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.

Top 5 Reasons to Pursue a Short Sale versus Letting Your Home Be Foreclosed

1. Stress - A short sale is less stressful than a foreclosure.  With a short sale you have some say in the outcome.  With a foreclosure you are at the mercy of 3rd parties.
2. Credit - A short sale is less damaging to your credit.  Either way you will have late payments on your credit report, but with a successful Short Sale the debt will usually be listed as satisfied.  A foreclosure will show up on your credit report.
3. Time - If you notify your lender that you are trying to sell your home many times they will give you more time to stay in your home while you are trying to sell it.  You will likely not have to pay your mortgage during this time.  You should use this time to save your money so you will have some money to move and find another place to live.
4. Release - If you successfully close a short sale you will usually be released of remaining unpaid debt.  In many states, with a foreclosure the lender can continue to legally pursue you after the foreclosure proceedings are over in order to try to recover the amount of the debt they were still owed after the lender sells the home (it is called a deficiency judgment).  Walking away without having any further obligation to repay a debt is reason enough to pursue a short sale.
5. Responsibility - The responsible thing to do is to pursue a short sale.  Most homes are foreclosed simply because the owners refuse to face reality and will not deal with the situation.  This hurts the homeowner and the lender.  There is no reason for this.  The responsible thing to do is to mitigate the lender's loss and give yourself a chance at a future without that remaining mortgage debt weighing you down.

Bloomberg.com Article: U.S. Existing Home Sales, Prices Slumped in January

According to this Bloomberg.com article U.S. Existing Home Sales, Prices Slumped in January.

The gist ofthe article is that the declining economy is going to going to continue to drag down the housing market as consumer confidence also declines.

According to the article the economy will likley not rebound with respect to unemployment until 2011.

The article quotes Lawrence Yun, the chief economist for the National Association of REALTORS (NAR), as saying that the recent goverment actions may lift home resales by as much as 900,000 units this year.

Being a REALTOR myself, I have read Mr. Yun's predictions many times over the past 3 years. 

I have to say that he has said the market would improve in 2006, 2007 and 2008.

Each time he was wrong and he will be wrong this time as well. Despite what NAR would like

consumers to believe, homes are still not affordbale. NAR's way determining home affordability is

to factor in financing (see the NAR Home Affordability Index). The problem is that when financing

is abnormally cheap (i.e. like during the market boom) it lends itself to over-inflated prices (like during the market boom).

The result is that when rates increase the home owners cannot sell their home for as much as they paid and a whole

new problem starts just like what we see now. The fact is that prior to the huge run up in home prices that started

around 2000, the median home price in a given area was more related to the median income in that area.

For homeowners to be financially solvent the ration of home prices to median income needs to be around 2 to 1

with an absolute maximum of 3 to 1. Now even after the market declines that started in 2006

the median price of a home in most areas of the US is 3-4 times the median household income

meaning that 2 people now need to work to buy a home as opposed to just one worker in each

household. Two family incomes helped push up the median price and this was worsened by

consumers accepting more debt as being OK. Historically, the values of real estate were

determined by the quality of life that the location offered, the size and type of property and

local employment prospects. Unfortunately, during the most recent run up in prices the major

factor was the monthly housing payment versus household income. As rates went lower and

financing became more available, prices increased until the prices reached a popping point.

That cannot happen again, otherwise, we will see the same problems all over again. The solution

is that real estate prices need to continue to decline for a while longer in order to bring affordability

more in line with common sense criteria, not monthly housing payments.

In Bloomberg Interview, Harris of Barclays Capital Says President Obama is doing the "Right Thing" for U.S. Housing

Accroding to this Bloomberg interview with Ethan Harris, Co-Head of U.S. Economics Research for Barclays Capital, President Obama is Doing the "Right Thing" for U.S. Housing.

I disagree with his assessment.  This entire financial crisis was caused by:

1. Too much total consumer debt including real estate and non-real estate debt.
2. A natural waning of housing prices after a "too good to be true" run up in real estate prices.
3. A decline in the secondary market for debt instruments largely due to concerns about issues above.

Unfortunately, President Obama's plan is to try and solve a problem caused by debt with more debt to finance his massive spending plan.   Economists and media pundits are now referring back to the Great Depression to try to analyze the effectiveness of President Roosevelt's New Deal to compare it to President Obama's "Newer Deal".  Increasingly, economists are forced to admit that Roosevelt's New Deal did not stop the Great Depression, and in fact, according to some economists made the economy worse.  While that is still an issue to be debated, there can be no doubt that the current financial crisis differs from the Great Depression in one significant repspect: one major cause of the Great Depression, drought and widespread crop failures, are completely absent from our current situation.  Drought and crop failure is a tangible and understandable problem.  Our current financial crisis, on the other hand, is almost entirely due to poor financial decision making by banks (mortgage companies and investment banks) and individuals (the people who borrowed more than they ever could repay).  Therefore, I fail to see how a small number of infrastructure projects and some other haphazard spending can get us out of a mess caused by debt if those projects are going to be financed by debt.  In order to solve this problem total debt cannot be increased and debt payments must decrease in order to lessen the burden on consumers.

In order to properly address this current financial crisis I think a simpler solution would be for the Federal Reserve to take all the debt off of all the banks' books at current market value by:

• Swapping out all the residential mortgage debt held by US Banks (totals approximately $11.3 Trillion) in exchange for US Treasuries with a guaranteed yield of say 2.5% with provisions for the banks to sell of the Treasuries in controlled allotments in order to raise cash.  Currently the total value of all US Federal debt is $10.76 Trillion.  Therefore, this plan would essentially double the national debt.  However, since it is really a debt swap the total of all US public and private debt would remain the same at about $53 Trillion.
• The Fed would then alter the terms of all the mortgages "purchased" so that all people current on their mortgages and have equity would receive a reduced interest rate of 3%.  People who are current, but have no equity would receive 3.5%, people who have equity, but are delinquent (assuming they can pay the mortgage after the reduction) would get 4% and people who have no equity and are delinquent (assuming they can pay the mortgage after the reduction) would get 4.5%.  Any people with negative equity would have been dealt at the time of the Fed's "purchase" of their mortgages since the Fed would be paying a discounted amount for their mortgages (i.e. the banks would take a haircut by reducing the face values of these assets).  The delinquent homeowners with negative equity would also share the pain by agreeing to pay the Fed 10% of future home appreciation in order to make up for the higher rate of default.
  

The initial cost of this plan would be very little.  The long term cost to the Fed (and US Taxpayers) would be the risk of mortgage default, which would be spread over time anyway.  Since the banks would now have 100% performing and guaranteed assets on their books instead of non-performing mortgage assets they would be saved.  Since there would be a provision for the banks to sell off the Treasuries in controlled amounts their capital would be replenished in an organized fashion thus leading to a return of normal lending.  Since the problem in the economy was and is too much consumer and business debt including, but not limited to, real estate and the near complete evaporation of the secondary market for debt instruments this plan would work by creating the secondary market (the Fed) and reducing debt payment levels by reducing interest rates of homeowners.  In short this would be the same as a tax cut for homeowners thus putting more money back into the economy, some of which would surely be spent.  Since my plan is a debt swapping/debt shifting plan it will not increase total debt, thus not creating any additional burden on taxpayers or the economy.  Conversely, the President's plan of borrowing more money to spend will increase debt and probably make things worse in the long run.

Foreclosures now hitting previously untouched areas of the US

The foreclosure problems in California, Florida, Nevada and Arizona continue to batter those markets.  This has been well covered.  However, now foreclosures are hitting areas previously spared from the problem.  I recently came across this article on the website of the Nashville Business Journal.  According to the article approximately 25% of the Middle Tennessee are home builders are either out of business, or bankrupt and that buyers have been able to buy foreclosures that previously sold for almost $600,000 for only $250,000.  The article also states that part of the problem is "equity calls" (similar to a margin call) that lenders are hitting home builders with that are a result of the declining market value of the builders' inventories.  Based on some research that I conducted it appears that this market is still significantly overbuilt due to a boom in new construction from 2005 through 2008.  It will take some more time and some larger price declines before hitting bottom.

Top 10 Things to Do When You are or Will be Behind on Your Mortgage Payments or are already in Foreclosure

The purpose of this blog is to help people who are or will be behind on their mortgage payments, or are already in foreclosure.  I know that being in that situation is very stressful.  I have seen it first hand as I have helped many clients through those difficult times.  I welcome questions and comments from people needing assistance.

 

As a first attempt at providing some assistance, I came up with the following list of the “Top 10 Things to Do When You are or Will be Behind on Your Mortgage Payments or are already in Foreclosure”.

 

1. Take a step back to reflect - Take a deep breath and regain your composure.  Getting behind on your mortgage payments or being in foreclosure is a difficult problem.  You cannot solve any problem if you panic and are not capable of reasoned thought.
2. Relax - What is the worst that can happen?  You will lose your home and possibly have to move in with relatives, or into an apartment at least for some time.  It might be embarrassing and even humbling, but it is not the end of the world.  No one is going to throw you in jail.  Your life is not over.  You can and will rebuild your life after you get through this.
3. Gather information - Put together a monthly budget of all your income and expenses.  Use your net take home pay (i.e. after taxes).  Be sure to include all your living expenses (i.e. food, health insurance, housing payment, vehicle payments, gas and vehicle repairs, meals, grooming, pet expenses, entertainment, child support, alimony, etc.  You need to know exactly where your income is going and how much you are really short each month.
4. Be honest with yourself - Ask yourself some difficult questions and be honest with yourself.  How did you get here?  Did you buy more home than you could reasonably afford?  Do you buy too many things on credit?  Are you a shopaholic?  Can you do without things?
5. Analyze - Put together your monthly budget (income and expenses).  Analyze your budget to see if you can eliminate things from your budget.  After cutting your budget see if there will be enough money left each month to pay your mortgage/housing payment?
6. Make your plans - If you cannot afford your home with your current mortgage even after you have trimmed your budget, you have 2 basic options: (1) contact your mortgage company to see if they will modify your loan terms.  (2) Sell your home.
7. Decide - If you prefer to try and stay in your home then a loan modification is your first option.  Call your mortgage company and tell them that you cannot afford your housing payment and that you need a loan modification.  They will likely send you to their loss mitigation department who will then fax or mail you their loss mitigation package, which you will need to fill out.  Your mortgage company will then review the information to see if a loan modification is desirable for them.
8. React promptly - If the mortgage company does not offer you a loan modification (or offers one that still will not help enough) then you need to sell your home.
9. Decide - You will need to make a decision to agree to the loan modification, or accept the sale of your home.  If you need to sell your home price it lower than any other home to get it sold fast.  Buyers will not pay retail prices for homes in foreclosure, or homes where the mortgage balance is greater than the market value (a short sale) due to the “as is” risk or to the lengthy time involved for a response in the case of a short sale.  In either case, you will need to price your home with this in mind.
10. Act – Regardless of what you decide to do you need to act quickly and decisively.  Letting the bank foreclose on your home will severely harm your credit for several years and in many states the bank can still come after you for their net loss after liquidating your home as an REO (this is called a deficiency judgment).  If you opt for the short sale you should be able to lessen the impact to your credit and eliminate the threat of a deficiency judgment.