New RealtyTrac numbers show that in April there were well over 300,000 foreclosures and the figure in on track to be higher in 2010 than in 2009. Several research firms say that underwater mortgages have moved above 11 million. The National Association of Realtors found that “in the first quarter, 91 out of 152 metropolitan statistical areas showed higher median existing single-family home prices in comparison with the first quarter of 2009.” But some cities posted double-digit drops for the period.
24/7 Wall St. reviewed the NAR data for the first quarter along with Bureau of Labor Statistics unemployment levels by city. The two databases should match one another very well. Each has municipalities defined by metropolitan statistics areas (SMA) as set by the US Office of Management and Budget in 2004.
City unemployment rates are compared to a 9.9% national rate for purposes of this article. Government numbers for joblessness do not include part-time workers looking for full-time jobs or people who have become “unattached” from the work force. These additions would bring the national unemployment rate to 17.1%. That means that if a city has unemployment of 14%, joblessness could be closer to 21%
Home prices were based on NAR indexes for the first quarter of 2010 compared with the full-year 2007, near the top of the housing market.
There are some areas where housing prices have dropped but unemployment has improved, so home values may recover. Honolulu is an example of this. But, most cities with sharp drops in home values are also the hardest hit by the recession’s impact on employment. These areas may take years to get back to “normal” unemployment rates of 5%. In the meantime, home prices will continue to stagnate, or worse, continue to fall because of a lack of buyers.
These are the thirteen cities where, based on home values in 2007 and current unemployment, housing will never return to the levels of three years ago:
1. Riverside, CA. Housing prices are down 52% and unemployment is at 18%
2. Lansing, MI. Housing prices are off 38% and unemployment is 11.8%
3. Palm Coast, FL. Housing prices down 63% and unemployment is 16%
4. Sacramento, CA. Housing prices down 47% and unemployment is 17.5%
5. Orlando, FL. Housing prices down 49% and unemployment is 15%
6. Fort Myers, FL. Housing prices are down 65% and unemployment is 14.2%
7. Grand Rapids, MI. Housing prices are down 30% and unemployment is 14.3%.
8. Reno, NV. Housing prices are down 44% and unemployment is 13.3%.
9. Toledo, OH. Housing prices are down 30% and unemployment is 13%.
10. Boise City, ID. Housing prices are down 34% and unemployment is 9.9%
11. Rockford, IL. Housing prices are down 16% and unemployment is 17.9%
12. Las Vegas, NV. Housing prices are down 51% and unemployment is 13.8%
The Refinance Index decreased 14.3 percent from the previous week and the seasonally adjusted Purchase Index decreased 5.7 percent from one week earlier. … “Purchase and refinance applications dropped this week, even after an adjustment for the Memorial Day holiday. Purchase applications are now 35 percent below their level of four weeks ago, ashomebuyers have not yet returned to the market following the expiration of the homebuyer tax credit at the end of April,” said Michael Fratantoni, MBA’s Vice President of Research and Economics. “Although rates remained essentially flat, refinance applications dropped this past week for the first time in a month. Despite the historically low rates,many homeowners have already refinanced recently, remain underwater on their mortgages, have uncertain job situations, or have damaged credit following this downturn, and therefore may not qualify to refinance.”
…
The purchase index has collapsed following the expiration of the tax credit suggesting home sales will fall sharply too. This is the lowest level for the purchase index since February 1997.
“More evidence is out on Wednesday that the pool of homeowners who can refinance under today’s more stringent lending standards has been exhausted: Mortgage rates have hovered close to their lowest levels in decades, and yet refinance demand fell last week from the previous week.
Demand for home-purchase mortgages also continued to fall last week, according to the weekly application survey from the Mortgage Bankers Association. That means there have now been five straight weeks of declining demand for purchase mortgages, which have fallen to their lowest level since February 1997.
“Home buyers have not yet returned to the market following the expiration of the home-buyer tax credit at the end of April,” said Michael Fratantoni, the MBA’s vice president of research and economics.
Early indications show that home sales activity plunged in May, the first month after the tax credit’s expiration. Sales in markets including Minneapolis, Denver, Seattle, Phoenix and New Jersey were down by around 25% in May from one year earlier.
Most analysts expected housing demand to fall after the tax credit expired, but few had predicted that mortgage rates would tumble to such low levels after the Federal Reserve ended its purchases of mortgage-backed securities in March. Average rates on 30-year fixed-rate loans fell to 4.81% last week from 4.83% at the end of May.”
Amazing example of human innovation at work. They emphasize the “Green” angle in this short documentary, but it’s the design that will have you in awe. This guy grew up in the exact same apartment with 3 other people, so he’s had a LOT of time to think about this design…
Some housing experts are predicting what one calls a “saw-tooth bottom” to the housing market driven by a shadow inventory that may include up to 4.5 million properties.
This issue isn’t just bank-owned homes that aren’t yet on the market, but sellers who would like to sell but fear they can’t. “These sidelined sellers closely watch the market for signs of a possible turnaround and rush in if there’s a hint of good news,” says Leslie Appleton-Young, chief economist for the California Association of REALTORS®.
This rush to sell drives prices back down — hence, the “saw-tooth” description.
Stan Humphries, chief economist for Zillow.com, describes the potential problem this way: “Prices go up; inventory rises, which sends prices down again. That plays out for three to five years of no appreciation. … Without price appreciation, it leaves more home owners in negative equity. That’s toxic. Any setback, like a job loss, they go into foreclosure.”
For Mother’s Day, flowers and chocolate are nice, but watching your single daughter take the lead in the real-estate market may be even nicer.
Unmarried women accounted for 21% of home purchases in 2009, while unwed males were 10% of the buyers, according to a National Association of Realtors report in November. It’s a dramatic shift from 1981, the first year the numbers were tracked, when single women and men each accounted for 10% of home sales.
Still, some industry professionals have been slow to take note of females’ robust activity. Single women have held steady at the 20 % mark for more than five years, yet when the Urban Land Institute hosted its annual real-estate conference in late April, analysts had to remind the audience to expect big numbers from young, single female buyers.
“I’ve given some of my [home-building] clients lessons on how to be gender friendly,” said Brooke Warrick, president of the market research firm American Lives. He reminded sellers to treat young women as viable buyers, not bystanders, by doing something as simple as handing them a brochure when they enter a for-sale home.
His advice to real-estate developers: “Make sure to pay enough attention to these women. You want these women.”
These women tend to stake their claim on homes in the 1,700-square-foot range predominantly in the Washington, D.C., California and Texas markets, Warrick said.
After segmenting the market, Warrick noticed that young women, especially those rooted in secure industries like health care, make more money than their male peers.
Though not quite rooted in a stable industry, freelance video producer Sara Barger, 26, pursues buying homes as a way to safeguard her net worth.
Earning roughly $90,000 a year, the American University graduate bought her third Washington property in three years in January when she closed on a four-bedroom $350,000 foreclosed townhouse in Columbia Heights. Barger rents out three of the bedrooms as well as her two condominiums to supplement her income and subsidize her monthly $5,866 mortgage, condo and tax expenses. After her rental income, she ends up owing about $625 a month, including utilities.
“I think people put way too much emphasis on the long term,” Barger said of the ease with which she approaches purchasing. “You have to look at it the same way as a 401(k). It’s a gamble, but it’s something tangible. At least I can get some utility.”
Relatives contributed $5,000 to Barger’s first two purchases. Her father loaned her $50,000 for the third and she repays him in $1,000 monthly installments. She said that buying properties that needed work was one of her strategies, as was working a full-time job throughout college.
Barger’s broker, David Bediz of Coldwell Banker subsidiary Dwight & David, began to see women taking a more active role in real estate five years ago. But he said the company’s 20-something clients are still pretty much split evenly down the gender line.
From the 1920s almost through to the present, the predominant female homeowners were widowed seniors, according to Richard Sylla, financial historian at New York University’s Stern School of Business.
Although pop culture tends to portray women as eager shoppers, women may have taken the lead in home purchases in recent years because of their thrifty habits, some say.
“Men are much more interested in consumption,” said Walter Molony, a spokesman for the National Association of Realtors.
Barger said she observed such indiscretion in spending among her male friends, noting that quite a few who have hit 30 are now reeling in the debt they racked up in their early 20s.
“The last three boyfriends I had, I’ve broken up with because they were dirt broke,” Barger said. “I don’t need you to pay for me. I need you to go out and do things.”
Inspired by women’s interest in personal finance, in January 2009 Amanda Steinberg established DailyWorth.com, a free newsletter tailored to teaching women how to manage their money. Steinberg said her readership doubled to 20,000 in the last three months and that their interests lie mostly in protecting their assets. Of the eight topics offered in a recent preference poll, 79% of 500 respondents checked off “saving” as one they would like to read more about, whereas 45% chose “frugal shopping.”
Steinberg said she’s pretty sure she knows why her readers are swiping less and budgeting more. “I think it’s the fact that more and more women realize that a man is no longer the financial plan.”
Realtors, home buyers and sellers are rushing to complete sales agreements before the tax credit for home purchases expires this week.
Home buyers must have a deal by April 30 and close by June 30 to qualify for the federal tax break, up to $8,000 for first-timers and $6,500 for those merely moving to a different residence.
Though the Treasury Department and the real estate industry have termed the program a success, helping 1.8 million people buy homes, many tax policy experts say it has been singularly cost-ineffective: most of the $12.6 billion in credits through end of February was collected by people who would have bought homes anyway or who in some cases were not even eligible.
The credit has caused a surge in sales and has been widely lauded for helping to stabilize prices. In places like Lafayette, Ind., where the number of homes sold in March was up 48 percent over last year, real estate agents say they have been inundated with buyers like James and Aubrey Green, students at Purdue University, who said the credit had persuaded them to jump into the market.
“We were happy in our apartment, but $8,000 was just too much to pass up,” said Mr. Green, 29, who shopped furiously with his wife for two months before signing a contract in March to buy a three-bedroom ranch.
“We bid on a couple places that didn’t work out,” he said, “but we always made sure we had a backup plan because we didn’t want to miss the deadline for the credit. And when we finally agreed to a contract, it was this huge relief.”
For every home buyer like the Greens, real estate agents say there are at least three others who collected the credit even though they would have bought without it. That means for each new buyer who was truly lured into the market by the credit, the federal government paid more than $30,000.
In addition to legitimate buyers, tens of thousands of people who collected the credit were not qualified. An audit by the Treasury Department’s inspector general released last year found that hundreds of millions of dollars in credits went to people who had not yet bought homes or who were not first-time home buyers, as the program initially required.
Hundreds of others who received the credit were not old enough to sign a binding contract, the audit found, with some as young as 4 years old.
“There’s a political appeal to offering government aid to homeowners because it affects a lot of people,” said George K. Yin, former chief of staff of the Congressional Joint Committee on Taxation, who now teaches at the University of Virginia. “But if you weigh the cost and the results, you have to wonder whether it’s a failure of imagination.”
The home buyers’ credit was actually an amalgam of three separate programs. It began in spring of 2008 as a $7,500 tax credit that taxpayers were required to repay on their tax returns over a 15-year period.
After the financial crisis that fall and taxpayer anger over the hundreds of billions in bailout money being directed to banks and Wall Street firms, a broad subsidy for middle-class homeowners had wide political appeal. So Congress sweetened the plan — dropping the repayment requirement and increasing the credit to $8,000 — and included it in the economic stimulus bills.
Last November, with the residential market beginning to rebound, Congress extended the period for five months and added a $6,500 credit for existing homeowners looking to relocate.
After the number of homes sold in January and February dropped to record lows, sales rose 6.8 percent in March from a year earlier, as buyers raced to cash in before the credit expired. Nearly half of all March home sales involved first-time buyers, according to the National Association of Realtors.
“It’s true that a lot of people who got the credit might have bought without it, but they might have bought in 2012 or 2013,” said Senator Johnny Isakson, a Republican from Georgia, who worked for 30 years as an agent. “This got them to buy in 2009 and 2010, when we needed to shore things up.”
But the program was open to widespread misuse. The first two phases of the credit did not require taxpayers to prove that they had actually bought a house. The Treasury’s inspector general found in October 2009 that the I.R.S. had allowed $139 million in credits to people who had not yet bought homes, and $479 million to taxpayers who were not first-time buyers.
The I.R.S. resisted proposals to require proof that a home had been bought, with officials saying that the additional paperwork would be too onerous because it would prevent returns from being filed electronically. Tighter restrictions were nonetheless enacted: as of last fall, those claiming the credit were required to file a paper return and provide documentation that they had bought a house.
I.R.S. officials say that examiners found more than 70,000 taxpayers who had improperly claimed the credit, but were unable to say how much money had been recovered. Frank Keith, an I.R.S. spokesman, said that given the complexities of the program, “we did an effective job” administering it.
Some tax policy experts suggest that the federal government might have used the money more effectively by creating a program to help unemployed homeowners stave off foreclosure.
“If you tried to address the supply side of the housing market rather than the demand side, you could target your resources more effectively,” said Roberton Williams, an analyst at the Tax Policy Center. “And you’d also have the benefit of helping to keep people from losing their homes instead of subsidizing people who were going to buy anyway.”
But other economists say that, whatever its inefficiencies, the home buyers’ credit had a valuable effect on the psychology of millions of Americans who were alarmed to watch their largest investment lose value.
“The tax credit helped to stanch the price declines, which had substantial benefit for the entire economy,” said Mark Zandi at Moody’s Economy.com. “The home is still the largest asset on most people’s balance sheet, so when prices are falling, nothing works for most families. But now people can take a deep breath and think clearly again.”
More U.S. companies plan to boost payrolls as sales strengthen and the outlook for economic growth brightens, a quarterly survey of economists showed.
The percentage of businesses planning on increasing staff in the next six months exceeded the share projecting more firings by 21 points, up from 6 points in January, according to a survey by the National Association for Business Economics. Demand rose for the third consecutive quarter, and more respondents estimated the economy will grow faster than 3 percent this year.
“The U.S. recovery from the Great Recession continues, with business conditions improving,” William Strauss, a senior economist at the Federal Reserve Bank of Chicago who analyzed the results, said in a statement. Rising demand indicates “a better outlook for hiring,” he said.
About six out of every 10 respondents said sales increased in the first quarter, up from 45 percent in NABE’s January survey. A pickup in the labor market is needed to sustain the economy’s recovery and help repair the damage from the worst employment slump since the end of World War II.
Thirty-seven percent of those polled said they project an increase in hiring within the next six months, up from 29 percent in January, NABE said. Sixteen percent said they expected their firms to trim staff through attrition or major layoffs, down from 23 percent in the prior survey.
The NABE survey, taken from March 25 to April 10, included responses from 68 members of the business economists group.
Growth Outlook
Twenty-four percent of the respondents said they expect the economy will expand faster than 3 percent in 2010, up from 14 percent who forecast that pace in January. In the latest survey, fewer economists estimated growth will be less than 2 percent.
More firms, on net, said they increased capital spending in the first quarter. Even so, investment expectations cooled after improving for five consecutive quarters. Forty-one percent of firms said they forecast capital spending will rise in the next 12 months, compared with 43 percent in the January survey.
Credit conditions remain a hurdle for business. Forty-seven percent of the firms in the survey reported they were hurt by stricter borrowing rules, up from 35 percent in January.
Inflation is likely to remain contained as fewer firms expect to increase prices, the survey showed. The net reading for firms planning to charge more over the next three months dropped to 18 in April from 29 in January.
The group’s net figures subtract the share of respondents reporting falling results from those reporting an increase.
‘A rolling loan gathers no loss” was the play on words often used throughout the savings and loan association debacle during the 1980s. Back then it was the way that financial institutions delayed reporting problem loans. The devious technique allowed thrift institutions to stay afloat a bit longer.
Thrifts extend large, commercial real estate loans in hopes that magic would happen, turning the bad loans into good ones if they waited long enough. But the foundering lenders eventually failed and the government formed the Resolution Trust Corp. to dispose of their defaulted assets at bargain prices.
That was then. Now industry jokesters call it “extend-and-pretend,” a different euphemism for the same inaction. Once again, lenders are making believe that defaulted-loan problems will go away if they wait long enough. They also hope that regulators buy into their chicanery long enough to keep them from reclassifying bad loans and requiring them to raise more capital — or, worst case, close them down.
Speaking about regulators, I was invited to a March meeting in St. Petersburg where three bank regulators with the Office of Comptroller of the Currency were among the speakers. I was interested in hearing their advice to the bankers in the audience regarding problem loans.
But the host told me the regulators objected to my being there after they found out that I write a column for the Herald-Tribune. My invitation was revoked.
Meanwhile, Allen Horton e-mailed me, asking, “Can you point me in the direction of where I can find listings of commercial mortgage default lists?” Horton is with Tennessee-based Jireh Investment Group LLC. “I want to obtain owner information of owners of commercial property that are headed for default or are already in default.”
Like many investors, Horton is trolling for bargains while prices have bottomed out. But lists are not useful for buying distressed assets from banks because they are extending loan-due dates and holding on to foreclosed properties in hopes prices will improve.
According to an article in Multifamily Executive magazine, opportunity investors are looking for a 25 percent return and there is too much money chasing too few deals. The banks are pricing the properties unrealistically high and would rather hold on longer.
“Can I get them (lists) from a commercial broker?” Horton asked.
Sure, commercial brokers have lists. But property acquisition professionals and dealmakers compile their lists based upon relationships, not names that are readily available for purchase from trade magazines and list brokers.
So I suggested to Horton that he join the trade associations in which lenders, property owners and real estate investors are members. For example, if he were interested in acquiring shopping centers, the International Council of Shopping Centers would be a good choice. Like all trade associations, it has national conventions, regional events and opportunities to volunteer, an excellent way to get noticed.
Building Owners and Managers Association, National Association of Office and Industrial Properties and National Apartment Association are also trade associations for mingling with income-producing property professionals.
The Encyclopedia of Associations lists all trade associations and gives contact information. It also gives you a members profile.
Whatever your industry is, joining a trade association is the best way to form relationships.
The Treasury plan to buy illiquid financial assets has been widely criticized as being unfair to taxpayers, who will have to bear losses ahead of shareholders of the institutions that will be bailed out.
There is a better alternative to stabilize the markets: Invest the $700 billion of taxpayer money in senior preferred stock of the troubled financial institutions that pose systemic risks. Let’s call this the “Preferred plan.” In fact, it is the Fannie Mae and Freddie Mac model — which the Treasury Department has already endorsed and used in practice. It is also the approach Warren Buffett used for his investment in Goldman Sachs.
There are major problems with the Treasury plan. First, by buying banks’ worst assets at above-market prices, taxpayers take an immediate economic loss — while transferring wealth to shareholders and executives of the very institutions that brought on the financial crisis.
Second, this plan puts too much discretionary power in the hands of Treasury officials. Who determines what financial assets are purchased and at what prices? Who determines which bank gets to benefit from these taxpayer subsidies? Will bank shareholders continue to receive dividends, and executives continue to get paid huge bonuses?
When financial institutions borrow massive amounts of money to invest in assets that are now found to be illiquid and poorly performing, it is not the responsibility of taxpayers to bear the resulting losses. These losses should be borne by the shareholders.
If taxpayers have to step in and provide capital to keep operating enterprises that the government decides are key to the functioning of the economy as a whole, taxpayers must receive protection.
Treasury Secretary Henry Paulson said at the Senate Banking Committee hearing this week, “[the] Fannie Mae and Freddie Mac [interventions] worked the way they were supposed to.” These enterprises continued to function, maintaining homeowner access to and lowering the cost of mortgage financing. However, managements of these companies had to leave and forfeit the compensation packages they had negotiated.
Shareholders had their dividends blocked and remain first in line to bear losses, as they should have been. Taxpayers came both first and last — first to get paid back, as the new preferred stock is senior to all shareholders; and last in realizing losses, as common and other preferred equity would be extinguished before the taxpayers would be at risk.
This mechanism — purchases of senior preferred stock with warrants in troubled institutions — addresses the problems with the Treasury plan. The financial market is stabilized, companies get recapitalized, failures are avoided, debt securities are supported, and time is gained for illiquid assets to mature.
The institutions continue to function, their cost of funding will decline as equity capital increases, and innocent third parties like bank depositors, broker/dealer clients and insurance-policy holders are all protected. The only difference is that potential losses are kept with the shareholders where they belong.
The Treasury plan would also entail larger outlays than the Preferred plan. By allowing all banks to sell their worst assets to Treasury at inflated prices, taxpayers would be subsidizing healthy banks which have access to private capital (Goldman Sachs, J.P. Morgan, Wells Fargo, and Bank of America, for example) as well as banks that don’t have a private alternative. But under a Preferred plan, only banks that don’t have a private alternative will be given federal assistance. This would reduce the outlay otherwise required to solve the crisis.
Few people familiar with the issues deny that Treasury action is needed to stabilize the financial markets. However, the question is who should bear the cost?
Under the Treasury plan the taxpayer pays the price. Under a Preferred plan, the shareholders of the firms who created the problems bear the first loss. Who do you think should pay?
Before committing $700 billion of our money, we should encourage Congress to take a few extra days to get this legislation right.
More than three-quarters of homeowners who have had their monthly mortgage payments reduced under the Obama administration’s primary foreclosure-prevention program owe more on their mortgage than their house is worth, according to a new report by government auditors.
Over half of the roughly 170,000 distressed borrowers who have gone through the program are seriously underwater, meaning they have negative equity of at least 25 percent, the report shows, citing data through February. In other words, for every $1.00 their home is worth, they owe at least $1.25.
The average homeowner that’s received a five-year modified mortgage under the administration’s plan had negative equity of about 35 percent prior to the program, according to a Wednesday report by the Congressional Oversight Panel, a federal bailout watchdog. After modification, that burden actually increased for the average homeowner, who is now underwater by more than 43 percent, according to the bailout watchdog’s report. Research shows that the more under water homeowners are, the more likely they are to fall behind on payments, default, or walk away.
But that data understates the problem, the report said. Those figures are for first-lien home mortgages only. Debt owed on junior liens, like second liens and home equity lines, isn’t part of that calculation. The Obama administration estimated last April that “up to 50 percent of at-risk mortgages currently have second liens.”
“If junior liens were to be included, the percentage would be significantly higher,” the report notes. “The continuing deep level of negative equity for many HAMP permanent modification recipients makes the modifications’ sustainability questionable; even with more affordable payments, deeply underwater borrowers may remain tempted to strategically default or may be compelled to because core life events, such as death, divorce, disability, marriage, child birth, job loss, or job opportunities necessitate a move.”
HAMP refers to the administration’s Home Affordable Modification Program, which seeks to lower troubled borrowers’ monthly payments primarily through interest rate cuts. Strategic defaults occur when homeowners are able to make the payments, yet willingly choose not to and instead walk away from the mortgage. Recent research estimates strategic defaults are on the rise.
“Negative equity is the single most important driver of defaults,” Laurie S. Goodman, senior managing director at Amherst Securities and a top mortgage bond analyst, said in February during a panel discussion at the American Securitization Forum’s annual conference.
After months of sustained criticism — including by the bailout watchdog and by Democrats in Congress — the Treasury Department finally outlined a plan late last month that calls for principal reductions, which is the only way to address the problem posed by underwater homeowners. (Absent a rise in property values, the only way to give borrowers equity is to reduce the overall amount owed). But that plan doesn’t kick in until the fall. Meanwhile, the foreclosure crisis does not show any signs of abating, the panel’s chair, Harvard Law professor Elizabeth Warren, said during a Tuesday evening conference call with reporters.
Her panel’s report notes that “principal forbearance was rare and principal forgiveness rarer still.” Deferred principal accounted for about 28 percent of the mortgage modifications, while “only” six percent of them involved principal cuts. An additional six percent incorporate principal cuts and deferred principal.
“[T]he Panel has concerns as to whether the modifications make homeownership sufficiently affordable to avoid foreclosure, given borrowers’ broader circumstances. As noted previously, the program…without considering the existence of junior liens, leaves borrowers still paying a significant percentage of their income for housing,” the report notes. “This is particularly problematic because most HAMP modification recipients are underwater.
“This points to the problem with the lack of principal forgiveness in HAMP up to this point. Lack of principal forgiveness means that homeowners will continue to be underwater. It also means that more of each payment will be going to interest, rather than paying down principal, and it may mean that some borrowers have to pay for a longer period of time. All of these factors increase the re-default risk on modified mortgages, and to the extent that a permanent modification is not sustainable, it merely delays a foreclosure and the stabilization of the housing market.”
Less than a quarter of eligible homeowners have converted from temporary trial modification plans into five-year plans, the report notes. Treasury originally forecast up to a 75 percent conversion rate. And while it’s too early to tell the rate at which these modified loans will default, Treasury estimates a 40 percent re-default rate, the report notes, citing testimony from Treasury officials. The administration originally promised to help three to four million homeowners avoid foreclosure.
The panel estimates that in the end as few as 276,000 foreclosures will be averted. Last year lenders foreclosed on more than 2.8 million homes, according to real estate research firm RealtyTrac. The firm estimates three million homes will get foreclosure notices this year; more than one million of them will be repossessed by lenders.
“For every borrower who avoided foreclosure through HAMP last year, another 10 families lost their homes. It now seems clear that Treasury’s programs, even when they are fully operational, will not reach the overwhelming majority of homeowners in trouble,” the panel’s report notes.
In an e-mail to reporters, Treasury spokeswoman Meg Reilly said that the department’s latest monthly report on HAMP will show that more than 230,000 homeowners have transitioned into five-year modification plans. Additional 108,000 have been approved and are awaiting borrower acceptance. The report is expected to be released Wednesday, Reilly wrote.
One issue that’s been pondered by investors and housing analysts, but hasn’t been fully addressed by policymakers is the supposed backdoor-bailout nature of the HAMP program. While it’s supposed to help homeowners, many have criticized its design as benefiting the mortgage servicers instead. The four biggest mortgage servicers are the four biggest banks — Bank of America, JPMorgan Chase, Citigroup and Wells Fargo — and taxpayers pay them for every successful modification. Also, because those modifications rely primarily on interest rate cuts, rather than principal writedowns, they end up increasing troubled homeowners’ amount of overall debt, according to the panel’s report.
“HAMP’s original emphasis on interest rate reduction, rather than principal reduction, benefits lenders and servicers at the expense of homeowners,” the report reads. “Lenders benefit from avoiding having to write down assets on their balance sheets and from special regulatory capital adequacy treatment for HAMP modifications. Mortgage servicers benefit because a reduction in monthly payments due to an interest rate reduction reduces the servicers’ income far less than an equivalent reduction in monthly payment due to a principal reduction.
“Servicers are thus far keener to reduce interest rates than principal. The structure of HAMP modifications favors lenders and servicers, but it comes at the expense of a higher redefault risk for the modifications, a risk that is borne first and foremost by the homeowner but is also felt by taxpayers funding HAMP.”
Treasury allocated $50 billion to help struggling homeowners, with an additional $25 billion for government-backed housing giants Fannie Mae and Freddie Mac. The nation’s four biggest banks by assets received a combined $140 billion alone in initial taxpayer bailout money.
“Foreclosure prevention is not just the right thing do for suffering Americans, but it is the linchpin around which all other efforts to achieve financial stability revolve,” said Richard H. Neiman, New York’s top bank regulator and a member of the Congressional Oversight Panel.
Over the past two months alone more than 450,000 homes have received a foreclosure notice. Slightly more than 100,000 homeowners have been helped by Treasury’s anti-foreclosure efforts over the same time period.
“In the final reckoning, the goal itself seems small in comparison to the magnitude of the problem,” the panel said in its report.
“Bank of America, the nation’s largest mortgage lender, ramped up its foreclosure activity in March, sending hundreds of letters warning delinquent borrowers in the region that it could sell their homes at auction in as little as three weeks, according to North County Times analysis of data from ForeclosureRadar.
The bank said the increased activity was a natural consequence of borrowers running out of options.
Analysts and real estate agents said the moves by the Charlotte, N.C., banking giant, which controls a large share of the Southern California mortgage market, could signal a final reckoning for homeowners who have been protected by government programs for months or even years.
Last month, a Bank of America division called ReconTrust N.A. sent out a flurry of “notices of auction,” which alert owners of the date their homes could be sold in foreclosure proceedings.
The notices went to 230 homeowners in North San Diego County, a 69 percent increase from February, and to 391 owners in Southwest Riverside County, up 67 percent from February.
By comparison, in March 2009, ReconTrust sent a total of 31 such letters to both regions combined.
ReconTrust was formed as the foreclosure division of Countrywide Financial Services Inc., the company that helped drive the real estate boom of the 2000s with its no-documentation “liar loans” and enormous subprime portfolio.
As borrowers could no longer make payments on such loans, home values plummeted, dragging with them much of the national economy.
More foreclosures expected
When Bank of America agreed to take over Countrywide in January 2008, Countrywide said it managed 9 million loans valued at $1.5 trillion.
The purchase made Bank of America the largest manager of home loans in the nation.
Richard Simon, a Bank of America spokesman, wrote in an e-mail that he couldn’t speak to the sharp increase of notices in San Diego and Riverside counties, but that the bank has expected more foreclosure activity.
“We have reported recently that we anticipate a rise in foreclosure activity through the coming months as homeowners are unable to qualify for loan modifications, fall out of modification programs or go into delinquency due to the ongoing stress in the economy,” he said.
Bank of America has permanently lowered monthly payments for 12,700 borrowers through the Treasury Department’s Home Affordable Modification Program, more than any other lender.
But the program as a whole is widely deemed a failure, because just 17 percent of applicants nationally have managed to qualify and keep up their payments, according to the latest Treasury report.
Data showing that Bank of America borrowers were falling out of HAMP and into foreclosure in rising numbers didn’t surprise analysts.
“That makes sense,” said Jamie Peters, a financial analyst who covers Bank of America for the investment research firm Morningstar Inc.
“‘We’ve given them the chance, it hasn’t worked, we need to move ahead’ type of idea,” Peters said.
Another analyst who tracks Bank of America, Shannon Stemm of investment bank Edward Jones, said the loans now being foreclosed are “older,” meaning borrowers had plenty of time to try a modification, and the bank had to get the delinquent loans off their books.
“A lot of the bad loans we’re seeing from a couple of quarters ago are getting to a place where (Bank of America) need to make a decision for what to do with that bad loan,” she said.
Morningstar’s Peters thought the bank might be taking advantage of a strengthening California housing market.
“It’s going to be in part an assessment of the ability of the market to handle some more real-estate owned (foreclosed) properties,” she said.
A local look
In San Diego County, the widely respected Standard & Poor’s Case-Shiller Home Price Index in March showed home values rising at a 12.5 percent annual rate since hitting a bottom in May.
Riverside County also has begun to see a rise in the median home price, and real estate agents in both counties said they often get multiple offers on the lowest-priced homes.
Peters also noted that moving more foreclosed properties into the market in spring and summer, the traditional buying season, made a lot more sense than foreclosing in November.
But there will be a little more delay before these properties reach the market.
After a notice of auction is sent, state law requires lenders to provide public notice in a newspaper three weeks before the property is sold.
That explains why locally, foreclosures haven’t suddenly jumped: Notices of auction sales in March were down 74 percent in North County and down 64 percent in Southwest Riverside County, compared with the same month in 2009.
Such notices go to borrowers who typically are unlikely to suddenly get caught up on their payments.
A notice of auction is the second warning of impending foreclosure, sent three months after a notice of default, which is customarily sent after borrowers have missed three payments.
A surge in available listings could give a lift to real estate agents, who have complained about frustrated buyers amid tight supplies of homes for sale.
“My Bank of America asset manager told me we’d really start to get hit with inventory in mid-May to June,” said Teri Garcia, a real estate agent based in Escondido who sells Bank of America foreclosures.
“If they’re sending notices of auction in March, that about fits,” she said.
Garcia said the local supply of foreclosed homes has been low all through the winter. She was thrilled to hear that more homes might be coming onto the market this summer.
“Let’s get them on the market, get them sold, and get through all this,” she said.”
“Morgan Stanley has told investors in its $8.8 billion real-estate fund that it may lose nearly two-thirds of its money from bum property investments, according to fund documents reviewed by The Wall Street Journal.
That would likely make it the biggest dollar loss—$5.4 billion—in the history of private-equity real-estate investing. Over the past 20 years, Morgan Stanley’s real-estate unit was one of the biggest buyers of property around the world, doing some $174 billion in deals since 1991, mostly with money raised from pension funds, college endowments and foreign investors. The losses come from investments in properties such as the European Central Bank’s Frankfurt headquarters, a big development project in Tokyo and InterContinental hotels across Europe, among others.
The loss also represents a huge challenge for the firm as it tries to resuscitate its Morgan Stanley Real Estate Funds business, known as Msref.
The firm has reinstated Owen Thomas, the executive who helped create Msref, as head of the real-estate business and brought in an outsider, real-estate-debt veteran John Klopp, to lead its property business in the Americas.
The soured investments made by the $8.8 billion fund, Msref VI International, continue to be a distraction for Morgan Stanley as it tries to extricate the fund from complex deals around the world. In many cases, the company can’t walk away from foundering investments because the fund made billions of dollars in guarantees.
Morgan Stanley now is negotiating with lenders to reduce the fund’s obligations on the money it borrowed, its interest payments, renovation costs and other expenses.
Adding to the difficulties, the economic downturn and big real-estate losses have rattled some of Msref’s core investors, leading to a challenging fund-raising environment. Morgan Stanley has sought to raise a new, $10 billion fund, Msref VII Global.
But it hasn’t been easy. For example, the public-employee pension fund in Contra Costa County, Calif., made a tentative $75 million commitment to Msref VII in 2008, but, in February 2009, rescinded it after its chief investment officer wrote a memorandum citing uncertainty over the future of Morgan Stanley, and of its real-estate business in particular.
Morgan Stanley ended up settling for about half of its initial fund-raising target for Msref VII, people familiar with the matter say.
A Morgan Stanley spokeswoman declined to comment about the losses. She emphasized the company’s long-term commitment to real-estate investing.
The company’s real-estate group has “a longstanding history of investing through many different business cycles over the past two decades,” the spokeswoman said in a statement. “We are committed to managing through this cycle and moving our real-estate business forward.”
Msref VII is forging ahead with deals for shopping centers in the U.K. and the U.S. In addition to Mr. Klopp, the firm recently hired its former co-head of European real-estate investing, Olivier de Poulpiquet, to head its European real-estate business.
The returns of Msref VI could still improve if the global economy recovers faster than expected.
Morgan Stanley’s success or failure at reviving its business will help determine whether private-equity shops run by investment banks play as big a role in real estate in the upcoming decade as they did in the past two.
Some of Morgan Stanley’s Wall Street competitors, such as Citigroup Inc., have scaled back or sold off their property-fund businesses. Proposed new regulations in Washington could limit banks’ ability to manage real-estate funds.
The struggling Msref VI fund once projected a 22.1% average annual return on its commercial-real-estate deals around the world.
When times were good, the fund generated fat fees for various segments of the bank. In 2007 alone, Morgan Stanley earned $104 million in acquisition fees, $22 million in fund-management fees, $13 million in financing fees, $36 million in real-estate-management fees, and $21 million in financial-advisory fees, according to fund documents reviewed by the Journal.
But when the commercial-property bubble popped, the fund turned into a major headache.
As credit conditions worsened, Morgan Stanley executives had to spend increasing amounts of their time disentangling the fund’s complex deals. About 20% of the $8.8 billion raised for the fund came out of the pockets of Morgan Stanley and its employees. By mid-2009, Morgan Stanley had fully written down its exposure to reflect deep losses in the fund, according to a person familiar with the matter.
In South Korea, Msref VI expects to lose its $350 million investment in an office building called Seoul Square, according to fund documents. A group of investors acquired it in 2007 for $1 billion—the highest price ever paid for a Seoul office building—with Msref VI taking a majority stake. The third-quarter report floated the possibility of walking away from the deal—but the fund wouldn’t be able to do that before making good on $91 million in renovations, guaranteed interest payments, and other obligations, the report said.
Morgan Stanley is still negotiating with lenders and hasn’t made the decision to walk away, a person familiar with the matter said. The building is known to Seoul residents for the giant digital display mounted on its façade.
In some cases, Morgan Stanley has extricated itself after lenders agreed to reduce some of the fund’s guarantees.
In Germany, the fund on Jan. 1 handed a $2.9 billion portfolio of German office buildings back to the lender, Royal Bank of Scotland Group PLC, according to a February presentation to investors.
The fund’s third-quarter report also said it would return an $800 million portfolio of 10 European hotels, including Hiltons, to lender Barclays Capital, a unit of Barclays PLC.
While numerous other real-estate funds may lose more than half their values, the dollar value of the $5.4 billion loss at Msref VI International is likely to dwarf the losses at many competitors because of the fund’s large size. According to data firm Preqin, only two other real-estate funds—managed by Blackstone Group LP and Lone Star Funds—had even raised more than $5.4 billion from investors.
As of Sept. 30, Blackstone’s $10.9 billion fund had an unrealized, marked-to-market loss of about 60% and less than half of investors’ money had been spent, according to a report by the Oregon public-employee pension fund. Lone Star’s $7.5 billion fund was up about 15%, according to the report.”
“Much hope has been pinned on the recovery in home prices that began about a year ago. A long-lasting housing recovery might provide a balm to households, mortgage lenders and the entire United States economy. But will the recovery be sustained?
Alas, the evidence is equivocal at best.
The most obvious reason for hope is that, unlike stock prices, home prices tend to show a great deal of momentum. Correcting for seasonal effects, home prices as measured by the S.&P./Case-Shiller 10-City Home Price Index increased each month from June 1995 to April 2006, then decreased almost every month to May 2009. Since then, they have risen through January, the latest month for which data is available.
So, because home prices have been climbing of late, isn’t it plausible that they’ll keep doing so?
If only it were that simple.
Home price booms and busts do end, sometimes quite suddenly, as was the case for the boom of 1995 to 2006 and the bust of 2006 to 2009. Today, we need to worry about strong headwinds, as the government begins to withdraw its support of a still-troubled lending industry and as foreclosures are dumping millions of homes onto the market.
Consider some leading indicators. The National Association of Home Builders index of traffic of prospective home buyers measures the number of people who are just starting to think about buying. In the past, it has predicted market turning points: the index peaked in June 2005, 10 months before the 2006 peak in home prices, and bottomed in November 2008, six months before the 2009 bottom in prices.
The index’s current signals are negative. After peaking again in September 2009, it has been falling steadily, suggesting that home prices may have reached another downward turning point.
But why? Unfortunately, it is hard to pinpoint causes for a change in demand for housing. The factors clearly include government economic policy, like interest-rate changes and tax credits. But these moves don’t line up neatly with major turning points in the market.
Sociological processes may be driving these changes. Trends in news media coverage, for example, generate conversations in barbershops and hotel lobbies, which in turn alter the conventional wisdom about investing.
Consider how that process might have worked during the run-up to the 2006 turning point in home prices. In May 2005, two months before the peak in the N.A.H.B. traffic index, Consumer Reports magazine had a cover article, “Your Home: How to Protect Your Biggest Investment,” that conveyed a very bullish sentiment.
“Despite years of dire warnings from some economists that the housing boom is about to end, it hasn’t,” the magazine said. “Indeed, last year prices rose even more — about 11 percent nationally.”
The article went on to give advice: “You can no more time the real estate market than you can the stock market,” it said. “If you need a house, and can afford one, go ahead and buy.”
The article extended to the housing market the conventional wisdom that then prevailed about the stock market — namely, that it was quite efficient, without identifiable bubbles and bursts. According to this theory, there was an identifiable profit opportunity: buy and hold stocks, and by extension, housing, and watch your wealth grow.
But as 2005 continued, the conventional wisdom began to change.
Some people in the United States were by then aware of the 2004-5 home price decline in Britain. Some were learning a new lexicon: “housing bubble,” “housing crash” and “subprime mortgage.” Newspapers and magazines began to include some derisive reviews of a March 2005 book by David Lereah, “Are You Missing the Real Estate Boom?” And accounts began to appear of the risky behavior of an army of real estate flippers.
In May 2005, I included in the second edition of my book, “Irrational Exuberance,” a new data series of real United States home prices that I constructed, going back to 1890. I was amazed to discover that no one had published such a long-term series before.
This data revealed that the home price boom was anomalous, by historical standards. It looked very much like a bubble, and a big one. The chart was reproduced many times in newspapers and magazines, starting with an article by David Leonhardt in The New York Times in August 2005.
In short, a public case began to be built that we really were experiencing a housing bubble. By 2006 a variety of narratives, taken together, appear to have produced a different mind-set for many people — creating a tipping point that stopped the growth in demand for homes in its tracks.
THE question now is whether a strong case has been built for a new bull market since the home-price turning point in May 2009. Though there is no way to be precise, I don’t believe it has.
Since that turning point, most public discourse on housing has not been about a new long-term view of the market. Instead, it focused initially on whether the recession was over and on the extraordinary measures the government was taking to support the housing market.
Now we’re shifting into a new phase. The recession is generally viewed as being over, and those extraordinary measures are being lifted.
On March 31, the Federal Reserve ended its program of buying more than $1 trillion of mortgage-backed securities, and the homebuyer tax credit expires on April 30.
Recent polls show that economic forecasters are largely bullish about the housing market for the next year or two. But one wonders about the basis for such a positive forecast.
Momentum may be on the forecasts’ side. But until there is evidence that the fundamental thinking about housing has shifted in an optimistic direction, we cannot trust that momentum to continue.”
“Two disparate portraits of Fannie Mae — one as the victim of an unprecedented dislocation in the housing market, the other as an example of a deeply rooted culture of arrogance and greed — were presented to the Financial Crisis Inquiry Commission on Friday, as the commission wrestled with the causes and consequences of the housing crisis.
On the third day of the commission’s latest round of hearings, Robert Levin, former executive vice president and chief business officer of Fannie Mae, told the commission that the stresses that buffeted Fannie Mae during the housing crisis “would have been difficult for the company to withstand regardless of any business decisions that preceded the crisis.”
In September 2008, the federal government stepped in and seized control of Fannie Mae and Freddie Mac, the mortgage lending giants.
Phil Angelides, chairman of the commission, asked the Fannie Mae executives why they decided to dive so aggressively into the high-risk market that ultimately was the company’s undoing.
The Fannie Mae executives replied that in trying to balance the company’s charter as both a for-profit private company and a government-sponsored enterprise dedicated to meeting public policy goals for the financing of affordable housing, the company was sometimes forced to drive the market rather than simply participate in it.
Different standards
“This required the company to engage in affirmative efforts, including outreach programs and application of different underwriting and pricing standards, to create business to help us meet the goals,” Levin said.
Daniel Mudd, former chief executive of Fannie Mae, told the commission that balancing those goals “became impossible,” because the company was in many cases “faced with a choice between unsavory alternatives.”
“I could not leave the market, close the window or short mortgages,” Mudd said, referring to the practice of betting that housing prices and loan values would decline.
“There have been suggestions that Fannie Mae subordinated its mission to the pursuit of higher profitability, but I beg to differ,” Mudd said in prepared remarks. The company “filled the vacuum left when the private sector fled the market in the face of this crisis.”
He added: “I hope the good that was done will not be forgotten as we weigh the lessons of 2008.”
Absent a new way of thinking about how the government can promote homeownership, Mudd said, there is no way to escape the fact that “government entities created to support homeownership as a social good will tend to socialize the risk to all taxpayers.”
Regulatory officials who were charged with overseeing Fannie Mae, however, also were scheduled to testify later Friday that the companies were not victims of an economic down cycle.
‘Political attacks’
“Their failure was deeply rooted in a culture of arrogance and greed,” Armando Falcon, former director of the office of Federal Housing Enterprise Oversight, said in prepared testimony submitted to the commission. The company’s executives and supporters repeatedly used lobbyists and political support to subject the regulators to “malicious political attacks and efforts of intimidation,” he said.
Those efforts included blocking examinations of Fannie Mae’s business or undermining reports on its shortcomings, he said. As Fannie Mae suffered a drop in profitability as other portions of the mortgage market grew more quickly than Fannie Mae’s, he said, the company decided to begin investing in subprime assets.
“This certainly accelerated their demise,” he said, “when the housing bubble burst.”
