"It's going to get worse before it gets worse."

[Tybee Island]

Re: "It's going to get worse before it gets worse."

Two things to share that I think fit into this thread's thesis.

1. I have been wondering if home owners and commercial property owners have taken a hard look at the level of property insurance they are currently carrying on their properties and evaluated whether our not they are "over-insured" as per the value of their homes and assets. We crossed a line in October in my view where the market value of homes had fallen substantially below replacement value. I live in the southeast US on a coastal barrier island and prior to that in Florida on the coast as well. I have seen the destruction left behind by hurricanes first hand. However, I wouldn't insure my home at this time for replacement value let alone "market value," it would be cheaper for me to go out an purchase a new one if a calamity occurred. (Incidentally, I don't own, after selling, we rented a magnificent just completed home on the beach for 1/3 of what my costs would be to own)

Now of course their is provision inserted into every mortgage whereby the Lender must have insurance in place provided by the borrower to protect the collateralized asset. However, who and by what measure today do you decide "insurable value?" "Mortgage value is certainly higher than market value.

What if 50% of the country reduced its coverage thus lowering its premiums? I think in the event of another Katrina, their will be no claims paid whatsoever by what are now insolvent insurance companies scrambling for TARP funds. The State of Florida, is so upside down on its "Citizens" state funded insurance system, that any minor storm would bankrupt the State, yet the premiums that residents pay are unbelievably expensive

Would the insurers be driven to bankruptcy with their annual premiums vastly reduced?

2. As an investor/developer (who saw the light an sold all of his RE assets in 2005), I have been making bids of late to banks for large portfolios of new residential construction. With not divulging too much more detail, what I will share, is that I am pricing the assets at between $0.08 and $0.17 on the dollar. I see no bottom until 2015 and the assets are only worth what my target yield is for cash flow from rental operations.

Moreover, in evaluating where I think we will be in the next 12-36 months, I may be overpaying for these assets and most likely scale my offers back by 50%.

I think housing values are going 50% lower from current levels.

Good weekend to all.

[Jay]

Re: "It's going to get worse before it gets worse."

I am pricing the assets at between $0.08 and $0.17 on the dollar...
I may be overpaying for these assets and most likely scale my offers back by 50%.

Good weekend to all.

Holy crap. So a million dollar house at the peak bidding for as low as 40k-85k with a straight face. That is incredible.

[Tybee Island]

Re: "It's going to get worse before it gets worse."

Go out and see who is lending today on any home that exceeds Fannie/Freddie/FHA loan limits.

Moreover, consider if you can locate a lender interested in a jumbo loan, the current LTV is at most 70% and moving down towards 50%.

In Florida, I saw luxury homes on the water that had been sitting on the market for 2 -3 years. When I inquired about a few, the realtors explained that I needed to call the bank and forget dealing with the owner.

I asked "why is that?" Realtor explains, that the owner hasn't paid his mortgage for 2+years on the house.

Now get this, the bank hasn't even issued a Notice of Default (NOD) on the mortgage even after 2 years of non-payment. These were homes that in 2005 were selling for $3,000,000.

If the borrower received a loan of 90% of value and then took out a HELOC on top of that for another 15% a year later, the borrower made $120,000 net on the deal and walked away. The lender is sitting with $3,150,000 outstanding on a home worth $1,500,000 (-50% +/-) if one believes the current Case Shiller data. However, that data has only just begun to consider the high-end of the market as the vast majority of foreclosures have occured at the low end of the market. Also, those numbers as well as the the governments housing data does not include CONDOS! Which is a major dwelling class in Florida, Georgia, New York, California, etc.

I called the banks a year an half ago about a few of these and it was astounding. Much like a comedy sketch, the bankers quickly didn't want to acknowledge the loan delinquency and I am sure right after I called, they buried it at the bottom of the pile of files on their desk so that no one was the wiser. Many of these are publicly traded banks that have not even divulged to their regional managers the problems they have with these loans.

Incidentally, my bids are for much smaller homes, vintage late 2006-2008 that were selling for $175,000 on average. My highest bid today is $25,000 and going lower quickly.

[Wild Style]

Re: "It's going to get worse before it gets worse."

As callous as it may sound, to me it says that we value property rights. If I have 5 houses (and live in one) and you have zero, I'm sorry, but you're not "entitled" to live in one of my houses.

Sure, it'd be nice if the owners of the empty houses let those without occupy them until a sale can be arranged (or a renter found), but the reality is there's a cost and risk associated with that. I bet most people have a spare bedroom - what does that say about us as a society? Why aren't people inviting homeless people to stay in their spare bedrooms?

Because many of them are crazy as cat shit and could kill you in your sleep?

[bill]

Re: "It's going to get worse before it gets worse."

Go out and see who is lending today on any home that exceeds Fannie/Freddie/FHA loan limits.

Moreover, consider if you can locate a lender interested in a jumbo loan, the current LTV is at most 70% and moving down towards 50%.

In Florida, I saw luxury homes on the water that had been sitting on the market for 2 -3 years. When I inquired about a few, the realtors explained that I needed to call the bank and forget dealing with the owner.

I asked "why is that?" Realtor explains, that the owner hasn't paid his mortgage for 2+years on the house.

Now get this, the bank hasn't even issued a Notice of Default (NOD) on the mortgage even after 2 years of non-payment. These were homes that in 2005 were selling for $3,000,000.

If the borrower received a loan of 90% of value and then took out a HELOC on top of that for another 15% a year later, the borrower made $120,000 net on the deal and walked away. The lender is sitting with $3,150,000 outstanding on a home worth $1,500,000 (-50% +/-) if one believes the current Case Shiller data. However, that data has only just begun to consider the high-end of the market as the vast majority of foreclosures have occured at the low end of the market. Also, those numbers as well as the the governments housing data does not include CONDOS! Which is a major dwelling class in Florida, Georgia, New York, California, etc.

I called the banks a year an half ago about a few of these and it was astounding. Much like a comedy sketch, the bankers quickly didn't want to acknowledge the loan delinquency and I am sure right after I called, they buried it at the bottom of the pile of files on their desk so that no one was the wiser. Many of these are publicly traded banks that have not even divulged to their regional managers the problems they have with these loans.

Incidentally, my bids are for much smaller homes, vintage late 2006-2008 that were selling for $175,000 on average. My highest bid today is $25,000 and going lower quickly.

With no pressure applied to banks from regulators they will not be forced to liquidate. I have looked at several loan portfolios to purchase and passed on every one, over priced and legal issues.
Loan originators that started a new company PennyMac are having a hard time finding value.
http://features.csmonitor.com/econom...-toxic-assets/

Will anyone want to buy banks’ toxic assets?

Prospective buyers hunt for the good stuff amid all the bad debt, anticipating a supersale.
By Ron Scherer | Staff writer/ May 6, 2009 edition



New York
Buying loans from banks – the types of loans that need to be handled with latex gloves and hazmat suits – is becoming a new growth industry.
Former mortgage bankers and Wall Street wheeler-dealers even now are leafing through confidential bank documents detailing tens of billions of dollars of bad mortgages and other loans known as “toxic assets.” Their goal: to find undervalued assets they can buy cheaply and make money on.
It may be chutzpah. It may be opportunism. Or it may be the solution to cleaning up the banks’ balance sheets. Whatever the case, many prospective buyers are mining for data that will help them in June, when a new government plan to deal with banks’ problems starts up.
This time, unlike during the roaring mortgage boom, some potential investors are actually visiting houses, talking to lenders, and acting like crime scene investigators for bad loans.
The decisions made by loan sleuths on how much to pay for the banks’ bad holdings will determine the success of the government’s plan to try to move those holdings off the banks’ books. If the banks agree to the prices offered for their loans, the shifts in ownership of those loans could ultimately free up capital for the economy’s recovery. But if the banks balk because they believe the assets are more valuable, think about the economy in terms of molasses.
“It will be interesting to see who does participate,” says Paul Koches, executive vice president and general counsel at Ocwen Financial Corp., a mortgage servicing company. “We need to get this part of the economy unstuck from the mud.”
No doubt, there’s lots of opportunity. The combination of smelly loans and battered securities (pools of loans) on banks’ books may total as much as $2 trillion, say industry insiders. Less than $50 billion has been raised so far from private investors and institutions such as pension funds and endowments to buy some of these troubled assets.
A big part of the money that needs to be raised will go toward the federal government’s latest effort to take bad loans off the banks’ balance sheets: the Public-Private Investment Program (PPIP). This complex program will try to get the banks to sell bad loans (termed “legacy loans”) and legacy securities (containing lots of loans).
The buyers eyeing these loans have different histories and take different approaches.
Take Private National Mortgage Acceptance Co. (PennyMac) in Calabasas, Calif. It was founded in January 2008 by Stanford Kurland, a former executive at Countrywide, a US mortgage firm that was bought by Bank of America after it ran into trouble.
“If anything, we are the good guys,” says David Spector, the company’s chief investment officer. “Homeowners actually like us.”
The reason homeowners may smile on PennyMac: After it buys loans from banks at a discount, it tries to work on loan modifications to prevent foreclosures.
But first, PennyMac does a lot of homework, analyzing every loan it is considering buying. The firm looks at payment histories and calculates the probability of default. It adds in regional factors pertaining to how much housing values have changed: A loan in Florida may be worth less than a loan in Wyoming, for example. And, of course, it factors in a 20 percent return on its investment.
Unlike the days of instant approvals for mortgages, the review process for each package of loans takes at least two weeks, usually longer.
PennyMac says it has looked at $60 billion worth of loans but purchased only $800 million. “It’s not a great hit rate because we are cautious,” Mr. Spector says.
Other prospective buyers of legacy loans are popping up on Wall Street, where the scent of money is particularly strong. For instance, at the end of 2007, Goldman Sachs purchased Litton Loan Servicing, which is responsible for a large portfolio of subprime mortgages.
“Firms like Goldman Sachs have been buying distressed mortgage-backed securities and individual loan portfolios since the meltdown occurred [last fall], buying them at a deep discount,” says Kenneth Alverson, a managing director at Novantas, a financial-services consulting firm based in New York.
Some buyers of distressed debt, Mr. Alverson notes, use sophisticated computer models that look at underlying default rates, the influence of the economy on homeowners, the direction of interest rates, and factors related to local metropolitan statistical areas (MSAs).
Other analysts on Wall Street have another approach: focusing on the few trades that do take place for a distressed security. One company taking this approach is Pluris Valuation Advisors, based in lower Manhattan. It has a licensing agreement to get data from SecondMarket, a Wall Street firm that does trading in illiquid, or distressed, securities.
“We believe as long as there is some kind of market, it gives us some kind of guidance of what the market is or what the value may be,” says president Espen Robak. “And that is a lot better than using a theoretical model with assumptions that who knows where they came from.”
For example, one “toxic asset” Mr. Robak has tracked is a $600 million Lehman Brothers deal that securitized some of the assets backing up a complex insurance product. “There is almost no market, but when the securities do trade, it’s for 10 to 20 cents on the dollar,” he says.
Why would people buy such securities? “Some people are speculating that these things will have a greater recovery [of investment] than what is expected today,” he says. But these securities sold by Wall Street “are real long shots, and they have serious losses.”
Of course, banks, too, are scrutinizing their portfolios to assess the value of mortgage-related debt. But future buyers “are looking for something the bank can’t find,” says Michael Burns, a lawyer who used to work at the Federal Deposit Insurance Corp. and is now at Anderson, Burns & Vela in Dallas. “The buyers’ strategy is to make money or turn a profit on a portion, such as 10 percent, of the loans in a pool that they purchase. They realize that the majority of the loans in a pool will not be profitable

[jpatter666]

Re: "It's going to get worse before it gets worse."

Because many of them are crazy as cat shit and could kill you in your sleep?

In today's legalese nightmare, my understanding is that if you voluntarily allow someone to stay in your house (or even garage), they now have the "right" to stay there and it can be *very* hard to get rid of them should they turn out to be looney-toons.

This may vary from state to state.

[ax]

Re: "It's going to get worse before it gets worse."

In today's legalese nightmare, my understanding is that if you voluntarily allow someone to stay in your house (or even garage), they now have the "right" to stay there and it can be *very* hard to get rid of them should they turn out to be looney-toons.

This may vary from state to state.

From what our HOA lawyer says, this is correct. It's very hard to prove that multiple families are living on a single lease, it's very hard to get renters out of their homes even if they are not paying rent and the homeowner is not paying their HOA. What you and I may consider "way too many people" living in one home is covered very easily by person/#rooms per house or per sq. ft according to him. In my opinion, we are already sheltering the homeless as about 20-25% of my community is delinquent or in foreclosure. Just paying electric to keep their Dish TV and Wiis functioning.

[Tybee Island]

Re: "It's going to get worse before it gets worse."

Bill:

Thank you for the informative article. I completely understand Penny Mac's position. Although I am not crazy about how Mr. Kurland, jumped from Countrywide just to repurchase loans that he most likely had a part in originating, but that is besides the point.

My target yield is no less than 15% and more preferably 20%. That may seem too aggressive and way outside a typical rental operators margin, however, I want to be the last man standing. I have checked several homes that are currently in the rental market for the vintage, total SF and area that I am watching. $1300 seems to be the average for a 3/2 but I think that these landlords have no margin of safety and will in fact be foreclosed upon in the next cycle as their renters either stop paying or can only afford a vastly reduced rent. My threshold is $850 at a 35% discount to current market. However, I would drop to $425 if need be and still have a 7% - 10% return if pressed by the market to do so. My competitors are at breaking point at around $1100.00 just to cover the expense of the home.

Patience is the name of the game. I have explained to bankers, that my first offer is my best offer, and when they call in the future, do not assume for a minute that I will be offering anything close to what I initially bid.

Today, either they are all certain that Federal Govt. will somehow rescue them or that the market will miraculously revive and everything will return to normal with just a little sprinkling of Obama Fairy Dust.

However, I think when they finally see the light an all head to the exits at the same time, $.05 (if that) on the dollar will probably be the best they receive and I think they will be happy to have unloaded the liability of maintenance, insurance and vandalism.

I have already told them that I will agree to take the unimproved lots along with the homes for free and they should be happy I am not charging them a premium for assuming their liabilities.

[CanuckinTX]

Re: "It's going to get worse before it gets worse."

Bill:



However, I think when they finally see the light an all head to the exits at the same time, $.05 (if that) on the dollar will probably be the best they receive and I think they will be happy to have unloaded the liability of maintenance, insurance and vandalism.

I have already told them that I will agree to take the unimproved lots along with the homes for free and they should be happy I am not charging them a premium for assuming their liabilities.

Forgive me for being dubious but according to this site the deepest of discounts right now are only 46% - and this is in California so it's probably not far from what's occurring in Florida. Wouldn't your 5 cents on the dollar be many many years away, if ever? It also seems, anecdotally, that there are many people chasing foreclosures looking for the bottom of the market so I would have to assume the banks could find many buyers even higher than your 8-17 cents on the dollar range.

But hey, I could be wrong and if so more power to you!



From http://www.fieldcheckgroup.com/blog/

[Tybee Island]

Re: "It's going to get worse before it gets worse."

Thank you for the wonderful chart. We already have product here trading at $.030 on the dollar to loan value. Which is a deeper discount to retail value as of the last sale.

I know Mark at Fieldcheck's work in CA and I am a big admirer of it.

Unfortunately, the statistics he is providing aren't showing the entire picture. Many of these distressed assets are held by small regional and community banks that loaned to small builders and developers. The majors, Lennar, DR Horton, Beazer, etc, all have funding from the big players and there is a different class of vulture going after these assets (large private equity with inside connections to these portfolio managers.) I worked for a large national builder in land acquisition in CA in the 1990's, and it was an insiders club than with all of our funding flowing from Wall Street and so it remains.

For example I was bidding on a Lehman loan for a property in Atlanta late last in year that eventually was sold for less then my bid, but I didn't have an inside line to the loan manager who was based in Colorado.

My offer price is only based on an desired yield for the investment. It is only cash flow that generates the price. I see multi-generations of families gathering under one roof in the coming months and years and my position is that if I can entice a current underwater borrower who is currently evaluating how they can continue providing shelter for their family with a near identical alternative for 50% less of their current housing costs, I will have gained a renter.

A bank sitting with a 100 unit sub division with 20 completed homes, another 10 that were abandoned half completed and 70 unimproved lots is not selling a one off home to a retail buyer. I am offering to take the entire bulk development in one swift cash transaction warts and all.

Unless, you are prepared to take the entire sub-division and perhaps several others at one time, and signup for the risk of not finding renters, yet still being liable for property taxes, maintenance, etc. I do not believe that banks are finding a great many buyers at .08 -.17 on the dollar (to loan value) today. The recent tear down of homes in Victorville, CA by a lender in Texas I think speaks to my point.

Respectfully, I think that .05 on the dollar or perhaps the satisfaction of some percentage of back property taxes and liens is where it will be in the end.

I can only share with you my perspective from being in the residential real estate development business since 1980 and fully subscribing to the Itulip thesis of 20% unemployment in the near future and the collapse of the FIRE economy forever.............Thank you for your thoughtful response.

[metalman]

Re: "It's going to get worse before it gets worse."

I can only share with you my perspective from being in the residential real estate development business since 1980 and fully subscribing to the Itulip thesis of 20% unemployment in the near future and the collapse of the FIRE economy forever.............Thank you for your thoughtful response.

what, only 29 years in the industry... since the start of the fire econ? just kidding.

welcome! your experience/background/expertise in rre puts you on par with grg55 on oil/energy. i'm psyched.

[rogermexico]

Re: "It's going to get worse before it gets worse."

Thank you for the wonderful chart. We already have product here trading at $.030 on the dollar to loan value. Which is a deeper discount to retail value as of the last sale.

I know Mark at Fieldcheck's work in CA and I am a big admirer of it.

Unfortunately, the statistics he is providing aren't showing the entire picture. Many of these distressed assets are held by small regional and community banks that loaned to small builders and developers. The majors, Lennar, DR Horton, Beazer, etc, all have funding from the big players and there is a different class of vulture going after these assets (large private equity with inside connections to these portfolio managers.) I worked for a large national builder in land acquisition in CA in the 1990's, and it was an insiders club than with all of our funding flowing from Wall Street and so it remains.

For example I was bidding on a Lehman loan for a property in Atlanta late last in year that eventually was sold for less then my bid, but I didn't have an inside line to the loan manager who was based in Colorado.

My offer price is only based on an desired yield for the investment. It is only cash flow that generates the price. I see multi-generations of families gathering under one roof in the coming months and years and my position is that if I can entice a current underwater borrower who is currently evaluating how they can continue providing shelter for their family with a near identical alternative for 50% less of their current housing costs, I will have gained a renter.

A bank sitting with a 100 unit sub division with 20 completed homes, another 10 that were abandoned half completed and 70 unimproved lots is not selling a one off home to a retail buyer. I am offering to take the entire bulk development in one swift cash transaction warts and all.

Unless, you are prepared to take the entire sub-division and perhaps several others at one time, and signup for the risk of not finding renters, yet still being liable for property taxes, maintenance, etc. I do not believe that banks are finding a great many buyers at .08 -.17 on the dollar (to loan value) today. The recent tear down of homes in Victorville, CA by a lender in Texas I think speaks to my point.

Respectfully, I think that .05 on the dollar or perhaps the satisfaction of some percentage of back property taxes and liens is where it will be in the end.

I can only share with you my perspective from being in the residential real estate development business since 1980 and fully subscribing to the Itulip thesis of 20% unemployment in the near future and the collapse of the FIRE economy forever.............Thank you for your thoughtful response.

I've not been this negative on RE (pretty negative even for itulip, though)

You've got me working on it.
Thanks for the post.

[jtabeb]

Re: "It's going to get worse before it gets worse."

Thank you for the wonderful chart. We already have product here trading at $.030 on the dollar to loan value. Which is a deeper discount to retail value as of the last sale.

I know Mark at Fieldcheck's work in CA and I am a big admirer of it.

Unfortunately, the statistics he is providing aren't showing the entire picture. Many of these distressed assets are held by small regional and community banks that loaned to small builders and developers. The majors, Lennar, DR Horton, Beazer, etc, all have funding from the big players and there is a different class of vulture going after these assets (large private equity with inside connections to these portfolio managers.) I worked for a large national builder in land acquisition in CA in the 1990's, and it was an insiders club than with all of our funding flowing from Wall Street and so it remains.

For example I was bidding on a Lehman loan for a property in Atlanta late last in year that eventually was sold for less then my bid, but I didn't have an inside line to the loan manager who was based in Colorado.

My offer price is only based on an desired yield for the investment. It is only cash flow that generates the price. I see multi-generations of families gathering under one roof in the coming months and years and my position is that if I can entice a current underwater borrower who is currently evaluating how they can continue providing shelter for their family with a near identical alternative for 50% less of their current housing costs, I will have gained a renter.

A bank sitting with a 100 unit sub division with 20 completed homes, another 10 that were abandoned half completed and 70 unimproved lots is not selling a one off home to a retail buyer. I am offering to take the entire bulk development in one swift cash transaction warts and all.

Unless, you are prepared to take the entire sub-division and perhaps several others at one time, and signup for the risk of not finding renters, yet still being liable for property taxes, maintenance, etc. I do not believe that banks are finding a great many buyers at .08 -.17 on the dollar (to loan value) today. The recent tear down of homes in Victorville, CA by a lender in Texas I think speaks to my point.

Respectfully, I think that .05 on the dollar or perhaps the satisfaction of some percentage of back property taxes and liens is where it will be in the end.

I can only share with you my perspective from being in the residential real estate development business since 1980 and fully subscribing to the Itulip thesis of 20% unemployment in the near future and the collapse of the FIRE economy forever.............Thank you for your thoughtful response.

Could you provide some pearls of wisdom to those of us that must navigate the residential real estate market?

Specifically (if you would care to answer), What's a Good price for a primary residence going to be? I'm not talking investment here, I'm talking as a primary residence. The market I'm looking at has a ton of supply but the prices are still in the unbelieve-o-sphere range. Like foreclosures are selling for over $100/sq ft. Retail in like $140/ sq ft. This in a place where $75-85/sq ft was an insane amount of money for a house in say 1999.

Any thoughts?

Thanks

[Starving Steve]

Re: "It's going to get worse before it gets worse."

Prices are very high wherever I look here in British Columbia with the odd deal, but not much of one. I keep hearing of deals, but they don't check-out. In other words, they are bologna-sausage.

People like to tell stories. That is the nature of people.

If you were a bank, and you know how banks are, would you sell an asset in an inflation for 3% of its value? Think about it.

Yes, a bank could burn down a few homes to raise the value of the others it holds, but it certainly is not going to sell homes for 3% of market value because that would destroy the value of all of the other homes it holds....Again, reason things through.

[CanuckinTX]

Re: "It's going to get worse before it gets worse."

I can only share with you my perspective from being in the residential real estate development business since 1980 and fully subscribing to the Itulip thesis of 20% unemployment in the near future and the collapse of the FIRE economy forever.............Thank you for your thoughtful response.

No, thank you for that great explanation. Adding this extra colour definitely has helped me out.