Green Shoots Update, Part B: Residential Real Estate (23% mortgages underwater!)

[c1ue]

http://www.bloomberg.com/apps/news?p...d=allDMOrP8m3M

Mortgage Holders Owing More Than Homes Are Worth Rise to 23%

By Brian Louis



May 10 (Bloomberg) -- More than a fifth of U.S. mortgage holders owed more than their homes were worth in the first quarter as repossessions climbed to a record, according to Zillow.com.

Twenty-three percent of owners of mortgaged homes were underwater during the period, up from 21 percent in the previous three months, the Seattle-based property data provider said today in a report. More than one in 1,000 homes were repossessed by lenders in March, the highest rate in Zillow data dating back to 2000.

Underwater homes are more likely to be lost to foreclosure because their owners have a harder time refinancing or selling when they fall behind on loan payments. U.S. home values dropped 3.8 percent in the first quarter from a year earlier, the 13th straight period of year-over-year declines, Zillow said.

“Having a lot of underwater homeowners will add to the downward pressure on house prices,” said Celia Chen, senior director at Moody’s Economy.com in West Chester, Pennsylvania. “We do expect that home prices will fall a bit more.”

Bank repossessions in the U.S. rose 35 percent in the first quarter from a year earlier to a record 257,944, according to RealtyTrac Inc., an Irvine, California-based company.

Sales of foreclosed properties by banks accounted for more than a fifth of all U.S. home sales in March, Zillow said. They made up 66 percent and 62 percent of transactions, respectively, in the metropolitan areas of Merced and Modesto in California.

About 32 percent of homes sold in the U.S. in March went for less than their sellers paid for them, Zillow said.

The closely held company uses data from public records going back to 1996. Its mortgage figures come from information filed with individual counties.

[cjppjc]

Re: Green Shoots Update, Part B: Residential Real Estate (23% mortgages underwater!)

Not exactly what I had in mind when I started a thread called "get ready for some good housing numbers" Insert smiley here.

[don]

Re: Green Shoots Update, Part B: Residential Real Estate (23% mortgages underwater!)

These charts may as well be from the ICU. Hey, for housing, they are!

Since the toxic assets were never marked to market, the big losses have been funneled to the big GSEs (and as we will show in this article, now makes up 96.5 percent of the entire mortgage market). In other words, banks are making profits gambling on Wall Street while pushing out mortgages that are completely backed by the government. We are letting the folks that clearly had no system of underwriting mortgages correctly or any financial prudence lend out government backed money and the losses are piling up but only in the nationalized Fannie Mae and Freddie Mac. What a sweet deal. Stick the junk in a taxpayer silo. I wanted to go into the details on the current U.S. housing market and the data is not pleasant. In fact, it is downright disturbing. For background information, the U.S. has roughly 51 million active mortgages. As we go through the next 10 charts, it is important to keep this in mind. Whitney Tilson’s T2 Partners came out with some riveting charts regarding the current state of the housing market. Let us go through 10 of the most crucial charts.

Chart 1 – Homes in foreclosure



The ultimate sign of housing distress is foreclosure. This should be obvious. So for all the talk of a housing recovery I point to the above chart. Today, as in right now, we are in record territory for the number of homes in foreclosure. 14 percent of all U.S. mortgages are in some form of foreclosure. If you do the rough math, this equates to:

51 million x .14 = 7,140,000 mortgages in default or 30+ days late

I always get this question about how folks arrive at the figure of 7 million. The above equation should give you an idea. This by the way is not a good situation. And with many toxic loans including option ARMs and Alt-As still lingering in the market, we have a few more years of problems baked in unfortunately.

Chart 2 – Foreclosure filings



Building off chart one, foreclosure filings are still at record levels. In fact we are heading to a 3.5 to 4 million foreclosure year in 2010! This is somehow a positive thing for the market? People forget that foreclosures happen because of underlying economic issues. If everyone was making big bucks and homes were going up in value then we wouldn’t have this problem. Just look at the number of foreclosure filings back in 2005. Roughly 60,000 to 70,000 per month. Last month we hit 367,000+ which was an all time record. When foreclosure filings get back down to more normal levels, then we can say the housing market is improving.

What about strategic defaults? At most, 1 out of 5 foreclosures is probably a strategic default. But that means 4 out of 5 are losing their home because they can’t pay. This is why we absolutely need bigger down payment requirements. If you get a government backed loan (aka the 96.5 percent of the market) then you should at the very minimum put down 10 percent from actual cash sources (no using tax credit nonsense).

Chart 3 – Home prices dropping



I think some people have a hard time understanding why home prices have fallen lately. Well, when a large part of home sales are distress properties prices usually shoot to the downside. We had a nice little bump from the alphabet soup of government programs including HAMP, tax credits, and other gimmicks but the trend is back to lower prices. Why? Because the underlying economy is still not healthy. Now that people have to at least show some proof of income, it turns out that many cannot afford high priced houses. Is this a surprise to anyone? What do you expect when your strategy involves kicking the can down the road? The above chart basically shows one World Cup kick to the can.

Chart 4 – Nationalized housing market



Congratulations, you are the housing market. 96.5% of all originated loans are now government backed. Remember Fannie Mae and Freddie Mac and their epic continuing losses? Apparently banks have no problem originating loans as long as they can use the government money to gamble in the stock market.

Wall Street enjoys handing your money out. They like to beat on their chest about the free market but have no intention of lending out their own money (i.e., your bailout funds). In fact, Wall Street has convinced itself that your money is basically their hard earned cash. For the risky housing market, they’ll be the middleman in lending out mortgages that are defaulting in mass. What do they care if the economy is on stable footing? They don’t care if you lose your job and can’t pay the mortgage in one or two years. By then, the banks will be gambling in another bubble putting another sector of the economy at risk.

Chart 5 – Housing overhang



Remember that 7 million figure? Well there it is. Keep in mind that we keep adding to this pile because foreclosure filings are running at 300,000+ per month. So the market is actually saturated with inventory. You may not always see this in the actual data but we’ve gone through multiple case studies of shadow inventory. This large amount of overhang will add additional pressure to housing prices in the next few years. In fact, with this amount of housing we have anywhere from 7 to 9 years of inventory to clean out!

Chart 6 – Distress inventory as sales



The dip you see in 2009 was basically the failed efforts of HAMP and other bank stalling efforts. Now that banks have basically nationalized the housing market and have made Fannie Mae and Freddie Mac their dumping ground, they really don’t care. They can use the taxpayer money they get under the guise of helping homeowners to speculate on Wall Street while funneling GSE debt to the public. An absolute win for them. The biggest and most risky of debt gets pushed to taxpayers while the lion share of profits stays in house as bonuses. The system couldn’t be more corrupt or broken.

Chart 7 – Not paying and living with no foreclosure



This is a stunning chart. 24% of those that have made no payment in the last year are still not in foreclosure! In other words, you have tens of thousands of people living rent free while banks pretend everything is fine and claim billions of dollars in profits. What a sham! Just look at the 24 months with no payment column. 39,000 people have not made a payment in 2 years and no foreclosure has been filed!

Chart 8 – Home equity lines



With so many homes underwater, the second mortgage market has virtually disappeared. But we still have $842 billion in loans made during the peak of the bubble outstanding. Most of these are actually held by the big four banks and that is probably another reason why banks are moving aggressively against some while letting others stay in their home without payment. In fact, if you look at the above chart it seems that if you leveraged yourself with multiple mortgages banks might wait to move on you while if you only had one mortgage backed by a GSE, you’re out. Fannie Mae and Freddie Mac defaults on standard mortgages are spiking to record levels.

HELOC defaults are soaring:



This means further bank losses but can Wall Street gambling outpace the losses from the housing market?

Chart 9 – nonpayment savings



There is an upside to not paying on your mortgage. More money to spend! Ironically some of the recent increase in consumer spending hasn’t come from job gains or actual employment improvement. It has come from people not paying their mortgage, downsizing (or getting a similar house for half off), and using the freed up income to spend. The estimate is that $8 to $12 billion per month is freed up from people not paying on their mortgage. You must have some uncanny self delusion to spin that as good news.

Chart 10 – REO vs distress



This chart pretty much sums it up. Banks are moving on current REOs (the small batch that they have) and pumping this up as good news but the 90 days plus foreclosure number is still trending up. How is this magic done? We’ve talked about it above. You simply don’t move on delinquent homeowners. You ignore actual losses. You mark your assets to fantasy valuations.

In total the housing market is in worse shape today than it was a few years ago. If the stock market was tied to housing we probably have a Dow of 20,000 with 14 million foreclosures. The bailouts have been one large transfer of wealth to the banking sector. Remember that the bailouts were brought about under the guise of helping the housing market and keeping people in their homes. None of that has happened. Ironically the only thing that seems to keep people in their home is when they stop paying their mortgage!

If that is the strategy we have arrived at after $13 trillion in bailouts and backstops to Wall Street we are in for a world of problems.

http://www.doctorhousingbubble.com/

[aaron]

Re: Green Shoots Update, Part B: Residential Real Estate (23% mortgages underwater!)

So, if the government indirectly owns most of the loans.. Why can't they just absorb the defaults? How does it affect me? If they have this huge pile of paper... and half of it goes to defaults (or principle reduction), what does that actually mean?
Isn't it all fiat? Why can't the government just say "Your principal is reduced 40%" to everybody? How does that cost anything?

[c1ue]

Re: Green Shoots Update, Part B: Residential Real Estate (23% mortgages underwater!)

So, if the government indirectly owns most of the loans.. Why can't they just absorb the defaults? How does it affect me? If they have this huge pile of paper... and half of it goes to defaults (or principle reduction), what does that actually mean?
Isn't it all fiat? Why can't the government just say "Your principal is reduced 40%" to everybody? How does that cost anything?

The government and the Federal Reserve are absorbing these bad loans - via subsidizing Fannie/Freddie plus taking over the loan securitization market in the former case and via buying back the worst of the toxic assets in the latter case.

How does it affect you?

Well, first of all clearly banks aren't bothering to even lend money to anyone anymore at the commercial level. This means less jobs created via new business formation, and in turn depresses demand already hit by high unemployment levels.

Second, the vast amount of balance sheet liabilities is making the foreign purchasers of Treasuries nervous to the point of many no longer buying US Treasuries.

At some point there WILL be an increase in interest rates - or we're going Zimbabwe.

As for fiat declarations: besides making those homeowners who don't have mortgages very unhappy (no free money for them) - and the renters don't even count - the fiat declarations also affect the banks. Since the toxic mortgages are being counted at full value - many even above full value due to penalties, late payments, etc added to principal outstanding - declaring them to be lower means effectively causing banks to declare losses.

Given that Obama and Congress have clearly sold out, this is very unlikely.

And if they haven't sold out, read http://www.itulip.com/forums/showthr...ilist&p=159596 to understand why they would act the same anyway.

[vinoveri]

Re: Green Shoots Update, Part B: Residential Real Estate (23% mortgages underwater!)

So, if the government indirectly owns most of the loans.. Why can't they just absorb the defaults? How does it affect me? If they have this huge pile of paper... and half of it goes to defaults (or principle reduction), what does that actually mean?
Isn't it all fiat? Why can't the government just say "Your principal is reduced 40%" to everybody? How does that cost anything?

This is indeed what should happen - a debt jubilee, but with equity for everyone to the best extent possible, including those with no mortgages, e.g., in the form of tax credits/rebates, even checks from the Treasury.

What is actually occuring is really inequitable. Of course the prime beneficiaries are the banks, and the gov could not care less about the homeowner.
Howver, those mortgage holders who are benefitting from the bail-out are just ones who, in a combination of factors, e.g., put little or no money down, speculating, living beyond their means, failure to be prudent, and now either strategically default or squat in their homes and are not foreclosed upon. The person who tried to get a reasonable home in 2005-2007, and put 20%+ down (a responsible thing to do to avoid PMI for instance), is now most likely sitting on a loss, but won't default b/c of the 20% loss of actual skin in the game.

Yes, forgive principal across the board, and give equity to those w/o mortgages. Most importantly though is to shutter the GSE's and make banks, for the license/privilege to be a bank, hold the debt they originate or at least a portion of it to insure they are penalized for making poor loans.

[thriftyandboringinohio]

Re: Green Shoots Update, Part B: Residential Real Estate (23% mortgages underwater!)

.. Why can't the government just say "Your principal is reduced 40%" to everybody? How does that cost anything?

Any forgiveness of principal on the first mortgage to avoid default ends up being a giant gift to the big 4 banks who hold a large portfolio of second mortgages (i.e. home equity loans). In a foreclosure the second mortgage is zeroed out. Huffington post had a nice article here

http://www.huffingtonpost.com/2010/0..._n_534898.html

This is the juicy bit:

Here's what's going on:
The nation's four biggest banks collectively own about $448 billion in junior liens -- those loans taken out on a property in addition to the more standard first-lien mortgage, like second liens, home equity loans and so forth -- as of Dec. 31, 2009, according to regulatory filings with the Federal Reserve. That's nearly 45 percent of all outstanding junior-lien home mortgages in the U.S., Federal Reserve data show.
The problem is that it's those holdings that are complicating efforts to modify home mortgages. Nearly two-thirds of all home mortgages are held as securities by investors worldwide, most of which are based on first-lien debt. Banks only hold a bit more than a quarter of all outstanding home mortgage debt, Fed data show.
If a borrower loses his home to foreclosure, the first lien is repaid first off the subsequent sale. Whatever proceeds are left go to second and subsequent liens; if nothing is left -- for instance, if an underwater borrower is foreclosed on and the sale of the foreclosed home doesn't even satisfy the outstanding first lien -- then the second and subsequent liens are worthless. They don't get a penny.
Based on that priority of payments, holders of first lien mortgage debt argue that those holding junior liens should take the first hit when it comes to modifying mortgages -- after all, if the home enters foreclosure, that's how it will play out.
Since nearly all mortgage modifications involve homeowners who are likely to default, investors argue that the second-lien holders should write down their holdings, take their losses, and get out of the way so troubled homeowners -- free of junior-lien debt obligations -- will have a chance to stay in their homes. Investors, after all, want homeowners to stay in their homes so they can continue getting paid; a foreclosed home rarely results in a profit to investors.
Megabanks, thus, should reduce the amount borrowers owe them on those junior liens, argue investors, economics, consumer advocates and mortgage bond analysts.
Their argument is "quite reasonable," White said.
But the big banks that own that junior lien debt aren't going to cut mortgage principal and take losses on their holdings without a fight, as emphasized by JP Morgan Chase's Lowman in his remarks.
"Realistically, as the process winds through, those second [liens] are going to get wiped out," White said. "[The banks are] just in denial about that."
The problem is so huge -- $448 billion huge -- that if the banks were to write down their positions and take the appropriate losses, some think it could necessitate a second bailout.
But until those homes are actually sold in a forced sale -- like a foreclosure sale -- the banks can keep pretending their holdings are worth more than they really are...