Foreclosures


Fannie Mae says it will suspend evictions for single-family foreclosures and two- to four-unit properties during the holiday season, from Dec. 19 through Jan. 2, 2012.

“The holidays are meant for families to spend time together, especially if they’ve gone through the stress of financial challenges and foreclosure,” Terry Edwards, executive vice president of Credit Portfolio Management for Fannie Mae, said in a statement. “No family should have to give up their home during this holiday season.”

While the holiday moratorium is in place, legal and administrative proceedings for evictions may continue, but “families living in foreclosed properties will be permitted to remain in the home,” Fannie Mae announced in a statement.

Source: Fannie Mae

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Living near an occupied property in foreclosure can bring down home prices nearly twice as much than just living next door to a vacant home, according to a new study by the Federal Reserve Bank of Cleveland, which analyzed sales data of nearly 10,000 homes in the Cleveland area.

“The impacts of homes with multiple indicators of distress are larger than the impacts of homes that are only vacant, delinquent, or recently foreclosed,” the researchers found.

Some findings from the study:

  • Homes within 500 feet of at least one vacancy sold 0.8 percent lower.
  • Occupied home that had recently entered the foreclosure process lowered the sales price of nearby homes by 1.8 percent.
  • Sales within 500 feet of a home where a delinquent borrower abandoned the home saw, on average, a 3.1 percent drop to home values.
  • The largest drop was from homes that were tax delinquent, vacant, and foreclosed: Home sales prices within 500 feet were found to be 9.6 percent lower.

Source: “Study Finds Foreclosures Harm Home Prices More Than Vacancies,” HousingWire (Oct. 20, 2011)

S&P Lowers Fannie, Freddie Credit Rating-Daily Real Estate News | Tuesday, August 09, 2011

Standard & Poor’s downgraded the credit rating of lenders backed by the federal

government on the heels of the first-ever lowering of the U.S.’s credit rating.

Fannie Mae, Freddie Mac, and other government-backed lenders were lowered one step from AAA to AA+, S&P reported in a statement issued Monday. Some analysts say the downgrade may force home buyers to pay higher mortgage rates.

“The downgrades of Fannie Mae and Freddie Mac reflect their direct reliance on the U.S. government,” S&P said in a statement. “Fannie Mae and Freddie Mac were placed into conservatorship in September 2008 and their ability to fund operations relies heavily on the U.S. government.”

The GSEs own or guarantee more than half of U.S. mortgage debt.

Freddie Mac said that the lower debt rating will cause “major disruptions” in its home-lending by possibly reducing the supply of mortgages it can purchase. It said in a Securities and Exchange Commission filing that the lower rating could hamper home prices and even lead to more home-loan defaults on mortgages it guarantees.

Meanwhile, the Federal Housing Finance Agency on Monday assured investors that securities issued by GSEs are sound. “The government commitment to ensure Fannie Mae and Freddie Mac have sufficient capital to meet their obligations, as provided for in the Treasury’s senior preferred stock purchase agreement with each enterprise, remains unaffected by the Standard & Poor’s action,” said Edward DeMarco, FHFA acting director.

Some analysts and lenders have said they don’t see the fallout from the S&P downgrade on the U.S. and other banks as having such a widespread affect. “It’s likely that once the storm passes, you’ll get an increase in mortgage rates because of this, but it won’t be significant,” says Anika Khan, a housing economist at Wells Fargo.

S&P also announced on Monday that it had lowered its credit ratings for 10 of 12 federal home loan banks and federal farm credit banks from AAA to AA+.

Source: “S&P Lowers Fannie, Freddie Citing Reliance on Government,” Bloomberg (Aug. 8, 2011); “S&P Downgrades Fannie and Freddie, Farm Lenders and Bank Debt Backed by U.S. Government,” Associated Press (Aug. 8, 2011); Freddie Mac Reports $4.7B Loss, Says S&P Downgrade Will Disrupt Mortgage Market,” Associated Press (Aug. 8, 2011); and “FHFA Assures Investors After Fannie, Freddie Downgrade,” HousingWire (Aug. 8. 2011)

Read More:
Will the S&P Downgrade Affect Interest Rates?

 

Home Listings Fall but Woes Persist

Sharp Drop in Houses for Sale, Usually a Plus for Market, May Reflect Foreclosure Logjam Rather Than More

 

By NICK TIMIRAOS

The number of unsold homes listed for sale declined sharply in a number of U.S. cities during the second quarter, offering glimmers of hope that some housing markets could be entering a recovery phase. Nick Timiraos has details.

The number of homes listed for sale declined sharply in a number of U.S. cities during the second quarter, offering glimmers of hope that some housing markets are starting to recover.

At the end of June, nearly 2.34 million homes were listed for sale on multiple-listing services in more than 900 metro areas, the lowest level for that time of year since at least 2007, according to Realtor.com. In some cases, inventory levels are at their lowest levels since the housing downturn began five years ago.

Shrinking inventory often is seen as a positive sign for housing because it usually means demand is rising, which often leads to higher prices. But in the current environment, the decline in inventory may instead reflect how the market remains anything but healthy. While sales are picking up in some cities, analysts say the sharp decline in inventory also reflects the slow pace at which banks are processing foreclosures.

The Wall Street Journal’s latest quarterly survey of housing-market conditions in 28 major metropolitan markets found inventory levels were down in all but three markets and were down by double digits in 16 markets in the second quarter, compared with a year ago. Listings in Miami were down 43% from a year ago and were off 30% in Washington, D.C. Several cities, including Charlotte, N.C.; Seattle; and San Francisco, saw declines greater than 20%, according to figures compiled by John Burns Real Estate Consulting.

Associated PressA decline in the number of homes for sale has raised hopes the market is improving. Above, a house coming off the market in Bath, Maine.

HOUSINGQ

HOUSINGQ

In markets such as Sacramento, Calif., and Phoenix, where home values are down nearly 50% from the peak in 2006, it would take just four months to sell the supply of homes listed for sale at the current sales pace.

“We’re in a shortage situation,” said Brett Barry, a real-estate agent in Phoenix. “It’s a very artificial, ‘Twilight Zone’ kind of feeling, because we know there’s a lot of homes out there.”

The bottleneck in bank foreclosures has contributed to that situation. In the past year, banks have been accused by federal and state officials of circumventing legal procedures when foreclosing on homeowners. To correct those problems, banks are moving more cautiously when repossessing a home.

As a result, the number of newly initiated foreclosures has dropped to a three-year low. But the number of homes in foreclosure—a backlog of 2.1 million—is near a high, according to LPS Applied Analytics.

If supply remains constrained, prices could stabilize. “We’re not at the end of the housing nightmare, but we seem to be getting closer,” said Jeffrey Otteau, president of Otteau Valuation Group, an East Brunswick, N.J., appraisal firm. But if banks accelerate foreclosures, inventories will swell again. Mr. Otteau says it is too soon to celebrate because “we are all expecting that foreclosure ‘tidal wave’ to begin sometime soon.”

Home values, meanwhile, fell at a slower pace during the second quarter, with 19 markets reporting quarterly gains, according to data from Zillow.com. Values were still below year-earlier levels in every market.

For the quarter, the biggest gains in home values were reported in Nashville, Detroit, Dallas and Raleigh, N.C. Markets that have struggled with a glut of foreclosed properties posted the biggest quarterly declines, with values down by more than 2% in Phoenix, Las Vegas and Sacramento.

Another factor behind falling inventory levels is shifting behavior on the part of sellers, who in recent months have started to yank homes off the market because they couldn’t get a high enough offer. “Sellers think they’ll get a better price if they wait and sell it next year, and I just didn’t hear that from sellers two years ago,” said Glenn Kelman, chief executive of Redfin Corp., a Seattle-based real-estate brokerage that does business in 13 states.

Consider the case of attorney Natasha Gonzalez Rojas. After landing a job in Dallas last summer, Ms. Gonzalez Rojas tried unsuccessfully to sell a three-bedroom condo in Philadelphia for $499,000. She and her husband rented it out and in June discussed renewing their tenants’ lease for another year. They lose about $1,000 every month but don’t want to sell for less than what they owe. “We’re not willing to pay somebody to buy our house,” Ms. Gonzalez Rojas said. Until they sell their Philadelphia home, they are also unlikely to buy a home in Dallas. “We don’t want to have two mortgages, and I doubt we’d even qualify,” she said.

Rising rent is another factor pulling some potential homeowners off the fence. During the housing boom, landlords lowered rents to hold on to tenants who were leaving apartments to become homeowners. Now that trend has reversed, sending rent levels soaring.

Shannon Keyes Woodward, 29, and her husband are ready to move out of a “ludicrously priced” rental apartment in Alexandria, Va., but have been outbid on every property on which they have made an offer. “It’s devastating, not being able to find anything,” said Ms. Keyes Woodward.

She expresses a common frustration for entry-level buyers in markets, such as Northern Virginia, that are seeing more activity. Nearly all the homes in their low-$300,000 price range either need renovations or are scooped up within days of hitting the market, often by investors making all-cash transactions.

Nearly 68% of homes sold in Miami last quarter were all-cash sales, up from 56% a year ago, according to Miller Samuel Inc., a real-estate appraisal firm.

Out-of-state buyers and foreigners are seeking bargains on vacation properties. Meanwhile, mom-and-pop investors and private-equity-backed buyers of distressed real estate are snapping up foreclosures at courthouse auctions with plans to fix them up and resell them for a profit. In some cases, prices are so low that investors are holding on to the properties and renting them.

Allen Chan paid $121,500 for a three-bedroom townhouse in Montgomery Village, Md., last August that he now rents for $1,525 a month, more than enough to cover the $850 monthly mortgage, property-tax and insurance costs.

The biggest challenge for Mr. Chan, a 26-year-old investor in Silver Spring, Md., is competition. He bought four homes last year, reselling one and renting the other three. Since December, he has been outbid on every property he has offered to purchase.

Despite the possible downsides of emergency repairs, careless tenants or periods of vacancy, “with the returns as high as they are, there’s a lot of room for error,” Mr. Chan said. “Any way you look at it, it’s just an incredible deal.”

—S. Mitra Kalita contributed to this article.

Write to Nick Timiraos at nick.timiraos@wsj.com

What Happens to Borrowers After Foreclosure?

The after-effects following a foreclosure to a borrower may not be as bad as once thought, according to a new paper by Fed economists. With the wave of foreclosures plaguing the nation, Fed economists sought to find out what happens to households following a foreclosure.

Overall, the study found that post-foreclosure borrowers don’t fare too bad: The majority of these borrowers do not end up in “substantially less desirable neighborhoods or more crowded living conditions.” Also, the study found that from 2006 to 2008, 22 percent of post-foreclosure borrowers moved to a multifamily rental building, while about 75 percent still lived in a single-family structure. What’s more, the places where they moved were not found to have significantly lower median income, median house value, or median rent than their old neighborhood.

“These results suggest that, on average, foreclosure does not impose an economic burden large enough to severely reduce housing consumption,” according to the report.

Source: “Foreclosure Effects Found Not So Bad,” National Mortgage News (July 26, 2011

Raising Debt Ceiling Critical for Real Estate

In a letter issued to President Obama and members of Congress, a diverse group of national business leaders, including Realogy CEO Richard A. Smith, called on lawmakers to raise the $14.3 trillion U.S. debt ceiling and commit to a deficit reduction plan.

Experts have said that failing to increase the debt ceiling would not only have significant implications on the economy in general, but also real estate. If the government defaulted on its bonds, the government likely would have to raise interest rates dramatically, which would in turn hamper home ownership. (Read more at Speaking of Real Estate.)

“It is critical that the U.S. government not default in any way on its fiscal obligations,” the business leaders wrote in the letter to lawmakers. “Treasury securities influence the cost of financing not just for companies but more importantly for mortgages, auto loans, credit cards, and student debt. A default would risk both disarray in those markets and a host of unintended consequences.”

The letter was signed by several associations and companies, including Realogy, the Business Roundtable, the U.S. Chamber of Commerce, the Financial Services Forum, the National Association of Manufacturers, and others.

Also in the letter, the group called on lawmakers to reduce the nation’s long-term budget deficits. “As businesses make plans to invest and hire, we need confidence that, in the absence of a crisis, our government will not reverse course and return to large deficit spending. … Now is the time for our political leaders to put aside partisan differences and act in the nation’s best interests,” the letter stated. “We believe that our nation’s economic future is reliant upon their actions and urge them to reach an agreement. It is time to pull together rather than pull apart.”

Read more:

‘No’ on Debt Ceiling Would Clobber Real Estate

Strategic default smarts

By Tara Tran • Jul 7th, 2011 • Category: Feature Articles, Journal Articles, July 2011 Journal

 

This article reviews a newly-developed Fair Issac Company (FICO) analytics model which predicts a borrower’s likelihood to exercise a strategic default and revisits the financial advantages of a strategic default for a negative equity homeowner.

 

FICO findings

Fair Issac Company (FICO) researchers have developed new analytics to predict a borrower’s likelihood of walking away from a mortgage – a strategic default – whether or not he is delinquent on his payments. The rise in strategic defaults over the past year is of concern to mortgage lenders. Thus, FICO consulted with them (not underwater homeowners) to develop the analytics with the purpose of preventing strategic defaults and their costly impact on lenders, investors, homeowners and the housing market.

35% of mortgage defaults in September 2010 were strategic, an increase from the 26% more than a year earlier in March 2009 according to a University of Chicago Booth School of Business study. 22.5% of residential mortgage defaults nationwide were strategic in the third quarter of 2010. This number increased to 23.1% in the fourth quarter of the same year.

In negative-equity-laden California, strategic defaults are also widespread (more so than the nation as a whole since California is a nonrecourse state and lenders cannot viably threaten to sue for their losses). There were 45,380 strategic defaults in 2009 – 80 times the number in 2005. [For more information on the strategic default trend, see the August 2010 first tuesday article, Fannie Mae, our government and strategic defaults.]

FICO researchers found borrowers who walked away from their mortgages had common traits including:

  • higher FICO scores;
  • better credit management (understood financial statements);
  • less retail balance (did not need credit to buy);
  • shorter length of residence on the property and thus greater likelihood of a negative equity; and
  • more open credit in the past six months with which to purchase items. [For more information on FICO’s findings on strategic defaulters, see the FICO article Predicting Strategic Default.]

 

The study concluded the degree of difference in the loan-to-value (LTV) ratio between the current market price for a home and the mortgage owed on the home (home price depreciation) is not as strong of an indicator for predicting a homeowner’s ability or willingness to strategically default. However, the study did conclude a borrower with a stronger history of good money management and a higher credit score tended to strategically default at a higher rate than other borrowers.

FICO and mortgage servicers are alarmed of the increasing frequency of strategic defaulters and warn homeowners of the consequences of walking away from their mortgage payments. Not only will homeowners suffer a 150+ point hit to their credit scores, but they may also face higher rates, tighter terms for other types of credit and a bump in insurance premiums. FICO goes on to implicitly threaten the homeowner who reverts to renting after walking away by saying landlords will be more unwilling to accept them as a tenant when they see a strategic default on the tenant’s credit record. [For more information about the fallacy of FICO’s argument, see the June 2010 first tuesday article, The FICO score delusion.]

This is a fabrication of the worst type. FICO and the lenders they consulted with (who incidentally are the ones who pay FICO for the use of their algorithms) have an economic interest in keeping California’s population of negative equity homeowners imprisoned in their underwater homes. The truth is, any landlord fully understands that a strategic defaulter is going to make a very fine, long-term tenant if they have a job and otherwise pay their bills – and most all do since they made the sound decision to strategically default.

Walking away is for smart people, and lenders know it

Several studies over the past years have already observed strategic defaulters tend to hail from a more financially savvy crop of people. The recent FICO study repeats this conclusion of which many of us are familiar.

What it also advertises — to the endorsement of lenders — are the detrimental effects of walking away from a mortgage. Agents and brokers must construct the bigger picture, especially in California where underwater homeowners collectively hold over 2,000,000 negative equity mortgages. [For more information on the relationship between higher credit scores and strategic defaults, see the October 2009 first tuesday article, Financially savvy homeowners turn to mortgage defaulting as a strategy.]

California negative equity homeowners have the short end of the stick with black-hole assets on their hands, so the question they should be answering is not whether a strategic default would be a in the best interest of their lenders. Rather, they should be considering whether a strategic default would be a prudent choice for their personal financial situation.

It’s true, homeowners will see a hit to their credit scores from a strategic default — and of course FICO will highlight this since the media often overstates this figure — but homeowners must not be inveigled into staying in negative equity properties by the vague economic threat of a lower FICO score. It’s not about the FICO score alone, but the costs versus benefits analysis of the homeowner’s individual situation.

Either a homeowner can continue to siphon his money into a dead-end loan, or he can save that money and invest it into a much more lively investment — improving his family’s standard of living.

Paying lenders the full amount on an underwater home is not what is going to fuel the recovery of a family or the California economy — what we need is to put cash in the hands of negative equity Californians.

A strategic default when the LTV is above 125% is not a dishonest financial bailout – it is prudent business decision. It may temporarily hurt the pride and credit scores of California homeowners, but these things are soon remedied. [For more information on when to strategically default, see the May 2011 first tuesday article, Short sale or foreclosure? The naked truth for underwater homeowners.]

Paying lenders the full amount on an underwater home is not what is going to fuel the recovery of a family or the California economy — what we need is to put cash in the hands of negative equity Californians. If they aren’t going to get any cramdowns in bankruptcy courts, they need to exercise their legal right to strategically default — that “put option” in every trust deed. Besides, it’s what all the smart people are doing anyway, right?

– ftCopyright © 2011 by the first tuesday Journal Online – firsttuesdayjournal.com;
P.O. Box 20069, Riverside, CA 92516

Readers are encouraged to reproduce and/or distribute this article.

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