Distressed real estate: the pig in the room
Commentary: We need a quicker way to clear out inventory
By Lou Barnes, Friday, July 1, 2011.
Flickr image courtesy of slash__.Markets reversed this week, with stocks and rates both rising fast. The immediate cause: Greece is back from the brink. But not for long.
Deeper causes: Last week stocks stared at the darkness below 1,256 points, a bottom that has held since last Halloween, and have run up to 1,331 points on the bodies of short-sellers forced to cover. The 10-year Treasury note bottomed at 2.91 percent last week after a straight-line drop from 3.6 percent on April 12.
This week's bolt to 3.2 percent was overdue; ditto mortgages to 4.875 percent. The coup de grace: the June Institute for Supply Management index rose to 55.3, beating forecast.
With Europe on hold again, interest rates will not decline unless the U.S. economy does, and until it becomes clear who will buy $120 billion in net-new Treasurys each month now that the Fed has stopped QE2, its latest quantitative easing program.
The newest housing data has showed signs of a bottom in price, delinquency and sales volume. However, three questions apparently too impertinent to pose at the press conferences of either the Fed Chairman or the President:
1. How much distressed housing inventory has accumulated?
2. How fast are distressed homes selling vs. new ones arriving?
3. If ... if they are selling faster than piling up, but at a rate that will not clear for a decade or two, what are we going to do about it?
Variables are huge. Which will prevail: jobs first, economy first, or housing first? Any of the three? And, given the mass and velocity of the distressed-housing pig leaving the south end of the python, how much damage will there be to bystanders?
CoreLogic reports that shadow distressed inventory not listed fell in April, from 1.9 million homes to 1.7, down from the 2.2 million peak in early 2010. Distress is defined as 90-plus days delinquent, in the foreclosure process, or real estate owned (REO).
Meanwhile, LPS says the total count of distressed properties, listed and not, is 2 million that are 90-plus days delinquent, and another 2.2 million in foreclosure, plus analysts' guess that REOs range from 500,000 to 800,000. Conservative "totus porcus" (if you'll excuse the "pig" Latin): 4.8 million.
However, LPS says that an astounding 70 percent of loans in the foreclosure process have been there for more than a year, and almost that many 90-plus days delinquent are not yet in foreclosure. If that portion is frozen, the remainder of the distressed inventory is flying on and off the shelf at improbable warp speed.
The National Association of Realtors estimates annual sales of existing homes at about 4.5 million, and total listed inventory (all kinds) at about 4 million. Given LPS' count of 4.8 million total distressed, minus CoreLogic's 1.7 million distressed-not-listed, that would leave 3.1 million distressed listed properties: 77 percent of all listings.
Nonsense. There must be a hell of a lot of distressed inventory not anywhere near a market. And in the expanded definition of distressed, CoreLogic's count of "underwaters" (homeowners who owe more on their mortgage -- those at least 50 percent or $150,000 underwater -- represent another 2 million homes. Big pig.
At what rate are we barbecuing the fat off this baby? CoreLogic says 30 percent of existing homes sold are distressed (two-thirds REO, one-third short sales): or roughly 1.5 million annually. If nobody else enters hopeless delinquency, or takes a strategic walk from underwater, it would take three years to clear.
Realistically, based on declining new rates of delinquency, we are probably net-reducing inventory by a few hundred thousand homes annually, clearing in 2020 or something. That clearing will likely cave-in the market some more.
What to do? Old stuff.
Do not ever let a big zombie pig hang around the yard. The only one way to run it off, as the U.S. Housing and Urban Development Department began to do regionally in the '80s, and the Resolution Trust Corp. showed with commercial real estate: modest fix-up, price it to sell, and finance it: prepacked financing and no appraisal.
If that means Fannie and Freddie is to finance REO buyers from servicers who cannot finance buyers (the whole subprime legacy), then do it. If the Fed has to buy those loans, do it.
The Federal Housing Administration cleared the oil and savings and loan patch in two years by offering sweet terms: $500 down for owner-occupants; 15 percent down for investors -- got to qualify, for real. And knock off these pretend mitigations and procedural roadblocks.
Get ... this ... pig ... out ... of ... here.
This Mortgage Bankers Association accounting correlates fairly well with LPS numbers: Roughly 8 percent of U.S. mortgages are 90-plus days in foreclosure; of 54 million loans, that's a 4.3 million-home pig.
Source: CalculatedRiskBlog.com.
Per this LPS chart, the pig is old, and getting older:
Source: Lender Processing Services.
Total delinquencies are falling, but households are so fragile -- especially the underwater homeowners -- that there is no way to know if delinquency will fall to historical norm and shut off the pig inflow; or plateau; or in unfortunate circumstances: re-spike.
Source: Lender Processing Services.
Source: CoreLogic.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.
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Submitted by William Metzker on July 1, 2011 - 12:34pm.
Umm, weren't some of us saying this three years ago?
Submitted by Jon Astaris on July 1, 2011 - 5:28pm.
There IS a short simple answer to the housing problem, there really truly is: Abolish the due on sale clause, allow the mortgage to be assumed without qualification.
The loan stay with the house anyway, the lender doesn't care who has title and who signed the note, the lender takes the house back and that's the end of it, no recourse in most cases.
Here in califorrrnya ANY lender can foreclose and take the house back, all that matters is that SOMEONE at some point used the land as collateral to borrow money - the loan may have been sold a few dozen times, the trustee may have been substituted and re-re-resubstituted til the cows came home, and it may have agents and subagents til the entire herd arrived - in califorrrnya it doesn't make any difference, all the "agent" whoever he is at the time need do is show a copy of the loan docs! None of that "Chain of title" stuff, as in recording assumption/transfer/substitution papers.
Somehow it makes sense: you borrowed, you put the house up - now you don't pay? auf wiedersehen mein liebe schloss!
If so, how is the lender harmed if A sells to B and walks off leaving castle and mortgage to B, no need for lender interference?
Aah, says you, in a horrible down market with no real end in sight, the lender may not mind, but when the market turns the other way, you will surely have lots of speculators making money while the lender sits there chewing his fist.
But that is your solution. The apartment vacancy rates would skyrocket as millions would jump to buy everything in sight, so rents would come down to where they are affordable again to kids starting out, so they'd move out of their communes where they now reside. Family Formation! They'll need new futons and dinette sets too.
The much maligned (of late) suburbia would flourish again. Sellers would take back junior liens in lieu of cash down payment then sell them at a discount to retired firemen and cops. Local guvmints would collect zillion of bernanks (whatever's left of the old buck will proudly bear that name) in transfer fees and taxes. The newly minted millions of homeowners would spend like drunken sailors and yes, the shadow inventory and in fact all housing inventory would be snapped up in six months to a year.
The end result: within a year the economy would grow at 6 percent, inflation at 7 or 8, and the only job left for the Fed will be to keep the economy from growing too fast.
Foreclosure, at least residential foreclosure, would be very rare indeed. Many apartment buildings will fall in value dragging down some REITS and many small owners but this is a solution to the housing crisis not all the world's problems.