Fannie Mae and Freddie Mac Becoming Large Landlords

According to this Forbes article, Meet Your Landlords: Fannie And Freddie, collectively Fannie and Freddie own 1 out of every 9 foreclosed properties with Fannie owing 64,000 single family homes and Freddie 29,000. The article mentions that foreclosures are going to accelerate due to the moratorium on foreclosures being lifted. Both GSE's are working on greatly increasing loan modifications and programs that allow foreclosed former homeowners to remain in the properties as tenants. The article mentions that this landlord role may be difficult for Fannie and Freddie. Also, the article quotes Rick Sharga, Vice President of RealtyTrac, as saying that Fannie and Freddie will need to seize more properties as prime conforming loans start to default more. He goes on to say that the rental programs may help the housing market by preventing a flood of foreclosures from entering the market at the same time. While I agree that there will be more foreclosure, I disagree that holding back foreclosures is a good idea. Americans need this problem to end now. Fannie, Freddie and private banks need to just dump the properties now and push down prices to get the market to hit bottom ASAP so that people can feel confident that the worst is over. This continuous market meddling is dragging this nightmare out far too long.

Foreclosures Reach New High in April 2009

According to this Inman News article, Foreclosures plateau at new high, RealtyTrac data indicated that foreclosures in April 2009 increased by less than 1% from March 2009, which was the previous high. However, this represents a 32% increase over April 2008. According to the folks at RealtyTrac the recent March-April surge in foreclosures is due to the previous moratoria on foreclosures expiring. I believe that due to the declining economy foreclosures will continue to increase for the foreseeable future.

Birmingham Auction Ended Abruptly After Too Many "Low Bids"

According this article in The Birmingham News, City Federal auction ends abruptly due to low bids, the auction was originally scheduled to sell off 20 condo units, but was stopped after only 11 sold due to what the condo project owners, Synergy Realty Services LLC, called "low bids". Condos that once were listed for $239,000 to $935,000 ended up selling for only $80,000 to $320,000. The project owners said they were disappointed by the low prices, but would try to re-market the remaining condos at pre-auction prices.

My opinion is that these people are fools. There is no other market for these condos. $935,000 for a condo in Birmingham? Sorry, it makes no sense. That market is long gone and never coming back. It was a sham built upon a mountain of debt that is no longer available. The condo project owners should liquidate for whatever they can get as it is only going to get worse.

"Stress Tests a Sham"; Banks Have $2 Trillion Dollar Hole While Credit Card and Commercial Real Estate Loan Defaults Soar

According to this interview with William Black, a former bank regulator, author and current law and economics professor at the University of Missouri, the "Stress Tests" are a "sham"and US banks need $2 trillion dollars to remain solvent. Since he directly attributes this figure to Treasury Secretary Tim Geithner I am guessing that the real number is much higher since according to Mr. Black the "stress tests" do not factor in bank reserves or asset quality (i.e. the increasing defaults on all types of loans including credit cards and commercial real estate loans). Additionally, Mr. Black states that commercial real estate is in for a "world of hurt". As I stated previously, there is going to be a surge in the number of foreclosures hitting the market as banks fail and are forced to finally liquidate the foreclosures they have artifically been holding back and most of the large banks in the US are already insolvent and will need to be nationalized soon.

Don't Believe the "Good News Bulls"

According to this New York Times article, U.S. Says Ailing Banks Need $75 Billion, US Banks need $75 Billion in additional capital in order to pass the government stress tests and this is good news!?  First, it is not good news.  It means that US banks need a lot of additional capital.  Second, it is not even accurate.  According to Gary Shilling we should not be trusting the rosy government reports as they are really meant as a PR piece then they are a measure of the banks' financial condition.  I agree.  The government stress tests are a joke.  Regardless of these phony stress tests most large US Banks are insolvent.

Commercial Real Estate Loan Defaults Will Sink Big Banks

I have read many articles that are stating facts that the mainstream media is not covering.  The most important one is that commercial real estate loans are defaulting at an alarming rate.  While the mainstream media continues to debate whether or not the residential housing bust has reached it bottom they continue to ignore the greater problem of bad commercial real estate loans.  My prediction is that the commercial real estate loan defaults will finish the bank killing that the residential bubble bursting started.  I believe that most, if not all, of the major national banks (think Wachovia, Bank of America, Wells Fargo, etc.) will need to be nationalized within 12 months.

The expected massive bank failures will further curtail lending (including home mortgages) and result in further softening of home prices, particularly in over-built areas of the US.

Duplicating Disaster: A Lesson Not Learned

According to this New York Times article, Sweetening the Pot for Home Buyers, the $8,000 Federal Tax Credit for first time home buyers created by the Obama administration will not have much of an impact (I believe I told you this previously) due to most first time buyers not having enough money for a down payment and to cover closing costs.  The article trumpets a Missouri plan that allows home buyers to borrow that $8,000 to buy that home and then to repay it when they receive the tax credit.  In my opinion, this is a recipe for more disaster.  The problem was and is that TOO MANY FINANCIALLY UNQUALIFIED PEOPLE PURCHASED HOMES.  Offering this "loan" will only exacerbate the problem.  If a person cannot find a way to save $8,000 to buy a home then they should not be buying a home.  What happens when the roof leaks, or heating system needs replacement, etc.?  These "home buyers" do not save money, they spend.  That is why they could not even put together a measly sum like $8,000 to buy a home.  The problem is that we have turned owning a home from a privilege into an entitlement.  When will we learn!?

My prediction is that if this Missouri program gains traction we will see increased rates of foreclosures for these "home buyers".

Foreclosures Increase as Banks Start to End Voluntary Foreclosure Abatements

According to this Ritholtz.com article, Voluntary Foreclosure Abatements Ending, banks are starting to end their volunatry foreclosure abatements due to the increasing number of delinquent loans piling up.  This is after the banks have changed the definition of a delinquent loan from 60 days to 120 days and even 180 days.  Per my previous post, the banks are trying to make things appear better than they are.  Mark my words, it will fail.

Government Meddling and Banks' Incompetence Will Cause More Home Price Declines

According to this RISMEDIA article, Are Banks Withholding Foreclosed Homes to Prop Sales?, banks are only marketing 30%-50% of the foreclosed homes they have on their books.  The article cites the possible reasons for this including government intervention in the form of foreclosure moratoria, banks' hopes that the government will offer them more than the foreclosed homes are worth and banks' unwillingness to take the losses now.  Unfortunately, I predict that the result of all of this is ultimately going to be a flood of these foreclosed homes coming on the market all at once whent eh pressure finally builds up to a peak, or a continued foreclosure problem for years to come as these homes keep coming onto the market even after the foreclosure problem has subsided.  The fact is you cannot escape reality forever.

Prices Still Need to Decline to Make Homes Affordable Again

According to this Forbes.com article, How Low Will Real Estate Go?, home prices need to decline substantially in or der to bring them in line with median incomes, especially given the rising unemployment and increasing foreclosures environment.  Predictably, the article lists the top 10 (or worst 10) markets as being in Florida, California, Arizona and Nevada.  However, even outside these devastated markets other markets in the US will still decline with may seeing double digit declines.  This will result in more homeowners being underwater (i.e. negative equity), which has been shown to increase foreclosures, which in turn increase the rate of home price decline thus creating a nasty cycle of home price declines.  This will continue to get worse for the next 1-2 years.

Tennessee Foreclosures Filings Increase Nearly 20% in March 2009

According to this article in the Memphis Busines Journal, RealtyTrac: Tennessee foreclosures up in March but trending down in 1Q, foreclosures increased in March 2009 compared to February 2009 by 19.7% and by 13.1% when March 2009 was compared to March 2008.  According to the article, the overall foreclosures in the 1^st Quarter of 2009 are 16.3% lower than the 1^st Quarter of 2008.  Unfortunately, the writer of the article used an article of the title that misrepresents the facts.  The sad truth is that in order for foreclosures in the first quarter of 2009 relative to 2008 and still have foreclosures soar in March 2009 by 19.7% it means that in January 2009 foreclosures dropped substantially, but that drop was followed by huge increases.  It is normal for foreclosures to be low in January so this is not abnormal.  However, a near 20% increase for March is not good.  According to the article, Tennessee has one foreclosure filing per 263 households.  That ranks 17^th nationally.  For comparison purposes, Pennsylvania (my home state) has only one foreclosure per 464 households.  This means Tennessee’s foreclosure rate is 76% higher than Pennsylvania’s rate.  Not good.  Contrary to whatever nonsense and spin is out there in the media foreclosures are going to increase for the next several months, if not longer due to general economic problems (think unemployment) and continuing financial problems (think bank failures).

Home Prices Still Need to Decline More to be "Affordable"

Home affordability is a reltaive thing.  However, that affordability should not be based on interest rates.  It should be based on income and housing prices - in other words the cash value of the home.  According to this Wall Street Journal article, Home Prices: Low, But Still No Bargain, home prices do indeed need to fall more.  I agree with this overall assessment.  Of course this will lead to more foreclosures as more homeowners experience negative equity situations.  If you do factor in financing then there is another problem: the looming commercial real estate crisis (more on that soon).

President's "Making Home Affordable" Program Not Enough to Stop Foreclosures

According to this Inman News article, Negative Equity: a housing timebomb, President Obama's Making Home Affordable Program (MHA)  will only have a small impact on reducing foreclosures because it igores one of the key drivers of foreclosures: negative equity.  The article also mentions that investors being excluded is also a problem with MHA.

As usual, I predicted this before the "real media".  Per my blog post on March 5, 2009 regarding the new government foreclosure programs, since investors are excluded and many people have negative equity in their homes the government foreclosure programs (now labeled MHA) will not be successful in significantly reducing foreclosures.

Higher Unemployment = More Foreclosures

According to this New York Times article, unemployment increased in March 2009 with another 663,000 jobs lost bringing the total jobs lost in this recession to over 5,000,000.  No doubt this will mean more foreclosures.

Recent "Sales Uptick" Not Really Good News for Real Estate

According to this Forbes.com article, Riskiest Places for U.S. Homeowners, there are several places in the country (mainly parts of CA, FL, MI, TX and parts of the Midwest) where things will get significantly worse.  However, even outside of those places things are not likely to improve.

"While the National Association of Realtors estimates existing-home sales rose 5.1% nationwide in February, foreclosures are still on the rise. Dr. David Berson, chief economist of mortgage insurer PMI Group, says the sales uptick simply reflects re-sales of foreclosed properties.

"Sales will turn up before the recession ends," says Berson, but they will be at lower prices. That does little for those who already bought homes during the boom and now face the dual forces of negative equity and job loss. "Delinquencies and foreclosures lag behind unemployment," he says, "and unemployment lags behind the recession."

I think it is clear that while the recent sales uptick is nice and presents some people hope it is more likely just a sign that prices were dropped on distress sales and foreclosures.  It is only when the distress sales and foreclosures decline significantly and regular sales increase and prices increase can this poor real estate market be deemed "over".  Until then the market is still in decline.

A Brief Synopsis: How We Got Here and Where We Are Going

How We Got Here

• Government - The problems were caused by the relationship between Fannie Mae/Freddie and the Community Reinvestment Act (pushed by social agenda politicians (think Bill Clinton, Barney Frank, Chris Dodd, etc.).  The result was that more and more high risk loans were made to financially unstable and under-capitalized borrowers under the guise of social justice.
• Greedy Bankers - Pushed by the government, bankers soon realized that they could make more money lending to unstable and under-capitalized borrowers as a result of being able to make more loans and charging higher rates and fees.
  
• Foolish Consumers - Consumers started viewing buying a home as an "investment".  While that may sound good, the problem is that what most people classify as an "investment" is really noting more than speculation (i.e. gambling).  As a result people took on more and more debt to buy bigger and bigger homes since they were "investments".  In reality, the only investment part of owning a home is that in the old days you would buy a home and eventually own it free and clear instead of perpetually paying rent.  Now, "homeowners" just perpetually have a mortgage which is not much different from perpetually renting other than you benefit if the price goes up and get hurt if the price goes down.  This is made much worse by leverage (think 0-5% down mortgages).  In reality, owning a home was never meant to be an investment other than you would eventually own the home free and clear and maybe get some appreciation, which would protect you from inflation (not 20-50% annual appreciation, but more like 3-7% per year).  Owning a home was primarily meant to provide a lifestyle.   People just had the common sense not to buy a lifestyle that they could not afford.

Where We Are Going

• Some recent real estate news shows existing homes sales up 5.1% and new home sales up 4.7%, but home prices only improved 1.7%.  This is likely the result of more builders dumping their homes for cheap, but their median prices are still higher than resale homes so the overall prices went up a bit.
• Despite sales increasing a bit the number of homes in inventory increased for the first time since July 2008.  This means supply will likely increase.  Not good for prices.
• As soon as the general public thinks the market has improved there will be additional inventory added to the market as all those sellers that gave up on selling flood the market with their homes.  Again, this will not be good for prices.
• The problem now is the absurd Obama stimulus plan, which will surely drive up inflation (and as a result interest rates) and drive up unemployment as investors and companies pull back investments (i.e. in start-ups, equipment, facilities, etc.) due to higher future taxes (necessitated by the huge government spending in the Obama plan) reducing their future returns.  This is what will likely break the back of the real estate market in the mid to long term.  So while prices may increase a tiny bit in the short term, in the long term they will suffer.  As a result I do not see the real estate market rebounding back to the pre-2006 price levels any time soon.
  

Manhattan Real Estate Will Decline in Value to 50% of Market Peak

According to this New York Times article, Looking for Bottom in N.Y. Real Estate, Manhattan real estate prices hav already fallen by 25% according to some people involved in New York real estate.  In the summer of 2008 I told my wife that the Manhattan real estate market would collapse since it was absurdly over valued combined with the beginning of the financial meltdown layoffs.  I believe that prices will end up being 50% or less of the previous market peak.

More Job Losses Will Cause More Foreclosures and Bank Failures

According to this New York Times article, Job Losses Hint at vast Remaking of Economy, job losses are increasing rate.  This will definitely lead to more foreclosures and more bank failures.  The job losses have escalated since December with the job loss numbers for December and January being revised higher.  In my opinion this is proof that businesses and Wall Street have no faith in the Obama administration as it seems that things have gotten worse since he won the election with even more rapid deterioration since the unveiling of the "Stimulus Plan".

Reuters: One in 8 U.S. homeowners late paying or in foreclosure

According to this Reuters article, One in 8 U.S. homeowners late paying or in foreclosure, 1 out of 8 US homeowners is behind on their mortgage, or already in foreclosure. This is absolutely stunning. According to the article even prime loans are experiencing higher foreclosure rates caused by job losses and overbuilding. The author of the article did not seem optimistic that Obama's foreclosure plan would work. I agree. This will certainly lead to more short sales and foreclosures and result in hurting the housing market even more. Since Tennessee has a higher than average number of foreclosures I expect the TN housing market to be hurt more than average over the next several years.

New Government Programs to Reduce Home Foreclosures

According to the article U.S. Sets Big Incentives to Head Off Foreclosures on the New York Times website the Obama Administration unveiled two new plans that will help many in people in foreclosure.

In my opinion neither plan will not solve the foreclosure problem.  The problems with the plans are as follows:

1. Investors are excluded.  Since many foreclosures, particularly in Florida, Nevada, Arizona and California were from investors (actually speculators) those foreclosures will continue.
   
2. Second homes and vacation homes are excluded.  Since many people not only purchased too much home for their budget, but also too many properties (i.e. second homes and vacation homes) they got into financial trouble.  Since the plans do not cover these owners the foreclosures will continue.
3. Many people who are in foreclosure are there as a result of not being financially responsible.  I have personally seen people with combined incomes of almost $100,000 not be able to pay mortgages payments of $2,000 to $2,400 per month (includes principal, interest, taxes and insurance).  The Obama plans allow for mortgage payments to be as low as 31% of a person's income via paying matching funds to the lenders.  The numbers I show above are less than 31% yet those people still did not pay.  The reality is that the housing payment is only one part of the problem.  Typically, these people had a lot of other debt and just spent recklessly.
4. Both plans require that the home owners have enough income to pay the modified payment.  This is meaningless if the people have lost their job due to health issues or the current economy.  For a while now health issues which cause a person to lose their job have been a big factor in foreclosures.  Since the plans require that people have a job people in this position will not be helped by the plans.
5. Plan 1 (Refinancing for Strong Borrowers) limits the total new loan to a maximum of 105% of the home's current market value.  Since many people now owe far more than their home is worth even if they are current on their mortgage payments they will not see any help from Plan 1.  The result will be that these homeowners will eventually slip into foreclosure as the market value of their home declines.
6. Plan 2 (Loan Modifications for At-Risk Borrowers) does not place a limit on the loan amount with respect to the market value of the home, but it limits the reduced modified payments to a term of 5 years.  After 5 years the interest rate will probably reset to today's market rates.  The problem is that for may people they still will not be able to pay the market rate in 5 years.  Also, this Plan fails to address the issue of what happens when the people cannot pay the modified mortgage and the loan amount is still greater than the market value.  In short, this plan is betting that the market values will substantially improve in 5 years.
7. Neither plan addresses the core reasons of why we are in this mess to begin with.  The core reasons are: (1) Homes and real estate just got too expensive as a result abnormal demand caused by what I call "housing euphoria" which resulted from an increase in the homeownership rate that was enabled by loose credit standards.  (2) People started buying homes that they could barely afford even with a 2 income family so there was no room for any job loss.  (3) People purchased homes with risky adjustable rate mortgages in order to allow them to buy more home in the short run without regard for any rainly days or "what if's".  (4) People just borrowed and spent too much in general.