Treasury Department Foreclosure Report

Foreclosure and Mortgage Deliquencies

Q4 2009

I finally finished the OCC and OTS Mmortgage Metrics Report for the fourth quarter of 2009 (I know you’re jealous at how much fun I get to have).   The report looks at all first liens held by most of the largest mortgage servicers.  It covers almost 34 million loans totaling almost $6 trillion.  It is the raw data before it gets spun by the press or politicians.  Here are some highlights and lowlights from the report:

Delinquent Mortgages

• Mortgage performance declined for the seventh consecutive quarter.  Delinquent mortgages and mortgages in foreclosure rose to 13.6% of all mortgages (once again, just talking about first mortgages).

• The percentage of mortages 30-59 days late stayed stable, most of the increase was in seriously delinquent mortgages.  This may be a positive as it is showing that the pace of new delinquencies is not picking up, and that loans are staying seriously delinquent longer which is an indication that banks are working longer to modify before moving to foreclosure.

• Option Arms continue to be the worst performing loans with only 662% current.

• There was a large increase in the number of seriously delinquent prime loans as the number jumped fro 838k to 976k in one quarter.  Almost 1 in 25 prime borrowers is more than 60 days late on the mortgage.

• Overall, 7.1% of all mortgages are seriously delinquent (60+ days late) and an additional 3.4% are 30-59 days late.

• Although the Sub-Prime and Alt-A loans have the highest percentage of delinquencies, the Prime loans have the highest number – this is important as if the percentage of prime loans going bad keeps rising it has a real chance of bringing the market down again.  However, these are also the borrowers that have the best chance of recovering if employment and the economy continue to recover after the stimulus expires.

Home Retention Actions

• The number of home retention actions slipped by 19.1% compared to the third quarter.  This is probably likely to the fact that HAMP received so much publicity in the third quarter that most people who were eligible applied then. 
• Discouraging number on the HAMP program was that although 349k people had entered the 3 month trial period in the second and third quarters, only 21k of those received permanent modifications during the fourth quarter.  That’s about a 6% conversion rate (it’s too early to have data to see how many re-default).  If that is an accurate number (it is possible that many were delayed past 3 months by paperwork issues, etc.) then the program is really a failure.  Let’s hope the numbers get better.
• More than 50% of HAMP trial plans and modifications are for prime borrowers
• There were almost twice as many home retentions started as foreclosures (this would also explain the increase in seriously delinquent mortgages as they stay delinquent until fully modified).
• The percentage of loans modified that had principal reductions fell to 6.8%.  Rate reduction and capitalization (adding your late payments back to the loan) were the most common modifications.
• HAMP modifications only included principal reduction 0.1% of the time, but they did utilize principal deferral 26.8% of the time.
• 42% of all modifications decreased payments by 20% or more – this is important to the  borrower being able to keep up with payments on the modified mortgage.
• 82% of HAMP modifications decreased payments by 20% or more.

Modified Loan Performance

•  The performance of modifications continues to improve over time:
  • Only 33.5% of loans done in the second quarter of 2009 were 60+ days late six months later compared to 42.7% of loans in the first quarter.
  • Only 14.7% of loans modified in the third quarter were 60+ days late 90 days later as compared to 30.8% of the loans done in the first quarter of 2009.
• Loans 30+ days late were obviously a higher percentage; 47.5% after 6 months for loans modified in the second quarter and 29.8% after 3 months for loans modified in the third quarter.  Both of these are significantly better than they were prior to the second quarter.
• The highest Re-Default rate is for Government-Guaranteed loans (FHA, VA, etc.)  with 67.8% 60% days late a year after modification (these are obviously reflecting pre-HAMP modifications as none have been modified for a year yet).
• One reason to be a little more positive about HAMP modifications (if more get completed) is that they seem to be reducing payments by 20% or more, and historically loans that have payments reduced by 20% or more have a re-default rate of only 39.8% a year later (as opposed to 67% if the payments are unchanged).

Foreclosures

• Newly initiated foreclosures declined in the 4th quarter as homes are staying in the seriously delinquent phase longer as lenders are working harder on modifications.
• Completed foreclosures increased by 8.6% over the previous quarter and 35.7% higher than a year ago. 
• There are almost 4x as many foreclosures as short sales and Deed-in-Lieu actions, although short sales are up 96.8% over a year ago.
• 7.8% of all subprime mortgages are in foreclosure while only 2.3% of prime mortgages are in foreclosure (however since there are more prime mortgages, there are actually more total prime loans in foreclosure than subprime).

A couple of key numbers to look at next quarter will be:

• How many of the HAMP trial periods get converted to permanent modifications.
• If the loans that are seriously delinquent transfer into the foreclosed or modified category.
• If loans modified in the third quarter of 2009 and later continue to have a lower re-delinquency rate.

I expect that the data for the first quarter will continue to improve and the real questions will come with the second and third quarter data as that data will reflect the market after the stimulus has expired.

Monday Morning Coffee – Politics as Usual

Monday Morning Coffee

Delaying Foreclosures to Get Re-Elected

February 28, 2010

Good morning,

I hope you had a nice weekend.  We had the open house for our Rancho Bernardo office on Friday afternoon and had a nice turnout.  Thank you to everyone who stopped by.  After being cooped up in the house Saturday, it was nice getting out for a walk with Zach before going to the office on Sunday.  Most of Sunday was spent getting data ported over to our new web site which should be up and running by the end of the week.  Things are getting really busy and with the typical spring increase in activity coupled with ramping up the new office and switching over all our web sites, sleep seems to be  a luxury right now.  Very glad the team is running smoothly right now – speaking of team, Cori is doing well enough in her recovery from the multiple back surgeries that she is back handling our property management again.  It is nice to have her involved again.

A couple of quick notes on the market.  Things seem a little slower now than they were a couple of months ago.  Not so much that homes aren’t selling, but instead of 7-8 offers, we are getting 1 or 2.  It could just be that everyone bought when they thought the tax credit was expiring, but it could also be the start of a trend.

I saw an article last week that didn’t make sense.  The headline was: Obama May Prohibit Home-Loan Forelcosures Without HAMP Review.  I know some of you out there are going to make that silly argument about that Constitution thingy we studied in school, but I think there is a clause they didn’t tell us about where the President can ignore certain parts of it if he really needs to.  The effect of a HAMP review would be to delay the foreclosures for about three months (plus another three while they get the systems in place to process everything), so another 6 months of artificially tight supply.

Then, another piece fell into place on Friday.  A colleague of mine who does a lot of work with the foreclosure departments at many large banks and loan servicers was told that the banks are being pressured to keep their foreclosures off the market until after the mid-term elections.  That made me wonder if maybe the HAMP review proposal was designed to keep the foreclosures from hitting the market until after the election in November.  

Ok, so I went back and did a quick re-read of that same Constitution we slept through in high school.  And guess what?  The whole ”ignore sections of this document if they are inconvenient to your current crises or desire to be re-elected” clause never made it in there. 

I know I am making light of a bad situation, but I think that we ought to consult the original rule book every once and awhile to make sure we are still playing the right game.

Ok, enough on the whole Government hijacking the country theme.  Let’s talk about a positive!

We’ve got a great new listing in 4S Ranch.  This home has 4 bedroom suites (1 downstairs), a loft, and a great layout for the growing family.  Due to allergies of one of the children, almost every room has engineered wood flooring and the house is spotless.  If you know anyone wanting to move into the Poway School District, please shoot them over to the site.

We have a couple more new ones, but the virtual tours are not ready yet, so I will have them next week – along with the new web site!

Enjoy the Coffee!!!

Bad Temper

There once was a little boy who had a bad temper. His father gave him a bag of nails and told him that every time he lost his temper, he must hammer a nail into the back of the fence.

The first day, the boy had driven 37 nails into the fence. Over the next few weeks, as he learned to control his anger, the number of nails hammered daily gradually dwindled down. He discovered it was easier to hold his temper than to drive those nails into the fence.

Finally the day came when the boy didn’t lose his temper at all. He told his father about it and the father suggested that the boy now pull out one nail for each day that he was able to hold his temper. The days passed and the boy was finally able to tell his father that all the nails were gone.

The father took his son by the hand and led him to the fence. He said, “You have done well, my son, but look at the holes in the fence. The fence will never be the same. When you say things in anger, they leave a scar just like this one. You can put a knife in a man and draw it out. It won’t matter how many times you say I’m sorry the wound is still there. A verbal wound is as bad as a physical one.”

 Have a Great Week!

Scott Voak

Monday Morning Coffee – One West Bank and the FDIC

Monday Morning Coffee

One West Bank & The FDIC

February 22, 2010

Good morning,

I hope you had a great weekend.  As I am typing, the sky has opened up on another rain storm in San Diego.  This could complicate things as we have 3 new listings we need to shoot photos for on Tuesday (that’s called a teaser!)  I am going to give you a couple of quick notes and let you click through for more information.  But first – HAPPY BIRTHDAY CORI!  That’s right, my wife turns, well let’s just say younger than me today.  We are looking forward to going out with our friends John and Jean to celebrate tomorrow night.

Secondly, I am VERY HAPPY to announce that I have added Adriana Amon to my team as a buyers’ agent.  Adriana lives a long stone’s throw away from me in 4S Ranch and she has a strong background as a lender prior to stepping into her agent shoes two years ago.  She is very involved in the community and we have served together on charitable foundations in the past.  I was looking for someone who combined a love for real estate with a commitment to the community and for the 4S Ranch and Del Sur areas, she was the only person I considered (so good thing she accepted!)  We are happy to have her on board and look forward to great things.

Ok,  a couple of quick points on the real estate market:

• You may have seen a video last week being sent around that was done by a couple of mortgage brokers that ripped the FDIC for selling the assets of Indy mac to One West Bank.  The terms they allege are pretty bad as One West received a guarantee that the FDIC would cover loses on every loan and the losses were calculated from the original loan balance and not what One West paid for them.  The video is here.
• The FDIC took the unusual step of answering the video as it was spreading viraly.  Their response is here.
• Then, the brokers ran a response to the response which is here.

My thoughts on this are that One West did receive a great deal and I don’t like the fact that some of the One West senior management were the same people that helped cause this crash in the first place.  However, we also have to consider that the FDIC needs to get rid of the assets of these failed banks and there are not a lot of people walking around with the experience to run this type of bank nor the access to cash needed to make this purchase.  Because of these two factors, whomever bought the assets was going to have to get a great deal (if you know a good banker, and have a couple hundred million dollars you can get a hold of, you might get a similar deal).  That said, I think it is disgusting that the bank then insisted that the  borrowers doing the short sale sign a promissory note to complete the sale – the bank was not going to take a loss at all, saddling the defaulted homeowner with a permanent anchor as they try and swim to shore is inexcusable.

My second topic is on short sales.  We are finding the following is happening:

•  There is a lot of agents that are marketing themselves as ”short sale specialists” and are doing more harm than good.  These agents are listing homes 20% under market in order to drive a bunch of offers they can take to the bank.  The problem is, that banks are getting tired of agents underselling homes and are suspicious that the buyer may be related to either the agent or the seller.  Therefore, they come back with a higher counter or just foreclose.  Unfortunately, the house sits on the market for the 6-9 months the agent is trying to get the short sale approved and brings down the value of all the homes around it.  I spoke to one agent this weekend who had done this (and received so many calls she finally would only schedule appointments by text) and her position was that she wasn’t worried about the neighborhood but only about her client.  What she didn’t realize is that this is a tactic that doesn’t w ork anymore and only hurts everyone involved.   I think as agents, we have the responsibility to do the best we can for our clients and that we can do that in a way that doesn’t destroy neighborhood values.  However, we have very low standards of entry into real estate and not all agents share this view.  If you know someone thinking of a short sale, let them know that the banks are not blindly accepting offers significantly below market price and if they just list slightly below market, they will get the offers they need.
• We have noticed a big change in lender negotiating of short sales in the last 6 weeks.  Lenders are insisting on seeing owners IRA and 401k statements even though they cannot legally go after that money.  The strategy the banks are using is that if they own the second loan and turn down the short sale causing the first lender to foreclose, the second loan can chase the borrower for the money they have lost (as long as it isn’t purchase money).  They are betting that the borrower will dip into their retirement for a portion of the loan in exchange for not being chased for years. 
• While this is troubling, I don’t find it unethical by the banks.  After all, the borrower promised to pay the loan back and the bank can negotiate as hard as they want – just make sure you have a good negotiator on your side if you are looking at a short sale.
• I believe we are at the beginning of a trend where the banks are going to be harder on defaulted borrowers.  I think that initially they were fearful that the Obama led government would come down hard on them if they did not cooperate with loan modification programs.  But now that the Home Affordable Program is looking like a pretty solid failure and Obama has lost a lot of his political power, I think the banks are getting bolder in going after people who owe them money and are not paying.  Make sure you have a good legal and negotiating team on your side when taking on your bank.

Ok, we have some new listings coming out this week, but I will wait until we have photos to show you – weather permitting, that will be next Monday.

So, enjoy the Coffee!  This time it is once again by way of my Dad in Arizona (and no, I did not check it on Snopes, it is a good story regardless!)

RED MARBLES

I was at the corner grocery store buying some early potatoes.  I noticed a small boy, delicate of bone and feature, ragged but clean, hungrily appraising a basket of freshly picked green peas. 

With loving gentleness she lifted the lifeless fingers of her deceased husband. Resting underneath were three exquisitely shined red marbles. 

I was at the corner grocery store buying some early potatoes.  I noticed a small boy, delicate of bone and feature, ragged but clean, hungrily appraising a basket of freshly picked green peas. I paid for my potatoes but was also drawn to the display of fresh green peas. I am a pushover for creamed peas and new potatoes. Pondering the peas, I couldn’t help overhearing the conversation between Mr. Miller (the store owner) and the ragged boy next to me. ’Hello Barry, how are you today?’ ’H'lo , Mr. Miller. Fine, thank ya. Jus’ admirin’ them peas. They sure look good.’ ’They are good, Barry. How’s your Ma?’ ’Fine. Gittin’ stronger alla’ time.’ ’Good. Anything I can help you with?’ ’No, Sir. Jus’ admirin’ them peas.’ ’Would you like to take some home ?’ asked Mr.. Miller. ’No, Sir. Got nuthin’ to pay for ‘em with.’ ’Well, what have you to trade me for some of those peas?’ ’All I got’s my prize mar ble here.’ ’Is that right? Let me see it’ said Miller.. ’Here ’tis. She’s a dandy.’ ’I can see that.. Hmmmmm, only thing is this one is blue and I sort of go for red. Do you have a red one like this at home ?’ the store owner asked. ’Not zackley but almost..’ ’Tell you what. Take this sack of peas home with you and next trip this way let me look at that red marble’.. Mr. Miller told the boy. ’Sure will. Thanks Mr. Miller.’ Mrs. Miller, who had been standing nearby, came over to help me.. With a smile she said, ‘There are two other boys like him in our community, all three are in very poor circumstances. Jim just loves to bargain with them for peas, apples, tomatoes, or whatever. When they come back with their red marbles, and they always do, he decides he doesn’t like red after all and he sends them home with a bag of produce for a green marble or an orange one, when they come on their next trip to the store..’ I left the store smiling to m yself, impressed with this man. A short time later I moved to Colorado , but I never forgot the story of this man, the boys, and their bartering for marbles. Several years went by, each more rapid than the previous one. Just recently I had occasion to visit some old friends in that Idaho community and while I was there learned that Mr. Miller had died. They were having his visitation that evening and knowing my friends wanted to go, I agreed to accompany them. Upon arrival at the mortuary we fell into line to meet the relatives of the deceased and to offer whatever words of comfort we could. Ahead of us in line were three young men. One was in an army uniform and the other two wore nice haircuts, dark suits and white shirts….all very professional looking. They approached Mrs. Miller, standing composed and smiling by her husband’s casket. Each of the young men hugged her, kissed her on the cheek, spoke briefly with her, and moved on to the casket.. Her misty lig ht blue eyes followed them as, one by one; each young man stopped briefly and placed his own warm hand over the cold pale hand in the casket. Each left the mortuary awkwardly, wiping his eyes. Our turn came to meet Mrs. Miller. I told her who I was and reminded her of the story from those many years ago and what she had told me about her husband’s bartering for marbles. With her eyes glistening, she took my hand and led me to the casket. ’Those three young men who just left were the boys I told you about. They just told me how they appreciated the things Jim ‘traded’ them. Now, at last, when Jim could not change his mind about colour or size…..they came to pay their debt.’ ’We’ve never had a great deal of the wealth of this world,’ she confided, ‘but right now, Jim would consider himself the richest man in Idaho.’ With loving gentleness she lifted the lifeless fingers of her deceased husband. Resting underneath were three exquisitely shined red marbles. 

Have a Great Week!

Scott Voak

Monday Morning Coffee – What happens when the Fed stops buying Mortgages?

Monday Morning Coffee

What Happens when the Fed stops buying MSBE’s?

Januray 17, 2010

Good morning,

I hope you had a great weekend.  We were very busy as we had 18 friends over for dinner on Friday night and went to the San Diego Association of Realtors Installation Dinner where our friend Mark Marquez was installed as President on Saturday night.  So now, it is a race for bed!

Updated my blog earlier today with a post on what is going to happen when the Fed stops buying MSBEs in March.  The short version is that the market will slow, interest rates will rise and they will step in again to resume purchases, but on a smaller scale with rates up about 1% over the year.  The long version is here.

We have a new couple of new homes this week, but due to lingering issues with the office move, I do not have single property sites up for them yet.  Both are short sales:

Palomino Plan 3 in 4S – 4550sf 6 bedroom home with a 4 car garage on a very large lot.  It is priced at $900k.  We have offers on this and will probably be off the market early in the week.

Canyon Ridge Plan 2 in 4S – 3600+ sf 4 bedroom home with an loft and an office over the garage.  This is also a large lot and has a pool (but there is an issue with underground water that needs to be dealt with or at least acknowledged).  There are no showings on this until next weekend when we will have an open house (owners are packing).  It is priced at $800k.

That’s it – I will have single property sites for them next week.

Enjoy the Coffee!

This week I am revisiting a story I posted last year for an update.  It’s the one about the autistic basketball player and hits home for Cori and I as Zach’s Fragile-X puts him on the autistism spectum.  As he is getting older, his issues are becoming more pronounced and we gain more respect every day for both our own son and other families that navigate the world of autism/Fragile-X every day.  He is almost 4, and although I prefer he take up soccer to basketball (due to my own limited skills), any way he can have a moment like this would be worth it.  Videos like this are a great source of hope for parents who have handicapped children.

Have a Great Week!

Scott

Prediction for when the Fed stops buying MBSEs

I was looking at numbers over the last year as they related to sales values to try and figure out what effect that Fed’s purchases of Mortgage Backed Securities has been.  A major problem it getting accurate numbers is that housing prices are reported as an average or median price.  In markets that are consistent, this is a good method to use.  However, when the market changes (as it has recently) the median price especially becomes less and less meaningful.  Here’s a quick explanation:

Let’s say there are 10 houses that sell. 

• 4 are two bedroom homes that sell for $200k.
• 2 are four bedroom homes that sell for $400k.
• 4 are six bedroom homes that sell for $600k. 
• In this case, your median price is $400k (median is the price of the average home, not the average price of homes). 

 Now, let’s say the price for each home increases $50,000.  However, due to a factor such as loans being difficult or no inventory being available on 6 bedroom homes, we sell the following homes:

• 4 two bedroom homes for $250k.
• 2 four bedroom homes for $450k.
• 1 six bedroom home for $650k.
• In this case, your median price is $250k. 

Here is a simplistic example showing that the median price fell even though the price on every home increased.  It is also the reason why current data on housing prices is to be viewed a little skeptically.  My guess is that the data on median prices is under reporting the gain in housing because the shift has been towards more less expensive homes selling which brings the median down. 

So, I looked at my favorite housing micro-economy, 4S Ranch.  Here I can break houses down to similar sizes and ownership (condo vs fee simple) and look at what a slice of homes has done over several years.  In some of the data segments, there are not enough sales to be meaningful,  but in others, there is a large enough sample size to give a relatively clear picture.  A problem does come into play when one segment has several short sales or foreclosures in a quarter as they skew the prices downward.  Going through the home sales for the past year and trying to adjust for foreclosures, etc.  I come to the following conclusions (with reservation as this is not exact by any means and there is a good margin for error):

• Detached homes priced under $650k were up 5-12% (the 12% is a little shaky due to small sample size).  I would feel fairly comfortable saying these homes are up in general about 7% in the last year.
• Homes priced above $800k slumped early in the year, but have made it back to about even. 

I think a large part of the difference here is the fact that loans are much easier to get in the lower price ranges (in fact, all of the homes I have sold over $800k in the last year have been bought by buyers with large downpayments.  There are almost no loans above $700k to be had).  The only reason that loans below $700k are available at current interest rates is that the Fed has been buying them from the banks to the tune of many BBBBillions of dollars a week.  If this ends as scheduled in March, rates are going to have to rise for the following very simple reason – we have to entice someone else to buy the loans.  Here’s a fictional conversation between Bank of America and China:  Remember those BBBBillions of dollars of loans we sold you a couple of years ago?  We know it didn’t turn out real well for you what with all those defaults and foreclosures.  But….how about buying a couple hundred BBBBillion more?  It is not too hard to see that China (or any other buyer of mortgages) is going to want a higher return for taking on the risk.  A higher return for them means higher rates for you and me. 

So, if the Fed stops buying mortgages as planned in March, rates will rise rather quickly.  How high and how fast?  Well they have to rise high enough that the rest of the world will buy the loans, but not high enough that people stop buying houses.  Market “experts” think rates will rise between .75% and 2%.  If they rise 1.5%, it could take someone who qualifies for a $640k loan down to about a $495k loan.  That would take the wind right out of the housing market.  A buyer who has been looking at a $675k house an imagining the four bedrooms is not going to put the same payment into a three bedroom condo.  They will likely sit on the sidelines and we will see the number of transactions slow dramatically until prices fall enough to put our buyer back into a four bedroom house. 

So, do I think prices are neccessarily going to drop 20%?  No.  For the same reason I predicted in August that the Home Buyer Tax Credit would be extended – politicians are running the show.  I am not an economist, but I have at least a basic understanding of the markets.  However, I think it is fairly easy to predict what is going to happen – so, here it goes:

• Rates will start to rise in mid-late February (loans that start in mid February will be completed in mid March and have to be sold in late March, when the Fed is scheduled to stop buying them).
• By the end of March it will be pretty clear that rising rates have slowed down the housing market and talk will start fresh about a housing led double-dip recession.
• Democrats who control the entire political engine in Washington will very quickly realize that a summer recession with ever increasing unemployment and vacant foreclosed homes will translate into a lot of lost seats in the House of Representatives in the November election.
• By mid-April (if not sooner) the Fed will announce that they will resume buying MBSEs although on a smaller scale (this will be an attempt to create a soft landing).
• The market will stabilize again although we are not likely to see the same enthusiasm for real estate as we are seeing right now.  This is because the Fed eventually has to get out of buying all the mortgages the banks can write (don’t they?), and as they do, rates will slowly creep up.

Since I am making the prediction, it is sure to not happen, but I think we will end the year with mortgage rates about .75-1% higher than they are today and prices within 3-5% of where they are although they may bounce around a lot before settling down.

Monday Morning Coffee – Happy New Year!!

Monday Morning Coffee

Look at Foreclosure and Default Rates for Q3 2009

January 3, 2010

Good morning,

I hope you had a great Holiday and New Year.  Cori and I were planning on going out New Year’s Eve, but life got in the way of the party.  So, as we were sitting home waiting for the New Year, I was drinking a Guiness and trying to figure the best way to salute 2009 as it made its exit.  Then I remembered a very eloquent speach an Irish friend of mine (I was drinking a Guiness) once made that summed up my feelings for 2009 pretty well, “Piss Off!”  (He was acutally pretty drunk at the time, and we were a lot younger, and it was in reference to a girl in a bar and things weren’t going well for him and…) Anyway, it seemed to kind of fit everything that happened in 2009.  Then I congratulated 2010 because 2009 set a pretty low standard to beat.  I went to bed only to have Zach wake me up at 3:30 am and make me realize that things aren’t going to change overnight (but at 3:30 am I was thankful it was only 1 Guiness).

 Anyway, here’s hoping 2010 is a great year for all of us.

Late in December, Office of the Comptroller of the Currency and the Office of Thrift Supervision (imagine a lot of accountants that don’t get invited to anyone’s New Years Eve party) released their report on mortgages, foreclosures and other fun stuff for the third quarter of 2009.  (Since I took the last week off from MMC, you had to know this was going to be a long one.)  The report is 49 pages and I can send it to you if you want it.  Key points were:

• Non performing loans are up to 12.8% of all mortgages.
• Almost 1/3 of all option ARM loans are delinquent.
• Home retention actions were up significantly (driven by Home Affordable) in the quarter.
• For every 6 homes that were 60 days late or in foreclosure, there was 1 person who received a mortgage modification or started a trial period plan.
• The most positive sign was that for loan modifications done in the second quarter of 2009, only 18.7% were 60 days late a quarter later (down from 30.7%) This is due to the fact that more modifications than before are lowering the monthly payment by 20% or more.   (I know, it’s kind of like being happy we only lost another 400,000 jobs last month). 
• For 2008, if loan modifications resulted in a payment that decreased by 20% or more, 38.6% of the loans were 60 days or more delinquent by the end of the third quarter of 2009.  If the payment decreased by less than 10% a month, 55.1% of the loans were 60 or more days delinquent.
• Completed foreclosures increased 11.9% and short sales by 22.4% over the second quarter showing that the banks are starting to process more of both.
• Government guaranteed loans (FHA, VA, etc.) perform worse than other loans with 17% of all these loans at least 30 days delinquent. 83% of these loans were securitized by Ginnie Mae.
• There are 3 times as many government guaranteed loans in serious default as there are in foreclosure, indicated there will be a continuing increase in these foreclosures.  (It is also important to note that much of the growth we are seeing right now in the market is because of the easy availability of FHA loans – I hope that the newer loans being issued are not showing the same risk level as those writen 2-3 years ago.)
• Fannie and Freddie loans are mostly Prime loans and are performing better than the rest of the market with only 7.9% 30+ days delinquent.
• An interesting thing to note is that even though prime loans have only a 3.6% serious delinquency rate (60+ days late) compared to 20.1% for subprime, the number of prime loans that are seriously delinquent is 838,083 vs 558,419 for subprime.  The serious delinquency rate for prime loans grew 117.5% in the past year.  The sheer number of prime loans out there means its performance will dwarf anything that happens in the subprime or Alt-A loan arena.

Ok, that’s enough cheerful news to start the year.  On a better note, we had one new listing we put on the market last week and before I could get the single property site up, we had 4 offers and ended up with 10.  We should go into escrow on Wednesday and it will sell for more than it will appraise for (it is under $500k). 

 I will have a 4 bedroom 3,200+sf home for you next week in 4S.

That’s it for now, but before the coffee, I wanted to share a cool project my sister was involved in last October.  She went down to Guatemala and helped fit people with prosthetics (she’s a PT).  There’s a link to the program video for anyone that’s interested (she’s in the orangish shirt) - and even if you aren’t interested, I’m still proud of her for doing it.

Enjoy the Coffee!

The Praying Hands

Back in the fifteenth century, in a tiny village near Nuremberg, lived a family with eighteen children. Eighteen! In order merely to keep food on the table for this mob, the father and head of the household, a goldsmith by profession, worked almost eighteen hours a day at his trade and any other paying chore he could find in the neighborhood. Despite their seemingly hopeless condition, two of Albrecht Durer the Elder’s children had a dream. They both wanted to pursue their talent for art, but they knew full well that their father would never be financially able to send either of them to Nuremberg to study at the Academy.

        After many long discussions at night in their crowded bed, the two boys finally worked out a pact. They would toss a coin. The loser would go down into the nearby mines and, with his earnings, support his brother while he attended the academy. Then, when that brother who won the toss completed his studies, in four years, he would support the other brother at the academy, either with sales of his artwork or, if necessary, also by laboring in the mines.

        They tossed a coin on a Sunday morning after church. Albrecht Durer won the toss and went off to Nuremberg. Albert went down into the dangerous mines and, for the next four years, financed his brother, whose work at the academy was almost an immediate sensation. Albrecht’s etchings, his woodcuts, and his oils were far better than those of most of his professors, and by the time he graduated, he was beginning to earn considerable fees for his commissioned works.

        When the young artist returned to his village, the Durer family held a festive dinner on their lawn to celebrate Albrecht’s triumphant homecoming. After a long and memorable meal, punctuated with music and laughter, Albrecht rose from his honored position at the head of the table to drink a toast to his beloved brother for the years of sacrifice that had enabled Albrecht to fulfill his ambition. His closing words were, “And now, Albert, blessed brother of mine, now it is your turn. Now you can go to Nuremberg to pursue your dream, and I will take care of you.”

        All heads turned in eager expectation to the far end of the table where Albert sat, tears streaming down his pale face, shaking his lowered head from side to side while he sobbed and repeated, over and over, “No …no …no …no.”

        Finally, Albert rose and wiped the tears from his cheeks. He glanced down the long table at the faces he loved, and then, holding his hands close to his right cheek, he said softly, “No, brother. I cannot go to Nuremberg. It is too late for me. Look … look what four years in the mines have done to my hands! The bones in every finger have been smashed at least once, and lately I have been suffering from arthritis so badly in my right hand that I cannot even hold a glass to return your toast, much less make delicate lines on parchment or canvas with a pen or a brush. No, brother …
for me it is too late.”

        More than 450 years have passed. By now, Albrecht Durer’s hundreds of masterful portraits, pen and silver-point sketches, watercolors, charcoals, woodcuts, and copper engravings hang in every great museum in the world, but the odds are great that you, like most people, are familiar with only one of Albrecht Durer’s works. More than merely being familiar with it, you very well may have a reproduction hanging in your home or office.

        One day, to pay homage to Albert for all that he had sacrificed, Albrecht Durer painstakingly drew his brother’s abused hands with palms together and thin fingers stretched skyward. He called his powerful drawing simply “Hands,” but the entire world almost immediately opened their hearts to his great masterpiece and renamed his tribute of love “The Praying Hands.”

        The next time you see a copy of that touching creation, take a second look. Let it be your reminder, if you still need one, that no one – no one – - ever makes it alone!

Have a Great YEAR!

Scott Voak

858 688 0189

What Happens When the Music Stops – Interest Rates?

The current real estate market has been a nice surprise (if you aren’t surprised, you weren’t paying attention this time last year).  However, is it going to last and what happens if it doesn’t?  I think there are two factors to loook at.  Back in August or September I wrote that the administration and Congress were likely to extend the First Time Home Buyer Tax Credit to try and help the economy going until they were able to at least get healthcare passed (see posts from that time frame for the full logic).  Surprise!  In October, it was announced that not only was the credit being extended through the first quarter, but it was broadened to include more people.  Plus, the Fed was to continue buying MBSEs through March.  These actions (the Tax Credit and Fed purchases of MBSEs) are largely responsible for the current recovery.  Each of them is working on different factors that are driving the market.  In this post, I am going to talk about Mortgage Backed Securities (MBSE) and the effect they are having on interet rates.

 MSBEs were a major contributor to the mortgage meltdown.  When a bank makes a lot of mortgage loans, the package them up and sell them as a “pool” of mortgages.  This pool may be worth $200-$500M.  By securitizing the pool, it can be split into many pieces.  The idea was that this allowed investors to buy a piece of a lot of mortgages rather than all of a single mortgage. 

 The thought was that this limits risk.  After all, one homeowner might lose his job and go into foreclosure, so by putting his mortgage in with 200 others, it lessened the blow.  Since this made investing in mortgages a “very low risk investment”,  hedge funds and other aggressive investors would buy MSBEs using 10% of their own money and then borrow 90% from banks making a spread.  If you are interested in the math, read the next section, otherwise jump ahead:

• Hedge Fund invests $10M of its own money and borrows $90M at 4% (paying $3.6M in interest a year)
• Same Hedge Fund uses the $100M to buy MSBEs paying 5% or $5M a year in interest.
• After paying the interest, the Hedge Fund made $1.4M a year but only invested $10M
• 14% Return.  That’s leverage. 

Making 14% in what is supposed to be a risk free investment is unheard of.  So, they demanded more mortgages and to make them available, the banks had to relax standards.  Instead of 20% down, a good income and good credit, nothing down with decent credit and your word that you had a job was good enough.  Nobody figured that making $700k loans to people with a fake income was going to be a problem.  And, since the loans were so easy to get, everybody got a house or three, driving the market up insanely. 

When the market collapsed, the Hedge Fund above couldn’t make its payment on the $3.4M because the borrower with fake income couldn’t pay his mortgage.  All of a sudden, the banks realized that the 90% they had loaned the Hedge Fund was gone (bye bye Shearson) and the companies that insured these MSBEs had issues too (bailout for AIG). 

For our discussion here, the important point is that this frenzied investing in MSBEs drove the availability of money up and therefore allowed home prices to go up to a point we had a bubble.  When the bubble popped, nobody wanted to buy MSBEs anymore.  Not to mention, that the banks didn’t know (and still don’t know) how much of their money was gone – since the loans are securitized, everyone owns a piece of the mortgage and nobody can really tell which ones are good and which ones are bad. This is when the entire world credit market frooze and the Fed had to inject large amounts of money into the system.

One of the things they did was to steop in and announce they would buy a few mortgages (currently about $14B a week).  Well, with the Fed guaranteed to buy this many loans, banks have been willing to write the loans again.  AND, since the Fed is using your and my tax dollars, they don’t care too much about the return them make, so the loans are at a very low interest rate.  (When you hear that the Fed is subsidizing interest rates, this is what it means).

Here’s the problem.  The Fed is going to stop buying these mortgages at the end of March and someone else will have to step in. 

Now, think real hard.  How many foreign countries can you think of that have a lot of excess cash?  Really rich people that would jump at a 5% return?  Not many.  To get people other than the US Government to buy these mortgages, the return on them will have to go up.  Which means the interest you and I pay for a mortage is going to go up.  How much?  Well, if you were sitting on $100M to $200M, what kind of return would you want?  Before you answer, consider also that investors want a higher return if the risk is high.  After all, if you might lose your money, you want to make more on it than if you know it is safe. 

How risky are mortgages?  Well, consider what the administration is doing to help people with these loans.  They are “encouraging” the banks to reduce the principal and interest rates.  Sounds great for you and me, but it is basically telling the investor, “Listen, I know you were promised 5% but it just isn’t going to happen.  We want you to drop your return and, by the way, reduce the amount you are going to get paid back by 20% (principle reduction).  So you are going to lose money rather than make money.”  Since this has happened before, you would be stupid (and probably wouldn’t have $100M lieing around) if you didn’t think it could happen again.  Since you know that this could happen, would you invest in the mortgages for a 5% return?  How about 6%?  7%?  Me either.  Not a lot of people are going to be lining up to purchase these mortgages.  Which means rates will have to go up significantly. 

In my converstations with Pwastim (People Who Are Smarter Than I Am), he says that the market is expecting rates to go up between .5% and 2% in 2010.  Ouch.   Here’s the other problem.  Even if rates go up, I think it will be hard to find $14B a week of investor money.  This means that banks will raise rates AND make fewer loans. 

What does this mean.  Basically that this was a very long explanation for the following recommendation:

If you have a mortgage or are buying a home.  Get a 30-year fixed and pay the points to buy down the interest rate.  You will not see interest rates like this for another 5-15 years if ever.  Plus, in another post I will talk about inflation and why you will look REALLY SMART in 5 years if you do this now.

Monday Morning Coffee – Sub-Prime and Alt-A

Monday Morning Coffee

Sub-Prime and Alt-A in California

Good morning,

I hope you had a nice weekend.  Cori and I saw Blind Side this weekend and highly recommend it (if you were in the theater, she was the one crying).  We are looking forward to seeing my dad and step mom who are driving out from AZ tomorrow.  It has been about a year since we have seen them and I am looking forward to it, even though I know they are much more interested in the grandson than the son:-)

I spent a lot of time going through data this week with the goal being to look at all types of mortgages that are currently out there and see what the delinquency rate is and when they are due for interest rate adjustments.  We know from historical data that the following has been true:

 Once a loan is 60 days late, there is a 98% chance that it will be liquidated through a foreclosure, short sale or a loan modification will take place.

• Over the past 2 years, it appears that for every 1 foreclosure or short sale there have been 3 loan modifications.
• Within one year, 58% of all loan modification are 90 days late and since the banks do not do 2 loan modifications on the same loan, at least 58% of the 75% delinquents that were modified the first time around will be liquidated within between 12 and 24 months of first going delinquent.
• Taking those together, once a loan is 60 days late, about 25% of the homes will be liquidated within a year (that’s the longest they are generally taking to process) and 44% (58% x 75%) will be liquidated in the second year.  (I could not find data on the second year after loan modification, most likely because there isn’t enough yet).
• This means that the effects of the mortgage defaults are felt over an extended period.
• These numbers will likely improve over the next couple of years as the Home Affordable modifications do more to reduce principle and payment that previous modifications.  However, there are many that don’t think it will make much difference.  The Home Affordable modifications allow for 5 years before the new loan adjusts towards market interest rates.

 With the above track record, I was hoping to look at all loans that are out there and overlay loan types with when they are adjusting and the forecasted foreclosure/modification rates to get an idea how long until we work through the distressed inventory of homes (and who said I’m not a fun guy to hang out with on a Friday night.)

Unfortunately, I cannot get my hands on all the data.  Those who have it are not giving it up without a lot of dollars and frankly, I think we can get a rough idea with what I did find.   

What I found is available on the Federal Reserve Bank of New York’s Web site (if you want to get really depressed, they have a map showing every county in the country with mortgage, auto, credit and student loan delinquencies).  I was able to download the data for Sub-Prime and Alt-A loans as of June 30 of this year.

 Quick note – Alt-A borrowers have better credit scores than Sub-Prime borrowers and typically longer time periods before adjustable loans re-set which is why you see lower delinquencies.  

So, the first wave of foreclosures that started last year was in the sub-prime market and the next (possibly this summer) is the Alt-A market.  But look at the number in bottom that is bolded – even after the loan mods and foreclosures of the past year 50% of the people in the country with sub-prime loans are delinquent!

I know this is getting long, but a couple more pieces of information on both types of loans, focusing on CA:

Sub-Prime:

• Of the 326,521 sub-prime loans in existence, about 208,000 are adjustable.
• 172,359 of those have already re-set (the introductory interest rate is over).
• There are only about 36,000 homes left to re-set.

Alt-A:

• Of the 613,650 Alt-A loans in existence, about 428,000 are adjustable.
• 181,898 of those have already re-set.
• There are 246,000 homes left to re-set (most of them more than 2 years out)
• Because of better credit scores, more Alt-A homeowners were offered negative ammortization loans which will be harder to modify because they have no equity.

 At least in California there is likely to be more damage in the second wave as the Sub-prime loans that were modified the first time default again combined with a larger pool of Alt-A loans that are re-setting over the next 3 years.

However, I don’t think this means a 20% drop in market prices.  I think we are likely to see another drop during 2010 and an extended period of up and down (the Alt-A loans will re-set through the next 3-4 years and then we will have the Home Affordable loans re-setting starting in year 5 which should be a smaller number (if the market stabilizes) but will still be a negative influence). I think we are mostly through the painful devaluation phase and moving into what I can best call (someone else’s term) an extended “muddle through” period.

In summary as I have said before, we have oversold housing as an investment over the past 10 years and undersold it as “home”.  We don’t have a choice anymore but to look at our homes as places we raise our families and with the help of 30 year fixed mortgages, slowly pay off so that our true  “investments” don’t have to pay for our mortgage when we retire.

 That’s it – enjoy the coffee (if you’re still awake! – I’m off to bed)

FRIENDSHIP AND LOVE

• Love starts with a smile, grows with a kiss, and ends with a tear.
• Don’t cry over anyone who won’t cry over you.
• Good friends are hard to find, harder to leave, and impossible to forget.
• You can only go as far as you push.
• Actions speak louder than words.
• The hardest thing to do is watch the one you love, love somebody else.
• Don’t let the past hold you back; you’re missing the good stuff.
• Life’s short. If you don’t look around once in a while, you might miss it.
• A best friend is like a four leaf clover: hard to find and lucky to have.
• If you think that the world means nothing, think again. You might mean the world to someone else. 
• When it hurts to look back, and you’re scared to look ahead, you can look beside you and your best friend will be there
• True friendship never ends.
• Friends are forever.
• Good friends are like stars….You don’t always see them, but you know they are always there.
• Don’t frown. You never know who is falling in love with your smile.
• What do you do when the only person who can make you stop crying is the person who made you cry?
• NOBODY IS PERFECT UNTIL YOU FALL IN LOVE WITH THEM. (Isn’t that the truth?)
• Everything is okay in the end. If it’s not okay, then it’s not the end.

Most people walk in and out of you life. But only True friends leave footprints in your heart.

Have a great week!

Scott

Monday Morning Coffee -

Monday Morning Coffee – Tax Credit Extended

November 2, 2009

Good morning,

I hope you had a great weekend.  Just a couple of quick notes – a few weeks ago I mentioned that I thought the government would extend the first time home buyer’s tax credit in an attempt to keep the economy rolling so they can keep their agenda moving.  I also said it wouldn’t be done until late October or early November.  This time, I was right on both counts as it was passed by the Senate last week and is expected to get Obama’s signature this week. 
Don’t know if you caught this on the news, but this guy had the market pegged.  Cori said he’s pretty good looking too.

We accepted an offer on one of our silent short sales in 4S, but still have a very nice condo in Torrey Highlands (3 beds, 2,000 sf with about 400sf of additional storage off the garage that is not included in the sf).  If you are interested, please let me know.

We also will have a short sale in 4S listed this week.  4 beds, 2344sf in Garden Walk.  Let me know if you would like an early peak at it.

Enjoy the Coffee!

How To Love Yourself

Stop All Criticism – Criticism never changes a thing. Refuse to criticize yourself. Accept yourself exactly as you are. Everybody changes. When you criticize yourself, your changes are negative. When you approve of yourself, your changes are positive.

Don’t Scare Yourself – Stop terrorizing yourself with your thoughts. It’s a dreadful way to live. Find a mental image that gives you pleasure (mine is yellow roses), and immediately switch your scary thought to a pleasure thought.

Be Gentle And Kind And Patient – Be gentle with yourself. Be kind to yourself. Be patient with yourself as you learn the new ways of thinking. Treat yourself as you would someone you really loved.

Be Kind To Your Mind – Self hatred is only hating your own thoughts. Don’t hate yourself for having the thoughts. Gently change your thoughts.

Praise Yourself – Criticism breaks down the inner spirit. Praise builds it up. Praise yourself as much as you can. Tell yourself how well you are doing with every little thing.

Support Yourself – Find ways to support yourself. Reach out to friends and allow them to help you. It is being strong to ask for help when you need it.

Be Loving To Your Negatives – Acknowledge that you created them to fulfill a need. Now, you are finding new, positive ways to fulfill those needs. So, lovingly release the old negative patterns.

Take Care Of Your Body – Learn about nutrition. What kind of fuel does your body need to have optimum energy and vitality? Learn about exercise. What kind of exercise can you enjoy? Cherish and revere the temple you live in.

Mirror Work – Look into your eyes often. Express this growing sense of love you have for yourself. Forgive yourself looking into the mirror. Talk to your parents looking into the mirror. Forgive them too. At least once a day say: “I love you, I really love you.”

Love Yourself .. Do It Now – Don’t wait until you get well, or lose the weight, or get the new job, or the new relationship. Begin now — and do the best you can.

– Louise L. Hay Educational Institute

Have a Great Week!

Scott Voak

858 688 0189

Since the Fed Lowered Rates to 0%, Why Haven't Mortgage Rates Fallen Farther?

A friend was over on Sunday and asked this question.  I tried to explain, but don’t think I did a very good job.  But, it is a good question and one that I hear a lot, so I am going to try to explain it here (within the limits of my understanding).
First of all, let’s define a couple terms:

• Fed Funds Rate – This is the rate set by the Fed.  It is currently targeted to be between 0% and 0.25%.  This is the rate that the Fed uses to provide short term loans to banks.
• Prime Rate – This is the interest rate that commercial banks offer to their most valued and credit worthy customers.  It has tracked at 3% over the Fed Funds Rate over the last several years.  This 3% is the spread that banks make.  Think about it this way; if the bank borrows at 1% from the Fed, they will loan to their best clients at 4% and to others at more than that.  That difference is their profit and how banks typically make money. Note that their profit is a lot more than 3% because with $1,000 of assets, they can borrow $10,000 to loan out a total of $11,000.  So, in that case, they pay your grandmother 2% for her deposit of $1,000 and the Fed 1% on their $10,000 for a total of $120 cost a year and earn $440 (4% on $11,000) for a profit of 367% (ok, they had operating costs, but who can’t cover operating costs on a 367% gross margin?)
• US Treasury Bonds -Bonds issued by the US Government paying the buyer interest payments every 6 months.  They usually have a maturity rate of 30 years.  The payments are set by the government, but when the bonds are issued, they are done so in an auction and they are in $100 increments.  The amount paid in the auction determines the Yield, or actual rate the holder will receive.  For simplicity, lets say the bond is going to pay 5% a year for 30 years.  If people think that is too low, they will bid less than $100.  If they bid $90, they are still going to get $5 a year, plus their $100 back in 30 years, so the effective interest, or Yield, would be closer to 5.7%.  Likewise, if they think 5% is a great rate, people may bid the bonds up over $100, lowering the yield.  This is why when bonds go up, it is the same as saying the yield, or interest rate is coming down.  Since US Treasury Bonds are guaranteed by the US Government, they have historically been considered the safest investment and offer the lowest yield.

It is important realize that your bank does not keep your loan.  (Remember from above that every $1 your bank has in deposits allows it to borrow $10 to loan out.  Once they loan out $11, they are done.  To get around this, the bank sells your loan (hopefully for more than $11) takes the profit and loans it out again).  Your bank sells these mortgages to investors such as insurance companies, foreign governments, pension funds, Bill Gates, etc.  (from here on out, we will call this group Pwtom for People With Tons of Money).  This buying and selling of mortgages is what is called the Secondary Mortgage Market.  Here is the important part.  Your bank does not set the price on the secondary market – the buyers do, by insisting on a yield.  So, what determines the yield the investors want?

Treasury Bonds.  Treasury Bonds are (historically) the safest 30 year investment because they are backed by the US Government and everybody knows the US Government is safe (isn’t it?).  So, if Pwtom has a choice between buying Bonds from the government or a mortgage from your bank, what is going to determine which he buys?  Basically, the difference in the yield, or interest rate, between Tresuries and mortgages.  If the difference (or spread) is too small, Pwtom buys Treasuries and to get him to buy mortgages, the rate on mortgages needs to go up (remember that if Pwtom doesn’t buy mortgages, your bank has to hold onto them and can not lend out anymore money).

Let’s look at today.  Treasury Bonds are currently trading at historically low rates.  So, why aren’t mortgages falling as far as Treasuries?  It’s the risk involved in mortgages.

Imagine that you are Pwtom and you are trying to decide where to put your money.  You have always bought Treasuries and in the past several years have bought US backed mortgages.  You were willing to buy the mortgages because they were guaranteed by Fannie Mae and Freddie Mac – basically by the US Government, not so different from Treasuries.  However, now the administration is talking about requireing banks who are going to get government aid to “modify mortgages”.  While mortgage modification sounds great to those of us with a mortgage, what about Pwtom?  He basically bought a bond in the form of a mortgage that he thought was guaranteed by the United States Government and now he is being asked to accept a lower interest rate or less money at the end when the mortgage is paid back.   Now, we don’t have to be smart like Pwtom to realize he is getting screwed in this deal.

The important thing to realize is that if Pwtom thinks that there is a chance the mortgage he is buying will be re-negotiated or go into foreclosure, he is going to require a much higher interest rate on all the mortgages he invests in to cover the ones that go bad.  So, the exact thing we are hoping will help, mortgage modifications, is creating uncertainty for buyers of mortgages and causing mortgage rates to stay higher than they otherwise would.