FHFA, Treasury, HUD Seek Input on Disposition of Real Estate Owned Properties
Range of Ideas Sought, Including Transition to Rental
Washington, DC — The Federal Housing Finance Agency (FHFA), in consultation with the U.S. Department of the Treasury and Department of Housing and Urban Development (HUD), has announced a Request For Information (RFI), seeking input on new options for selling single-family real estate owned (REO) properties held by Fannie Mae and Freddie Mac (the Enterprises), and the Federal Housing Administration (FHA).
The RFI’s objective is to help address current and future REO inventory. It will explore alternatives for maximizing value to taxpayers and increasing private investment in the housing market, including approaches that support rental and affordable housing needs.
“While the Enterprises will continue to market individual REO properties for sale, FHFA and the Enterprises seek input on possible pooling of REO properties in situations where such pooling, combined with private management, may reduce Enterprise credit losses and help stabilize neighborhoods and home values,” said FHFA Acting Director Edward J. DeMarco. “Partnerships involving Enterprise properties may reduce taxpayer losses and meet the Enterprises’ responsibility to bring stability and liquidity to housing markets. We seek input on these important questions.”
“As we continue moving forward on housing finance reform, it’s critical that we support the process of repair and recovery in the housing market,” said Treasury Secretary Tim Geithner. “Exploring new options for selling these foreclosed properties will help expand access to affordable rental housing, promote private investment in local housing markets, and support neighborhood and home price stability.”
“Millions of families nationwide have seen their home values impacted as their neighbors’ homes fall into foreclosure or become abandoned,” said HUD Secretary Shaun Donovan. “At the same time, with half of all renters spending more than a third of their income on housing and a quarter spending more than half, we have to find and promote new ways to alleviate the strain on the affordable rental market. Taking steps to encourage private investment in REO properties and transition them into productive use will help stabilize neighborhoods and home values at a critical time for our economy.”
The RFI calls for approaches that achieve the following objectives:
reduce the REO portfolios of the Enterprises and FHA in a cost-effective manner;
reduce average loan loss severities to the Enterprises and FHA relative to individual distressed property sales;
address property repair and rehabilitation needs;
respond to economic and real estate conditions in specific geographies;
assist in neighborhood and home price stabilization efforts; and
suggest analytic approaches to determine the appropriate disposition strategy for individual properties, whether sale, rental, or, in certain instances, demolition.
FHFA, Treasury and HUD anticipate respondents may best address these objectives through REO to rental structures, but respondents are encouraged to propose strategies they believe best accomplish the RFI’s objectives. Proposed strategies, transactions, and venture structures may also include:
programs for previous homeowners to rent properties or for current renters to become owners (“lease-to-own”);
strategies through which REO assets could be used to support markets with a strong demand for rental units and a substantial volume of REO;
a mechanism for private owners of REO inventory to eventually participate in the transactions; and
support for affordable housing.
Link to RFI
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Media Contacts:
FHFA Corinne Russell (202) 414-6921
HUD Tiffany Thomas Smith (202) 708-0980
TSY Matt Anderson (202) 622-0631
I know some people have this notion that somehow California real estate prices are going to miraculously recover simply by sheer determination and the belief in late night infomercial catch phrases. Instead of focusing on larger macro economic trends they will use limited data that doesn’t capture the larger emerging trend. We’ve all seen those TV ads yet data is going in a very different direction. Inventory is increasing in California. Prices are dropping. Problem loans are still filling the pipeline. These are facts and as stubborn as they are, they tell us a more provocative story about real estate in the state. That story revolves around the fact that a large shadow inventory is lingering and the artificial dams of government intervention are having a tougher time holding back the flood. Today, I wanted to focus on the higher end markets of Los Angeles County to show that contrary to a handful of anecdotal cases, overall there is a bigger trend emerging. The mid-tier market is now entering its correction.
Before we look at Santa Monica our targeted city today, I wanted to provide you with 35 specific examples of million dollar prime location foreclosures in Southern California. These are all in Los Angeles County:
Now, if this is only a piece of the American Pie that was created…Imagine this is a fraction of the 8 million waiting in the shadow foreclosure inventory looming in the highest states such as Arizona, California, Florida etc. Sellers need to price their homes aggressively or risk losing to these shadows.
In my opinion what these banks are doing now is committing fraud. Why? Because they are not disclosing this inventory and are making loans to unsuspecting buyers when they know for a FACT the values are still heading south!
Many commentators continue to describe the housing market in Queens as surprisingly resilient. Hardly any has warned of a possible collapse. Is this a disservice to both sellers and buyers? Let’s take a close look and see.
Introduction to the Queens Housing Market
The borough of Queens in New York City has a population of roughly 2.2 million. For nearly a century, it has been the bastion of the middle class in the Big Apple. To put things in perspective, you could have bought a nice two-story attached brick house in south Queens for $16,000 in 1950. Twenty-five years later, the cost of this same house was still under $30,000.
That began to change as inflation soared into double digits in the late 1970s. At the start of the new millennium, the median price of home sales in Queens had climbed to roughly $168,000 according to trulia.com. During the bubble years of 2003-2006, home sales soared in Queens and throughout New York City (NYC). Prices really skyrocketed.
Between 1996 and 2006, the annual number of first lien purchase mortgages originated in NYC more than doubled. Citywide, a record of more than 50,000 owner-occupied homes were sold in 2006. That year, the median size of a first lien purchase mortgage climbed to $384,000 according to the Furman Center for Real Estate and Urban Policy. That nice brick house in south Queens actually sold in 2005 for a whopping $360,000.
As we saw in a previous REAL ESTATE CHANNEL article, the mortgage problem was exacerbated by the growing use of piggyback second liens to cover the 15-20% of the purchase price which the first mortgage did not. In 2006, 28% of all New York City buyers took out piggyback seconds. The Furman Center found that 43% of purchasers with incomes from $100,000 to $150,000 used a piggyback second mortgage.
According to trulia, home sales in Queens soared to a record of more than 20,000 in 2005. The following year, the median price of all existing homes sold reached roughly $500,000.
While most bubble housing markets weakened in 2006 and then plunged in 2007-2008, the NYC market remained relatively robust because of the roaring stock market. But quite unnoticed, sales volume began declining. After the stock market peaked in the summer of 2007, the housing market began to unravel.
The Looming Default Disaster in Queens
According to RealtyTrac.com, as of June 16 there were 9,054 Queens residences which the banks had placed into default since the middle of February 2009. Of these, 2,550 have been in default for more than a year. None has been foreclosed by the banks yet. Every one of these owners who is occupying the property has been living basically rent-free since stopping the mortgage payment.
More than 4,000 of these homes have outstanding mortgage debts in excess of $400,000. Over 2,500 have mortgage liens of more than $500,000.
When RealtyTrac is unable to obtain the outstanding mortgage debt figure, it lists the amount for which the owner is in arrears. Here is the real shocker. More than 3,500 properties have arrearages listed, some as high as $100,000. Roughly 280 of these owners owe anywhere from $25,000 to $100,000 in delinquent mortgage payments. Those with arrearages of roughly $100,000 have not paid a cent to the lender in about three years. Nice deal isn’t it? Let’s not feel too sorry for these poor folks.
Without a doubt, the word has spread throughout Queens that the banks are not foreclosing on owners who stop making mortgage payments. It is not very surprising, then, that an incredible 11.2% of all borrowers are now delinquent in their payments by 60 days or more. This figure comes from Trans Union, the credit-reporting firm, which puts out a quarterly mortgage delinquency study based on a database of 27 million anonymous credit reports. That is up from only 7.2% a year earlier. The chart below shows how the serious delinquency rate has skyrocketed in the last three years.
How many delinquent owners are we talking about? The borough has roughly 250,000 single-family homes and another 240,000 units in 2-4 family houses owned by investors. Even assuming that roughly 1/3 of these owners are mortgage-free, at least 25,000 properties are seriously delinquent now. We know from Core Logic’s monthly mortgage report that nearly all of these seriously delinquent borrowers will eventually default. That is 25,000 additional properties which will eventually have to be foreclosed and repossessed by the banks. Meanwhile, they are living rent-free and pocketing perhaps $3,000-$4,000 a month. Investors who own 2-4 family houses may also still be collecting rent. Sort of makes your blood boil, doesn’t it?
What About the Foreclosed Properties Owned by the Banks?
You would think that with so many delinquent and defaulted homeowners in Queens, there would now be a huge number of homes owned by the banks and sitting in their inventory (REOs). Wrong.
RealtyTrac showed a total of only 1,389 homes in the banks’ repossessed inventory as of June 16. Nearly 400 have an outstanding mortgage debt exceeding $500,000. Dozens of these properties have been owned by the banks for more than two years.
You may have read something lately about how banks nationwide are unloading their REOs at a faster pace now. Not in Queens. RealtyTrac lists a total of 12 properties which the banks have up for sale now. That’s right – 12. Why only twelve? Who knows? The banks are clearly concerned that if they dump too many of their REOs onto a housing market that is now so thin, this will severely depress prices. They would also have to write down the actual losses on their balance sheet.
What is the State of the Housing Market Now in Queens?
As of June 16, Trulia listed 12,777 properties for sale. Of these, 672 were added in the previous seven days. The average listing price was $438,000.
Are homes selling now in Queens? Hardly. According to MDA DataQuick, which culls its figures from county recorder offices, the median price of all new and existing single-family homes and condos sold in the first quarter of 2010 was $403,000. That isn’t too bad a drop from the peak, right? The problem is that only 1420 new and existing single-family properties were sold during this latest quarter. That is an average of only 473 per month. We are talking about a county with 2.2 million people and nearly 500,000 housing units (excluding multi-family apartment buildings).
By way of comparison, let’s take a look at Houston with a population slightly smaller than Queens. According to the Houston Association of Realtors, sales of all existing homes in the Greater Houston area in May totaled 6,659. Why such a difference? Simple. The median price of Houston sales was only $155,000.
With the market in Queens so awful, are home sellers cutting their asking price? Not really. Trulia reveals that only 24% of all homes listed there now have had the asking price dropped by the owner since being posted on the website. That seems crazy, doesn’t it? True, some of these owners are probably not what we might call serious sellers. They don’t have to sell and are just “testing the waters.”
What about those who either really want to sell their home or are distressed and must sell the property? Don’t they need to lower their asking price, perhaps substantially, in order to find a buyer? Absolutely.
Even more important, what happens when the banks start putting into default the 25,000 seriously delinquent homeowners and foreclosing on the 9,000+ properties currently in default? This overhang waits like a potential tsunami that we know will follow when an earthquake measuring 9.1 erupts underwater as it did in late 2004.
Sooner or later, the banks will have to begin whittling down the growing number of delinquent and defaulted properties in Queens. What will happen to prices when the banks finally start to place this potentially enormous REO inventory on the market? Simple. Prices will plunge. Make no mistake, it will be ugly.
Those who currently have their home on the market in Queens need to see what’s coming down the road. If they refuse to lower their asking price substantially, they will almost certainly regret that decision in the next year or two. Furthermore, prospective buyers probably ought to seriously consider whether waiting might be the more prudent course of action.
To a lesser extent, this analysis also applies to the three other outlying boroughs of Brooklyn, the Bronx, and Staten Island.
Every once in a while, the term “shadow inventory” makes it into the business headlines. Invariably, stories warn of a looming flood of foreclosures that will drag the housing market down as soon as homeowners begin to feel optimistic again.
But what is shadow inventory — and is it really such a big threat?
Different experts have different definitions. Some only include homes that have already been repossessed by banks and are awaiting distressed sales. Others include those whose owners are long-overdue on mortgage payments, while others still count homes whose owners would like to sell but are waiting for conditions to improve.
8 Million More Foreclosures May Be Waiting
“The definition of shadow inventory has gotten out of control,” says Rick Sharga, senior vice president at RealtyTrac, an online market for distressed homes.
As a result, estimates of homes in the shadows vary widely between 2 million and 8 million. By comparison, approximately 5.5 million homes are expected to change hands this year, of which about a third are in some kind of distress.
High estimates usually include include repossessed homes that have not yet been listed for sale, homes that have been moved from the delinquent bucket and into foreclosure, and homes that are more than 60 days delinquent.
“Theoretically you could say up to 7 million homes are in the pipeline, but not all of them will go into the market and if even if they do, not all of them will hit at once,” says Sharga. Given the current pace of sales, Sharga believes shadow inventory could be cleared by the end of 2013, at which point the housing market can begin a real recovery.
Shadow Inventory Can Be Lethal
The problem with shadow inventory is that it does not simply represent additional supply. It’s supply of the worst kind: distressed homes that are often in hard-hit regions, often in a state of disrepair. Homes in foreclosure have more power to drag down real estate prices and keep them depressed for years to come.
“If you can buy a cheap foreclosed home next door to a normal home, many people will choose to buy the discounted home,” says Celia Chen, housing analyst at Moody’s Economy.com. She estimates that 4.6 million homes are currently waiting in the shadows, almost a whole year’s worth of housing supply.
Shadow Inventory Stuck In Limbo
Like many other analysts, Chen believes we still have a long way to go before real estate prices begin recovering. Some expect a recovery to begin in the middle of next year, others don’t see it coming for several more years.
There are many reasons that shadow inventory is so difficult to gauge.
For one thing, financial institutions that own distressed mortgages are not saying exactly how many homes they hold. Firms have generally been releasing their supply of distressed homes slowly into the market for fear of crushing prices.
Another problem is that nobody knows exactly how many homes will make it out of the government’s “Home Affordable Modification Program.” Chen estimates that only 45 percent of the 1.2 million loans that are aiming for a modification will actually succeed, while the rest will likely end up in foreclosure.
While these numbers certainly are cause for concern, the good news is that this shadow inventory is unlikely to cause a shock to the system similar to the initial crash.
No Nuclear Event in Housing
“Much as during the arms building between the U.S. and the Soviet Union, neither one ever launched a nuclear attack for fear of causing complete destruction,” says RealtyTrac’s Sharga. “You’re not going to see a nuclear event happen in the housing market either.”
Esmael Adibi, economics professor at Chapman University says shadow inventory is actually a good thing bcause it means that financial institutions – primarily lenders and investors who own the delinquent mortgages – are holding on to the inventory instead of dumping it into the market.
Adibi says financial institutions are not only holding on to their inventory in order to avoid crushing the market, but also because they believe they might get a better deal once prices have recovered slightly.
“Can you imagine if all those homes ended up in the market now?” he says. “Things would be much worse.”
How many real estate agents and brokers does it take to sell a California home? 2 ¼ if we look at current inventory levels and the amount of Californians with a real estate or broker’s license. One of the early observations of the housing bubble was how much money was being spent in the economy because of high wage California housing bubble jobs. Toxic loan after toxic loan provided wonderful commission checks but also provided the state with a nice chunk of tax revenue. Year after year this went on. Our fate has been intertwined with real estate and since real estate has busted so has ourstate economy. I remember a few colleagues that were pulling in high six-figure incomes as mortgage brokers and real estate agents and were spending every dime as quickly as it came in. Many have downsized drastically and don’t have a penny to their name. Ironically many of these people drank their own Kool-Aid and bought million dollar homes with the same mortgage sewage they were passing onto their clients. A few are now in bankruptcy and many have lost or will lose their homes.
California is likely to face a lost decade in housing. Do I mean from 2000 to 2010? In some areas we have already reached a lost decade. Yet many areas will face their lost decade from 2010 to 2020. Here are 5 reasons why California real estate will have a decade of slow or no growth ahead:
Reason #1 – High paying finance and real estate jobs are gone
I went ahead and compiled 14 years of license and broker data for California above. From 1996 to 2002 we averaged approximately 300,000 active licensees in the state. This was before the bubble ramped up. We reached a peak in 2008 of 549,000 active licensees. Today that number is down to 493,000 and is continuing to fall as many simply let their license expire. Even with recent sales increases we are still close to half the volume of the bubble years. Plus, home prices are half of what their peak values were. So even basic math will tell you that at the very least, half of income in this industry is gone (for example the 5 to 6 percent agent cut is based on the sale price). Then on the lending side you have 96.5% of loans being government backed and these don’t provide the nice kickbacks that the option ARMs did for example. In other words, high income no GED required jobs are now gone. Even those with industry specific degrees and training are finding it hard to get good jobs in today’s economy.
And many other jobs tied to the FIRE side of California employment and construction took big hits:
These were good paying jobs that are now gone. Many of these jobs depended on the perpetual growth of the housing bubble. But even as we will see with inventory levels, do we still have a bubble in this industry?
Reason #2 – Too little inventory and sales for the amount of workers
I went ahead and took a major snapshot of how much MLS inventory is currently listed for public view in California. Although inventory is spiking, you start seeing issues that are plaguing the industry:
Since February of this year California has added 64,500 homes to the MLS, an increase of 41 percent. This is a massive jump. Part of this jump aligns perfectly with the failure of HAMP and more banks pushing inventory onto the market.
But let us use that current inventory number and run a quick analysis:
493,576 real estate agents and brokers / 219,217 homes on the CA MLS = 2 ¼ agents and brokers for each home
I find the above fascinating. We have close to 500,000 licensed agents and brokers for 219,000 homes on the market. And you wonder why we have a problem? This is like going to a used car lot with 20 cars and finding 50 sales representatives. However like many things in life, I believe that the Pareto principle applies here as well. That is, 80 percent of sales is likely to come from 20 percent of those with active licenses.
Although the shadow inventory is much larger than the 219,000 homes on the MLS, agents and brokers only make money when they sell. And banks don’t seem in a big hurry to move the entire inventory out at once. In other words, we have years of junk built up in the pipeline with wages slashed.
Reason #3 – California budget and revenues shattered
If you want to see a problem in the making look at this:
The state for the fiscal year of 2007-08 collected over $101 billion. How do things look today?
For the fiscal year that is coming to an end, we are projected to bring in $81 billion. We are short by $20 billion and this includes every kind of tax increase you can imagine. This does little considering half of the state revenues come from personal income taxes and many of those high paying bubble jobs (see above) are now gone. Yet the state kept spending more and more assuming that a Ponzi like income stream was going to come in forever. That is not the case as we are now painfully finding out so we must adjust.
The Legislative Analyst Office (LAO) is projecting problems well into 2015. Another issue that the state will have to contend with is high pension costs of soon to retire baby boomers. Recently CalPERs announced that the state will need to pitch in $700 million to cover its poor bets. They are pulling back for the moment:
“(LA Times) Facing political fire, the state’s largest public pension fund Wednesday retreated for a month from a plan to approve a $700-million increase in taxpayer contributions it gets from the state and about 1,000 school districts.
State Treasurer Bill Lockyer, a member of the California Public Employees’ Retirement System board, said the fund needs to assess the consequences of the huge hike on California at a time when the state faces an estimated $19-billion budget deficit.”
You can rest assured that there will be some serious battles on this front for years to come.
Reason #4 – Shadow inventory
The Wall Street Journal put together data regarding shadow inventory that we already knew about. California ranks near the top of shady banks and home squatters that are simply staying put and not paying their mortgage:
This is just nuts. In California 7 percent of loans that are 90 days overdue are not in foreclosure! What is even more stunning is the nationwide amount of people living in homes with no payment and foreclosure for 2 years! This is a slap in the face of every prudent middle class American. And the idea of poor homeowners is nonsense here in California. You have folks living in prime locations not paying their mortgage who can easily afford a nice rental. But they’ll sit it out while banks sit back and suck on thetaxpayer gravy train. This data merely confirms what we already know. The state is plagued with delinquent loans. In fact, 15 percent of all California loans are 30+ days late or worse.
Reason #5 – Consumer psychology and jobs
The mantra that real estate prices never fall is completely shattered for an entire generation of Americans. Those who lived through the Great Depression are largely absent from our current economy and can’t share their wisdom. And given the preference of Americans to watch Dancing with the Stars instead of reading some history, many have forgotten that real estate can crash and crash hard. But if history is any guide, we will have a generation of Americans who are more cautious and thus will put a lid on any mega jumps in appreciation for the next decade.
On Friday the California unemployment rate came out and we are still at a record high of 12.6 percent. Adjusted for the underemployment rate we are closer to 23 percent. Even the running average at the BLS shows us over 21 percent:
Keep in mind this is a one year rolling average so this will only move higher as we have been at peak levels for many months. This also goes back to my earlier reasons for a lost decade in home prices. Those high paying jobs are gone. You can only purchase a home by what your income can support. A large number of those depended on toxic mortgagesthat were easy to churn on a short notice. After all, giving NINJA loans with no verification allowed seedy mortgage brokers to turn out loan after loan. Now even with lax lending inFHA insured loans, at least they have to verify income. As it turns out, there simply isn’t that many that can qualify in California.
I see a sideways moving decade for California real estate. And for the next one or two years prices will start trending lower again as the Alt-A and option ARM waves hit and the gimmick parade starts running out. You can only keep a lid on corruption for so long. The “once in a century” problems now seem to be hitting every month. A near 1,000 point drop in the Dow, the trillion dollar Euro bailout, and other mega events will come quicker as a reckoning day will hit. All it takes is a failed Treasury auction and you can kiss cheap mortgage rates goodbye.
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