The Housing Crisis is Like Hurricane Katrina

There were four back-to-back panel sessions on the topic of Foreclosures at Real Estate Connect this morning. Here are some sound bites and quotes.

There are 25,000 homes per MONTH in California that are going back to the lender.  This is going to create a glut of housing inventory for many months into the forseeable future.  The percentage of loan modifications that are re-defaulting and going into foreclosure is high.  Estimates are 40% or higher.

In Cali, the very low end price range REO homes are now selling to long term investors who are are able to put a renter in that house and make their cash flow goals. 

There are an estimated 400,000 people living in their homes for free in California right now.  Lenders are stalling the foreclosure process because there simply is not enough people working in the loss mitigation departments to process all the paperwork.

There is a huge problem nationwide with listing agents who are taking short sale listings and have no clue on how to help the homeowner navigate through the short sale process.

Quote: “This [the housing crisis] is like Hurricane Katrina.”

Question to the panelists: How can consumers who are facing foreclosure help themselves?
Answer from Frances Flynn Thorsen, “Stay away from Realtors.” 

Jillayne here. That answer brought forth many laughs and suprised blurts of shock.  I personally think this took quite a lot of moxie to say in a room filled with Realtors. The point Frances was trying to make was that not all homeowners who are in default want to sell their home!  When real estate agents stick with only a single mindset that selling is the ONLY option, they are doing a grave disservice to their clients.  Frances said it is imperative that agents connect homeowners with either Acorn or NACA or some other HUD-approved Housing Counseling Agency that can effectively negotiate with the lender, and to make sure the homeowner receives legal counsel from attorneys who specialize in consumer protection law, which is something they can find at NACA. 

There are very few loan modifications being granted if the homeowner is seriously underwater. The example given was $2,000 in monthly income and $11,000 in monthly debts.  No loan mod for that consumer because the chances of re-defaulting are way too high.  This homeowner may be better served through the foreclosure process.

The loan modifications that are granted are often done by lowering the interest rate on the note to say, 3% for a fixed period of time such as three years, but with NO principal reduction. 

Jillayne again.  I say this practice may lead to a build up of shadow inventory that could end up hitting the market in 2011 and further drawing out the housing recession into 2012.

Short sales in Florida are a complete waste of time.  Buyers in Florida are looking at sellers with equity or REOs ONLY.  Banks are only now starting to dump their REOs by lowering the prices in order to get them off their boooks.

Florida should WISH FOR another Florida bank failure because then the other banks will become extremely nervous about the bank regulators poking around and will begin to get real with dropping the prices on REOs in order to clear out their inventory, especially the closer we get to the end of a quarter.

“Real estate agents have a moral and fiduciary duty to our clients.  We have a duty to try and maintain values.  We should be encouraging sellers to help hold the value by offering to “buy down” the interest rate instead of lowering the sales price.”

Jillayne here again.  That quote came from LJ Jennings, a real estate broker/owner.  I’m not so sure that holding prices artificially high could pass a fiduciary test.  This may NOT be in the client’s best interest.

VERY interesting insight from a data analyst. She said some companies would rather stick with data that their analysts have been using INSTEAD OF showing NEW data to their end users….because then their existing analysts would be proven wrong and the company doesn’t want to deal with that. 

Take aways:

  • Banks will begin to “throttle out” their inventory quarter to quarter,
  • A lot more big pools of scratch and dent (loans with problems) loans will start to be sold off in bulk to investors
  • Lenders will slow down the default process for due diligence and accounting reasons
  • In the second have of 2008, 100 billion (correction: dollars) in loans will reset.  If ONLY 13% default, this is a huge number of homes that will impact inventory levels for the years to follow.
  • Hundreds of thousands of Alt A loans will reset in 2009.
  • Foreclosure relief bill is a little too late.  Our problem right now is that lenders are afraid to lend on a declining asset and buyers are afraid to buy.  The bill does more to shore up confidence in Fannie and Freddie than anything else.
  • There ARE options for a homeowner in default who does not want to sell.
  • Foreclosure is only a temporary part of a person’s life.  Life goes on.
  • Loan modifications and short sales are being done faster through banks that have a history of predatory lending (this is a concept I’ve been teaching for 8 years now.)

I have an entire set of notes from the attorney who spoke on the liability issues agents face when listing REO homes. I’ll have to do a separate blog article on that for you. 

69 thoughts on “The Housing Crisis is Like Hurricane Katrina

  1. “100 billion loans will reset”

    Is this right? 100 billion loans? That’s an awfully big number, much more than the US population.

  2. I agree ND. We’d have to look at the number of subprime loans originated in 2006 to see if that number would make sense. Let me see if I can find those statistics.

    Dr. Housing Bubble shows total subprime and Alt A originations in 2006 at over 1 trillion.

    So then the 1 bill must be in dollars.

  3. Jillayne:

    I have not seen evidence that loan resets are the primary cause of the rising defaults, even though it seems to be the major media story.

    I have seen studies that show that the subprime vintage of 2005 and 2006 were defaulting at very high rates BEFORE their resets, from Boston Federal Reserve.

    I think the serious resets will be in 2009-2012 when the majority of Option Arms reset, and lose the minimum payment option.

    Got a ways to go to work this one out.

    I have a question for one of the economist types that haunt these pages:

    Why are the banks writing off losses on bad loans that have not defaulted yet?

    Is it a legal requirement, or is there some economic benefit they get from it? I haven’t been able to figure that one out for myself.

  4. roger must be an agent in denial. You don’t see it because you are not allowing yourself to. It’s fairly easy to do some DD…try it and you’ll find you might not like the picture but that IS the picture.

  5. @Roger “I have not seen evidence that loan resets are the primary cause of the rising defaults,”

    Historically, the primary causes of defaults are divorce and failure of a business. I’m sure if we put together a top 10 list we’d see job loss and medical bills/health issues as well.

    With the bubble run up, we have other problems compounding the default statistics such as flat-out mortgage, real estate, and appraisal fraud, investor speculation, predatory lending, the push from government to increase the number of homeowners in America along with the political/religous backed downpayment assistance programs, simple human greed from investors down through the banks and loan originators to “sell” option arms to people for whom they were never intended. Consumers who were qualified at the note rate were told they could refi out into a fixed rate “no problem” and of course the massive relaxation of underwriting standards nationwide.

    Firstam Core Logic did a study in 2007 on this and they predicted that for every percentage that home values went down, the corresponding default rate on mortgage loans rose. I do not have that study with me here in San Fran but I handed it out in the classroom as part of the “subprime meltdown” class last year. I can fax it over to you when I get home this weekend if you’d like.

  6. @ Roger “Why are the banks writing off losses on bad loans that have not defaulted yet?”

    Though I am far from an economist, I can answer this question.

    The banking industry plans for mortgage loans to default at about a 2% rate. This means they KNOW that at least 2% of all mortgages will fail for some reason or another, so the FDIC has required banks to set aside up to 5% of profits into reserves to cover the 2% of planned foreclosures.

    Over the past many years, as home values rose, foreclosures have been declining so banks made more of a profit. Yay! Whoo Hoo!

    But realize that when defaults go way, way down, to something like .5%, when defaults start to reverse and go UP, then going from .5% to 1% feels like a 100% increase. 1% to 2% feels like another 100% increase. Yikes! Ruh Roh.

    Today’s problem began when subprime started to default at extremely high levels. Something like 13% to 15%.

    Banks regulated by the FDIC or even local state chartered banks must put aside money in reserves to cover their loan losses as well as their EXPECTED loan losses.

    This is why banks are scrambling to try and gather more and more deposits; so that they can be in harmony with what’s required by their regulator.

    Now, compounding mortgage defaults, we have problems with our economy. Job losses, small business failures, discover of massive mortgage fraud, as well as ARM resets in a “declining values” market.

    Homeowners underwater on their mortgage are way more likely to walk away and let the bank foreclose, especially when faced with financial distress.

    Banks are being pressured to put more money in loss reserves IN ADVANCE of what they know is coming. We are only in, say, the 3rd inning of this ballgame.

  7. Michael:

    I think it is a normal human condition to be in denial. That is, if we define denial as the tendency to remain in a position for a longer than actual conditons merit.

    My comment, which Jillayne addressed, is an objection to the media portrayal that the problem is contained to “the other guy”, by naming it the “Subprime Meltdown”, and not providing comprehensive studies of the causes.

    The actuality is much more painful.

    In the coming upheaval, some will be lose more than others, and an even smaller number will benefit, but the pain will not likely be confined to “the other guy”.

    Here is the Federal Reserve Bank of Boston study.

    So, I will admit to being in denial about a great many things: An active, hopeful life requires that we cling to the security of outdated worldviews, while tentatively seeking new, and hopefully better ones.

    Jillayne, thanks for the short explanation re writedowns. The law requires them to set aside reserves to cover expected losses. Since the law requires it, I tend to think it is not in their best economic interest (else, why require it).

  8. “Since the law requires it, I tend to think it is not in their best economic interest (else, why require it).”

    Because they got drunk and needed to be protected from themselves? Why were so many mortgages written in the past decade with no tax and insurance escrow? Is that in the lender’s interest, or are they just plain stupid? There was a lot of just plain stupid going on in the past few years. So now regulators have to write regulations that are common sense, because some lenders have shown themselves to lack any.

  9. Larry:

    Good point. Often, businesses need government to regulate activity in the private sector, just to create a level playing field amongst themselves. It’s function is not just to protect consumers. Of course, the regulation process can also be used to hamper your less politically connected competitors.

    I cannot understand either why the subprime mindset was not to collect taxes and insurance in escrow. I cannot see how it was in the lender’s best interest to adopt and encourage that practice, and it generally was not in the best interest of the average consumer either. The only defense I ever heard was that it allowed a tiny fraction more borrowers to qualify for loans.

    Since one of the first refinances I completed was a nice older couple in E. Wash that had failed to pay their property taxes (and was in danger of losing their home), I have ALWAYS advocated to have escrows included. Remember, it is currently a decison made by the borrower, and is sometimes a requirement from the lender. Most lenders provide an incentive to set up escrows.

  10. Roger, I’m not in disagreement about the general downside to a lot of regulation. I’m just furious at some of these lenders who have literally brought legal requirements to follow common sense upon themselves, as well as their more responsible competitors. Some people are just too stupid to be in business. There should be an IQ test required for a business license.

  11. Larry-

    A lot of the “stupidness” you’ve described was made possible through gain on sale. No doubt they’ve over-extended, but it wasn’t like eveyone who participated were dummies! They did make a killing up to 2007. Hindsight is always 20/20.

  12. Larry asks, “Why were so many mortgages written in the past decade with no tax and insurance escrow?”

    Excellent question. My answer comes from just under a decade of teaching how to identify predatory lending practices.

    One of the tactics commonly used was when a refinancing homeowner was trying to lower his or her monthly payment. The loan originators were TAUGHT how to do this by their managers, which is horrifying to imagine but the Household Finance class action settlement exposed quite a lot.

    The LO was told to compare and contrast the old monthly payment including PITI (principal, interest, taxes and insurance) with the
    !new and improved! monthly payment WITHOUT collecting for taxes and insurance: P and I only. Duh, of course the payment is going to look lower. Blatant deception.

    Now the consumer realizes much later that no reserves are being accumulated each month. What do they do?

    Well some would say “shame on the consumer” for falling for this tactic. Others would say shame on the corporation for coaching, teaching, and rewarding their employees to use this tactic. Perhaps the blame could be shared.

  13. @ Larry: “I’m just furious at some of these lenders who have literally brought legal requirements to follow common sense upon themselves, as well as their more responsible competitors”

    I have written and published articles about this problem for many years now and will try to briefly encapsulate my view.

    Today, the lending industry doesn’t listen to guidelines or ideas. The only thing they will pay attention to is LAW. Surely there were some responsible lenders who did not make subprime loans at all. The one that comes to mind right away here locally is HomeStreet Bank which chose instead to continue to offer FHA loan products and forgo the tempting profits on subprime.

    Another way to say common sense is common values which could take us down and long path where we would find the word “responsible” and then attempt to define it for a large group of professionals.

    Instead of doing that, I will go down another path. Mortgage lending is an emerging profession. One of the main problems with the mortgage lending crisis that simply MUST BE FIXED or else the problems will continue again years from now is that we must fix the relationship between the loan originator and the consumer. Many, many consumers held a false belief that their LO was looking after their best interests when this was far from the truth in many cases.

    As you point out, there were plenty of loan originators who treated their customers with respect and care. Let’s hope those folks are still in business today.

    The industry is judged, by consumers, not on the very BEST work of loan orignators but on the lowest common denominator. It is in an industry’s best interest economically to self-regulate ethical conduct. The long term, positive consequences for the majority of its members will be consumer respect and the ability to charge more for their services.

    Those ethical companies who now have to pay the price by facing harsher government regulations have many choices. One choice is to come together as one and decide to self-regulate ethical conduct. Similar to how other classic professions operate such as doctors, lawyers, nurses, CPAs, engineers, teachers, psychologists, and so forth.

    By enacting self-regulation an industry will have an easier time getting the government off its back.

    I am hopeful that the mortgage industry is, perhaps, finally ready to listen to what I’ve been saying for 8 years.

  14. This is a heartbreaking story.

    Responsible mortgage people tried to stop this, but the folks that ran the state prevented it.

    Read all of it.

    Read the side bars.

    It is a most thorough repudiation of the radical conservative movement founded by Reagan, personified in the Bush family, that tries to convince us that our own government is our enemy, and the market place cures all.

    And that the best way to acheive the most happiness is to starve our government, hire incompetent cronies to head the agencies that we pay to protect us, and allow the oligarchs to run off with the gold when we are not looking.

    Our government is NOT our enemy. Wake up, and take it back.

    Be thankful that this did not occur (at least on this kind of scale) everywhere.

    I am.

  15. Micheal, re #4, what is DD?

    Dungeons and Dragons?

    Due Diligence?

    I am not an RE agent, but a loan originator. I do try and take off the rose colored glasses from time to time.

    I actually tried to get my partners to name the company Diligent Lending, but they thought it was too dorky.

  16. The following portion of the original post explicitly confirms an assumption I’ve seen expressed just as explicitly by RE agents in many other posts and real estate forums. The real estate industry has only one client whose interests it exists to serve and protect. That one client is the seller.

    “Real estate agents have a moral and fiduciary duty to our clients. We have a duty to try and maintain values. We should be encouraging sellers to help hold the value by offering to “buy down

  17. Hi denismurf,

    I took a look at the 2008 version of the Realtor Code of Ethics. There’s nothing in the Code that confirms what that particular Realtor said in the workshop.

    I see a few standards of practice that would speak to your concern. The one that comes to mind right away is:

    Standard of Practice 1-3
    REALTORS®, in attempting to secure a listing, shall not deliberately
    mislead the owner as to market value.

    And Article 1

    Article 1
    When representing a buyer, seller, landlord, tenant, or other client as an agent, REALTORS® pledge themselves to protect and promote the interests of their client. This obligation to the client is primary, but it does not relieve REALTORS® of their obligation to treat all parties honestly. When serving a buyer, seller, landlord, tenant or other party in a non-agency capacity, REALTORS® remain obligated to treat all parties honestly.

    Remember, not all real estate agents are members of the Nat’l Assoc of Realtors.

  18. What happens when a lender ‘writes off a loan that hasn’t defaulted yet’? Does that mean the homeowner is delinquent on payments but not in foreclosure, and the lender just gives up on the note?

    Assuming there is no foreclosure, does the note get paid someday when homeowner sells or refinances, with interest due?

  19. Hi leanne,

    The lender isn’t necessarily “writing off” the loan. Instead, the lender is setting aside more money in reserve to cover expected losses from their loan portfolio. They’re not giving up on the note.

    With your assumption of no foreclosure, this means the homeowner may have either sold the home, refinanced with a different lender, or received a loan modification from the same lender. There is also the possibility that the homeowner was able to make it through their financial crisis and was once again paying “as agreed.”

    What banks would like to do right now is to sell some of their outstanding mortgage loans. Unfortunately, there aren’t many buyers for those pools of mortgage loans….at the price the bank needs.

    One of the theories floating around right now is that banks don’t want to have to sell their pools of mortgage loans at the deflated value.

    Once one bank is forced to do this, then the true value of the existing mortgage loans held by banks becomes known in the market and banks would have to start fessing up as to the true losses.

    We could take one case study and look deeper. Right now Bank of America is holding LOTS of scratch and dent Countrywide loans.

    Scratch and Dent is a term that means the loans are, well, not that good of quality. BOA would like to mark these down and sell them. There IS a market for these loans. Private investors will buy them and then contact the homeowner to try and arrange some sort of loan modification. Then the investor will sell the loan again; private money.

    Hope that helps!

  20. I was surfing over at CR, and found this interesting quarterly report from Wachovia.

    Some decent data on performance of the Pick-Your-Poison portfolio that they bought with the World Savings Deal.

    They predict the “trough” in housing values to be mid 2010. Sounds about right.

    Of note, Wachovians are busy modifying the Pick-A-Pain borrowers into conforming loans as fast as they can, waiving pre-pay penalties (they dropped ALL of them 6/30/08). The cynic in me says they are doing this so they can increase the payments now, before the borrowers default, and get as much cash as cash can.

    They may be setting the future model for the resetting Option Arms of 2009 thru 2012.

  21. Jillayne said: “There are very few loan modifications being granted if the homeowner is seriously underwater. The loan modifications that are granted are often done by lowering the interest rate on the note to say, 3% for a fixed period of time such as three years, but with NO principal reduction.”

    This is SCARY! From what I understand it seems as if most borrowers going into delinquency are already under-water, and if having equity is a virtual pre-requesite to a loan modification, then the prospect of many struggling borrowers finding relief is slim to none.

    One other thought that occurs to me is whether there are some lenders who literally can’t afford to do a loan mod by reducing the principal? Doing a modification, with a principal reduction, would require an IMMEDIATE write-down of the value of the mortgage on the lender’s books. Unfortunately, some lenders might be in such dire straights that a forced write-down of large numbers of delinquent loans would put them in conservatorship.

    Far better to dawdle in bringing an under-water home to foreclosure, and even sit with masses of unsold REOs listed at ridiculous prices, rather than taking write-downs (i.e. acknowledging that they will never recover the value of their mortgages). If the choice is between going into conservatorship tomorrow or waiting for 9 more months, most lenders would choose the latter option. Hey, there could be some sort of miraculous market recovery that winds up making their investments whole again…

  22. The vast majority of the foreclosures have nothing to do with predatory lending even though that is the headline the media continues to run with.

    Most foreclosures are still caused by 1) job loss 2) divorce or 3) medical issues. In fact, Countrywide had a presentation out last year showing the causes of the foreclosures in their portfolio. Less than 2% were due to a rate reset.

    The other story that is glossed over is that something like 50% of all foreclosures now are speculators and investors – particularly in the hot spots like Nevada, Arizona, CA and Florida.

    Little old ladies aren’t foreclosing at any higher rate than they were in years past, but that is who the media likes to drag out as the face of the foreclosure crisis, when in fact it is the Casey Serins ( types.

    Banks are taking losses on these loans because the book value of the loans is garbage right now since the secondary market is pretty much dead. In addition, the banks borrowed against the value of their loan portfolios for other investments. The value of the mortgages aren’t worth what they thought, yet they leveraged that portfolio to the hilt and now the bank’s creditors want their money forcing the banks to start defaulting. The problem with the market is that there is no liquidity.

    I have a theory that the foreclosure rate is where it is SUPPOSED TO BE. The past few years foreclosures were held artificially low because we had subprime lending. Most of the subprime loans were refinances, not home purchases. Many of those refinances were nothing more than bailouts for homeowners. Now that the subprime market is gone, people that would have foreclosed years ago are finally meeting their maker.

    It is amazing how fickle people are. During that run up, homeowners would be kissing your feet for saving their ass with a 2/28 cashout refinance to payoff their debts. Now you are a predatory lender for giving them an extra two or three years in their home when they should be foreclosed on years ago.

  23. Russ:

    Good point regarding the artificially supressed foreclosure rate. Clearly, folks were using increased equity in their home as if it were income.

    Have you been able to dig up data supporting it? I suspect there is some.

  24. Hi Sniglet,

    Two of the panelists were divided on this: “having equity is a virtual pre-requesite to a loan modification,”

    One firmly believed that no principal writedowns were happening and that banks were only offering 3% interest rate reduction for a period of, say, 3 years.

    The other panelist was quite irritated at this statement and said that if a homeowner would simply work with a consumer protection attorney, that homeowner has a much greater chance of receiving a principal write down. Her estimates were something like 40% of the clients coming through NACA and Acorn were achieving principal write downs.

    When the president signs the Fannie/Freddie rescue bill, there are provisions in that bill that encourage banks to do principal write downs on these loan modifications…..but it’s only voluntary.

  25. Roger:

    Nothing hard, but if you look at it objectively, I think it is difficult to come to a different conclusion. The media isn’t trained in data analysis, so they tend to just look at the numbers, but never really try to understand the causes and what the numbers are really saying.

    Another thing that I really think is throwing the foreclosure numbers off dramatically are second mortgages. A large number of home owners have 2nds and it is my understanding that a foreclosure on a home with two outstanding mortgages counts as two foreclosures, not one.

  26. Hi Russ,

    Good to hear from you as always. Are you here at Real Estate Connect? If so, send me a text and I’ll buy you coffee!

    Historically, the majority of foreclosures happen because of things like divorce or failure of a business. However, the market we’re coming out of was not a traditional market so historical cause and effect systems don’t entirely work for the bubble market.

    As the bubble readers have taught me, along with these traditional reasons for default, the biggest cause right now is declining property values…..because when people have to sell and cannot, foreclosure rates go up.

    In the bubble market run-up, when people who were in financial distress had to sell, they could. Now they are having a much harder time.

    Christopher Cagan from Firstam Core Logic released a report in the spring of 2007 where it was estimated that for every percentage that home values go down, foreclosure rates will go up. His estimates, at that time, seemed extreme. I’m sad to say that what he reported is now happening.

    In terms of predatory lending, what has dwarfed that (in terms of its effect on foreclosures) is flat-out mortgage fraud, perpetuated by all parties to the transaction.

  27. Hi Russ,

    A second behind a first, where the first is in foreclosure and the second is not, would not count as two foreclosures.

    Public records data would not provide data aggregators with a “notice of trustee sale” deed for the second, so this would not be in the statistics.

    If both are in foreclosure, both would count.

  28. Jillayne said: “As the bubble readers have taught me, along with these traditional reasons for default, the biggest cause right now is declining property values…..because when people have to sell and cannot, foreclosure rates go up.”

    This is so true. It’s not so much that the REASONS for default have changed, but rather that price declines reduce the options people dealing with personal economic trauma have. When a house is under-water and you HAVE to sell (i.e. due to divorce, job loss, etc), then foreclosure is pretty much your only option.

  29. I read a story (from CR, I think) showing that an alarming number of workouts are going to foreclosure anyways.

    The banks only have so many resources, and they need to direct them where they will do the most good (for the banks), kind of like triage in medical terms.

    They will have to be judicious about who they decide to save, and who they let go, as sad as that seems.

    I would like to see the term “predatory lending” retired. It’s definition is so loose as to be meaningless.

    I agree that the regulators should focus on mortgage fraud, because of it’s severity on the victims, and the moral decay that attended it.

  30. Jillayne:

    I never miss a chance for a good coffee, but unfortunately, I didn’t make it out to the conference.

    I agree property values are an underlying cause of foreclosure, but again, that has nothing to do with the lender per se. From what I have seen, many of those who “have to sell” need to do so because of job loss or they are a flipper (which are a large number of the fraudulent loans). Property values may limit options, but the root cause is still that they lost a job or whatever the other reason is for the financial hardship.

    I don’t think I could sell my house for what I owe on it. I am in no danger of foreclosure because I can pay my mortgage. However, if a situation came up that required me to sell because I needed to move and I couldn’t, how is that the fault of my mortgage holder? Yeah, it sucks… I would want them to work with me.. but at at the end of the day, life’s a bitch and you just have to deal with it. My personal circumstances is of no concern to them.

    Again, my issue is that the foreclosures are presented as it is somehow the fault of the lender when in the vast majority of the cases it is not. Unless of course, you blame new lenders for not making loans on properties above the current market value.

    I wonder if mega hip hop producer Scott Storch will get to benefit from the housing bill?

    or better yet, should we be crying for these people too (again)???

    I guess I am just sick of all the whining.

  31. Russ, regarding media reporting, the most egregious thing that they do, and they do it routinely, is report YOY as monthly drops. The headline says something like “housing drops 8% in May”, and then in the second or third paragraph, they’ll explain that it’s compared to a year ago. When people see headlines every month declaring values dropping be several percent, is it any wonder we have so many fence sitters?

  32. Larry,

    You mean like saying foreclosures are up 50% while failing to mention that foreclosures are about 1% or so of the total loans outstanding which means instead of 99% of people not being foreclosed, it is now 98.5%?

  33. And the media buzz now is “the worst housing market since the Great Depression”. They never bother to explain how they came to that conclusion, and if there’s any context to it.

  34. On a slightly different subject, does anyone think that an FDIC seizure of WaMu could actually be positive for the local market? The credit insurance markets are now convinced that WaMu will fail (it is more expensive to insure WaMu debt that it was for Bear Stearns), so it is looking increasingly likely that WaMu will bite the dust.

    However, maybe this wouldn’t be a bad thing. The IndyMac seizure didn’t cause any additional harm to the southern california real-estate market. In fact, the FDIC is now taking a more liberal view to loan modifications than the originial lender. Maybe the FDIC would be more willing to work with struggling borrowers than WaMu is today?

    Should we look forward to a WaMu collapse?

  35. Russ:

    Thanks for sharing the Extreme Takeover, Home Edition.

    Heres a bit better link, with a video clip.

    Here’s what is shameful.

    The homeowners got the home free and clear, 1,800 volunteers helped in the makeover, they got $100,000 in cash.

    15 months ago, they took $450,000 in cash out.

    Now, they are refusing to pay it back.

    We have to call this kind of theft shameful.

    Or everyone will do it.

  36. Jillayne said: “A Wamu collapse would be very hard on the Puget Sound area. Consider the number of people employed at Wamu and the potential job losses.”

    Are the job losses from unemployed staff the only real negative implication we would face from a WaMu failure?

  37. There’s be a significant reduction in the number of bank machines. 😉

    Seriously, I agree with Jill in that the main impact would be on the employees. I feel sorry for them already–this type of uncertainty is not good for emotional well being.

    As to Sniglet’s premise that the FDIC might work better with borrowers, I’d be skeptical. And I say that still being of the opinion that the banks need to do more in this area.

  38. Kary said: “As to Sniglet’s premise that the FDIC might work better with borrowers, I’d be skeptical. And I say that still being of the opinion that the banks need to do more in this area.”

    Unfortunately, I suspect that some struggling lenders (like WaMu) are in such a precarious financial position that they cannot really consider arranging significant loan modifications with borrowers. Modifying a loan (and reducing the principal) would FORCE WaMu to take an immediate write-down on the value of the mortgage. If they had to do this for many of their delinquent borrowers the institution might well be insolvent.

    So long as WaMu doesn’t make any big mods on delinquent loans, and drag their feet on the foreclosure process, they can keep unrealistically high values for these loans on their books, which allows them to stay above legal reserve requirements.

    It’s far better for WaMu to own forests of REOs that aren’t selling (with ridiculous list prices) than to sell them for market clearing prices that would necessitate major write-downs on their books.

    This is why I postulate that the FDIC might be more amenable to working with borrowers than lenders on their death-beds.

  39. I doubt that. I suspect the reserves they’ve set aside would probably more than cover since it would be a loan already in default, and making it a performing loan would probably make things look better than what they really are (since the chance of another default would be significant on such a loan).

    But I think you’re addressing workouts and I’m addressing short sales.

  40. What makes you think that a government takeover would result in layoffs? If a deal were brokered to allow another bank to swallow them, there would probably be layoffs, but not a government takeover.

  41. There’s increasing calls from government figures (Barney Frank , eetc.) to halt or delay foreclosures.

    This is gonna sound crazy and mean, but I think it’s a BAD idea to prevent banks from pursuing foreclosures.

    Without a credible threat to lose one’s home (and possibly equity and credit rating), what incents the less ethically endowed homeowner to continue making payments (see #40)?

  42. Foreclosure is like a nuke. You hope you don’t have to use it, but the threat of using it gets most people’s attention. But if you announce that you won’t use it under certain circumstances, then you’re right, they’re just going to continue delinquency.

    I think what Frank et. al. were driving at is that they should make sure they’ve exhausted all of their forbearance possibilities before dropping the big one. If there isn’t much equity, it’s likely that the lender will lose more money by going to auction than by forgiving some portion of the loan. They just need to make sure that it’s clear that they’ll do this once, and won’t do it a second time.

  43. Kary said: “But I think you’re addressing workouts and I’m addressing short sales.”

    They both amount to the same thing: they force the lender to take an immediate write-down on the value of the mortgage. A foreclosure is preferable to a short-sale or workout/modification since it doesn’t require the lender take any write-down on the mortgage (not until the place actually sells for less than the value of the loan, which is why many REOs just sit on the market forever since many lenders are unwilling to accept any loss).

  44. Hi Sniglet,

    Two things I picked up from the panelists at the convention:

    1) If a person who is in default wants to stay in their home, they are way better off working with Acorn or NACA, a HUD-approved counseling agency OR an attorney. These homeowners have a better chance of receiving a principal write-down. Banks ARE currently performing loan mods but most homeowners are receiving a TEMPORARY interest rate reduction and NOT principal write down.

    2) I also learned that in some market areas, Florida was given as an example, the banks are just now starting to slash the prices on REOs in order to get them off their books. This gentleman was the one who was wishing for more Florida bank failures because he believed this would force other Florida banks to come clean before the FDIC catches up with them.

  45. Jillayne said: “Banks ARE currently performing loan mods but most homeowners are receiving a TEMPORARY interest rate reduction and NOT principal write down. … This gentleman was the one who was wishing for more Florida bank failures because he believed this would force other Florida banks to come clean before the FDIC catches up with them.”

    Interesting… This just further adds to my suspicion that some lenders will do anything to avoid being forced to take write-downs on delinquent loans (i.e. refusing principal write-downs, short sales, or REO sales at market prices). Heck, some lenders are even extending the time frame required to be considered “delinquent”.

  46. Jillayne said: “What are they waiting for? Eventually, aren’t they going to have to come clean? Are they just waiting for a larger bank to buy them or for their own government bailout????”

    Well, if I am correct, some lenders don’t want to come “clean” because doing so would force them into insolvency. If a lender realized that truly writing down their portfolio to market values would leave them under-capitalized according to regulatory requirements, they might very well wish to avoid having to make any write-downs that weren’t absolutely necessary.

    Sure, in the LONG run it might make sense for a lender to take their lumps now, rather than wait for prices to decline even further, but if your choice is between going bust today (by making write-downs that leave you under-capitalized) or going bust 10 months from now, then most lenders would decide to wait.

    Hey, maybe the markets will recover, or the government will bail them all out in the meantime…

  47. Pingback: Quick hits on the Bailout | Real Central VA

  48. Keep an eye out for Covered Bonds. That market could bring back significant investors if a gov framework can be developed.

    The $3 trillion covered bond maket in Europe has been around for many years. Banks like them because they get better pricing then pledging to the FHLB/MBS, help diversify from US investors, and provide longer maturities. Investors like them because they are AAA rated, provide better yield than Fannie/Freddie MBS, remain on balance sheet, have legal framework (in some countries, gov. framework) for issuance, the collateral pool is conservative and they can diversify from government assets.

    Right now the market for US covered bonds is non-existant because of the mortgage crisis, but it the gov can put together the legal framework, it could mean a big funding relief for banks who have large mortgage portfolios. Plus, it places the responsibility on the banks who want to play in mortgage space instead of government intervention.

  49. Q-diddy writes: “Keep an eye out for Covered Bonds. That market could bring back significant investors if a gov framework can be developed.”

    Huh? If investors aren’t willing to buy traditional mortgage backed securities today what would make them so eager to buy “covered” bonds? The underlying mortgages are the same. The only difference, as I see it, is that the banks offer a guarantee in case the mortgages default.

    I suppose investors might find covered bonds a wee bit more attractive (due to the bank guarantee), but this certainly doesn’t help banks. The LAST things banks want to take on these days is more liability.

    Nevertheless, all this is beside the point. There is precious little appetite in the market these days to finance mortgages at better terms than those available from the GSEs. The only reason for there to be a private mortgage security issue is if it was for some loan product differing from those available from the GSEs. And what would that be? To people with poor credit? To people with no down-payments? I just don’t see which mortgage products could interest investors. And there is just NO reason for an investor to buy a mortgage bond in the private sector that has the same risk/return as a GSE security yet is devoid of the government backing.

    In short, as long as the GSEs are offering government-backed mortgage securities, who in their right mind would prefer to buy an issue that was only backed by a private bank?

  50. The only “who” that comes to mind off the top of my head is investors looking for a higher yield, right?

    Please correct me if I’m wrong.

    WHY is Paulson coming out with this plan right now? The president is getting ready to sign on the fannie/freddie bailout bill. Couldn’t banks just sell their conforming paper to F&F?

    Then if we’re talking about triple A ratings, this means loans conforming to fannie/freddie and FHA, yes? Why not just sell to F&F?

    This smells of some kind of scheme to make Paulson’s investment banker friends rich…..or am reading too much into it?

    Thanks guys.

  51. Jillayne said: “Couldn’t banks just sell their conforming paper to F&F?”

    This is the crux of the matter. So long as the mortgages are conforming, there is NO reason not to just pump them through the GSEs. If there is some expectation that investors are interested in loading up on non-conforming loans, then someone is seriously deluded.

    Now, if the GSEs stopped buying loans then I could definitely see a place for private investors. Many investors would be thrilled to buy mortgage securities that had tighter requirements than the GSEs demand, at higher interest rates than currently on offer. However, as long as the GSEs remain offering government subsidized loans private investors will be squeezed out (i.e. why would someone want to get a mortgage from a private lender for 200 basis points more than they can get from a GSE?).

  52. Jillayne and Sniglet-

    You guys ask the right questions, but you’re not seeing the whole picture. Yes, F&F are the preferred paper because of the government backing, but they perform differently. Unlike the implicit and now explicit guarantee of the government, CBs rely on structural mechanics that GAURANTEE payment of interest and principal until maturity regardless of insolvency. In other words, even in recievership, the bond holders are guaranteed the economics. That’s one of the many differences that make CBs attractive.

    It’s perplexing to me why F&F stock is being so battered. I don’t see why investors are worried the US government will go under. The MBS after all are stil performing. Perhaps I have too much faith in the Fed not collapsing?

    Also, think about asset allocation limitations. All lot of investors are already “full up” on GSE paper. They simply can’t and don’t want to double down. US CBs is a new security and gives investors another avenue to invest.

  53. Q-D

    I’ve been following this and reading over on CR as well. They seem to be a bit more pessimistic about the initiative, as a whole (well, and frankly about darn near everything that would bring a smile of pleasure to Joe Average).

    Who guarantees the payment of the bond? The bank? And who guaratees the bank’s promises? The government?

    This seems to be something banks could already do, but chose not to: What would make them choose it now?

    Will this further accelerate the consolidation of banking?

  54. Q-diddy said: “Unlike the implicit and now explicit guarantee of the government, CBs rely on structural mechanics that GAURANTEE payment of interest and principal until maturity regardless of insolvency. In other words, even in recievership, the bond holders are guaranteed the economics”

    Well, I may mis-understand how covered bonds work, and would love to have my misconceptions dispelled if you would be so kind.

    From what I have heard it sounds as if Covered Bonds are “guaranteed” by 1) the mortgages behind the bonds and 2) the ballance sheet of the particular bank which issues them. If this is the case, then investors would stand to lose if there are both defaults on the mortgages behind the bond AND a bank failure.

    Or are is Q-diddy saying that even if the bank which issues the covered bonds goes bust AND all the mortgages in the bond pool default that the CB holders are still made whole? If this is the case, then marvelous. I would LOVE to know how they are structured to provide such guarantees. Are they relying on some kind of bond insurance coverage?

    This would seem riskier, by far, to me than GSE bonds. GSEs are backed by the government whereas private banks are not.

  55. Sniglet & Roger-

    The key to the struture is the isolation and ring fencing of the collateral pool. In order to do this the banks create a trust, if you will, that uses a swap to guarantee the payment of cash flows in case the collateral pool does not perform.

    So, in this case the investors are first protected by the underlying collateral pool and the banks ability to replace/replenish it and second, the isolation of the trust and the swap. This is key because the isolation must prevent the powers of FDIC to take control of the trust. That is hopefully a big part of Paulson’s effort right now.

    Roger, you are right, GSEs will always be safer since they are government backed, but it doen’t mean that CBs will fail simply because they are private. If our government can create legislation to protect the isolation then the investors will always be made whole, which is different than MTM risk.

    So, Roger asked why now? Simple, there is no more gain on sale. Before, banks could simply unload loans from their balance sheets. In the new world, loans will become simpler and more generic. Aren’t we already seeing that now? Gain on sale will be minimal. CBs will be another liquidity avenue for banks with large mortgage portfolios like WaMu, Wachovia, etc.

    In terms of consolidation, I think it is already happening, but I don’t think it will be because of CBs. It’s more about which bank has sufficient capital to ride out the crisis. Those that run out will be bought up or go bankrupt. CB’s will play a role, if done right to boost the markets recovery.

  56. One more thing, if the US CB market takes off, it will relieve a lot of pressure from the government and F&F to take on more loans. Remember, the market in Europe is over $3 trillion.

  57. Thanks Q-Diddy. So then Fannie and Freddie will take the four star, A plus prime conforming product, all the marginal borrowers will be sent to FHA/VA, and then anything in between will eventually go into these covered bond portfolios, yes?

    In order to create the kind of yield needed, that means interest rates at the retail end are going to rise.

    Rising rates historically has a negative effect on housing…

  58. Jillayne wrote:

    “….anything in between will go to CB”

    Not neccessarily. Remember, GSEs do have limits. They can’t keep on purchasing forever and the government will not want to continue piling on more risk. It is in everyones interest for the banks to shoulder the responsibility and CB is one way to do it. CBs can and will take conforming as well as some other stuff. It is a conservative pool by nature since the banks have an incentive to keep the stuff on balance sheet that performs.

    “Interest rates at the retail level will rise”

    CBs won’t automatically trigger higher interest rates. In the mix bag of liabilities a bank holds, CBs can help diversify, extend duration (lock up funding for a long time) and create additonal liquidity for mortgages. Let’s face it, the CP, CDO and SIVs won’t prob be around in the new world, so why not CBs? Why not accept something that banks keep on balance sheet anyways? Also, one can argue that rates in the new world should be higher. Probably better for long term market stability.

  59. It looks like investors are shunning covered bonds in Europe, which is the gleaming example of a successful CB market policy makers want the US to emulate. Perhaps CBs won’t be a panacea to the credit crunch.

    CBs certainly haven’t kept the European real-estate from hitting speed-bumps. Lenders are clamping down all over the place and it is far harder to qualify for loans in most EU nations than it was a couple years ago. Many loan products, with 100% financing, etc, have simply vanished from the EU. Sound familiar?

  60. Sniglet-

    In this environment everyone is cautious on mortgages and justifiably so. But I don’t think Paulson is anointing CBs as our savior. I think he is simply looking ahead and saying there needs to be more secondary support for housing to pickup.

    100% financing loans vanishing is a good thing for the EU and CBs. Remember, these are on balance sheet structures, so why hold on to a risky product?

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