Residential loan delinquency rates more than FIVE times historic norms at major banks

Shadow inventory is primarily a problem for major commercial banks. The GSEs have been processing their foreclosures, and although delinquencies at the FHA are increasing, these are fresh delinquencies, not long-term shadow inventory. The too-big-to-fail commercial banks have been endlessly can-kicking to delay what I believe are inevitable write downs.

For as long as records on delinquencies were kept, rarely did the rate exceed 2%. Currently, it is over 10%! To make matters worse, the delinquency rate for commercial banks is not declining as fast as delinquencies overall. Over the last two years, the rate dropped from from a peak of 11.2% to the current 10.2%. If lenders continue at that pace, it will take another 16 years for delinquency rates to get back to historic norms.

Are we really at the bottom?

To me it is a source of some consternation that more than 10% of all residential mortgages held by the banks are delinquent. What is the future of those borrowers and their properties. Isn’t it likely that many, if not most, of these properties will be distressed sales as either short sales or foreclosures? Won’t those sales pressure prices?

I consider loan modifications can-kicking. Few of these borrowers are going to permanently cure their loans and sell with equity. Lenders are merely hoping to delay their losses and hope prices will go up which will minimize the carnage. Unfortunately, the liquidation of these bad loans requires an MLS sale — an additional sale the market would not ordinarily absorb. These sales will serve as a drag on appreciation if not a cause of outright price declines. That isn’t what lenders fantasize about.

What’s up with the housing market?

By Irwin Kellner, MarketWatch — Sept. 4, 2012, 12:01 a.m. EDT

It is nothing more mysterious than supply and demand. For the first time in a number of years, the supply of both new and used homes available for sale has dropped below demand.

No matter what the product or service, whenever demand exceeds supply, rising prices are sure to follow. Housing is no exception. …

Actually, housing is an exception. With ordinary goods and services, buyers are not limited in their ability to raise their bids. With housing they are. A precipitous drop in supply may prompt those few with the ability to bid higher to do so, but it may also serve to drastically reduce sales volumes, which is what’s happening here in the West. This is an important point because most pundits like this guy fail to understand (perhaps through willful ignorance) that less supply does not automatically mean house prices will go up.

This turnaround in prices is apparently convincing would-be homebuyers that it does not pay to delay …

Buy now or be priced out forever, right?

As a result, buyers have begun to deal. Home sales are up more than 20% from a year ago, while pending sales are now at a 2-1/2-year high.

The rise in home sales is almost entirely due to the influx of cash from hedge funds buying low-end properties as rentals. Owner-occupant buying is at a standstill.

And here is where banker’s fantasies truly take flight….

This should kick home prices even higher, and thus spur even more buying.

No, it won’t. If anything, higher prices will inhibit buying because the hedge funds buying rentals won’t chase the market higher. The fantasy contains a hidden erroneous assumption; there are not legions of fence-sitters who can be cajoled into buying. Rising prices won’t spur more demand. The warm bodies with jobs, down payments, and qualifying FICO scores simply aren’t there.

What Housing Recovery? Distressed Sales Still High, Shadow Inventory Massive

Agustino Fontevecchia, Forbes Staff — 8/28/2012 @ 6:57PM

Housing … prices are still more than 31% of their peaks and may take years to recover. With 11.4 million, or 23.7%, of all residential properties with a mortgage under water, and a shadow inventory worth $246 billion, according to CoreLogic, a true housing recovery is far away.

Tuesday’s Case-Shiller release, with data through June 2012, showed home prices continuing to recover. Both the 10- and 20-city composites finally recorded annual gains (0.1% and 0.5% respectively), prompting index Chairman David Blitzer to say:

We seem to be witnessing exactly what we needed for a sustained recovery; monthly increases coupled with improving annual rates of change. The market may have finally turned around.

Everyone who touts rising prices or declining inventory ignores why it’s happening. As the chart at the top of the page proves, the banks are not out of delinquent borrowers they need to process.

… There are several reasons to remain skeptical…. Goldman’s economics research team understands that much of the improvement in housing markets can be attributed to a fall in the percentage of distressed transactions, which accounted for 50% of sales in 2009 and has now fallen to 25%. (Read Steve Schaefer‘s piece, Why The U.S. Housing Recovery May Be Due For A Stumble for more on this).

And most of this reduction is entirely due to policy changes at the major banks to comply with the settlement agreement. Lenders simply stopped taking on more REO in hopes they can resolve these bad loans through short sales instead. When banks finally reach their quotas, likely by next spring, they will turn their attention to forcing out the committed squatters.

The typical foreclosure discount is on the order of 27%, according to John Campbell, chair of Harvard University‘s economics department. Thus, a falling percentage of distressed sales mean a lower percentage of discounted transactions. The number of distressed sales also affects the size of the foreclosure discount, which in May was reported to be about 20%, according to Goldman. A falling rate of distressed sales provides a double-whammy then, reducing the discount and the number of discounted transactions.

When the banks really are out of delinquent mortgage squatters to foreclose on, we will see the same phenomenon. The share of distressed sales will fall, the remaining inventory won’t need to be discounted as much, and prices will begin to rise. The issue today is that this activity is premature. It is not a natural bottom caused by a lack of distressed inventory. It is an artificial bottom caused by changes in bank policy.

While the number of distressed sales vis-à-vis regular sales has fallen quite dramatically since March 2009, its decline was more moderate from May 2011 to May 2012, when it went from 31% to 25%. The historical average, though, is far away, at about 5%.

So not just are the bank’s residential loan delinquency rates more than five times historic norms, the share of distressed sales is also five times historic norms. That sounds like a recipe for a housing market bottom, right?

While Goldman expects the percentage of distressed sales to slowly tend toward this average, they understand this could take many years:

In our view, returning to a more normal proportion of distressed sales will take several years, given the large number of borrowers with negative equity, the large current delinquency and foreclosure inventory, and the long current foreclosure timelines.

In other words, the bank’s can-kicking is dragging this out.

As mentioned previously, the most recent data on underwater mortgages shows that nearly a fourth of all residential properties with a mortgage are underwater. That’s 11.4 million as of the end of the first quarter. At the same time, financial institutions including big banks with exposure to the mortgage business like Bank of America, JPMorgan Chase, and Citigroup are sitting on a shadow inventory of 1.5 million units... . Worth $246 billion, the shadow inventory will certainly weigh on lending and economic conditions going forward.

I’m certain about it, but many industry “experts” are denying any of this is a problem.

… Regulation (such as the robo-signing sparked foreclosure moratorium) has helped to slow distressed sales, while vast number of underwater mortgages and size of the shadow inventory suggests housing markets can face a sudden increase in the number of distressed properties. It will be a bumpy ride for residential real estate.

Since lenders aren’t being pressured financially or by regulators to liquidate, it’s not likely we will see a flood of foreclosures, but certain areas may see some deep air pockets along the way. The sudden appearance of competing supply creates opportunities for buyers who recognize it.

Recognizing value

So how can buyers recognize a good value when they see it? On Monday, I posted OC housing market ratings and historic city values. In that post, I described how to use my OCHN report to find areas where values are relatively attractive.

I calculated rental parity for each OC city back to 1988. I compared these values to the median resale price to determine the historic relationship between rental parity and the median. In particular, I focused on the period from 1993 t0 1999 which was the last stable period between housing bubbles. By establishing the relationship between rental parity and the median during this period, I have a benchmark to where prices should bottom in the aftermath of our most recent housing bubble. Below is the result of this analysis.

What I found most interesting in this study was how inflated the beach communities have always been. I knew these communities were never at rental parity, but I didn’t realize some of them were more than 50% inflated even at the bottom of the last bust. In fact, some of these communities which are still inflated are less inflated than ever before. For example, Coto de Caza is trading for near rental parity today, an over 50% reduction from its normal level of price inflation. In other words, Coto de Caza is a relative bargain today.

Long history of OCHN ratings

When I developed the OCHN rating system (read this for more information), I used history as a guide to weight the variables of resales prices and rental rates in a way that timed the housing cycle. A useful rating system should say not to buy when prices when the timing is poor, and it should say to buy when the timing is right. You can see the results below.

Anyone using the OCHN rating system would have avoided buying when they were likely to end up underwater. The system even warned about buying in 2009 when everyone else was calling the bottom. Since interest rates have declined along with prices and rents have gone up, affordability is at record highs, and the OCHN rating system is issuing a strong buy signal. The last such strong buy signal was in 1998, the bottom of the last housing bust.

If you would like to use this information in your house search, you can request it below.

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Wouldn't you be embarrassed to overpay by $100,000? Only fools buy houses without knowing neighborhood values. Don't be a fool. Don't suffer the pain of an underwater mortgage. The surest way to lose your house is to overpay for it. Our reports identify overvalued and undervalued neighborhoods. Use it to broaden or narrow your search area. Savvy buyers work with us to find bargains. We've saved thousands from financial ruin. Let us save you too. If you want peace of mind while shopping for your next home, sign up for our monthly market newsletter.

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Wouldn't you be embarrassed to overpay by $100,000? Only fools buy houses without knowing neighborhood values. Don't be a fool. Don't suffer the pain of an underwater mortgage. The surest way to lose your house is to overpay for it. Our reports identify overvalued and undervalued neighborhoods. Use it to broaden or narrow your search area. Savvy buyers work with us to find bargains. We've saved thousands from financial ruin. Let us save you too. If you want peace of mind while shopping for your next home, sign up for our monthly market newsletter.

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Proprietary Irvine Housing News home purchase analysis

15396 ORLEANS Cir Irvine, CA 92604

$625,000 …….. Asking Price
$349,000 ………. Purchase Price
2/23/2001 ………. Purchase Date

$276,000 ………. Gross Gain (Loss)
($27,920) ………… Commissions and Costs at 8%
============================================
$248,080 ………. Net Gain (Loss)
============================================
79.1% ………. Gross Percent Change
71.1% ………. Net Percent Change
5.0% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$625,000 …….. Asking Price
$125,000 ………… 20% Down Conventional
3.51% …………. Mortgage Interest Rate
30 ……………… Number of Years
$500,000 …….. Mortgage
$114,036 ………. Income Requirement

$2,248 ………… Monthly Mortgage Payment
$542 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$156 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,946 ………. Monthly Cash Outlays

($351) ………. Tax Savings
($786) ………. Equity Hidden in Payment
$140 ………….. Lost Income to Down Payment
$176 ………….. Maintenance and Replacement Reserves
============================================
$2,126 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$7,750 ………… Furnishing and Move In at 1% + $1,500
$7,750 ………… Closing Costs at 1% + $1,500
$5,000 ………… Interest Points
$125,000 ………… Down Payment
============================================
$145,500 ………. Total Cash Costs
$32,500 ………. Emergency Cash Reserves
============================================
$178,000 ………. Total Savings Needed

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The property above is available for sale on the MLS.

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Cost of Ownership Analysis

Are you ready to make an offer, but you are worried the cost of ownership is really more than you can afford? Don't make a mistake that might cost you the family home, your life savings, and your good credit! Get the advice of a seasoned professional. Contact us at info@ochousingnews.com today! We produce detailed reports showing the cost of ownership based on the most likely transaction price and current financing terms. You will know how much you will spend each month in out-of-pocket expenditures and the true monthly cost of ownership factoring in tax deductions, loan amortization, and opportunity costs on your down payment. In addition, we show you how this cost compares to a rental of equal quality to make sure buying is the right decision for your situation. An OC Housing News Cost of Ownership Analysis will calm your worries and give you peace-of-mind. Let us show you the way!

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OC Housing News FREE Guides!

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Nearby Foreclosures

Gain a competitive advantage over other buyers. By locating distressed properties -- before they hit the MLS -- you can discover where tomorrow's REOs and short sales will appear. Most of these properties are not listed on the MLS, but they will be soon. Research properties in advance and get a jump on your competition. Don't miss out on another deal because you couldn't act quickly. Use this tool to your advantage! The red properties are already bank owned. As soon as REO asset managers prepare them for sale, they will be on the MLS. Get ready! The green and blue properties have owners who are not paying their mortgages. They may be offered as short sales, or they may go through foreclosure and become REO. Either way, they will also likely be available on the MLS soon. Find your next home! Be prepared to offer on these properties by researching them in advance or risk losing out to buyers who are have done their homework. Start your research today! To find distressed properties, enter your desired location and press search. Scroll through list by pressing "next."

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Comparative Market Analysis

Are you ready to make an offer, but you are worried you will either (1) underbid and miss the property or (2) overbid and pay too much? Don't make a mistake and miss your dream home, or worse yet, overpay for it! Get the advice of a seasoned professional. Contact us at info@ochousingnews.com today! Are you thinking about selling, but you are worried you will either (1) overprice and fail to sell or (2) underprice and leave money at the negotiating table? We are the experts in real estate valuation. Work with us to set the right prices to sell your property quickly for the largest amount possible. Let us show you what your property is worth today! An OC Housing News Comparative Market Analysis will calm your worries and give you peace-of-mind. See for yourself right now!

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Reports are available for properties in the Southern California MLS coverage area, and are generally delivered within 24-72 hours. If you wish to receive multiple properties, please contact us at info@ochousingnews.com, and we will prepare the reports for you.

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	$699,000 15301 SEINE Cir		0.11 miles 4 bd / 3 ba 1,988 Sq. Ft.
	$485,000 17 BLACK OAK		0.36 miles 3 bd / 2.25 ba 1,600 Sq. Ft.
	$610,000 5141 YEARLING Ave		0.47 miles 3 bd / 2.75 ba 1,480 Sq. Ft.
	$698,000 50 REDHAWK		0.97 miles 4 bd / 2.25 ba 1,854 Sq. Ft.
	$584,700 4371 MANZANITA		1.07 miles 3 bd / 2 ba 1,448 Sq. Ft.
	$550,000 52 DANBURY Ln		1.12 miles 3 bd / 2.25 ba 1,500 Sq. Ft.
	$725,000 41 SONGSPARROW		1.29 miles 4 bd / 2.5 ba 1,949 Sq. Ft.
	$659,000 3921 BLACKTHORN St		1.42 miles 4 bd / 2.25 ba 1,897 Sq. Ft.
	$698,900 1 SANTA CATALINA AISLE		1.62 miles 4 bd / 2.5 ba 1,900 Sq. Ft.
	$549,000 34 STRATFORD		1.69 miles 3 bd / 2.75 ba 1,273 Sq. Ft.