Foreclosures on the rise.

Reuters reports that foreclosures were up in May 2012.  This increase results from settlement of litigation over foreclosure practices and also may tend to hold down real estate prices:

By moving houses out of the so-called "shadow inventory" and onto the market, the increase in foreclosures could be a drag on the fragile U.S. housing recovery. The S&P/Case-Shiller index of home prices in 20 metropolitan areas inched up February and March, in monthly terms.

Increased foreclosures might only alleviate the glut of defaulting properties.  There remain many defaulting properties on which the banks have delayed foreclosure.

Elizabeth Warren - real estate flipper

The Boston Herald reports that Massachusetts Democrat Senate candidate Elizabeth Warren has reaped large profits from the purchase and sale of foreclosed homes in Oklahoma, despite attacking such practices in her campaign. The newspaper lists a number of transactions where Warren either purchased foreclosed homes and sold them quickly for large gains or lent money for others to purchase and eventually sell those homes.

Aside from Warren's hypocrisy and the political implications from this story, there are lessons regarding house flipping that the newspaper did not pick up and that apply to Pennsylvania as well as other regions where these practices take place. The bottom line is that the profits were not necessarily as high as the raw numbers reported in the Herald.

• Most likely these homes required repair and renovation (as do most foreclosed properties) - unless Warren unloaded homes with hidden defects on unsuspecting buyers.
• Real estate taxes accumulated during the period of Warren's ownership, all of which cut into her profits. Utility and financing costs also accumulated - unless Warren found tenants to rent the properties while she waited to sell them.
• Unresolved title issues may have forced Warren to incur expenses so that she could convey clear title - unless she unloaded homes with clouded title on unsuspecting buyers.

All of these points would make for good followup questions to determine the true nature of Warren's investments, although it is virtually certain that this followup will not take place.

Also, the Herald article referred to Warren "giving" mortgages to her family members so that they could buy and flip houses. In fact, Warren lent the money.  Those who lend money do not give mortgages - they receive mortgages.  The borrowers give the mortgages to the lenders.  Most newspaper writers do not understand this point. 

The final lesson is that a politician that takes part in real estate investment is not necessarily a friend to other such investors. Investors should not count on Warren acting in a way that supports investment if she reaches the U.S. Senate. 

Glut of foreclosed homes may deepen real estate downturn.

A recent article in the New York Times estimates that lenders own more than 872,000 foreclosed homes at this time:

All told, they own more than 872,000 homes as a result of the groundswell in foreclosures, almost twice as many as when the financial crisis began in 2007, according to RealtyTrac, a real estate data provider. In addition, they are in the process of foreclosing on an additional one million homes and are poised to take possession of several million more in the years ahead.

For each home a lender sells, they foreclose on many more:

In Atlanta, lenders are repossessing eight homes for each distressed home they sell, according to March data from RealtyTrac. In Minneapolis, they are bringing in at least six foreclosed homes for each they sell, and in once-hot markets like Chicago and Miami, the ratio still hovers close to two to one.

Before the housing implosion, the inflow and outflow figures were typically one-to-one.

The problem is apparently widespread and will contribute to continuing stagnation for several more years.

Strategic Defaults; Mortgage Foreclosures; Arnold Ahlert

I have written previously about "strategic defaults." This column from Arnold Ahlert summarizes the issue:

Welcome to the brave new world where clever vocabulary confers absolution on rotten behavior. "We weren't in any financial distress, but the value of the house had declined so precipitously that continuing to stay in this house and paying this inflated mortgage made no sense," said Chris Schreur of California, who contacted a company called You Walk Away, which helped him literally walk away from a freely-signed contractual obligation. "My degree is economics, so I understand that you don't keep putting money into a losing proposition just because you already put money in," he added.


Apparently they don't teach ethics along with economics, which might explain a lot about the current state of the country. Mr Schreur continues: "Objectively the hardest part was the hit to the credit rating. Defaulting on a debt is the hardest thing to accept."

Keep in mind also that Pennsylvania law allows a bank to pursue the former homeowner for a "deficiency judgment." This fact should affect any decision that one might make in this regard.

New records for foreclosures in 2010.

Foreclosures set records across the U.S. in the first quarter of 2010:

A record number of U.S. homes were lost to foreclosure in the first three months of this year, a sign banks are starting to wade through the backlog of troubled home loans at a faster pace, according to a new report.
RealtyTrac Inc. said Thursday that the number of U.S. homes taken over by banks jumped 35 percent in the first quarter from a year ago.

This record comes after foreclosures had set a new record in 2009, both for the year and for the first six months.

Click here for foreclosure predictions from September 2009 and commentary on the effect of foreclosures on the market in general and real estate fraud in particular.

Foreclosure delays; HAMP (Home Affordable Modification Program) review;

From Bloomberg.com comes the story that the Obama administration is considering a ban on mortgage foreclosures pending review by the federal government's Home Affordable Modification Program. Such a plan would create lengthy delays in the foreclosure process (even before the bank could get to the point of encountering the normal delays resulting from bankruptcy, the usual sheriff sale process, PHFA, etc.).

The Treasury Department was quick to point out that nothing has been finalized, but even the beginning of discussion of such a program will have a negative impact on lending. Borrowers and investors have already complained that lending standards have tightened tremendously over the past few years. Serious discussion of any plan that would delay and increase the cost of foreclosure will make lenders more skittish about lending in the first place.

Renting/Leasing as a solution to mortgage foreclosure?

According to CNN, Fannie Mae announced last week that it would allow distressed borrowers the opportunity to remain in their home by deeding the property back to the lender and renting the property as tenants:

The effort is aimed at borrowers with mortgages owned or guaranteed by Fannie Mae who do not qualify for or cannot sustain a loan modification. Borrowers must live in the home as their primary residence and must be released from any subordinate liens.

Private lenders have tried similar methods in recent months and years. The idea bears many risks for all parties, as owners may be tempted to rent the property to new tenants or otherwuse violate the residency requirement.

Not all lenders who offer this program to distressed owners are doing so under the supervision of Fannie Mae's program. Many private investors will purchase the home from the distressed owner as a way for the owner to avoid foreclosure or bankruptcy, only to evict the former owner (now tenant) under some pretext shortly afterward.

If you are an owner facing foreclosure, be sure to explore all of your options before entering into this type of arrangement, including bankruptcy. Be aware of how much equity you have in your real estate. Most importantly, be aware that your home is not worth trying to save if you cannot make the payments. If you cannot make the monthly mortgage payment, chances are that you cannot afford the new rental payment either.

Strategic defaults, deficiency judgments and bankruptcy

I have written earlier about "strategic defaults," by which homeowners intentionally stop paying their mortgage company even though they can afford the monthly payments. The owners intend to abandon the home to the bank because the home has declined so far in value that the mortgage debt far exceeds the value.

While this may seem like a viable option and a way to get rid of debt, homeowners in Pennsylvania must remember that the banks have the option of pursuing a "deficiency judgment" against the owner. Even if the bank forecloses on the home, the former owner remains indebted for the full amount of the loan less whatever the bank recovered by selling the home. The bank can pursue the former homeowner for the difference (or "deficiency"). Laws vary from state to state - and differences in state laws partially account for differences between states in the rate of "strategic defaults."

A former homeowner that is determined to avoid paying the deficiency can discharge any such claim by declaring bankruptcy, but there are pitfalls in this approach also. Both the foreclosure and the bankruptcy will create serious black marks against the former owner's credit (especially the foreclosure). A bankruptcy might result in the forced liquidation of some or all of the debtor's assets.

The bottom line is that you must be careful of financial advisors that present risky strategies that might not be tailored to Pennsylvania law.

Strategic Defaults

One of the newest trends in mortgage foreclosures is the "strategic default," where an owner abandons the home and simply stops paying the mortgage company, even though the owner can afford the monthly payments. Owners do this because the home has declined so much in value it becomes pointless to pay off a 30 year mortgage on a home where the owner will never recover his investment.

McClatchy posts details about this trend.

We are less directly affected by these strategic defaults here in Central PA, as market prices are somewhat more stable than in other areas of the country.

More foreclosure bad news; CNN

CNN reports more foreclosure bad news today:

Despite concerted government-led and lender-supported efforts to prevent foreclosures, the number of filings hit a record high in the third quarter, according to a report issued Thursday.

"They were the worst three months of all time," said Rick Sharga, spokesman for RealtyTrac, an online marketer of foreclosed homes.

CNN cites nationwide data and specific data for Nevada and Vermont. My own observations (and those of associated professionals) is that central Pennsylvania foreclosures appear to have been generally steady during 2009.

The bad news relates to foreclosures that are still to come. Banks have been slower to initiate foreclosures (both nationally and locally) than in prior years:

[T]he RealtyTrac statistics may understate the depth of the foreclosure mess because lender and government actions have delayed many filings. As a result, some delinquencies have not been counted on the foreclosure tallies. That means the crisis may not end quickly.

Lenders are also slow to dump delinquent properties back on the market for fear of causing a free fall in real estate prices. Foreclosures tend to depress real estate prices in general, not merely the prices of foreclosed properties. If real estate prices spiral downward, existing homeowners will not be able to sell or refinance their homes due to lack of equity. This problem will result in more foreclosures and a worsening real estate downward spiral.

We are witnessing the bursting of a very deep bubble.

Mortgage foreclosures - a catalyst for real estate fraud?

There are indications that a new wave of mortgage foreclosures may soon hit the already weak economy. The impact of those (and previous) foreclosures reaches far beyond the houses that are actually being foreclosed upon. As we have all learned, foreclosures tend to depress the price of all real estate, as lenders end up dumping large amounts of foreclosed real estate on the market in an attempt to cut their losses. The price effect of a few foreclosures spreads throughout the entire real estate market.

But prices fall slowly. Sellers are reluctant to lower the price of their house, as they harbor long held expectations of what their house is worth. Rather than lower the price of their house, many sellers will resort to misrepresentation and fraud in order to unload their property. There is hardly a characteristic of a house that a seller will not misrepresent. Fraud comes before price concessions.

We are told that the current real estate market is a “buyer’s market.” We are led to believe that buyers can obtain good deals by taking advantage of depressed prices. That theory is true only for those buyers who can withstand the gauntlet of misrepresentation that awaits anyone who attempts to obtain a bargain.

While specific cases of misrepresentation will have to await future posts, suffice it to say that buyers should assume that the road to a good bargain is paved with hidden costs. There are many ways for buyers to protect themselves, but they won't get this protection unless they assume the worst in each case. Stay tuned for details . . .

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update -
Home inspections as a possible solution.

Adjustable rate mortgage defaults and lending industry consolidation.

Reuters warned last week of the next round in the ongoing financial crisis:

The federal government and states are girding themselves for the next foreclosure crisis in the country's housing downturn: payment option adjustable rate mortgages that are beginning to reset.

"Payment option ARMs are about to explode," Iowa Attorney General Tom Miller said after a Thursday meeting with members of President Barack Obama's administration to discuss ways to combat mortgage scams.

The impact of this round of foreclosures could be severe:

The mortgages tend to be "jumbo," or for significantly large amounts, Goddard said, making it even harder for borrowers to sidestep foreclosure. He said he expected to see an increase in scams as distressed homeowners become more desperate to refinance big debts.

The loss for lenders on each "jumbo" mortgage foreclosure would be greater than the losses on smaller loans.

All of this bad news makes the following item even more interesting:

Peter Eavis, writing in the Wall Street Journal on Friday [September 18, 2009], noted: "More than half of US residential mortgages are being made by just three large banks. It is a stunning change, but is it good for the housing market, and to what extent will it boost profits over the long term for this elite trio: Wells Fargo, Bank of America, and JP Morgan Chase? Right now, housing remains on government life support. Treasury-backed entities are guaranteeing about 85% of new mortgages, while the Fed buys 80% of the securities into which these taxpayer-backed mortgages are packaged."

While this second item refers to new mortgages instead of the existing ARM mortgages of the first article, it should cause great concern that lenders are about to take another round of bad hits just as the mortgage industry seems to be consolidating into only three major institutions.

The articles cited above were speaking of national trends. But someday, this crisis has to reach the point where even the supposedly stable Central Pennsylvania market will feel the effects of the credit crunch more sharply than it has thus far.