Here is a great video that explains the impact that the Mark to Market Accounting rules has had on the numbers of foreclosures on the market.
The mark to market accounting change is just one of many, many variables that go into the banks decision making process. This video does a good job explaining this one variable but it doesn’t give us the full picture. It would take a shelf of books to fully explain everything about the foreclosure crisis and REO business but understanding this rule is a good start.
The changes to this formerly obscure accounting rule is one of the best things the government did to prevent a full financial meltdown. This simple procedural change probably did more to save our economy than the billions of dollars in bailouts and stimulus. The banks were being forced to mark down all their REO assets even if they had no intention of selling them. This caused the value of the assets to fall further which forced them to mark the assets down even further. If the feds hadn’t changed this rule it would have created an artificial death spiral of values.
Since this housing crisis began in 2007, there’ve been almost 8 million foreclosures so far.
2007 Number of foreclosures – 2,203,209
2008 Number of foreclosures – 3,157,806
2009 Number of foreclosures 2,466,204 (Jan – Sep 2009)
Total number of foreclosures so far 7,827,219
Every ten seconds a new notice of default is filed. Housing Predictor.com predicts that at this pace the total number of homes that go through foreclosure may be as high as 25 million.
The Worst Is Yet To Come
“REO activity was higher in the second quarter in all but two states and Washington D.C. This indicates that lenders may be starting to work their way through some of the backlog of foreclosure inventory caused by political delays and the HAMP loan modification “extend and pretend” scam. However, the numbers of REO listings currently for sale don’t even come close to the huge number of foreclosures that have been recorded. Banks continue to hold back REO listings for several reasons, including:
• Many of the homes have clouds on title that need to be fixed
• Many of the homes are in poor condition and need work
• Many states have strict right of redemption periods, which stops the lender from listing the homes.
• Many states have extended the length of time it takes to evict
• The huge number of REO homes has caused a “pig in the python” phenomena. The banks are using most of their manpower to satisfy the politically driven “Pray and Delay” loan mods that they simply don’t have the resources to foreclose on non performing assets.
Six states make up 62% of the nation’s foreclosure activity: California, Florida, Arizona, Nevada, Illinois and Michigan. These are the states that had the highest home price increases during the housing boom. These are also the states that had the highest use of sub prime loans and high risk unconventional loans like the infamous Pay Option ARM loans and interest only loans.
Pay Option ARM loans have just started to re-set. The home buyers who used these loans bought with no money down and often paid only the minimum payment which increased their loan balance. When you combine the drop in home values with the much higher interest rates once these adjustable interest rate loans reset you have the perfect storm.These borrowers will see their monthly payments double and even triple when their loans re-set.
“Strategic foreclosures” are on the rise. Strategic foreclosures are when home owners are walking away from homes even though they can still make their payments. Many homeowners are refusing to pay their loans because they can rent for a fraction of their mortgage payment. They bought with no money down and thought they were going to get rich as home values continued to rise. Now that values have dropped they are walking away and letting the bank take the hit.
Between strategic foreclosures and loan interest rate resets alone, we may have an additional 4.9 million foreclosures in 2010. That would bring the total number of REOs through 2010 to an incredible 12,727,219.
By the end of 2010 we will be more than half way to the 25 million mark.
Some of the solutions that are being implemented by the obama administration to delay foreclosures include:
Principal forgiveness – The principal balance is being reduced by the lender. While the banks seem to be going along with this idea, the loan servicers are fighting principal forgiveness.
Payment forbearance – The FDIC is pushing forbearance as a short term (6 month) solution for those home owners who are unemployed, but who were making their payments as agreed prior to losing their jobs.
Clearly, the administration and the banks have come to some sort of working arrangement to delay the rate of foreclosures. The banks want to have as many positive quarterly earnings reports as possible to prop up their stock price. The obama admin wants to delay as long as possible. The would like to keep the hurricane at bay until the next Congressional elections but I doubt they have the ability to prevent the eye stormwall from hitting us in 2010. Remember that it is always the second stormwall that is the most destructive part of a hurricane.
Here is a great article written by Thomas Sowell, a senior fellow at Stanford. He is one of the few journalists who understands economics and the “butterfly effect” principle that states that each small action can have unforseen consequences. His thesis is that the politicians push for “affordable housing” created the forclosure tsunamai. Here is his article.
Back in the days of the Soviet Union, two Russian economists who had never lived in a country with a free-market economy understood something about market economies that many others who have lived under such economies all their lives have never understood. Nikolai Shmelev and Vladimir Popov said: “Everything is interconnected in the world of prices, so that the smallest change in one element is passed along the chain to millions of others.”
What does that mean? It means that a huge increase in the demand for ice cream can mean higher prices for catcher’s mitts, among other things.
When more cows are needed to produce more milk to make ice cream, then fewer cows will be slaughtered and that means less cowhide available to make baseball gloves. Supply and demand mean that catcher’s mitts are going to cost more.
While this may be easy enough to understand, its implications are completely lost on many people in politics and in the media. If everything is connected to everything else in a market economy, then it makes no sense to have laws and policies that declare some given goal to be a “good thing,” without regard to the repercussions, which spread out in all directions, like waves that spread across a pond when you drop a rock in the water.
Our current economic meltdown results from the federal government — under both Democrats and Republicans — declaring home ownership to be a “good thing” and treating the percentage of families who own their own home as if it was some sort of magic number that had to be kept growing — without regard to the repercussions on other things.
We are now living with those repercussions, which include the worst unemployment in decades. That is the price we are paying for increasing home ownership from 64 percent to 69 percent.
How did we get from home ownership to 15 million unemployed Americans? By ignoring the fact that there was a reason why only 64 percent of families owned their own home. More people would have liked to be homeowners, but did not qualify for loans under the mortgage-lending standards that had been in place for decades.
Politicians to the rescue: Federal regulatory agencies leaned on banks to lend to people they were not lending to before — or else. The “or else” included not having their business decisions approved by the regulators, which could cost them more money than making risky loans.
Mortgage-lending standards were lowered, in order to raise the magic number of home ownership. But, with lower lending standards, there were — surprise! — more mortgage-payment delinquencies, defaults, and foreclosures.
This was a problem not only for banks and other lenders but also for those in the business of buying mortgages from the original lenders. These included semi-government enterprises like Fannie Mae and Freddie Mac, as well as Wall Street firms that bought mortgages, bundled them together, and issued securities based on the anticipated income from those mortgages.
In other words, all these economic transactions were “interconnected,” as the Russian economists would say. And when the people who owed money on their mortgages stopped paying, the whole house of cards began to fall.
Politicians may not know much — or care much — about economics, but they know politics and they care a lot about keeping their jobs. So a great distracting hue and cry has gone up that all this was due to the market not being regulated enough by the government. In reality, it was precisely the government regulators who forced the banks to lower their lending standards.
The other big lie is that this was a failure of economists and others to foresee that the housing boom would turn to bust and set off financial repercussions across the economy.
In reality, everybody and his brother saw it coming and said so — including yours truly in the Wall Street Journal of May 26, 2005. As far away as London, The Economist magazine warned about the danger. So did many American publications and individuals. The problem was that politicians refused to listen. They were fixated on the magic number of home ownership and oblivious to the economic interconnections that Russian economists saw long ago and from far away.
Posted in Uncategorized at 12:43 pm by Administrator
How rare and refreshing it is when a federal body says something that is true and not a distortion. The Federal Reserve has raised concerns that the recent attempts to modify loans for underwater borrowers are nothing but a “Pray and Delay” tactic. You can read the whole article here.
This is our economic policy
The controversial decision to allow interest only payment periods for loan mods only delays the inevitable; foreclosure. The banks want to delay it so they can have as many good quarterly reports as possible. The obama admin would like to delay the next wave of foreclosures until the next congressional elections are over. The truth is that the politicians and banks have no intention or ability to stop foreclosures, they can only delay them. They are simply pandering to the public. Their delaying actions only hurt the borrowers, the economy and the good people who didn’t make stupid financial decisions when the housing hysteria was in full swing. The only people who are being helped by these delays are people in the foreclosure industry. The REO agents, asset managers and vendors will be guaranteed job security for years to come. What was going to be a very brutal but short foreclosure crisis will now be dragged out for about 5-7 more years. If you were thinking that you wanted to become an REO agent but you missed the window that window is being held wide open.
I talked earlier in this blog about how I thought the banks would be releasing foreclosure in the 4th quarter of this year. I don’t believe they will anymore. The banks and politicians are going to drag this crisis out for as long as they possibly can. Our tax dollars are once again going to be used to prop up the incompetent, the greedy, the very people who created the current economic problems.
It doesn’t matter if you work for a company like AIG and created the infamous financial weapons of mass destruction, you still get a bonus paid for by our tax dollars. If you worked for GM or Chrysler who allowed the unions to bleed the companies dry over decades thats OK, we’ll use tax dollars to prop up the companies and hand over control to the very entities that sucked out the lifeblood. All you homeowners who bought too much home with no money down and adjustable rate mortgages we have some goodies for you too. We’ll let you stay in your home for years rent free and then instead of foreclosing we’ll just do a sham loan modification that everyone knows won’t work. This will let you stay a few years longer all courtesy of those tax dollars.
Its funny how everyone loves to bash AIG and other Wall street companies but they don’t like to talk about how the rewarding of stupidity cuts across all spectrums. As long as it’s their stupidity thats being rewarded thats OK. The reason capitalism works is because you have the freedom to succeed and the freedom to fail. The failures in capitalism are its greatest strength. It allows capital, labor and other resources to be diverted to a better venture. When you take tax dollars to prevent the failures you are hobbling our system by preventing the rebirth and reinvention that has always been the hallmark of the American people and economy. The politicians are sacrificing our long term well being for short term gains. Those short term gains will come at a huge price. You can’t reward the financially irresponsible without punishing the financially responsible. Of course you have to paint the financially responsible as being evil and greedy first before you can punish them. Thats coming next. Watch for it.
This is a very funny overview of how to buy a bank foreclosure. I can see why an unexperienced agent would feel this way about buying foreclosures. It is very different than traditional real estate but a little knowledge goes a long way. The ability to follow bank instructions is crucial.
The latest assault on common sense is a report from The Wall Street Journal that banks, under political pressure from the obama administration are now forgiving portions of the principal on loans to try to make loan modifications work. The knock on the HAMP or Home Affordable Modification Program has been that the criteria are too stringent and not enough borrowers qualify. This is because the loan to debt ratios and other guidelines for loan modifications are actually based in reality. The guidelines are designed to ensure that the loan will actually be repaid. The left is not happy with reality though. They want to warp it for their own political ends. Home values have dropped too far for alot of borrowers and they just won’t fit into the program guidelines. Interest rate reductions and forgiveness of past due penalties and charges are not enough to get most of the borrowers to qualify.
Enter the stupidity.
The banks are reducing loan principal to bring borrowers into the guidelines. They are doing this because Barney Frank, one of the principal creators of the housing crisis and other Congressional members are threatening to make mortgage “cramdowns” a part of bankruptcy. This piece of legislation would allow a bankruptcy judge to reduce the loan principal of a mortgage as part of a bankrutpcy. If this legislation passes the courts will be flooded with bankruptcies and the banks will lose control of the principal reduction process. The banks see the principal reductions done under the HAMP program as the less of two evils so they are forging ahead.
This is unfair and unamerican. It reeks of the kind of “social justice” you learn at Yale not the kind of fairness that we all learned as kids. If you agree to something you should be bound to it. If you can’t abide by the terms of the agreement then you should pay the penalty. Where the hell is my principal reduction. I actually bought a smaller house at the height of the housing bubble. I made smart decisions and I am bound by my agreement. Why aren’t people who made foolish financial decisions bound by their agreements too.
Gertrude Stein once commented on Oakland by saying “There is no there there”. What she meant is that the Oakland of her youth no longer existed. I now feel the same about my country. There is no there there anymore.
OK, The book The Code Of An REO Warrior is written and published. Now its time to get the word out to all the agents who want to become an REO agent. I’ve been brushing up on my Search Engine Optimization skills in order to get the job done. I’m struck by how similar the needed skill sets are.
Driving Traffic
Both require a clear vision of what you want to acheive, a belief that you will achieve those goals, a mindset that nothing will stop you, a proven system that you know works, and a step by step implemention of that proven system. Its fun to enter a new field when you have those things. Its a miserable confusing whirl of misinformation and indecision with little success if you don’t have these ingredients from the start.
The importance of having your end results in mind BEFORE you begin is crucial. If you start doing SEO with the wrong keywords you will never be succesful, if you only do BPOs with the wrong companies you’ll never get REO listings. If you start either process with a full head of steam but fizzle out halfway through you will only get a small fraction of the results you want.
The SEO field and the REO business both have their share of snake oil salesmen. Both fields are highly specialized and require some knowledge that is not widely known. Both fields have white hat methods that will result in long term success and unethical black hat methods that will get you a lot of early success but will utimately have you banned by the powers that be. (Google for SEO and REO Asset Management Companies for REO) Both fields require a steady climb with daily efforts to achieve your goals. You have to be consistent over the long term.
I am shocked at how much fun SEO is. I think figuring out how things work is very rewarding. I love the black box aspect of both REO and SEO and trying to figure out exactly what goes on behind the scenes.
Many Americans have a sense of entitlement about things that are privileges. A home loan is a privilege not a right. When a bank agrees to lend you hundreds of thousands of dollars they do this because the loan is secured by your home. This is why home loans have interest rates of about 6% and credit cards go as high as 29.9%. Unsecured credit debt is riskier and more expensive because there is nothing backing the debt but your word. When the politicians take away the security of mortgages guaranteed by foreclosure that will cause the rates that banks have to charge to skyrocket. It is simple economic truth.
Politicians were crying a friggin river about “affordable housing” a few years ago as if it was an entitlement too. Well now we have affordable housing but they aren’t talking about that anymore. The fact that this foreclosure crisis was brought on by loose lending standards that was encouraged by lawmakers in the name of “affordable housing” is forgotten. They talk about the greed of Wall street but it was the stupidity of politicians that brought this on.
Atlas Is Gonna Be Pissed Off
I read the book “Atlas Shrugged” about 3 years ago and I thought that it was an amusing piece of fiction but it is coming true. I suggest you read it. It was written over 50 years ago but it was prescient about todays political climate.
I’ve had a theory all year about what is going to happen with the millions of foreclosures that are being held back. Some people think the banks have been holding back their REO inventory in order to manipulate the market and stop prices from falling. Others think that it is the HAMP program of loan mods that is preventing the foreclosures from coming to market. I think it is a little bit of both but I think the main reason the banks have not foreclosed on most homes all year is because of accounting tricks.
REO Being Held Back?
Companies HATE having losses spread out over many financial quarters. They much prefer to take all their losses in one quarter in order to prop up their earnings statements for the other quarters. I think that the banks decided that since the political pressure to delay foreclosures was very strong all year, they would do just this: minimize their paper losses for the first 3 quarters of the year and take them all in the 4th quarter. The political pressure fit in nicely with their preferred method of declaring losses.
Well today is the first day of the 4th quarter. I finally get to see if my theory is true. I’ll be tracking the foreclosures very closely today to see if over 80% of the trustee sales get postponed again. This is what has been happening all year. Rolling postponements of thousands of foreclosures. I’ll keep ya posted.
I got a call today from someone at Titanium Solutions. They are a company that hires real estate agents to knock on the doors of delinquent borrowers. The goal is to gather the paperwork needed to do a loan mod. This company has been doing this for a while but they just scored a big contract from Freddie Mac.
I signed up with them a few years ago but I decided not to work with them because it is very time consuming and the pay is very low. You do have a possibility of getting a short sale listing but short sales are not my area of expertise.
The thing that strikes me is that these delinquent borrowers are not paying their loan and now they can’t or won’t send in the paperwork to get a loan mod. The feds decide to hire someone to actually knock on the door and try to get the paperwork. This is just a waste of time. If someone won’t send in the needed paperwork then don’t keep chasing them to do a loan mod. Spend valuable resources on the borrowers who are sending in their paperwork and forget the ones that don’t.
