This is the end
My only friend, the end
Of our elaborate plans, the end
Of everything that stands, the end
No safety or surprise, the end
Ill never look into your eyes…again
Can you picture what will be
So limitless and free
Desperately in need…of some…strangers hand
In a…desperate land
Lost in a roman…wilderness of pain
And all the children are insane
All the children are insane
Waiting for the summer rain, yeah
Theres danger on the edge of town
Ride the kings highway, baby
Weird scenes inside the gold mine
Ride the highway west, baby
The End — The Doors
I have been looking more carefully at the Adjustable Rate Reset chart to determine when these resets will hit the market.
It takes at least 300 days from the time of mortgage reset to the time the REO is listed on the open market. This process can drag on much longer if the borrower attempts to make payments on the new schedule. Borrowers may drain other resources such as credit cards or retirement savings to postpone default.
Once the property becomes REO, the lender may not quickly and efficiently prepare it for sale. Most lenders do not have sufficient staff to deal with the large number of REOs they currently have, and the numbers are growing daily. Plus the loss mitigation procedures often demand higher prices for 90 days before the price cuts get more aggressive. Basically, it will take at least one year between the reset and the final sale in the open market, and 18 months is probably a more realistic timeframe. So what does this mean? It means the REOs we are currently seeing are not being caused by the resets shown in the now-infamous Credit Suisse chart. The current REO pool is composed of those who gave up even before their loans reset. The huge number of resets and ensuing foreclosures is just now starting to hit the market. Today, we are beginning month 15 on the chart, but the impact on the market is at best in month 3 and more realistically, it is just now starting.
We have all seen the ugly Notice of Default and Notice of Trustee Sale charts. It will take 6 months or more before these turn into sales on the resale market, so there is a major lag between what you are seeing in this chart and when the problems show up in the market. Just eyeballing the chart says there will be twice as many REOs on the resale market six months from now than there are today. This is not conjecture, these are foreclosures in the pipeline. Some of these people will avoid foreclosure, but the rates at which NODs and NOTs have been becoming foreclosures has been getting steadily worse as well.
There is a chance we may see a brief bear rally this spring. Interest rates are low, and sales volumes are picking up from their record low levels. Do not be fooled into thinking there is any realistic chance we are currently at the bottom. Prices are still greatly detached from fundamentals, and the tidal wave of foreclosures has not hit the market yet. Any momentum the market may build this spring will be reversed by the onslaught of REOs later this year and throughout 2009.