What's Really Going on With Foreclosures?

Apparently I was wrong about the impact of foreclosures when I said that banks were holding onto the properties and not placing them on the market. It came to light via Diana Olick, who I respect at CNBC, in a report yesterday. It is not that banks are simply holding onto the properties, they are just so backlogged that they cannot get them into the market fast enough.

According to the report, banks are waiting as long as possible to try keeping people in their homes by using the Obama 'Making Home Affordable' plan. Unfortunately, people cannot simply refinance when they are unemployed or underemployed which is the primary problem now. Bank of America (BAC) told Diana that since most of the properties are owned by third party investors, the bank has an obligation to place properties on the market as soon as possible.

However, the sheer number of foreclosures are the problem, slowing the process of getting the inventory on the market. What the report did not comment on are the homes that the banks still hold mortgages on. For example my bank actually holds my mortgage, but if I was foreclosed on the bank might not place my home on the market and hold it until the market improved. Clearly, most banks do not hold these mortgages now as they were securitized, but it raises the question that if banks actually held the mortgages would we have these problems to begin with. Furthermore, if the banks held these mortgages would the loans have been made and if they were made would the bank work harder to keep people in their homes.

I think the answer is clear, if banks held these mortgages we would have less pain because foolish loans would not have been made. It's funny how banks become more conservative with their own money than they are when they package the mortgages up and sell them off to yield-hungry investors. Unfortunately we will never have a true answer to that question as banks, mostly, sold these mortgages off and continue to do so.

LPS Applied Analytics says there is no clear evidence of purposeful accumulation by the banks of these foreclosed properties. They are, he believes, working through the huge onslaught of new defaults as fast as possible, but it takes time. He says they are selling REOs at a fast clip as well, within about three months of taking them as REO.

Then he offered the following very detailed chart of what’s called “roll rates” or the rate at which troubled loans are moving through the system. Note the “average” is a four year average, and two of those years were the worst ever in the mortgage market, so as Jadlos notes:

Just getting to the average isn’t saying all that much. We need to be close to the four year low to be fully entrenched in a meaningful recovery. Based upon foreclosure and REO timelines, it’s going to take at least 18 months to flush the system of our current problems. But to flush the problems in only 18 months, more problem loans need to leave the system relative to the new problem loans of today and tomorrow. That does not appear to be the case right now—we aren’t clearing faster than new problems are emerging.

(click to enlarge)

Regardless, the foreclosed homes on the market are approximately 1.5 million, which sounds like a lot, and it is. However, the number of problem homes that are ‘seriously delinquent’ total an astounding 3.5 million. Unfortunately unemployment is still on the rise and that number should easily increase in the near future which is a major problem. It also indicates that the real estate market is still not even remotely healthy and there will be more pain on the way. Once that tax credit is gone I think we will see just how weak the real estate market is.

Let us not forget we still have commercial real estate to contend with which even the Fed is worried about. That market is much larger than the residential market and there are lots of institutions that hold these bonds. It is said that the majority of CRE outstanding will not be able to refinance because values have dropped so badly, 36% or so year-over-year. Ordinarily the rollover of commercial property into new debt or loans was not a problem, but when the existing loan value is so much higher than the value of the property no one will refinance it. Actually, I am betting the Fed will figure some way out to refinance these properties. Why not, since at this point it’s only our money they are playing with.

The bottom line is that there are still major problems and while some data looks positive the remaining data is negative. The negative data pretty much trumps the positive data and points to lower prices. I know we will get a much better view of this when the incentives go away in November. However, I am willing to bet there will be another program rolled out in either early winter or spring to boost sales again. I am wondering how many people are suffering from buyer’s remorse about their new home purchase especially when they get the property tax bill.

Comments

[CautiousInv...:]

Credit Writedowns offers an interesting piece today drawing Hope Now, which is believed to track around 75% of all mortgages; not all but enough to discern trends.

According to their data, around 3 million homes were at least 60 days delinquent in the month of July; foreclosure starts, however, were slightly above 283,000 and completioned foreclosures were only 89,000.

Not only is there is a lag between start and completion, a number of loans cure or are modified. Excluding the effects of the latter, banks in July increased the number of foreclosures on their books and being process by something close to 194,000.

Clearly, though, the system is overhwelmed by the scale of foreclosures, an eventuality clearly not forseen. In the absence of mitigating forces, foreclosures should increase over the long run in alignment with delinquincies.

Sep 01 09:46 AM

[lower98th:]

Diana Olick was a quick study and she generally speaks the truth...but BOA?.
1.The REO contracts I have seen say something like "manage and liquidate to create the most favorable financial outcome." Not "firesale quick." Maybe someone can send in a copy.
2. Neither foreclosures nor even Deeds-in-lieu (much easier than foreclosure), are being timely executed - resulting in houses vacant, bank-locked, but not on the market.
3. As owners have wised up that the foreclosures are slow to come, they are not leaving (and not paying). Tenants are kept in place. So until acting on the default, the bank has a "hometender" in situ, paying the utilities and preventing the vacancy problems, protecting the value of the client's collateral. This can go on for more than a year. Yet to see how long, really.
4. The foreclosure attorneys and the courts doing the actual work have a foreclosure or deed-filing backlog, but not the months-long ones you would think from the time it is taking vacant properties to get to the market. The backlog seems to be between the time of property abandonment and the bank making the call.
4. The $$ reason for banks not taking title is clear: The bank becomes responsible for HOA dues (dif. by state), maintenance, code violation remedies, and other costs upon ownership, which further erode the recoverable value.

Sep 01 09:56 AM

[sunbakd1:]

So I guess this be a bad time to sell my weekend home eh?

Sep 01 11:36 AM

[Gary A:]

There was an article on CNBC today that stated banks are now starting to dump foreclosures onto the market, presumably to make room for all the new ones Olick reported on yesterday. My take is that you were right and that they were hoarding them. They must thing they are Debeers, lol.

They are trying to manipulate the market as all the big guns are trying to do, whether it be housing, autos, oil, or sugar.

Sep 01 01:48 PM

[Tobby:]

Many have pointed out this information concerning extended lags from NODs to final foreclosure. Much of the delay has been from the servicers jumping through hoops to meet the governemnt's Save Our Home plan of the month, both state and federal. Now those properties are nearing the end of an extended pipeline with the result being a torrent of inventory being dumped into a slowing selling season. Perfect storm? Maybe.

Also, I too expect an extension of the $8,000 tax credit. It effectively ends in a month given the looooong closing times the banks have now. If you don't close by November 30, you don't get the tax credit.

Sep 01 03:20 PM

[Karen Consumer:]

Looking at the want-ads for jobs (online want-ads, nobody does paper anymore) and where I live and seek employment (Grand Prairie, Irving, Texas) the financial companies (Citi, Chase, Bank of NY Mellon) are desperately trying to hire mortgage workers with 2-3 years of experience in mortgages, knowledge of real estate, and knowledge of bankruptcy. In the 10 (ten) weeks I've been looking for work, the numbers of these ads has grown. Don't take my word for it, go look for yourself at Indeed.com.

What I'm trying to say is that I don't think the banks know how to get these properties to market. They've played the "Our hands are tied/Investors don't want to take a loss/It's just the subprime" kick the can game for so long, hoping that the economy would just go back to the way it was, now they are scrambling for something that they can make work quick. But you can't cheaply or easily fix a totaled car, nor can you cheaply or easily fix this mess, and I expect with future bank failures, this will only get worse, because the "lucky" bank survivors will have even less quality paper to look at when they pick through the wreckage of the failures.

Sep 02 03:46 AM

[valuestocks...:]

I do not think that the government has the money to extend the $8,000 tax credit. Shadow inventory is real and the banks are not being truthful. The longer they hold it they can keep it out of the loss column.

Sep 02 10:01 AM

[c smith:]

Let us not forget we still have commercial real estate to contend with which even the Fed is worried about. That market is much larger than the residential market...

FALSE

Sep 02 02:20 PM

[TinyTim:]

"It is not that banks are simply holding onto the properties, they are just so backlogged that they cannot get them into the market fast enough."

I can believe the backlog is holding up foreclosures.
I also think banks are holding onto their own properties so they won't have to write them off.

Sep 02 05:16 PM

[driftwood2:]

Although there is certainly a backlog of foreclosures that is holding up property from appearing on the market, I do not think that is the only thing going on. There is definitely some sort of hoarding or delaying going on. In the summer of 2008, a HUGE number of subprime foreclosures suddenly appeared in my market. I was looking for a house at the time and still am. Now, most of those houses have sold and there are much fewer foreclosures available. There has not been a huge number of new foreclosures to replace those earlier foreclosures.

Sep 05 01:29 AM

[ZachieSmith:]

Very good analysis! This is really a bad time if we want to sell a non foreclosed house

Sep 09 03:41 PM

[billddrummer:]

On Sep 02 03:46 AM Karen Consumer wrote:

> Looking at the want-ads for jobs (online want-ads, nobody does paper
> anymore) and where I live and seek employment (Grand Prairie, Irving,
> Texas) the financial companies (Citi, Chase, Bank of NY Mellon) are
> desperately trying to hire mortgage workers with 2-3 years of experience
> in mortgages, knowledge of real estate, and knowledge of bankruptcy.
> In the 10 (ten) weeks I've been looking for work, the numbers of
> these ads has grown. Don't take my word for it, go look for yourself
> at Indeed.com.
>
> What I'm trying to say is that I don't think the banks know how to
> get these properties to market. They've played the "Our hands are
> tied/Investors don't want to take a loss/It's just the subprime"
> kick the can game for so long, hoping that the economy would just
> go back to the way it was, now they are scrambling for something
> that they can make work quick. But you can't cheaply or easily fix
> a totaled car, nor can you cheaply or easily fix this mess, and I
> expect with future bank failures, this will only get worse, because
> the "lucky" bank survivors will have even less quality paper to look
> at when they pick through the wreckage of the failures.

I think you're right on the money, Karen. People with knowledge of the mortgage industry, bankruptcy law, title work and lending will find loss mitigation people beating a path to their door.

A friend of mine works in the industry and has job stability for as long as he wants it.

If anyone's interested, I've got that background.

Sep 10 01:59 AM