Despite the drop in foreclosure notices and sales, lenders have increased their REO inventory holdings 42% since last July, and shadow inventory continues to grow as well.
Irvine Home Address … 90 OVAL Rd #1 Irvine, CA 92604
Resale Home Price …… $326,900
You say you haven't been the same since you had your little crash
But you might feel better if I gave you some cash
You don't want to work, you want to live like a king
But the big, bad world doesn't owe you a thing
Get over it
Get over it
The Eagles — Get Over It
The market hasn't been the same since it had its little crash. There's too much debt and too little cash. Too many people didn't want to work, but they wanted to live like a King. For a while their houses made it real, but those days are long gone, and now everyone just has to get over it.
Understanding the dynamics of our market crash
There are a number of key relationships that control the dynamic of the ongoing market crash. Current and future market prices are impacted by delinquency, foreclosure, shadow inventory, cure rates, and MLS saturation.
Delinquency, foreclosure, and shadow inventory
When borrowers quit making their payments, they are classified as delinquent. Prior to the housing bubble, lenders typically gave borrowers 90 days to catch up on their payments, then they would issue a notice of default. Ninety days later, lenders would issue a notice of trustee sale, and three weeks after that, the foreclosure auction would take place. Those timelines have not been adhered to since 2006 or perhaps even earlier.
Once borrowers are delinquent, but before they are issued a notice of default, they exist in a strange limbo known as shadow inventory. It's called shadow inventory because there are no official statistics on the number of homes trapped here, and this inventory will ultimately be pushed through the system and become visible inventory picked up by vendors who track the public records. Most properties in visible inventory end up as foreclosures.
Shadow inventory was not discussed much in the past because houses were not allowed to accumulate there. Lenders didn't used to fool around with delinquent borrowers. The time between delinquency and notice of default was short, and shadow inventory was merely a conduit along the processing timeline. Now shadow inventory is a significant portion of the market (see red area below).
Delinquency rates, cure rates, and foreclosure
Shadow inventory is like a room with only two doors. Door number one is a cure. The borrower can cure the delinquency through a loan modification (most of which ultimately fail) or the borrower can come up with the cash to make up the missed payments. Door number one is everyone's favorite, but few have been able to pry it open.
Door number two exiting shadow inventory is through a sale. In an appreciating market, buyers can merely sell their house to pay off the loan from equity stored in the property, but after a crash like ours, many loan owners are underwater and unable to sell and pay off the loan. Many sell anyway through a short sale. Another method of selling and clearing shadow inventory is through foreclosure. Most homes in shadow inventory will ultimately face this fate.
Delinquency rates have been very high since 2007. In Orange County it peaked near 9%. With cure rates being very low, short sale and foreclosure has been the most widely used method of clearing out this mortgage debris.
Shadow inventory, foreclosure, and MLS saturation
Lenders build shadow inventory for two reasons: (1) many lenders lack the financial stability to write down the bad debts from their balance sheets and remain solvent, and (2) the faster lenders clear this inventory, the quicker it hits the MLS and builds up as REO inventory. There is only so much inventory the market can absorb at one time, so lenders must manage this inventory to prevent prices from falling further.
Think of shadow inventory and visible inventory as being like a pool and spa with a small drain. The spa is like shadow inventory spilling over into the pool which is visible inventory. The small drain is the final sale on the MLS. Whether the water is in shadow inventory or visible inventory, it will ultimately have to pass through the drain to empty the pool. If this water is released too quickly, the flood of properties ruins the market. if the water is drained too slowly, lenders have non-performing assets on their books inhibiting lending and the overall economy.
The balance sheet constraints have largely determined what lenders have foreclosed on so far; low-priced homes. Look at the problem from a lender's point of view. Let's say you are Wells Fargo, and you plan to write down $1B per quarter of your bad residential loans. Do you write down a large number of loans in a low-cost area, or do you write off a small number of loans in a high cost area? If you want to look like you are making progress, you would choose to write off loans from the bottom up. That's exactly what lenders are doing.
[below: house foreclosure timelines of high priced (red) and low priced (blue).]
In effect, what looks like cartel behavior is merely each lender taking the balance sheet write downs they can afford each quarter. Since they all still face similar constraints, they all act in a similar manner and resemble a cartel. However, this behavior will not continue indefinitely. At some point, the stronger banks will begin to work their way up the housing ladder and begin foreclosing on higher priced homes. The lender that does this first will be rewarded with the best recovery prices. The strong get stronger, and the weak are left as insolvent take-over targets.
How is the situation remedied?
There is no magic cure. Increased employment and more buyer demand will clean up the mess quicker, but lenders only make a certain amount each quarter, and they can only write off so much of their bad debt. Delinquency rates must fall down below 2% and stay there signifying shadow inventory has been purged. Foreclosure activity must also slow to its historically low levels to signify the visible inventory has been purged. And finally, the REO inventory available for sale must be sold and the percentage of distressed sales must fall from its clearance levels of 30% to 40% of the market to well under 10%. Until all three of those conditions are met, the crash is not over.
Toward the end of the cycle, house prices may start to rise, but appreciation will be tepid as long as the inventory clearance process is going forward. Lenders are working feverishly to manage inventories to prevent prices from going lower and causing more strategic default. No realistic seller is anticipating appreciation, they are merely hoping to stop more depreciation. Right now, their efforts to restrict supply are failing, and prices are still going down.
July 28th, 2011, 8:06 am · 1 Comment · posted by Jon Lansner
According to CoreLogic’s latest late-mortgage report, 6.24% of Orange County home-loan borrowers as of May are 90 days-plus late with their house payments.
This 90-day delinquency number is seen as a key indicator of future mortgages woes as it captures patterns of property owners skipping house payments before the formal foreclosure process begins. This most recent reading for Orange County is down 1.57 percentage points — or 20% – compared to a year earlier.
That is good news. A declining delinquency rate is a sign the landers are starting to process their REO faster than new mortgage defaults are being added to the system. Of course, falling prices may cause many still in denial to capitulate in which case strategic default will cause the delinquency rate to go up again.
As a comparison, California’s 90-day delinquency rate was down 24% in the same period while the nation’s rate fell 10% in a year.
Also in this report …
May OC CA US
90+ day delinquency (This year) 6.24% 8.17% 7.29%
90+ day delinquency (Last year) 7.81% 10.70% 8.13%
- Percentage pt. chg. in delinquency
-1.57 -2.53 -0.84
Foreclosure rate (This year) 2.09% 2.71% 3.45%
Foreclosure rate (Last year) 2.24% 2.98% 3.10%
- Percentage pt. chg. in foreclosure
-0.15 -0.27 +0.35
REO rate (This year) 0.51% 0.92% 0.67%
REO rate (Last Year) 0.36% 0.82% 0.57%
- Percentage pt. chg. in REO
+0.15 +0.10 +0.10
- Orange County’s foreclosure rate — owners losing homes — fell 7% in a year vs. California’s foreclosure rate falling 9% and a increase of 11% nationally.
- Lender portfolios of homes they’ve repossessed is rising. The share of Orange County homes that are bank-owned after foreclosure rose 42% in a year vs. California’s REO rate rising 12% and a increase of 18% nationally.
- Orange County’s 90-day delinquency rate is 1.93 percentage points lower than the state’s slow-pay rate and 1.05 percentage points lower vs. national pace.
- 2.09% of Orange County homes in May were in the foreclosure process; -0.15 percentage points vs. a year earlier.
- 0.51% of Orange County homes in May were repossessed by banks as REO (real estate owned); +0.15 percentage points vs. a year earlier.
- At right is a table showing how Orange County mortgage troubles compare to state and national payment woes.
At the rate lenders are chipping away at the delinquency rate — assuming strategic default doesn't make it go back up — in another three or four years, the delinquency rate will be back within historic norms.
Unfortunately, since lenders have been accumulating REO and are unable to dispose of it on the MLS, they have been dialing back on their foreclosure rates. The lower foreclosure rates are not a sign that there are not plenty of delinquent mortgages for lenders to foreclose on. The mistake most casual observers make when they hear foreclosure rates are declining is to assume that decline is from lack of mortgage delinquencies for lenders to foreclose on. The recent slowdown is pure REO and MLS inventory management. A slower foreclosure rate means the foreclosure pool is draining slowly and will take much longer to clear.
When preparing for today's post, I noticed Redfin provides the ability to quantify REO inventory not available for sale. When I ran the results last night, 70 homes showed up. I can't say that is a big or small number, but it does make me wonder why there are any at all. This one in Shady Canyon (21 Needle Grass Irvine, CA 92603) was purchased by the bank on September 9, 2009, nearly two years ago. If they are waiting for the high end to recover, they are making a very big mistake.
There are some interesting HELOC abuse cases in the REO debris. 78 Dovecrest, Irvine, CA 92620 was purchased on 4/3/1998 for $381,500. It went to the bank for $856,029 on 12/8/2008. That's almost half a million dollars in HELOC abuse plus a lender aging its inventory for two and a half years.
There must be a reason lenders are sitting on this inventory, and it isn't because they don't need the money back.
Today's featured property is part of the REO inventory lenders are willing to liquidate. To no surprise, it is at the low end. The previous owners did very well buying for $178,500 on 9/16/2000 and selling for $429,000 on 5/31/2007. They made a huge profit while the bagholder turned out to the the California Housing Finance Agency who provided the second and third mortgages to make this zero-down transaction happen. Apparently, the buyer for whom they opened the door stopped paying for a house they had nothing invested in. What a shock.
Recording Date: 02/07/2011
Document Type: Notice of Sale
Recording Date: 11/03/2010
Document Type: Notice of Default
At least they didn't mess around when it came time to foreclose. This property when from the first notice of default to foreclosure in near record time.
It's been stated by many in the MSM that lenders are behind on their foreclosures due to robo-signer and other made-up delays. That may be true in some judicial foreclosure states, but here in California, the only lender delays are the ones they create themselves.
This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707
Irvine House Address … 90 OVAL Rd #1 Irvine, CA 92604
Resale House Price …… $326,900
Sq. Ft.: 1059
Property Type: Residential, Condominium
Style: Two Level, Contemporary
Year Built: 1972
Community: El Camino Real
On Redfin: 61 days
* * * * BANK OWNED * * * * * WELL MAINTAINED 2 BEDROOM – 2 BATH CONDO – SELLER HAS COMPLETED RECENT REPAIRS – END UNIT – INSIDE LAUNDRY – CENTRAL A/C – GRANITE COUNTER – SMALL PRIVATE YARD. .
Proprietary IHB commentary and analysis
The cost of FHA insurance drives the cost of ownership on these low-end properties much higher. Anyone who saves their 20% down is going to be enjoying a much lower cost of ownership. This property is still priced above rental parity signifying these properties still have room to fall more in price.
Resale Home Price …… $326,900
House Purchase Price … $442,034
House Purchase Date …. 3/16/2011
Net Gain (Loss) ………. ($134,748)
Percent Change ………. -30.5%
Annual Appreciation … -70.3%
Cost of Home Ownership
$326,900 ………. Asking Price
$11,442 ………. 3.5% Down FHA Financing
4.53% …………… Mortgage Interest Rate
$315,458 ………. 30-Year Mortgage
$68,743 ………. Income Requirement
$1,604 ………. Monthly Mortgage Payment
$283 ………. Property Tax (@1.04%)
$0 ………. Special Taxes and Levies (Mello Roos)
$68 ………. Homeowners Insurance (@ 0.25%)
$363 ………. Private Mortgage Insurance
$270 ………. Homeowners Association Fees
$2,588 ………. Monthly Cash Outlays
-$258 ………. Tax Savings (% of Interest and Property Tax)
-$413 ………. Equity Hidden in Payment (Amortization)
$19 ………. Lost Income to Down Payment (net of taxes)
$61 ………. Maintenance and Replacement Reserves
$1,997 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$3,269 ………. Furnishing and Move In @1%
$3,269 ………. Closing Costs @1%
$3,155 ………… Interest Points @1% of Loan
$11,442 ………. Down Payment
$21,134 ………. Total Cash Costs
$30,600 ………… Emergency Cash Reserves
$51,734 ………. Total Savings Needed