Finding Foreclosures:

Yesterday I received a call from a friend on Wall Street who sat on a conference call announcing a major change from Wamu, advising its withdrawal from the wholesale side of the mortgage lending world.

That’s to be expected, given the recent pressures in the lending industry, specifically as the mortgage broker becomes more irrelevant each waking day.

The big surprise comes from the fact that Wamu has chosen to shut down its entire retail lending operation. Of course, you could stop at a branch and have a 19-year-old open a checking account, help you with your safety deposit box and write a mortgage while he or she is at it (presuming the teen knows how to spell “mortgage”).

Seriously, this announcement–effective immediately–essentially puts a nail in the coffin representing the riskiest mortgage program in America. For the investor community, the program generated tremendous cash flow and investment opportunities for those who understood its complexity. For the everyday homeowner, it was used as a way of stretching the affordability factor, and now it’s gone.

We suspect the elimination of the program will allow for greater stability in the mortgage markets, resulting in a flight to quality for many consumers who, blessed with an ounce of equity, will be able to refinance into more favorable terms in a more conservative, 30-year-fixed program.

I further suspect in the short term that those who became accustomed to $1,400 payments on a $450,000 mortgage will simply walk away, realizing that the ability to refinance will still result in an increased payment compared with the deferred payment that failed to cover the minimum interest payments.

I’m interested to see what impact that will have on lenders such as Wamu that control a huge portfolio of those toxic loans.

Great time to buy from a value perspective, but I feel for any borrower who lives close to one of these homes that has become a ticking time bomb. Of course, I feel even worse for the employees at Wamu who just had their legs kicked out from underneath them because their CEO failed to plan ahead.

Bill Nazur

With the recent drop in interest rates, many consumers are asking, “Is this the time to refi?” The decision is more complicated than “did my rate drop?” There are often many fees associated with refinancing, and consumers need to calculate when the time is right for them. Mortgage applications rose more than 8 percent last week, and there is good reason for that climb.

When the Fed drops rates, most banks drop their rates on certain mortgages, too. People locked into negative amortization or option ARM loans, where they aren’t even covering their interest or had a teaser-rate loan, may be looking to refinance now.

In general, home equity lines of credit see rate drops the day after the Fed lowers rates. How do you know if you should refi? Calculate the savings per month at the new rate, and ask your lender what the refi will cost you. Determine what the break-even point is in months - if it’s six months, and you plan to stay  in a house a year, you get a net win. If it’s 12 months and you plan to move in the spring, keep the higher rate.

Option adjustable rate mortgages, known as pay option ARMs, are the risky loans that let people pay less than the interest and accumulate mortgage principle. These tend to drop 30 to 90 days after a Fed rate drop. Margins always tend to lag the Fed rate. To figure out whether you should refi, get a good-faith estimate with all costs from the lender. Do the same analysis as for a HELOC. With the rate change, what is the savings per month? Divide the total cost of the refi into the savings, and you will get your break-even point in months. If you are planning to stay in your home longer than this number of months, you will save money.

Long-term rates, 30-year fixed loans, generally remain flat and may even increase. I would not consider this a viable option right now.

Short-term, interest-only loans–loans where the first three, five or seven years is held constant–will decrease. To figure out whether you should refi, get a good faith estimate with all costs from the lender and do the math.

There are also intangibles to consider:

1. Is your mortgage stressing you out? Is the unknown tough to handle? If so, you might opt for a short-term, interest-only loan or for a fixed-rate mortgage, even if the rate is higher.
2. Is your principle amount climbing faster than the appreciation rate? You may want to refinance even if the rate is the same, just to stop the bleeding.

Dani

The Fed endorsed rules on Tuesday that would “protect” homeowners against shady lending practices. Apparently the government feels the need to find another “in” to create a nanny state. There are substantial problems with this that may hurt the entire market.

The proposal applies to all new loans made by all lenders, including banks and brokers. Finalization is expected next year sometime.

Note: While there is a relevant reason for each one noted below, I also noted the reason it is a problem for the buyer. In the end it’s going to make it substantially harder for people to buy homes - period. That will hurt the market overall when we already have ten months worth of inventory!

Here is what is proposed, the reason the government feels it will protect homeowners and the reason it won’t. It will hurt more than it helps. Another reason to keep the government out of private enterprise.

1. Restrict lenders from penalizing some subprime borrowers who pay off their loans early (This is known in the industry as a prepayment penalty, and almost always is a result of refinancing).

• Why is this relevant to homeowners? Many who need to refinance can’t because the cost is so steep in prepays.

• Why is this a problem? The prepays are risk-based and help offset the risk-associated costs of doing business with subprime borrowers.

2. Force lenders to make sure subprime borrowers set aside money for taxes and insurance (This is known in the industry as impounds).

• Why is this relevant? Taxes and insurance that go unpaid force lender-created insurance, and late taxes go on record as tax liens that, when the home is foreclosed upon, also must be paid off.

• Why is this a problem? Some homeowners have flexible income; that is, it isn’t steady. It might be commission-based, for instance. Salespeople, for example, may wait until their end-of-year bonuses to pay taxes. Forcing them to impound could be a monthly hardship.

3. Keep lenders from making loans in which they don’t have proof of borrower’s income.

• Why is this relevant? It protects the lenders from lending to people who are using stated income loans as liar loans.

• Why is this a problem? Some homeowners have flexible income and they work off of bonuses or sales comp checks. People using this loan legitimiately may run into problems that are unfair–they won’t be able to use a loan designed for them. This may keep anyone on commission-based income from buying a home.

4. Prohibing lenders from lending without considering a borrower’s ability to repay a home from sources other than the home itself.

• Why is this relevant? The lenders are using something other than property to securitize it. While this is great for them, it’s a probem:

• Why is this a problem? The general rule has been that you need six months of monthly payments in the bank. That existed throughout the 2000s. To have another source of income or collateral you must have to be able to buy the home negates the entire way our market is set up–that the home is self-securing. It may make sense for lenders to do this to investors, but not for average homebuyers. This is going to make it tougher for people to buy homes in the future.

Dani

Is Bush’s plan enough to save homeowners? Perhaps not some, but it may delay the inevitable and create worry in the markets.

This plan is for homeowners who were making payments at lower introductory rates but have had a harder time at the adjusted rate.

The “plan” is a result of talks between U.S. Treasury Secretary Henry Paulson and other banking execs, regulators and mortgage investors–along with consumer groups–to try to stop the estimated 2 million new foreclosures by the end of the year.

The plan will apply to borrowers who made loans between the start of 2005 through January 30 of 2007, with rates that are scheduled to increase between January 1, 2008, and July 31, 2010.

Some groups wanted a seven-year freeze; others (banks) were looking at one to two years. The five-year plan appears to be a compromise.
This is really designed to help those who are going to have resets they cannot afford. It will freeze their rate, not allowing it to increase, for that five-year period.

The problem is, we may just be creating a situation where we’re delaying the inevitable. The worry over what will happen when all of these people who got their rate stabilized have to begin paying the full amount may hurt the markets. I think the goal is much like an on-ramp with a light–to let people on slowly (or to go into foreclosure slowly) rather than have a huge wave of them all at once, so prices can stabilize a bit. Perhaps we should leave the markets to do their thing, and let’s take the drop in price and the high foreclosure rate now. Banks don’t want to own homes; they will work with homeowners with or without government intervention.
To really look at this, a mortgage typically running around $1,200 per month would add $300 per year in payments by rate resets if you got a mortgage in 2006. The goal would be for borrowers to negotiate into a fixed rate plan. The hope is that by the time these people then have their rates reset (again), the market will be better equipped and there will be less inventory and more money back into the credit markets to handle the new wave of foreclosures. Will that occur? I’m not so sure it’s in the best interest of the markets and may just drag out a problem that could resolve on its own more quickly.

Dani

We have an interesting problem. If an individual files for Chapter 13 bankruptcy to restructure their debt over ten years, they may run into a glitch. The current code prevents mortgage lenders from changing loans on a primary residence, yet they can change terms on a vacation home, investment property, farms and businesses!

There are competing bills in the House and Senate that would allow bankruptcy courts to modify mortgage terms and extend repayment time frames. But as of now, primary homes cannot be modified. (WSJ)

It is suggested that if this modification is made, approximately 600,000 people who will be in foreclosure by the end of next year will save their homes. While it may keep foreclosures away for some, it may discourage lenders from borrowing to low income households. They also worry about what it will do to the loans they’ve turned into securities and sold to investors, because the terms of the loans, which investors paid a price for, could then be changed by the courts. There is, too, some worry that banks will make up the difference by charging everyone else higher rates.

Dani

It may seem counterintuitive, but many homeowners are turning to bankruptcy to stay in their homes and avoid foreclosure.

We already know from looking at Realtytrac’s data that many mortgage payment loans are in default. We have been hearing about the 100%+ increases in foreclosure rates, but what about bankruptcy rates? The WSJ reports this morning that bankruptcy filings increased 23% from one year earlier. During the first nine months of 2007? 44% increase, according to the American Bankruptcy Institute.

So how does filing bankruptcy keep you out of foreclosure? In some states, bankruptcy stops the foreclosure process. It is harder today than it was in 2005 to be granted a bankruptcy, but as homeowners find it harder to refinance and see their payments going up, many are turning to it earlier in the process.

Chapter 7 of the Federal Bankruptcy Code requires individuals to forfeit assets - including equity in their home - to pay off debts. Many who file Chapter 7 do lose their homes.

However, there is another option; Chapter 13. This stops the foreclosure process, and allows the homeowner to work out a play to pay debts - including your mortgage - over time. Usually this period of time is three to five years. To qualify, a person must have regular income and stay current on ther new bills. About 40% of today’s bankruptcy filings are under Chapter 13.

In some hot real estate markets like California, the WSJ reports that the number of Chapter 13 individual bankruptcy petitions went up more than 100% from one year earlier; and in the northern area of Illinois (including Chicago) this number is 40%. In Massachusetts, it is 70%.

Homeowners must be very skeptical though. There are a lot of scams out there where people are taking the money to ’start the process’ and running, particularly on the Internet. So homeowners in trouble need to be careful who they work with.

One downside? Chapter 13 stays on the credit for 10 years, which could cause problems if the person needs new credit. The new repayment plan often leaves very little money for anything else. If you have an emergency, job loss or illness, Chapter 13 may not work.

Dani

Where does it stop?  

DR Horton earnings were just reported, reporting a 39% drop in new orders, with a 48% cancellation percentage.  

According to their press release, they indicate that ‘more than 90 percent of D.R. Horton’s buyers used fixed rate mortgages for their purchase and 14 percent had Alt-A financing, the report said. Less than 1 percent were subprime borrowers. Alt-A mortgages are available to borrowers with good credit who generally cannot or choose not to verify their income. Orders at the Fort Worth-based company declined for a sixth straight quarter, falling 39 percent to 6,374 from a year earlier. That amounts to 219 homes per state for the 29 states where DR Horton builds homes.

My conversations with other major builder offices in California, Texas, and Florida further support that the price reductions that were taken by DR Horton, Hovnanian, Shea Homes, created great public relations, along with additional activity, while many of the sales and contracts that were issued have since canceled.  

It is clear that builders feel the pinch as the Builder Confidence Survey just announced, dropped to its lowers point since its inception in 1985. Given the condition of the markets in the late ’80’s and the mid 90’s that is a scary position for builders moving forward.  

Expect buyer sentiment to continue waiting for a better deal, realtors will continue to exit the industry at a record pace, resale homes will continue to drop in value,  and current homeowners will become renters as foreclosures continue increasing, in the absence of a significant rate decrease and/or improving the lending mechanisms that are missing today that will allow for those homeowners needing to refinance over a 100% loan to value, that will allow those homeowners that are underwater with favorable payment histories to keep their homes

The AFLCIO is reporting that 63% of people who signed mortgage papers in the subprime market didn’t know what an adjustable mortgage meant – that it would, shockingly, ADJUST! 2 million loans are due in 12 months to reset and will have new, higher mortgage payments. This will result in even more foreclosures. Right now 9.3% of the subprime market is delinquent in their payments, which means many of them will also lose their homes in the next 6 months. 69% of people still think their homes are worth the same as they were a year ago. They are in denial which will result in not being able to sell, and prices will continue to plummet – again leading to more foreclosures because they cannot refinance.

What does this mean for the market?

First, we must hold people accountable for their own choices – adjustable loan means precisely that! Second, we will see another influx of foreclosures particularly early next year, 2008. Third, if you have a mortgage, you need to call your lender to find out what your next five years payments will be to avoid foreclosure. Fourth – if you want a great deal, start looking now. The average homeowner remains in the same house for 7 years. You will not lose money in 7 years even if you buy today. Fifth – while individuals are still denying that they need to sell for less than they did a year ago, this will continue to put downward pressure on prices as these individuals lose their homes.

Are lllegals Adding to the Foreclosure Problem?

Some think so. Talk radio has been blasting illegals for the spiraling foreclosure problem. Most don’t understand the facts behind the real story nor are they analyzing the numbers.

First let’s get one thing out in the open - Illegal immigrants can get home loans. How? They get a social security number (this isn’t an area I’m an expert on with regard to how to obtain one, but there are web sites assisting people and those needing one know how to do it), they open credit cards, they build credit, they eventually apply for a home loan - if they’ve got the credit and the pay stubs, they can be approved like anyone else. As of September 2007, nothing in the federal law prohibits illegal immigrants from owning homes and banks can legally accept passports, tax ID numbers and consular cards from people who want to open bank accounts or get home loans. (Source: Comptroller of the Currency, a bureau of the US Treasury that regulates banks).

Banks can also accept ITINs instead of social security numbers, which are individual taxpayer ID numbers that undocumented workers can legally get.

But is the accusation that illegals are “causing the foreclosure problem” fair? 2/5 of the top 5 foreclosure markets happen to fall in the top 5 illegal resident category also - some might say that is more than coincidence. Those two states are California and Nevada as noted below.

But what also happened in those two states? In the early 2000s, a lot of investors happened to put their money there, and they are states that saw double digit real estate price increases year over year - essentially, they were considered bubble states.

Chances are, the illegals who are in California and Nevada can’t buy a home there anyway given the extremely high cost of those states! The other states? Well they simply don’t match up.

Despite their undocumented status, if an illegal is buying a home they are required to meet the same financial standards as citizens, and their income is not shown to be more or less stable than a citizen. So where’s the added risk?

Illegals are often frightened that the immigration authorities will find out they’re here illegally - and that is more likely to happen through a foreclosure process than paying their bills on time. I believe they have even added incentive to pay their mortgage.

I certainly am not arguing for giving illegals home loans or the same rights as citizens — I believe strongly we should not grant amnesty and should not incentivize illegal behavior.

But from a strictly economic standpoint — those who believe they’re contributing to the foreclosure problem are not looking at the motivation of these individuals or more important - at the numbers - so here they are:

These are the top 5 foreclosure states for 2007 so far: (Source: Realtytrac)

1: Nevada - 1 in 40 households

2. Colorado - 1 in 60 households

3. California - 1 in 69 households

4. Michigan

5. Florida

Now let’s look at the top 5 states that have a high illegal population: (Source Statemaster)

1. California - approximately 6% of residents

2. Arizona - approximately 4.7% of residents

3. Texas - approximately 4.5% of residents

4. Nevada - approximately 4.1% of residents

5. Illinois - approximately 3.3% of residents.

I’m not saying undocumented workers aren’t contributing to other problems, but we certainly can’t blame them for the foreclosure one.

Dani

Realtytrac reported today, September 18^th the highest one month jump in foreclosure rates since they began tracking data.

Up 36% in August over July, foreclosures across the country are increasing. Some of the biggest movers: Nevada – triple the national average; 48% increase in California from one year ago; 77% in Florida from one year ago. What does this mean? We are still seeing high inventories and lower demand. Even in area where demand has increased slightly, individuals are having a very difficult time securing loans due to the credit crunch – lack of available funds for new loans. We also have a serious problem with individuals who want to move up into a bigger or better home, but are not able to sell the home they live in to do so. What will fix this? Time, low interest rates, money back into the lending pool, confidence in the system (which companies like Hovnanian are not helping). It’s important to note that these three states were also high-speculative states – many investors bought homes in these states at the peak of the market and hoped to hold and flip or flip immediately to make a profit. It’s been well documented that individuals who are investing in homes or speculating on the market are letting their homes go back to the bank rather than taking huge losses by selling or renting them out – and not coincidentally, many of them in these biggest-mover states. With speculators/investors pretty well out of the market and incapable of getting loans short of very high down payments or willing to pay extremely high interest rates, demand will also be depressed, again lowering prices, spawning lack of confidence by consumers, and leading to the potential of a recessionary market. Nonetheless, there are incredible buying opportunities out there, particularly for first time home buyers and the new lower interest rate. Dani

Will the President’s plan help the market or borrowers? It may help the market in general but not specific borrowers who need money now. Here is why:

First, his plan, if it passes Congress, allows individuals to refinance with FHA/HUD insured mortgages. While he’s urging Congress to pass rules to allow HUD to be more flexible insuring people, as it stands today you cannot have a foreclosure in the past three years and need to have good credit for three years. Bankruptcies must be at least two years old with good credit two years after. Another major obstacle for individual homeowners is that in general the government insures loans for up to $202,000 in most states and $362,000 in high cost states like New York. I’m personally not aware of any real estate that costs anywhere close to $362,000 in New York or

Borrowers also may need money to close the refinance, money they may not have. Borrowers will need at least 3% in cash or equity, be able to show income to pay the loan, sustained employment, and be able to prove they were on time with payments before their rates reset. Their rates had to have reset between June of 2005 and December of 2009. In general, it might make investors “feel better� about the market, but it isn’t a fix or a quick solution. It will need to get through Congress, and reforms will need to be made before it is really beneficial.

The President did promise to work with Congress to create some type of tax reform to help borrowers in trouble, but that again isn’t instant money and since most foreclosures happen within 90 days to 6 months of a missed payment, next February to April will be too late for many homeowners. Another element of Bush’s plan is tougher predatory lending laws – again this will help make sure the same issue doesn’t happen in the future but it won’t help people suffering today. If anything it will make it harder for those in trouble to refinance.

What do we really need? A modest rate cut by the fed. I do think this gives some comfort though that the government has its hand on the pulse of the market and how it’s impacting every day working people.

Dani

 

Unfortunately for the housing market and many lenders, the federal reserve kept the interest rates banks charge one another at 5.25%, its one year rate. This has many concerned that the fed is out of touch with the consumer and is so focused on inflation that it isn’t looking closely enough at real estate. A cut in the federal reserve rate would have had a positive impact on the price of mortgages for consumers, and could help boost demand and lessen the excessive supply of inventory in some markets.