Housing Lockdown

This article is an anecdote to the cheery news about housing starts and the like that sound like whistling in the dark anyway. However, do not take it to heart either. As I have already said the housing market is locked in a situation where the banks have lost control of the timing of any liquidation of their foreclosed properties. They now have to wait for a saturated market to come to them.

Leading the market down to find a bid or two is vastly damaging. The inventory is carried on the books as worth a certain market price. Selling a house below that price means that you write down the entire inventory. How stupid is that?

That is why I have advocated the rewrite of the foreclosure rules to force a mandatory transfer of half the property to the bank and a fresh mortgage on the other half with the original borrower in possession. This causes all that inventory evaporate overnight. The government still has to provide cash to capitalize the banks but that is happening anyway. At least they will participate in the ultimate resale of the balance of the properties.

The other way, the losses are been capitalized now and lost.

I suppose that I could wander around the country telling folks that salvation is at hand.

Except that this is a sophisticated subtle solution with many fine points that only a mathematically inclined person is likely to appreciate. I have never succeeded before in making such a pitch so I will not waste my time. If however, someone were to listen, we can end this pain in a few short months with a burst of frantic energy followed by a rising real estate market. Sound too good to be true?

Housing Bubble Smackdown: Bigger Crash Ahead
Huge "shadow inventory"

By Mike Whitney

URL of this article: www.globalresearch.ca/index.php?context=va&aid=13283

Global Research, April 21, 2009

Due to the lifting of the foreclosure moratorium at the end of March, the downward slide in housing is gaining speed. The moratorium was initiated in January to give Obama's anti-foreclosure program---which is a combination of mortgage modifications and refinancing---a chance to succeed. The goal of the plan was to keep up to 9 million struggling homeowners in their homes, but it's clear now that the program will fall well-short of its objective.

In March, housing prices accelerated on the downside indicating bigger adjustments dead-ahead. Trend-lines are steeper now than ever before--nearly perpendicular. Housing prices are not falling, they're crashing and crashing hard. Now that the foreclosure moratorium has ended, Notices of Default (NOD) have spiked to an all-time high. These Notices will turn into foreclosures in 4 to 5 months time creating another cascade of foreclosures. Market analysts predict there will be 5 MILLION MORE FORECLOSURES BETWEEN NOW AND 2011. It's a disaster bigger than Katrina. Soaring unemployment and rising foreclosures ensure that hundreds of banks and financial institutions will be forced into bankruptcy. 40 percent of delinquent homeowners have already vacated their homes. There's nothing Obama can do to make them stay. Worse still, only 30 percent of foreclosures have been relisted for sale suggesting more hanky-panky at the banks. Where have the houses gone? Have they simply vanished?

600,000 "DISAPPEARED HOMES?"

Here's a excerpt from the SF Gate explaining the mystery:

"Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. And foreclosures, which banks unload at fire-sale prices, are a major factor driving home values down.

"We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market," said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. "California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You'd have further depreciation and carnage."

In a recent study, RealtyTrac compared its database of bank-repossessed homes to MLS listings of for-sale homes in four states, including California. It found a significant disparity - only 30 percent of the foreclosures were listed for sale in the Multiple Listing Service. The remainder is known in the industry as "shadow inventory." ("Banks aren't Selling Many Foreclosed Homes" SF Gate)

If regulators were deployed to the banks that are keeping foreclosed homes off the market, they would probably find that the banks are actually servicing the mortgages on a monthly basis to conceal the extent of their losses. They'd also find that the banks are trying to keep housing prices artificially high to avoid heftier losses that would put them out of business. One thing is certain, 600,000 "disappeared" homes means that housing prices have a lot farther to fall and that an even larger segment of the banking system is underwater.

Here is more on the story from Mr. Mortgage "California Foreclosures About to Soar...Again"

"Are you ready to see the future? Ten's of thousands of foreclosures are only 1-5 months away from hitting that will take total foreclosure counts back to all-time highs. This will flood an already beaten-bloody real estate market with even more supply just in time for the Spring/Summer home selling season...Foreclosure start (NOD) and Trustee Sale (NTS) notices are going out at levels not seen since mid 2008. Once an NTS goes out, the property is taken to the courthouse and auctioned within 21-45 days....The bottom line is that there is a massive wave of actual foreclosures that will hit beginning in April that can't be stopped without a national moratorium."

JP Morgan Chase, Wells Fargo and Fannie Mae have all stepped up their foreclosure activity in recent weeks. Delinquencies have skyrocketed foreshadowing more price-slashing into the foreseeable future. According to the Wall Street Journal:

"Ronald Temple, co-director of research at Lazard Asset Management, expects home prices to fall 22% to 27% from their January levels. More than 2.1 million homes will be lost this year because borrowers can't meet their loan payments, up from about 1.7 million in 2008." (Ruth Simon, "The housing crisis is about to take center stage once again" Wall Street Journal)

Another 20 percent carved off the aggregate value of US housing means another $4 trillion loss to homeowners. That means smaller retirement savings, less discretionary spending, and lower living standards. The next leg down in housing will be excruciating; every sector will feel the pain. Obama's $75 billion mortgage rescue plan is a mere pittance; it won't reduce the principle on mortgages and it won't stop the bleeding. Policymakers have decided they've done enough and are refusing to help. They don't see the tsunami looming in front of them plain as day. The housing market is going under and it's going to drag a good part of the broader economy along with it. Stocks, too.

Disclaimer: The views expressed in this article are the sole responsibility of the author and do not necessarily reflect those of the Centre for Research on Globalization. The contents of this article are of sole responsibility of the author(s). The Centre for Research on Globalization will not be responsible or liable for any inaccurate or incorrect statements contained in this article.

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© Copyright Mike Whitney, Global Research, 2009

Housing Market Floor

Again no one really gets it. Prices cannot be lowered to move inventory without the banks hugely expanding their losses. Right now they are working off what inventory the banks can finance and sell. They cannot lower prices anymore simply because it actually worsens their highly leveraged balanced sheet. Besides, they are unable to go back to the defaulting customers to make up those losses.

What is worse, if they decide to sell a few homes at a price ten percent below current appraisal to realize the cash recovery, the remaining 20,000 homes in this case are marked to market and the banks take a massive hit on their capital in addition to what has already been written down.

Right now the banks will be picking up problem sales to prevent any price lowering. This is what it really means to be a zombie bank.

They can only hope that a recovering economy will eventually burn off this entire inventory and that they can keep the price structure intact while this occurs.

In the meantime, fear mongers are pointing out that an even greater pool of foreclosures will be joining this pool and that it will take another two years to get the complete picture.

And once again there is a solution by using an equity take out to refinance a portion of the property through altering the foreclosure laws. But who is listening? The hard way is surely much more fun.

Banks aren't reselling many foreclosed homes

Carolyn Said, Chronicle Staff Writer

Published in the San Francisco Chronicle.
Wednesday, April 8, 2009

A vast "shadow inventory" of foreclosed homes that banks are holding off the market could wreak havoc with the already battered real estate sector, industry observers say.

http://www.sfgate.com/cgi-bin/object/article?f=/c/a/2009/04/08/MNL516UG90.DTL&o=0


Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. And foreclosures, which banks unload at fire-sale prices, are a major factor driving home values down.

"We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market," said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. "California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You'd have further depreciation and carnage."

In a recent study, RealtyTrac compared its database of bank-repossessed homes to MLS listings of for-sale homes in four states, including California. It found a significant disparity - only 30 percent of the foreclosures were listed for sale in the Multiple Listing Service. The remainder is known in the industry as "shadow inventory."

"There is a real danger that there is much more (foreclosure) inventory than we are measuring," said Celia Chen, director of housing economics at Moody's Economy.com in Pennsylvania. "Eventually those homes will have to be dealt with. If they're all put on the market, that will add more inventory to an already bloated market and drive down home prices even more."

More than one-third locally

In the Bay Area, a Chronicle analysis of data from San Diego's MDA DataQuick shows that more than one-third of foreclosures are in shadow territory - that is, they are not registering in county records as having been resold.

For the 26 months from January 2007 through February 2009, banks repossessed 51,602 homes and condos in the nine-county Bay Area, according to DataQuick. Yet in the same period, only 30,823 foreclosures were resold, leaving about 20,000 bank repos unaccounted for.

Turnaround usually quick

Realtors say foreclosures generally go on the market a month or two after the bank takes title and then sell fairly quickly, often getting an accepted offer within a week or two of being listed and then closing escrow within 30 days. That means that foreclosures should register as being resold within three months.

But taking the foreclosures in any given month or selection of months and looking at what happened three months later also reveals a big gap between what banks took back and what they resold.

Tom Kelly, a spokesman for banking giant Chase in Chicago, said the bank sells foreclosed homes in a timely fashion.

"We try not to be in the business of owning homes," he said. "Our goal is to get them back on the market as quickly as possible. We want to maximize what we sell them for and yet do it quickly."

Kelly was at a loss to explain the shadow inventory phenomenon other than the quantities involved.

"The inventory might be growing because there is just a lot of volume coming in. That would not surprise me," he said.

Locally, the monthly number of foreclosures has decreased since peaking at 4,321 in August 2007. That has allowed foreclosure resales to start closing the gap.

Most observers say the recent fall-off in foreclosures came because California and many banks implemented foreclosure moratoriums in the fall, not because the problem has diminished.

Only 65.5 percent resold

A second DataQuick study of all Bay Area homes repossessed by banks in the 18 months ending January 2009 tracked how many of those homes had resold by mid-March. It found that 65.5 percent had resold. Discovery Bay's ForeclosureRadar.com compared its database of Bay Area foreclosures to MLS listings for the past 120 days and found that fewer than one-fifth of the foreclosures showed up as for-sale listings.

"Foreclosure numbers are artificially depressed," said CEO Sean O'Toole. He puts California's shadow inventory at about 100,000 homes.

So why aren't banks selling off their foreclosures?

Observers say several factors are at work.

-- The "pig in the python": Digesting all those foreclosures takes awhile. It's time-consuming to get a home vacant, clean and ready for sale. "The system is overwhelmed by the volume," Sharga said. "In a normal market, there are 160,000 (foreclosures for sale nationwide) over the course of a year. Right now, there are about 80,000 every month."

-- Accounting sleight-of-hand: Lenders could be deferring sales to put off having to acknowledge the actual extent of their loss. "With banks in the stress they're in, I don't think they're anxious to show losses in assets on their balance sheets," O'Toole said.

-- Slowing the free-fall: Banks might be strategically holding back some foreclosures so prices don't fall as fast. "They want to be careful about not releasing them too quickly so they don't drive prices down and hurt the values," O'Toole said.

Besides the shadow foreclosures, yet another wave of distressed properties is in the pipeline. These are homes with delinquent payments for which the banks appear to be prolonging the foreclosure process.

Some of that could be because they're negotiating with homeowners about loan modifications or other ways to keep them in the home. But banks also could be deliberately foot-dragging for the same three reasons listed above.

"The problem is that no one knows how extensive (the shadow inventory) is," said Patrick Newport, U.S. economist with the Massachusetts research firm Global Insight. "It's a wild card. If it's a really big number, you'll see prices drop a lot more and deeper problems for the financial system."

Missing foreclosures

Only 65.5 percent of all Bay Area homes repossessed by banks in the 18 months ended January 2009 had been resold by mid-March. This study looked at the same homes over time, not an aggregate of all foreclosures.

County % foreclosures resold % foreclosures unsold
Alameda 58.6% 41.4%
Contra Costa 69.8% 30.2%
Marin 66.9% 33.1%
Napa 66.0% 34.0%
San Francisco 49.8% 50.2%
San Mateo 61.5% 38.5%
Santa Clara 62.0% 38.0%
Solano 67.5% 32.5%
Sonoma 75.3% 24.7%
Bay Area 65.5% 34.5%

Source: MDA DataQuick