Did you know that the only pressure on lenders to dispose of their real estate owned comes from shareholders?
Irvine Home Address … 15 MORRO BAY Irvine, CA 92602
Resale Home Price …… $1,629,000
So sure you are
Touch you now
I need to know
Did you think of me
But you’re forgettng me now
Don’t be so
Eager to let me go
Realise it could change you
It could change your mind
Repetition — Blur
Today I briefly want to again Revisit Option ARMs, and I want to address a common misperception about REO; lenders do not have to sell REO due to regulatory pressure. Shareholders may dissuade lenders from becoming real estate investors, but the banking regulators will not.
The Option ARM Kingpins: Who Holds the Elusive Option
$189 Billion Securitized and Outstanding and big Three of Wells
Fargo, JP Morgan, and Bank of America Playing with Time.
There have been many charts … and much of the confusion is around a few key points:
-1. Banks have been circumspect given the actual number of option ARMs
-2. Many option ARMs are in California (roughly 60 percent of the market)
-3. Many of those behind on payments are now simply not paying their mortgage but banks are not moving
It is hard to quantify the above data since this is something banks
would like to hide. Nearly 60 percent of all current outstanding
option ARMs are in the hard hit state of California.
As many of you know, the median price of a home in California has
fallen by 50 percent. The peak in home prices was reached in 2007, the
last year option ARMs were made in mass. Since that time, option ARMs
were merely ticking financial bombs.
But what if homeowners balk? Many in California are strategically
defaulting. In many cases, unless their mortgage meets with market
rents many will walk away. Also, the California unemployment and
underemployment rate is at 23 percent so no amount of modifying can
help out with a loss of income.
So let us sum up the option ARM market:
$750 billion in option ARMs were originated between 2004 and 2007.
The top 10 option ARM originators cornered over 60 percent of the
market. Of these, many are now part of the too big to fail banks.
We know that $189 billion is still securitized in investor portfolios
while many billions are still on the banks books (i.e., $107 billion
with Wells Fargo and $50 billion with Chase). The bottom line is the
option ARM issue is still here and we will be contending with this for
the next couple of years.
That doesn’t sound very good, does it?
From yesterday’s discussion about Shadow Inventory, matt138, said, “Shadow Shadow inventory – the people who are currently thinking, “why the hell am I still paying if nobody else is?” I did some calculations and my result was: A LOT.”
What I find interesting is how much of the Option ARM problem has already been resolved (probably through foreclosure). If $750B was issued, and only $200B remains, only 20%-25% of the Option ARM problem remains — at least in the form of Option ARMs. Many of these original borrowers already went through short sale, foreclosure or walked away. The Option ARMs didn’t go away due to market sale because the homedebtors were all underwater, and these loans did not go away through successful loan modification because cure rates are very low.
The good news is 75% of the Option ARM holders appear to have defaulted early. The bad news is most of the homes of these borrowers will end up as REO sold on the open market, it is only a matter of when. This problem is going to be stretched out as long as possible, and the abundance of overhead supply will prevent appreciation from saving the market for many years.
Lender’s Options for REO
The lenders I have spoken with are genuinely concerned about the auditors forcing them to reclassify loans. Many lenders are not properly categorizing their loans for accounting purposes — the still have it on their books as if it is a good loan and the borrower is making their payments. Many, many non-performing residential loans are still classified as performing while lenders have the shield of government loan modification programs. The reality is many of these loans are not performing, they are never going to, and lenders are not being forced to recognize this fact until their balance sheet ratios support it.
Regulators are not concerned with what a lender does with the REO it picks up through the foreclosure process as long as the losses are accurately accounted for — in theory. Once the REO department gets a property, the only pressure they get to sell property comes from through management from shareholders.
People who invest in banks are investing in a business that writes loans and carries loans on its balance sheet. If a balance sheet becomes polluted in the eyes of investors with real estate assets, it starts to look less like a bank and more like a real estate investment trust or a hedge fund. When banks cease to be banks, investors bail out and stock prices crumble — at least that is the belief of bankers, so the management does not want to hold real estate. Also, REO is lingering evidence of prior poor lending practices, and nobody wants to keep that around.
The implication for the market is simple, there will be no forced dump of REO instigated by bank regulators. That isn’t to say we don’t have a huge pig to send through the snake, but it can be digested in smaller pieces rather than one massive chunk. We may (probably will) see a cartel arrangement evolve, but the large amount of supply and the competition to dispose of it will serve as a drag on prices until the inventory is exhausted. In some markets that will take decades.
Direct from an Asset Manager
As part of my work, I go to Building Industry Association meetings on a regular basis. As a courtesy to them, I am keeping my sources anonymous, but should any of you wish to attend a BIA meeting, you can see and here these people yourself. The meetings are open to the public for a fee.
At a recent meeting I listened to asset managers from two major West Coast banks. I asked one of these asset managers to detail his banks policy toward REO based on market conditions. He said that in markets where they do not see recovery in a longer-term horizon (think Lancaster), they may sell at reduced prices to clean up the mess; however, if they do see the market recovering in a reasonable time, they will hold the property, and perhaps even rent it out while values improved. In short, the REO departments of these banks are empowered to act as responsible asset managers trying to obtain the greatest recovery for the bank. This also means there will be no massive inventory dump forced by a government regulator.
Each bank will evaluate its own financial circumstances, its exposure to the market and other factors and pursue a policy of maximizing recovery while disposing of these assets. Certain banks will dump in some markets and hold in others. It will be the chaotic collapse of a cartel with much volatility, and most likely slowly declining prices for several years as lenders slowly release their inventory to obtain price recovery.
Blue skies are not here yet.
Irvine Home Address … 15 MORRO BAY Irvine, CA 92602
Resale Home Price … $1,629,000
Income Requirement ……. $337,684
Downpayment Needed … $325,800
20% Down Conventional
Home Purchase Price … $791,875 ???
Home Purchase Date …. 3/28/2001
Net Gain (Loss) ………. $739,385
Percent Change ………. 105.7%
Annual Appreciation … 8.3%
Mortgage Interest Rate ………. 5.01%
Monthly Mortgage Payment … $7,004
Monthly Cash Outlays ………… $9,040
Monthly Cost of Ownership … $6,540
Baths 4 full 1 part baths
Size 4,464 sq ft
($365 / sq ft)
Lot Size 8,285 sq ft
Year Built 2000
Days on Market 4
Listing Updated 12/10/2009
MLS Number P713549
Property Type Single Family, Residential
**Bring your checkbook & RUN…DONT WALK!** Drop-Dead GORGEOUS & *PRICED TO STEAL!* PREMIUM GREENBELT Location, Serene PRIVACY & Tranquil PARK VIEWS! Rare *OVERSIZED LOT* w/Huge ENTERTAINERS BACKYARD! Location! LOCATION! **THIS HOME SURPASSES EVERY HOUSE IN THIS PRICE RANGE!** Must See to Believe! Exquisite Architecture w/Romatic Archways, Dramatic 10-Ft Ceilings, Walls of Windows, Splendor of Natural Light & Inviting French Doors that Welcome Outdoor Living & Entertaining! Spacious Open Design offers 4 Bedrooms w/Bath en suite (Including Main Floor BR & BA) & BONUS ROOM (Optional 5th BR) plus Office, Exercise Rm/Study, & Elegant Formal Living & Dining. Huge Gourmet Kitchen w/Chefs Island Opens to Charming Breakfast Nook & Generous Family Room w/access to Sprawling Backyard & Custom BBQ. An Entertainers Delight! Master w/Retreat, Fireplace & Huge Closet plus Generous secondary bedrooms w/walk-in closets & tranquil park views! EVERY ATTENTION TO DETAIL! *ACT FAST!* Only ONE like this!!!
This description is awful on every level. It contains (1) RANDOM CAPS LOCK, (2) three exclamation points, (3) random asterisks, (4) numerous cliches, (5) over-the-top writing, (6) Intermittent Caps, (7) cheap techniques to create urgency, (8) and a general lack of substance. If the nonsense were strpped from the description, the number of words cuts in half and the reader is spared needless distraction.
My data records do not show the original purchase price, but it does show me the original first mortgage. I assumed the mortgage was 80% of the purchase price. That may not be correct.
As borrowers, the owner’s of today’s featured property did not add to their mortgage. Kudos. That is a rare accomplishment worthy of recognition.