JPMorgan Chase has made a silent shift from foreclosures to short sales in an attempt to clear their delinquent loan backlog.
Irvine Home Address … 10 SUNSTREAM Irvine, CA 92603
Resale Home Price …… $549,000
Deep down you know it's best for yourself but you
Hate the thought of her being with someone else
But you know that it's over
You know that it was through
Let it burn
Let it burn
Gotta let it burn
Usher — Burn
Everyone is desparate to hang on to their houses. Some hopeless borrowers hold our for sentimental reasons, and in California many struggle for financial ones. There comes a time when reality sets in and people just let it burn.
Foreclosure sales are being canceled at a record rate. That sounds like good news. If it were occurring because (1) borrowers were curing their loans or (2) loan modifications were successful or (3) short sales were occurring more frequently, it might be something to celebrate. Unfortunately, none of those is occurring. Banks are canceling foreclosure auctions because they are overwhelmed by delinquent borrowers, and they don't have the slightest idea what to do about it.
HAFA Ushers Record Number of Foreclosure Sale Cancellations in California
Lenders are canceling more foreclosure sales in California than ever before, and new financial and political demand for short sales could be the culprit.
Lenders canceled nearly 22,000 California foreclosure sales in June, driven mostly by JPMorgan Chase. It’s a 27% increase from May, a 153% growth from a year ago, and an all-time high, according to ForeclosureRadar, which tracks foreclosures in the state.
Foreclosure sales can be canceled for successful loan modifications, short sales, a legal requirement, or even a filing error. In terms of strategy, a spokesperson for JPMorgan Chase said the bank has not made any policy shifts to cancel more foreclosure sales.
According to ForeclosureRadar, a certain number of the cancellations can be attributed to pending modifications and short sales, but homeowners and real estate agents have complained to the company of sales that were canceled without either.
This trend underscores how clueless the banks really are. They have no idea how to resolve this problem, so they lurch from one failed solution to another. The backlog of foreclosure properties is enormous, so pulling back from foreclosure in the short term is like bailing the sink before pouring in Liquid Plumber. They still have a clog and a sink full of soiled water, but they realized continued filling the sink is doing them no good.
Unfortunately, canceling all their foreclosure sales isn't going to work either. They can't foreclose on everyone because there simply isn't enough cash available to absorb a couple of trillion dollars of real estate at the courthouse steps. Resolving the backlog of delinquent borrowers is going to require a combination of successful loan modifications, short sales, and foreclosures.
The successful loan modifications will be few and far between because most borrowers are hopelessly overextended. Short sales will clear out a large number of properties, but it still requires active participation by the seller. Many properties are abandoned and many have squatting owners who are sitting there waiting for the Sheriff to evict them. Short sales alone will not solve this problem.
JPMorgan Chase is undoubtedly canceling too many foreclosures, and when the short sales don't happen — and many will be killed by owners gaming the system — the Chase and other lenders will need to ramp up their foreclosures again later to clear out the trash.
“We have seen a shift over the last couple of months where homeowners want this process to be over and they want to start to rebuild,” said a spokesperson for ForeclosureRadar.
Researchers at the company received varying answers as to why the cancellations are up. The best answer came from one unnamed REO professional. According to the source, the Home Affordable Foreclosure Alternatives (HAFA) program had the most to do with the cancellations. The Treasury Department launched HAFA in April to provide incentives to servicers for conducting short sales and deeds-in-lieu of foreclosure to homeowners who fail the Treasury’s Home Affordable Modification Program (HAMP).
Loan modifications are obviously not working. The HAMP program is a dismal failure for a number of reasons, not the least of which is the borrowers themselves:
“Now that servicers have systems in place to administer the program they are removing delinquent loans from the foreclosure pipeline to allow a reasonable short sale time period,” the source told ForeclosureRadar. “Predictably (also my opinion) the period would be expiring just after the November elections so there would be less political blowback as those properties that don’t conclude with a successful short sale are taken to foreclosure and ultimately, REO.”
This is a brilliant observation. Politics plays into this decision. Expect to see increases in foreclosure filings again after the elections when the short sales do not go through.
After foreclosure activity dropped across the board in May, new foreclosure notices increased 6.7% in June, and notices of trustee sale jumped 21%. In fact, notices of trustee sales have outnumbered preliminary notices of default for the past four months. The gap really widened in June, when there were almost 9,000 more notices of trustee sale.
But this trend could become the norm as banks have to restart more foreclosures than they initiate.
“Historically it is very unusual to have more Notice of Trustee Sale filings than Notices of Default” says Sean O’Toole, founder and CEO of ForeclosureRadar. “But with skyrocketing cancellations and the possibility of failing loan modifications, this will be increasingly common, as lenders are only required to file a Notice of Trustee Sale to restart the foreclosure process.”
Lenders pushed 23% fewer properties into REO status in June and 46% less than a year ago. The amount of properties that have received a notice of default but have not yet been scheduled for sale increased 8.8% in June, but further along the foreclosure pipeline, inventory remains constricted. The amount properties scheduled for sale dropped 1%, and REO inventory declined 4.8% in June.
Shevy and George are out in the trenches making offers on short sales daily. I spoke with Shevy yesterday, and he hasn't noticed any increased willingness among the various parties to make these deals happen faster. The usual culprit is the second mortgage holder.
The HAFA program pays the second mortgage holder $1,500 to go away. Most aren't taking it. Since many Orange County borrowers have assets, these second mortgage holders are demanding the sellers liquidate and pay them off before they approve the sale. In typical OC fashion, most of these sellers are unwilling to pay up. Perhaps at the lower rungs of the housing market where the borrowers have no assets, more short sales will go through, but in more affluent areas, the HAFA program is doing nothing to facilitate short sales.
Owners who attempt selling short haven't come to accept that they must be insolvent in order to walk away. The fantasy among most of them is that they can short sell and keep all their stuff. It doesn't work that way. Unless people start selling their assets to pay off these second mortgages, don't look for more successful short sales to occur in Orange County. It isn't going to happen.
Most owners will use delays in the short sale process to further game the system. It is an easy way to add six months to a year to the squatting process. The longer they play along, the more time they have to hide their assets and possibly get some price recovery.
As I have said before, all the parties involved have incentive to drag this process out. The end result is a great deal of squatting and more accelerated default. Once everyone has stopped paying their mortgage, the banks will be forced to resort to foreclosures to clean up the mess. More foreclosures are going to happen.
As banks attempt the transition to short sales and fail, the inventory should continue to balloon. More houses are being put up for sale, but the pace of transactions is not increasing. Between the flippers bringing foreclosures to the market and owners listing more short sales, I expect to see inventory to continue to rise.
Option ARMs are not affordability products
Many people took out Option ARMs because they could not afford the payments on a conventionally amortized mortgage. This was a classic affordability product, but as I have pointed out, Affordability Mortgage Products Make Prices Unaffordable. The previous owner of today's featured property used an Option ARM and despite a significant down payment, he couldn't afford the payments on this property.
- This house was purchased on 8/12/2004 for $620,000. The owner used a $461,000 first mortgage and a $159,000 down payment.
- On 7/27/2007, just before the credit crunch stopped origination of these products, the owner refinanced with a $458,400 Option ARM with a 1.75% teaser rate.
Recording Date: 04/20/2010
Document Type: Notice of Sale
Recording Date: 11/24/2009
Document Type: Notice of Default
This guy didn't get as much squatting as most. The property went to auction on 5/20/2010, and the opening bid was $409,500. To the pleasure of the first lien holder, the property was bid up to $445,300. The flipper stands to make a reasonable profit on the deal.
Irvine Home Address … 10 SUNSTREAM Irvine, CA 92603
Resale Home Price … $549,000
Home Purchase Price … $445,300
Home Purchase Date …. 5/20/2010
Net Gain (Loss) ………. $70,760
Percent Change ………. 15.9%
Annual Appreciation … 132.4%
Cost of Ownership
$549,000 ………. Asking Price
$109,800 ………. 20% Down Conventional
4.61% …………… Mortgage Interest Rate
$439,200 ………. 30-Year Mortgage
$108,683 ………. Income Requirement
$2,254 ………. Monthly Mortgage Payment
$476 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$46 ………. Homeowners Insurance
$300 ………. Homeowners Association Fees
$3,076 ………. Monthly Cash Outlays
-$379 ………. Tax Savings (% of Interest and Property Tax)
-$567 ………. Equity Hidden in Payment
$190 ………. Lost Income to Down Payment (net of taxes)
$69 ………. Maintenance and Replacement Reserves
$2,389 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$5,490 ………. Furnishing and Move In @1%
$5,490 ………. Closing Costs @1%
$4,392 ………… Interest Points @1% of Loan
$109,800 ………. Down Payment
$125,172 ………. Total Cash Costs
$36,600 ………… Emergency Cash Reserves
$161,772 ………. Total Savings Needed
Property Details for 10 SUNSTREAM Irvine, CA 92603
Baths: 1 full 2 part baths
Home size: 1,525 sq ft
($360 / sq ft)
Lot Size: n/a
Year Built: 1981
Days on Market: 40
Listing Updated: 40352
MLS Number: S619237
Property Type: Condominium, Residential
Community: Turtle Rock
Gorgeous Townhome in Turtle Rock community. New laminate floor and baseboard. Kitchen open to Family room with Balcony. Fireplace in Living room with new title decoration. Move-in ready.
Looks like another $70K the banks stole from the tax payers selling quickly to a 100% cash buyer.
I’d like to hear more about those “gaming” the system. So many articles in MSM portray only what they think are sad cases of an unfortunate few facing foreclosure for “legitimate” reasons.
Anyone have the guts to go on record and explain to IR how they’ve pretended to pursue a mod, then maybe a half-hearted effort to short sell, then filed BK all to delay the FC 2-3 years?
I know it’s being done by some.
I wonder if the people who play that game actually win. It seems like it would produce a lot of anxiety ridden years that would reek havoc on one’s health. I can’t imagine coming out ahead.
The MSM wouldn’t want the sheep to learn about this and get upset. Here in the bubble states, it’s a well known fact and most people are aware. But if you go back to Nebraska, I doubt most people there really know how bad the system is being gamed on the coasts all with their hard earned tax money!
Great video pertaining loan modification. Very educational and informative. Thanks for sharing!
Second the kudos. The video is not far from the truth based on daily conversations I have with homedebtors in our area. Brilliant!
Soylent Green Is People
The video was posted in the comments on Saturday’s post by OrangeRenter. At the end of the video is a plug for the website http://www.xtranormal.com/. I haven’t made one myself yet, but it looks pretty easy, and I will probably add it to my cartooning when I learn how.
We have been looking for a rental property for some time now, and looked extensively in that neighborhood.
The neighborhood is perhaps one small notch above an apartment complex minus any amenities (like the gym, clubhouse, etc.) My only impression was “depressing” and we eliminated that part of Turtle Rock from consideration.
Rents there are somewhat reasonable – 3br/2ba goes for $2400-2500/mo. A 2br/2ba goes for ~$2100-2200.
Even at $445K purchase price, it is still cheaper to rent, and with the additional $100K now it just does not pencil out.
Assuming one would want to live in those dark and rather tenement looking depressing units.
A reasonable $2100 to 2200/mo for depressing? Boy, have TPTB gotten to you or what? Next, you’ll be telling us that’s it’s okay to have higher taxes failing schools, and degrading infrastructure.
Come on people, wake up. Be outraged.
Let them eat recession.
WB says we don’t pay enough taxes. If only I could only pay $10,000 per year PT for a CA mansion.
Reasonable is in the eye of the beholder.
$2100/mo starts to look reasonable after 2 months spent bashing one’s head against $2500/mo for a 2br/2ba 1200sqft hutches…
“but this is Turtle Rock, of course it’s expensive” is all I heard from the herd of Realtors.
I agree with you – it IS OUTRAGEOUS! Unfortunately, all the property owners are simultaneously suffering from mass delusions that their matchstick homes are still million dollar properties!
Thanks for the reminder of the insanity gripping the debtors!
I actually looked into renting one of the 3/2s in this complex last fall. They were asking $2000, but I passed as it was dark, dated, and there is little parking.
even if you give on the idea that with reduced interest rates, breakeven for an owner is 200x GRM, that would pencil as $2000-$300HOAx200=$340k.
wake me up in a year.
Dark, dated, scant parking… you look out the window and all you can see is garage doors and others’ bedroom windows… claustrophobic!
I mean how much real value can one expect simply by being the closest batch of matchboxes near Shady Canyon!
And don’t even get me started on the “homeowner amenities”. The pool looks like you can catch aquatic life for bio research!
House Prices Continue To Improve Across The US
Housing market takes a turn for the better.
First Time buyers disappear as house buyer tax credit goes away.
Sellers having trouble dumping their overpriced houses and moving up without first time suckers to bail them out.
Market has slowed 30% to 40% across the country.
Realtors urge sellers to list prices using comparable sales not comparable listings (DUH)
Realtors urging sellers to hold off putting houses on market unless absolutely necessary so that buyers have fewer options and prices can remain inflated.
“Demand is not there”
Keep the price cuts coming. 2012 is looking more tenable each day.
Thanks for a great post, IR. You’ve answered the biggest question I’ve had on my mind as I’ve looked at all the housing numbers lately. Another can kicking govt effort.
Big thanks for the real time update on the short sale effort and second mortgage holder demands. I know it’s a pretty pointless effort to try to make squatters sell their hard earned HELOC toys as a condition for the second to be signed off. Even so, it just makes me smile. Oh the indignity of it all!
I’m confused – When you said
” * This house was purchased on 8/12/2004 for $461,000. The owner used a $461,000 first mortgage and a $160,000 down payment.
* On 7/27/2007, just before the credit crunch stopped origination of these products, the owner refinanced with a $458,400 Option ARM with a 1.75% teaser rate.”
Wouldn’t a $461,000 first mortgage w/$160,000 down mean a purchase price of $621K?
Yes, I made a mistake on the entry. The house was purchased for $620,000, and the down payment was $159,000. I have corrected the post. Thanks for pointing it out.
You mention that many of these squatters have assets, which I think is the key to immediate strong price gains in Irvine. With these assets they will purchase gracious homes, gracefully stepping aside from their old burdensome obligations into another wonderful Irvine residence.
That’s the secret of Irvine: well-heeled, discerning buyers. These propertied, high-class wealthy homeowners would never consent to abandon Irvine over something like a foreclosure. No, such discriminating people of good character and solid family background will brush off any current debt obligations and pay cash for their next wonderful Irvine home, in sophisticated travertine and pergraniteel. Yellow hordes of stereotypical foreign cash buyers, their children busily studying calculus in the back seats of their idling BMWs, will bid against these squires in a friendly race to drive Irvine homes ever higher in price.
In the unlikely scenario of any buyer requiring credit, government banking policy will provide. Money shall remain cheap. Forever.
Live the dream that is Irvine: return from each Starbucks run with latte in one hand and leather-clad steering wheel in the other, and gaze lovingly at yourself in the rear-view mirror as you feel the white-hot envy of those Riverside peasants, locked out of Irvine forever, never to know what it means to be financially savvy, cultured, and propertied!
There were more than one baby born today in Irvine. Driving home in their plush Porsche Cayenne,, a glimmer was in their eye pondering how they would one day convert their bountiful 2 day old trust fund into a decadent Irvine abode in 2037.
In the front passenger seat the beautiful new mother read last weeks article in Forbes magazine. She snickered at her invincible and well endowed husband, “did you know Las Vegas and Riverside are still ranked the top 2 riskiest markets?”. The husband just laughed as he stopped to pump more 93 octane gas into their family car. He took a minute to use his smart phone to transfer more funds into their new bundle of joy’s trust fund… thinking: my daughter will never live in that type of squalor.
Is that in California?
“Yellow hordes of stereotypical foreign cash buyers”
FUCK YOU… you racists piece of shit!
I agree with your sentiment, but sort of keep it civil huh?
Yes, I was appalled when I read that sentence… he should have said “racist” instead of “racists”
My bad, fuck you too bowd. What a stupid name, you probably typoed too… dipshit.
This poster will be banned, and the IP address will be blocked. If he is using a roving IP address, I will manually delete future messages as I see them.
i think it’d be better to delete his posts.
it’s just like spam.
it has no value. we don’t want to see it. so better to delete it.
Desire is not demand… one of my favorite IR quotes and nothing more true. Demand requires savings, good credit and cash flow capability. Almost none of these things exist above about 600-700K… look out below. What do you think will happen when we finally start looking at rising rates for our life times? Prices will crumble as rates rise… It is in our future.
Prices will crumble as rates rise… It is in our future.
I think you’re right, but there is the possibility, however unlikely, that we’ve guessed wrong.
Prices will fall as rates rise UNLESS the gov’t decides to inflate their way out of this recession. And that’s the game of chicken we’re playing here, isn’t it? We all believe that this is going to continue to be a deflationary recession with falling demand and prices. If the Fed hawks can continue to restrain the doves, it will probably continue that way. However, there’s been a lot of easy money over the past couple years. Also, the doves currently outnumber the hawks at the Fed, although the Fed’s traditional desire for consensus has held them back.
Inflation could kick in quickly and without warning. If it does, prices and wages will skyrocket. Retirees on fixed incomes will be screwed, but all those underwater homeowners may find themselves floating to the surface. I don’t think it will turn out this way, but hey, we could be wrong.
Your scenario is a possibility that is truly ugly for the AARP types.
I wonder if the politicians will go for it – with the baby boomers hitting the retirement, it only takes a single cry of “fire” by the AARP to stampede them and vote both of the Con chambers… er… Congress chambers I mean out.
If they can think that far ahead, they will probably avoid the inflation option like the plague. But then again, our elected representatives are not exactly known for deep critical and strategic thoughts.
It would be cool to see a website repository of where people could disclose all of their aforementioned “HELOC toys” with photos.
Maybe they call it “Craigslist”.
LOL!!! LOVE the video!!.. a great way to learn…