilized.

The government and lenders will share the effort to lower monthly mortgage payments to between 31 percent and 38 percent of a borrowers’ gross monthly income.  The first burden will be on the lenders with the government batting clean up.  Steps involved in reaching this goal are as follows:

1. Lenders will reduce interest rates on the current loan to as low as 2 percent hoping to reach DTI ratios of 31 percent
2. If interest rate reductions don’t accomplish the goal, amortization periods will be extended to 40 years to reach the proper ratio
3. If after completing steps 1 and 2 DTI ratios still have not reached 31 percent, lenders may forbear principal at zero interest until ratios are met
4. the federal program will supplement lenders efforts by sharing the costs involved with reducing ratios from 38 percent to the desired 31 percent ratio
5. modifications will be kept in place for 5 years.  After 5 years interest rates can be increased by 1 percent each year to the conforming loan survey rate in place at the time of modification.

Incentives for Success

As incentive to loan servicing companies, the HAMP program will reward each servicer with an upfront fee of $1,000 for each successful modification made within the guidelines.  Further servicers will be given an additional $1,000 per year up to 3 years, called a “Pay for Success” incentive as long as the borrower successfully remains in the program.  These success incentives will also be available to servicers who modify, FHA, VA, or agriculture department loans, and/or refinance loans according to the Hope for Homeowners programs.

Lenders and servicers willing to reach out to borrowers not currently in default may receive an additional $2,000 incentive payment ($1,500 to mortgage holders and $500 to servicers) by completing successful loan modifications before a borrower misses a payment.  Borrowers themselves will receive further incentive by successfully staying in the modification program.  An additional $1,000 per year, up to five years, will be given to borrowers going straight towards reducing the principal balance on the mortgage loan.

Addressing Further Value Erosion

One of the outstanding issues concerning lenders is the risk of further value erosion if modifications fail and they are forced to ultimately foreclose at a later date.  To address that issue the US Treasury Department will fund up to $10 Billion dollars for a program set to partially offset losses realized by lenders who experience steeper losses on foreclosed loans after completing a modification.  Structured as a simple cash payment, it will be received by mortgage holders on each modification, linked to the declines in the home price index.

Junior Liens

Although junior lienholders are not required to participate, lenders and servicers participating in the HAMP program will receive additional incentive to extinguish junior liens in order to reduce the overall indebtedness of the borrower.  Servicers will be reimbursed for the release according to a specified schedule and will receive an additional $250 payment for obtaining the release from a valid second lienholder.

Thoughts and Issues

Preferential treatment towards one class of borrower and geographic inequity across the 50 states are the two most glaring problems with the HAMP program.  Although well intended and very much needed in the residential markets, the program will continue to be viewed as biased and raise resentment among the majority of borrowers, currently not eligible for the program.  Clearly directed towards homeowners in the most dire of circumstances and with the fewest alternative solutions, wealthier borrowers and more sophisticated professional investors are left to fend for themselves.

If lenders and the federal government encourage HAMP qualifying borrowers to place themselves in a better financial position by changing the terms of their agreed up on loan, and then paying them to do so, shouldn’t wealthier borrowers and investors be encouraged to do the same?  If one group of borrower is “villainized” while others are forgiven for the same behavior isn’t it human nature for that first group to protect themselves against perceived unfair attacks?

The message of the current administration is hope and change.  Those of us encouraged by the message hoped that change would apply to all of us equally when reflected in public policy.  Their required agenda includes the stemming of a financial meltdown in the financial markets driven by catastrophic losses in the residential real estate markets.  Unfortunately the piecemeal approach to the problem has only encouraged more bad behavior by many who feel left out or villainized.

In theory we all pay taxes and we all have an equal vote.  In practice the policies and programs which spend tax payer money and address issues facing all groups of American citizens should be available equally and without bias or should not exist at all.