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As Predicted Here, "Home Affordable" Is Not Making a Dent in Foreclosures

For some time now, I have been unable to make a coherent entry into this blog simply because the level of my dismay, disbelief and despair over the unbelievable transfer of wealth from Taxpayers to Financial Institutions through the various Federal Bailout  schemes and the lack of massive public outrage over  the socialization of massive losses by private businesses through the FDIC.

Since the FDIC has burned through existing reserves, we will continue to see more and more "Public Private Partnerships" where the private partners (including many key financial contributors to both political parties and powerful lobbies) get distressed assets at unbeatable discounts with losses guaranteed by future taxpayers. Isn't this the privatization of profits and socialization of losses? A great example of this is the recent purchase of assets from the former Corus Bank by private investors, with public guarantees of losses.

I've said many times in this blog that no Loan Modification Program that does not mandate reductions in the Principal Balance of outstanding mortgages will solve the problem of increasing foreclosures, particularly in the "Bubble" states of California, Arizona, Nevada and Florida and anywhere else where the growth in housing values left median incomes far behind.  Add to the mix the increasing unemployment and underemployment in those same states and the outlook for a National SFR pricing recovery any time soon is very bleak.

More Unintended Consequences
The unintended consequences of the foreclosure moratoriums and the slow adoption and minimal implementation of the HAMP style modifications will only mean more and more foreclosures down the road.  By some estimates there is a "Shadow Inventory" of bank owned properties as many as 7 Million units as a result of defective Federal policies and their hit or miss implementation. Apparently banks are able to hold deflated assets in  off balance sheet holding vehicles and by using other accounting tricks.  Clearly the bankers do not feel the need to release any of this inventory to the marketplace.  If banks were mandated to release their shadow inventory to comply with capital requirements, market values would take another huge hit. 

I truly believe that if there is no huge public outcry with demonstrations and even some mayhem (similar to the emotional and visible response to National Health Care initiatives) nothing will change and the SFR market will continue to decline or fail to stabilize.  Truthfully, I am speechless at the lack of visible public response to travesties such as HAMP.

There have been numerous recent articles about the effectiveness and volume and sources of HAMP modifications and who is actually doing them.  Today in the Huffington Post, writer Shahien Nasiripour talks about one Loan Servicer that is doing almost half of the "Permanent" HAMP modifications. He also points out the pitiful HAMP results produced by the biggest beneficiaries of TARP funds.

The servicer mentioned in the Huffington Post article stands to earn more than $600 Million Dollars in taxpayer funded fees for doing the "Permanent" modifications they have completed as long as the homeowners stay current on the HAMP terms for five years.  The other aspect of these modifications is that the ultimate results rely solely on a strong market recovery that would incent the homeowners involved to keep paying the loan.  Since a typical HAMP modification does not include any reduction of mortgage principal to reflect current market value, the majority of these modifications will redefault if prices continue to fall. Many of these so called modifications represent a house payment in excess of 50% of Gross income which is not sustainable for most borrowers.

Under HAMP, desperate homeowners are willing to accept a 5 year reduction in rates to a low minimum of 2% (depending on their financial condition) and many have accepted an extension of their loan period to 35 or even 40 years at the full current loan balance. On top of the fees the servicers will collect if the market is relatively stable or goes up again, the lender is the beneficiary of a loan that has recast, with the borrower starting a new amortization schedule. This means that for better than 17 years on a 30 year loan, much if not most of their monthly payment will be interest to the lender and an extended loan period of 35 or 40 years means even more interest to the lender over the term of the loan. While a few of these homeowners may eventual pay off their properties, the opportunity cost in other financial areas of their lives, including pension savings, and their ability to contribute financially to the education of their children or support of their parents will surely be reduced. 

Banks Servicers and Investors Winning Big
The current status quo for bankers is not bad considering the more realistic alternative for the Feds would be to mandate that banks recognize current values in REO portfolios, and take the necessary hits to capital and earnings and make meaningful principal reductions part of any Loan Modification program.  Fortunately for the FIRE sector, their apparent total control of the new administration has given them every opportunity to ignore reality and kick the can down the road.  In the process they have lined their collective pockets with taxpayer funds and even created new sources of revenue, like HAMP. If the market should recover in the near term the bankers are the clear winners and taxpayers and homeowners will continue to fund the winning side. 

        

It's like Deja-Vu all over again...
Yogi Berra said it best. The media keeps explaining why the housing market is getting better, even going so far as to say it has hit bottom nationally. Maybe  "Housing is Bottoming", but only in the Headlines.
Kind of like saying the stock market has turned around and will go up forever from here. Should we be excited about relative increases in July Home Sales? I think not, for very fundamental reasons.
Housing Foreclosures Still on the Rise
Foreclosures in the bubble states are still increasing. The inventories of foreclosed properties are increasing and a growing percentage of those properties were purchased by Prime or Alt-A borrowers on larger and more expensive properties. The lack of Jumbo loan programs and the loss of exotic financing programs has all but guaranteed that the upper mid-section of housing in the ...<< MORE >>

So what if a few million "little people" people lose their homes...

Why should lenders and servicers raking in current profits worry about the future when the getting is so good right now?
For two years now at unsustainabubble.com I have been trying to understand/reason out why lenders and servicers are not modifying loans through principal reduction. I hypothesized that it was due to special tax loss carry forwards that made foreclosures with 50% loss severities OK, since the institutions would be paying reduced taxes on inflated and artificially induced profits from bailouts etc.

The "Re-Default Risk" entry on the Blog "Credit Slips"  (www.creditslips.com) and a really good one about "How to Stop Foreclosures" from Bank-o-Meter (www.bank-o-meter.com) have shined a major light on what may well be the key incentives for lenders/servicers forcing 80-90% of NOD's into foreclosure in CA, rather than trying to truly work out the loans. ...<< MORE >>

If only the Politicians Could hear anyone besides the big banks...

Small investors could lead the way out of a growing epidemic of empty, foreclosed and abandoned homes in many of the overbuilt bubble areas of the U.S., simply by buying, rehabbing and renting empty properties, contends California investor Bruce Norris.

At last, one man is making sense in a National forum!  Bruce is a longtime California Real Estate Investor who called the turn on the SFR Real Estate Bubble in California before almost anyone else. He made it to the big time in a nationally televised segment on ABC's Nightline. " Bargain Houses for Sale ". The result of a meeting and interview that lasted almost 3 hours is the short video at http://abcnews.go.com/video/playerindex?id=8188741 . You can see his website at www.thenorrisgroup.com . Hopefully, someone in Washington is listening to this eminently sensible man and his simple ideas.

The integrity and honesty ...<< MORE >>

What will be the Tipping Point for Home Prices?

In California, increasing numbers of  Foreclosures on higher priced residential housing is forcing the hand of sellers, many of whom have capitulated to market pricing in order to get their home sold and move on. Since there have been a few more sales at the higher end, the median home price appears to be increasing, but don't be fooled by statistics. A ton of foreclosed property is sitting in inventory at the financial institutions and they are releasing it as slowly as possible, presumably in order to maximize values at the time of sale. Short sales are still not working very well and the gap between sellers expectations and Market Prices has never been wider. Will capitulation at the high end by sellers be the tipping point for much lower values in Bubble States?

The YouTube video below demonstrates that ...<< MORE >>

Recent Article Points one Good Way to Fewer Foreclosures

Today I read an article from Milken Institute President Michael Klowden and Regional Economist, Ross DeVol,  that provoked an immediate response to the Editors at the Milken Institute.  My letter is reproduced below. Take a look at what out of the box thinking could do with enough support.

6/08/09
Dear Sirs,
Regarding your recent Op-Ed piece How to Rebuild U.S. Home prices and Fix the Economy.

I thank you for your clear thinking and willingness to propose ideas from outside the box to solve the underlying problem of negative equity in residential housing.  I have been writing about the failure of government initiatives to address negative equity in Loan Modification programs and bubble issues in general for the better part of two years at www.unsustainabubble.com . During this time, increases in negative equity have continued un-abated and thanks to gutless ...<< MORE >>

Unintended Consequences will Produce More Foreclosure Losses with Higher Severity in Bubble States

Legislation that would have resulted in Bankruptcy Cramdowns is dead, see  "Cramdown Bill Fails in Senate" . This is old news now, but what makes it important is that it may have been the last opportunity consumers had to create any pressure for mandated reductions of mortgage principal on first mortgages and the legislation probably will not revive thanks to the continuation of totally pro-banker policies from the Clinton and Bush administrations  by the Obama administration. So much for campaigning on a platform of "Change".

As methods go, Cramdowns were a poor substitute for lenders/investors doing what they know they should do, which is to take principal reductions (meaning current financial losses) and keep people in their homes, in performing loans with lower interest and values. Lenders have attempted to create a kind of shadow market for exotic loans through ...<< MORE >>

Current Market Conditions Validate assumptions in "Where's the Beef"

One of my first Blog entries ever, in July of 2008 is titled "Where's the Beef" after an old Hamburger commercial some of you may remember on TV. I wanted to discuss the incredible investment opportunities I saw coming for personal investing as well as alternative investing in truly  Self Directed Retirement Plans. I have another blog on this topic at www.selfdirectioncentral.com .

It seems that many of us are looking for alternatives to traditional Wall Street investments and conservative investors are looking closely at Hard Assets, including real estate, notes and precious metals.

Here is the link to an updated version of "Where's the Beef" at: http://unsustainabubble.com/2008/08/04/wheres-the-beef.aspx .

        

How Low can Single Family Real Estate Prices Go?
Perhaps the question should really be, how low will all real estate prices go during this recession/depression?
I had an email from a gentleman this morning that thinks much the same way as I do about the economy in general. He is currently considering relocating his principal residence to a different area and upgrading his home while taking advantage of current lower prices. He is in the enviable position of having the cash to back his intentions. Of course his worry is that he will buy now and that prices will continue fall, resulting in an unintended financial loss. In answer to his question. He said "I am thinking that the next wave of foreclosures is going to hit the market in the next 3-6 months, which would drive the prices down further. That would be the time to buy. What is your ...<< MORE >>