Foreclosures: What’s really going on
Posted by Ray on August 31, 2009 under Main | 
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Apparently I was wrong about the impact of foreclosures when I said that banks were holding onto the properties and not placing them on the market. It came to light via Diana Olick, who I respect at CNBC, in a report earlier today. It is not that banks are simply holding onto the properties, they are just so backlogged that they cannot get them into the market fast enough.
According to the report banks are waiting as long as possible to try keeping people in their homes by using the Obama Making Home Affordable plan. Unfortunately, people cannot simply refinance when you are unemployed or underemployed which is the primary problem now. Bank of America told Diana that since most of the properties are owned by third party investors the bank has an obligation to place properties on the market as soon as possible.
However, the sheer numbers of foreclosures are the problem and slowing the process down of getting the inventory on the market. What the report did not comment on are the homes that the banks still hold the mortgages on. For example my bank actually holds my mortgage, but if I was foreclosed on the bank might not place my home on the market and hold it until the market improved. Clearly, most banks do not hold these mortgages now as they were securitized, but it raises the question that if banks actually held the mortgages would we have these problems to begin with. Furthermore, if the banks held these mortgages would the loans have been made and if they were made would the bank work harder to keep people in their homes.
I think the answer is clear, if banks held these mortgages we would have less pain because foolish loans would not have been made. Its funny how banks become more conservative with their own money than they are when they package the mortgages up and sell them off to yield hungry investors. Unfortunately we will never have a true answer to that question as banks, mostly, sold these mortgages off and continue to do so.
Here is what LPS Applied Analytics had to say:
He says there is no clear evidence of purposeful accumulation by the banks of these foreclosed properties. They are, he believes, working through the huge onslaught of new defaults as fast as possible, but it takes time. He says they are selling REOs at a fast clip as well, within about three months of taking them as REO.
Then he offered the following very detailed chart of what’s called “roll rates” or the rate at which troubled loans are moving through the system. Note the “average” is a four year average, and two of those years were the worst ever in the mortgage market, so as Jadlos notes: Just getting to the average isn’t saying all that much. We need to be close to the four year low to be fully entrenched in a meaningful recovery. Based upon foreclosure and REO timelines, it’s going to take at least 18 months to flush the system of our current problems. But to flush the problems in only 18 months, more problem loans need to leave the system relative to the new problem loans of today and tomorrow. That does not appear to be the case right now—we aren’t clearing faster than new problems are emerging.
Regardless, the foreclosed homes on the market are approximately 1.5 million, which sounds like a lot, and it is. However, the numbers of problem homes that are ‘seriously delinquent’ total an astounding 3.5 million. Unfortunately unemployment is still on the rise and that number should easily increase in the near future which is a major problem. It also indicates that the real estate market is still not even remotely healthy and there will be more pain on the way. Once that tax credit is gone I think we will see just how weak the real estate market is.
Let us not forget we still have commercial real estate to contend with which even the Fed is worried about. That market is much larger than the residential market and there are lots of institutions that hold these bonds. It is said that the majority of CRE outstanding will not be able to refinance because values have dropped so badly, 36% or so year-over-year. Ordinarily the rollover of commercial property into new debt or loans was not a problem, but when the existing loan value is so much higher than the value of the property no one will refinance it. Actually, I am betting the Fed will figure some way out to refinance these properties, why not at this point it’s only our money they are playing with.
The bottom line is that there are still major problems and while some data looks positive the remaining data is negative. The negative data pretty much trumps the positive data and points to lower prices. I know we will get a much better view of this when the incentives go away in November. However, I am willing to bet there will be another program rolled out in either early winter or spring to boost sales again. I am wondering how many people are suffering from buyer’s remorse about their new home purchase especially when they get the property tax bill.
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