I don’t really have one unified article type when I write here. Sometimes I have a really strong conviction about something, and then it flows. At other times, I gather data, do an analysis, and come up with a way of motivating it. Then there are the Seven, Eight, Ten, Twelve, Fifteen, Twenty Points/Notes/Comments articles. Tonight’s piece is one of those.
(An aside — the numbers stem from a comment from an editor of a Canadian business publication — he told me that certain numbers grab people’s attention more. True? Not sure. I do know that one of my editors at RealMoney felt that some of my quirky titles lost readership. Even today, my editor at SA freely revises my titles, sometimes making something an emphasis that I had not intended. Whatever; she titles better than me. What intrigues me is that other sites sometimes pick up her title, not mine, even when they link directly to my blog.)
I don’t do linkfests. I don’t do them not because they are not valuable, but because others do them better then me, like Abnormal Returns. So, I do something different. As I troll the web each day, I tag articles for future comment. I then wait until I have a critical mass of articles on a given topic, and then I publish one of the “XX Points” articles. This enables a greater range of facets on a given issue. I also allows me to give more of an integrated explanation of how I think it all fits together. Now, the price is that some of the articles are dated. I think they are fresh enough to highlight trends.
Enough explaining. On to tonight’s topic, real estate and its effect on the real and financial economies.
1) Principal forgiveness — it is what underwater homeowners want, and what they are unlikely to get. Principal forgiveness means that a loss has to be taken by someone now. Adjust the rate, adjust the term, adjust the amortization — it is all tinkering, even if it lowers the payment slightly, because the owner is still inverted on his mortgage.
Ideas like lowering the principal, but giving the bank a large chunk of the price appreciation at sale, or say 30 years out, would be cute, but still, the bank (or juniormost MBS certificate holder, who usually directs the servicer) would take a loss now.
So, I’m not surprised when I read articles like these:
- Mortgage Servicers Are Under Pressure to Modify More Loans
- Lucrative Fees May Deter Efforts to Alter Loans
- U.S. Effort to Modify Mortgages Falters
- Foreclosure Plan Is Off to a Bumpy Start
- Foreclosures Are Often In Lenders’ Best Interest
Governments have power, but it is very difficult to fight the economics of the situation. One further note, as is mentioned by a few of the above articles, is that the most profitable situation for the lenders/servicers, is that the property teeters on the edge of solvency, not only paying the mortgage slowly, but pays additional fees in the process.
2) Will there be a second foreclosure wave? Maybe. First American CoreLogic argues that it will be the existing wave continuing. I tend to agree with CoreLogic for the following reason: when you have enough of the mortgaged homes of the country underwater, it is difficult to slow the rate of foreclosure, because foreclosures happen to properties that underwater where one of the following occurs:
- Strategic default (buy a nicer home cheaper, and stop paying off this overpriced garbage)
- Debt reset/recast
3) The GSEs, despite the rally, are still in lousy shape. Fannie lost $14.8 Billion, and tapped the Treasury for liquidity. Freddie earned less than $1 billion, but only because they revalued assets $5 billion higher. Their regulator believes that they won’t be able to repay all aid that the US has granted them. My verdict: the common of each company is an eventual zero. Stay away. Thrillseekers that like zero shorts, don’t do it; the odds are good for a zero, but the payoff is asymmetric.
4) What percentage of homeowners are or will be upside-down or underwater?
- 24 or 32% (now and soon)
- 30% (Zillow — soon)
- 32% (First American CoreLogic — now)
- 48% (Deutsche Bank — in two years, challenged by Lawler)
I favor the estimates of First American CoreLogic. First, they have great data. Second, my view is that properties with greater than 90% LTVs are likely upside-down in a sale due to closing costs. The inflection point in mortgagee behavior occurs between 90-100% LTVs, not at 100%+.
That’s why we are in such deep trouble. With 32% of all mortgages inverted, there will be many more foreclosures, and prices should still head downward, even on the low end.
5) But maybe things aren’t so bad, at least on the low end.
- Home inventories fell in July.
- In some markets, on the low end, foreclosures are selling fast.
- New home sales increased in June.
- Bottoms are longer than we would like to expect.
6) All that said, the high end isn’t seeing much action, and prices continue to sag. There aren’t many move-up buyers.
7) What characterizes the underwater borrower? Cash-out refinancing, and home equity loans. The home as an ATM always relied on the “greater fool” theory implicitly — that there would always be a greater fool willing to buy out the home at a greater price than the new amount of leverage. On the home equity loans — banks are doing all that they can to avoid recognizing losses. With home equity loans, losses are usually total. The only thing that surprises me here is that it has taken this long to get to realizing the losses.
8 ) So you want appraisers to be honest, but not yet? Appraisers, auditors, etc. — third party evaluators are conflicted — he who pays the piper calls the tune, and no one is willing to have the buyer pay for the appraisal. So now the appraisers try to be honest and business can’t get done?! Those who hire appraisers, make up your minds; do you want a few short term deals, or do you want reliable long term business?
9) On the dark side, many option ARMs will default before the payments recast. That means the recast wave will be more gradual, but it won’t be any less troublesom in aggregate.
That’s all for this evening. Absent something else pressing, I will write about commercial real estate on Monday night.