Will the foreclosure floodgates open after Jan 9th?

Asked by Gdn Bear, Milpitas, CA Mon Dec 29, 2008

Since Fannie & Freddie halted all single-family foreclosures between November 26th through January 9th, will we see a flood of new foreclosures coming after that date? Here is more info:

"Fannie Mae has issued Lender Letter 04-08 announcing that we are halting all foreclosure sales on occupied single-family properties that are scheduled to occur from November 26, 2008 through January 9, 2009. This temporary halt also applies to eviction lockouts of occupied single-family properties. These actions allow affected borrowers to retain their homes while we work with our regulator and conservator, the Federal Housing Finance Agency, to implement the previously announced streamlined loan modification program by December 15, 2008. To facilitate borrower communications, servicers must instruct foreclosure attorneys to send letters to borrowers whose foreclosure sales are halted urging them to contact their servicer, so that together, the servicer and borrower can continue working to...."

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Vatamin, Both Buyer And Seller, 94582
Mon Dec 29, 2008
It's too laughable that almost all of these so-called "Real Estate Pro"s still hold the wishful thinking that government's intervention can win over the intrinsic power of MARKET FORCES. With my zero-year of real estate pro experience but with common sense, I can say that the government's actions can do nothing about the essential decline in the housing prices; the best that it will possibly achieve may be slow down the "speed" of decline.

It's so simple, the sooner the house price returns to the historical normal in terms of affordability/rent-to-own-ratio, the better.
1 vote
Steve Reilly, , Danville, CA
Sun Jan 4, 2009
The simple answer is yes there will be a spike in foreclosures once the moritorium's are lifted, however that's going to be insignificant compared to the next wave of foreclosures coming from Alt-A and "prime" loans made within in the last 5 years. Most buyer in the Bay Area over the last 5 years used either Alt-A, Option Arm or some other type of Jumbo loan to purchase their house and those loans are just now beginning to reset and blow up. Foreclosures in the Bay Area are maybe in the 3rd or 4th inning and will get much worse in 2009 which will create further downward pressure on prices.

Since the conforming loans (Fannie & Freddie) are in the lower price areas, you'll see a greater increase in foreclosures in the lower priced areas such as Antioch, Bay Point, Stockon etc. I antipate the floodgates for higher priced areas will be in the second half of 2009.

The government can't do anything to really "stop foreclosures" without casuing greater harm through unintended consequences. It's analagous to a forest fire, we can created firebreaks, but in the end it must run it's course and bring equilibrium back to the ecosystem.
2 votes
Gdn Bear, Home Buyer, Milpitas, CA
Thu Jan 29, 2009
Here is more data on this subject. Comes from the blog Mr. Mortgage's Guide to the Truth. Very interesting read, by the way. Here is what Mr. Mortgage said recently on his blog (Note: the charts he references do not copy. You will need to follow the link to see the data):

A Flood of REO Properties About to Hit

Looking forward a few months, the REO inventory ‘wave’ that has built up in the past 12-months is about to hit hard. In CA, the SB1137 law exacted on Sept 5th forced a 60-day moratorium on Notice-of-Defaults and Notice-of-Trustee Sales. A Notice-of-Trustee Sale is needed before an insti can take a home to foreclosure. The law essentially kicked the can down the road where all of the inventory will hit as the Spring/Summer selling season kick off. In this respect, the plan worked.

Below is a chart of monthly chart of monthly Notice-of-Defaults, the first stage of foreclosure. NOD’s are filed after three to four missed monthly payments. NOD’s are a very leading indicator to foreclosures by 4-6 months in addition to an indicator of future supply/price depreciation. The massive wave of NOD’s from Jan to Aug and then again in Dec (post-SB117) is still out there waiting to turn into REO beginning soon.

The chart below shows monthly Notice-of-Trustee Sales, the second stage of foreclosure, which follow NOD’s by 4-6 months. At this stage the date and time of the actual foreclosure sale is given – foreclosure typically follows by 21 to 60-days. If you look at all of the NOD’s above from Jan to Aug in the chart above, where are all of the corresponding NTS? From Aug – Dec, NTS would have remained at that 37-40k level if not for SB1137 in addition to select full-moratoria by banks such as Countrywide. This just delays the inevitable. Despite that, NTS are growing and the chart below will look much like the chart above in the near-term – NTS will be back at all-time highs.

The chart below shows the monthly REO taken back by banks — 93-97% of all foreclosures go back to the bank as REO. Like the other two charts the numbers nose-dived as a result of SB1137. So where is all the REO??? The answer is it was delayed and coming quickly to the NTS phase. Additionally, Fannie and Freddie are on full foreclosure moratorium.

From the NTS phase properties are quickly taken back as REO. Supply coming out the other side is all dependent upon each institution, their capacity and willingness to take the associated hit. But as you can surmise from the charts above their dams are overflowing.

Note - at Field Check Group, my research firm, we track all of this by bank and servicer daily. Drilling down into each insti independently reveals that their actions are all over the map. Some do try hard to make this process smooth and transparent. Others are experts at playing ‘hide the REO’.
1 vote
Steven Ornel…, Agent, Fremont, CA
Tue Dec 30, 2008
GB: My post was certainly not intended to downplay the impact of looming foreclosures. As I stated, and as demonstrated by the "resets chart", we still have a way to go. From the chart it looks like the end of 2011.

In large part I agree with your first and second points (below).

On your third point I have a slightly different view. Yes, from a textbook view having the government step in with their various recovery programs lengthens the pain. However, there's also the "political management" of consumer and worldwide sentiment that our government must address. I do believe things would be much worse had our government done nothing.

I believe the real lynchpin to a recovery is jobs creation. The Unemployment rate can go down, but without jobs creation, you theoretically reach zero employment. The recovery of any housing market is a net positive jobs growth rate (local jobs growth rate - local unemployment rate). With jobs creation comes a heightened demand for housing, allowing prices to stabilize. Eventually, housing appreciation will develop.

My sincere hope is housing appreciation occurs well before 2011 and with enough zest to allow some homeowners to refinance into more affordable loans prior to the currently projected reset schedule.

1 vote
Bill Eckler, Agent, Venice, FL
Tue Dec 30, 2008
Uncertain about "flood gates" but there will be an influx simply based on the lack of seriousness to support distressed home owners. I can't help consider that the banking "think tank" is calculating the best avenues to convert public support into income for them.

Only time will tell, but thus far the score is banks 99, home owners 0.........
1 vote
Hawkeye, Home Buyer, 94403
Sun Jan 25, 2009
Hi Matthew,

Great question. One reason is that the banks are backed up with existing foreclosure inventory and in most cases, they won't get around to addressing newly foreclosed properties for six to eight months (current average in my area, a year just to get on MLS). The banks know that they can't address these properties in time to avoid further price erosion, so they might as well keep the homeowners making the payments (and as you pointed out, HOA's) for as long as possible.

The priority foreclosures for the banks are the homes that have PMI and a high relative mortgage balance. For example, a home that sold for $1.2M in 2006 and that has a current mortgage balance of $950K might only have a current market value of $750K (many examples in my area). Those homes are prime targets for quick foreclosures, because the PMI will cover the loan balance (which exceeds the market value). These types of foreclosures are actually profitable for the banks, so combined with the "string alongs" they are actually able to reinforce their cash flow at a time when their balance sheets are a mess.

I fully agree with your analysis on HOAs. In my area, even single family homes have HOAs. These planned communities promised the initial buyers a host of great amenities that were based on their assumption of total HOA cash flow. Now those communities are not collecting enough HOAs to build promised club houses, pools, parks, etc. As a result, the associations will either have to cancel planned amenities or significantly raise HOAs on the existing owners in order to fund the builds. Either situation will likely result in a owner initiated lawsuit against the builder; and, collectively these factors are driving potential buyers away from the new builds (new purchase or resale).

0 votes
Hawkeye, Home Buyer, 94403
Sat Jan 24, 2009
Great article Gdn Bear, thanks.

What they don't mention are the short sale listings, which are also delaying a large number of homes from going into foreclosure (and onto the market, ultimately). The banks are so backed up with existing foreclosures that processing new ones can up to a year.

Many distressed owners are deciding to just stop paying their mortgage, knowing they can live in the house for free and bank the resulting savings. To avoid this, banks are stringing distressed owners along by offering them short sales that they never intend to see through to close. As a result, the distressed owners continue to pay their mortgage because they think the short sale will eventually go through. The banks are effectively stringing them along to keep the payments flowing until they can foreclose.

In my opinion, this unethical practice is the real reason the closure rate on short sales is so low (less than half). These "limbo" homes will eventually go into foreclosure, representing a large amount of inventory that will eventually hit the MLS, driving prices down even further.

0 votes
Vicky Chrisn…, Agent, Purcellvile, VA
Sat Jan 24, 2009
GDN Bear - markets vary widely, so I will speak only to what I am witnessing first hand where I am. A year ago, it was a miracle to get a short sale to sell. Now, it's common place. More and more banks are working to limit their losses by negotiating alternatives with owners. So, YES, I feel that the number of foreclosures will be less than some sources would have you to believe. In general, these are better alternatives for all. Market forces, intelligent business practices and government pressure (and perhaps incentives) to prevent foreclosure are making their mark.

The other interesting thing is the way short sales are handled. Often, a listing agent will receive multiple offers and forward them all to the bank without ratifying anything - so there seems to be a big marketing time according to MLS, but the home is not really as available as one might think. My clients planned to write on a house last week that the listing agent has 8 contracts pending review at the bank. The result? Only one can buy it, there are 7 extra buyers all hoping for that same house, most of which will buy something else.

Again, I am speaking only to my market, and will admit that we are really seeing this at the starter home price point, not throughout the market. However, markets do recover from the bottom up.
0 votes
Gdn Bear, Home Buyer, Milpitas, CA
Sat Jan 24, 2009
Since Freddie/Fannie extended the foreclosure furlough, the expected influx of foreclosures hasn't happened yet.....however, it appears it is coming. Check out this report:

Flood of foreclosures: It's worse than you think
Banks are moving slowly to list repossessed homes for sale, which could mean that housing inventory is even more bloated than current statistics indicate.
By Les Christie, CNNMoney.com staff writer
Last Updated: January 23, 2009: 4:40 PM ET
NEW YORK (CNNMoney.com) -- Housing might be in worse shape than we think.

There is probably even more excess housing inventory gumming up the market than current statistics indicate, thanks to a wave of foreclosures that has yet to hit the market.

The problem: Many foreclosed homes and other distressed properties that are now owned by banks have yet to be listed for sale. The volume of this so-called 'ghost inventory' could be substantial enough to depress already steeply falling prices when it does go on the market.

"That's not good news," said Pat Newport, an analyst with IHS Global Insight. "[Excess] inventory is the biggest problem in housing these days, and it leads to lower housing prices, which leads to more foreclosures."

RealtyTrac, the online marketer of foreclosed properties, recently discovered that it has far more foreclosed properties listed in its database, which the company compiles using courthouse records, than there are listed in the multiple listing services (MLS) maintained by real estate agents.

RealtyTrac looked at listings in four states, California, Maryland, Florida and Wisconsin, and found that they contained only a third of the foreclosures it has in its database.

The scope of the problem isn't clear, but it could be huge considering that RealtyTrac has a total of 1.5 million bank-owned properties on its site.

"Many properties that should be listed on the MLS are not listed on the MLS," said Lawrence Yun, chief economist for the National Association of Realtors (NAR).

Underestimating inventory
The National Association of Realtors calculates official housing inventory statistics using data from the multiple listing services. By that measure, there were 4.2 million existing homes for sale in November, an 11.2-month supply at the current sales pace, up from a 10.3-month supply in October.

But now it seems quite possible that these figures, which are already at record highs, are underestimating the situation. And if that's the case, it could take much longer for the housing market recovery than analysts currently expect.

Until supply can be brought down to a more normalized level of six to seven months, home prices will continue to come under pressure, according to Yun.

"It could be a worse problem than we think," he said.

L.J. Jennings, a real estate broker with Pyramid Real Estate and Investments in Oakland, Calif., sees plenty of evidence that it is.

"There are a number of properties in my area that have actually been taken back by the banks, but have not hit the market yet," he said. "Once a bank repossesses a property, in some cases, it can take more than six months to hit the market."

He cites a handful of examples offhand, including a single-family home in Richmond seized in early October, a condo in San Ramon taken back the same month and a four-family building in Oakland that was repossessed in July.

"Either lenders are overwhelmed and can't get these properties back on sale quickly" said RealtyTrac spokesman Rick Sharga, "or they're deliberately slowing down."

Why there's a delay
The chief problem is probably system overload: Lenders are just not prepared to handle the sheer numbers of foreclosures that they have on their books. Banks took back about 860,000 in 2008 - more than twice the number in 2007 - according to RealtyTrac. Before the housing crisis hit, it took only about a month to get a bank-owned foreclosure on the market.

Lenders still insist they try to act as swiftly as possible. According to Tom Kelly, a spokesman for Chase (JPM, Fortune 500) Mortgage, their goal is to cut their losses on these homes, which are expensive to maintain, as fast as possible.

But banks might hold back listings in areas where they already have lots of homes for sale in order to avoid flooding the market, according to Michael Youngblood, a financial analyst and founder of Five Bridges Capital, an asset management company.

"If lenders have a significant number of properties in a limited area, they may want to stagger putting them back on the market," he said.

Eve Alexander, a real estate broker with Buyers Broker of Florida in Orlando, attributes the delays to the general malaise that's overtaken the lending industry as it's imploded.

"I think banks are dragging their rears about doing just about everything," she said. "They have so much going on, and there's so much red tape and the people don't care, nothing gets done."

There are also batches of bank-owne
0 votes
Gdn Bear, Home Buyer, Milpitas, CA
Tue Dec 30, 2008
Thanks for all of the responses. Other than Vatamin and Dunes, all of the responses either downplay the impact of the looming foreclosures or feel government intervention will prevent foreclosures.

First, it has been obvious that these foreclosure "holidays" do nothing more than delay the inevitable. Delaying a foreclosure helps no one....not the lender, not the borrower, and not the tax payer. A vast majority will eventually foreclose anyway.

Second, the loan modifications being pushed by the Feds has not, nor will not, work to solve this problem. It is already painfully obvious that despite very favorable loan terms, people will and can not continue to finance an asset that is underwater. And trust me, for someone that has worked in commercial banking for over 10 years, when a loan goes to our work out group, rarely do those loans "work out".

It seems to me that we want to get back to normalcy, right? In order to have the market correct itself, we need to cycle through this problem. Two things need to happen before we see improvement in real estate values....1) Unemployment needs to start trending down and 2) the foreclosures and defaults need to cycle through. Will it hurt? Sure. But let's be real, that is what it will take.
0 votes
Tina C. Wong, Agent, SAN BRUNO, CA
Tue Dec 30, 2008
Dear Gdn Bear,

I could see you are someone who really studies the market with all the precise information. Possibility of a lot of foreclosures but at the same time there are a lot of buyers out there that are purchasing due to the attractive low interest rate which plays a huge role in owning a home; FHA loan program with low down payment; people has been waiting on the sideline for a long time; investors with all cash to purchase because real estate has very low risk & good return by statistic in the history if it is in the bay area plus rent is not cheap right now.

It really does not matter what the market is doing because no one knows when is the lowest and everyone's needs and wants of their life is different. If you asked anyone who owns a home for more than 10 years or 20 years as if it was expensive as purchase at the time, they would say "yes". If they have witness the down trend market who still own their home or homes, they would say "yes" and if they have already made a great % of return on their initial investment, they would say "yes". Most importantly, are you willing to own a "home" that is yours.

Best regards,
Web Reference:  http://tinacwong.com
0 votes
Steven Ornel…, Agent, Fremont, CA
Mon Dec 29, 2008

The predominate amount of foreclosures tied to questionable loan products has passed, but we're not in the clear. This first chart shows scheduled reset loan volumes for different loan categories:

As this chart shows, Subprime loans have pretty much run their course; however, Option/Alt-A/Unsecuritized ARMs are the next phase to provide an unstablizing affect.

Here's the "good news": We have already taken on some of the projected Option ARM pain. This is because Option ARMs have valuation based "triggers" that can cause resetting to occur sooner than originally planned (due to property devaluation and the owner's payment selection). The following chart shows how the resetting of these loans has shifted and I have also provided an explanation.

Best Regards, -Steve
0 votes
Voices Member, , Benton County, OR
Mon Dec 29, 2008
Cool, prediction competition...Job loss is still occuring at record levels, unemployment checks are running out for many, loan mods are failing, home prices still declining creating more upside down mortgages, RE industry has still not be able to get those pesky buyers to buy in enough numbers to really change anything and foreclosure moratorium ends Jan 9. Hope for goverment to move fast and effectively(Am now LOL)

I'm predicting yes!!!

0 votes
John J Dutra, , Fremont, CA
Mon Dec 29, 2008
I agree with Cindi (below). We are still facing an increased number of possible foreclosures due to the resetting of many adjustable or option-arm loans, but overall, I believe that there will be great federal pressure to keep people in homes. It would make sense for lenders to keep people in homes as the longer they are able to do this, the greater the chance that values will again begin to rise. If they do nothing, values will continue their slide. What we may see is federal pressure in the forms of relief based on the ability of banks to slow this process. Time will tell, but overall we should see some slowing by mid-09'.
0 votes
The Hagley G…, Agent, Pleasanton, CA
Mon Dec 29, 2008
It could...but I suspect new programs will be introduced to help keep buyers in their homes. The plans put into play over the last several months have had little positive affect for homeowners trying to make a good faith effort to stay in their homes and pay their mortgage.
Web Reference:  http://www.cindihagley.com
0 votes
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