Number of Foreclosed Homes Keeps Rising

Posted on June 2nd, 2008 in Daily Mortgage/Housing News - The Real Story

New Bank REO, or ‘Shadow Inventory’,is continuing to surge and in my opinion, is the real threat to values across the nation. On average, banks are discounting this inventory by 25% of the original NOTE value with nearly half experiencing discounts of 30% or more. Remember, most first mortgage note values were originally at 80% loan-to-value, meaning many homes are being discounted nearly 50% from the original appraised value at the time the loan was done. What about all the comparable property owners who bought at the same time and are now 50% upside down in their home, and not in default? Yet.

The Wall Street Journal put out a story last night citing…

“Lenders and investors in mortgages owned about 660,000 foreclosed homes in April, up from 493,000 in January and 231,000 in January 2007, according to First American CoreLogic, a research firm based in Santa Ana, Calif., that collects data from lenders and county clerks. The April total works out to about one in seven previously occupied homes available for sale nationwide.”

Bank REO inventory is now ‘the market’. Banks are the market maker. According to DataQuick, in March and April 2008 Foreclosure Resale’s were responsible for 38.4% and 37.7% of Total Sales respectively. Last April, Foreclosure Resale’s were 5% of Total Sales.

Even worse, Notices-of-Default (NOD) counts, which is the first stage of forecosure, are also surging. In CA for example. NOD’s stood at a record 44,101 in the month of April. About 70% of these make it all the way to REO, meaning that in four months there should continue to be record REO counts.

Below is from Foreclosure Radar’s April CA Monthly Foreclosure Report.

High-level findings include:

  1. Notices of Default – the filings for the first step in California’s foreclosure process increased only slightly to set a new record of 44,101 new filings.
  2. Notices of Trustee Sale, which are issued approximately 3 months following a Notice of Default, increased 7.8 percent in April surpassing the previous record with a total of 29,892 new filings.
  3. April foreclosure sales at auction jumped 44 percent over March to a record 22,838 sales, with a combined loan value of $9.45 Billion. The majority of these sales received no third party bid and reverted back to the lender despite the largest across the board discounts ever offered at trustee sale auctions.

With discounts as large as banks are offering, entire neighborhoods and regions are being marked-to-market overnight. This is pulling thousands of other home owner’s values down sharply forcing them into a negative equity position, heightening their chances of loan default.

The Wall Street Journal  says…

“The REO glut is weighing on house prices in many areas, as banks tend to cut prices faster than other sellers. A new set of local home-price indexes, to be introduced this week by Integrated Asset Services, shows that the median price of homes sold in Riverside County, Calif., in April was down about 29% from a year earlier. The median price fell about 13% in Clark County, Nev., and 12% in Arizona’s Maricopa and Pima counties. Median-price comparisons can be skewed by shifts in the proportions of high- and lower-priced homes sold from one year to the next but provide a broad indication of market trends.”

In a nutshell and simplistically speaking if 10k people get a ‘great buy’ on REO, 100k home owners could have the value of their homes fall by 30-50% overnight. Of those 100k, 35% get thrown into a negative equity position, 35% of those experience loan default and 75% of those (9,200) go back the bank as REO. The banks sell at a 30-50% discount and the process repeats. Again, no inventory has moved. Values just continue to fall. It is a vicious cycle.Best, Mr Mortgage


Breaking April CA Foreclosure Stats

$6 Trillion in Homeowner Wealth to Vanish…If we are lucky!

16 Responses to “Number of Foreclosed Homes Keeps Rising”

  1. ISM manufacturing index is up in MAY, probably because of the booming of printing industry, printing money for FED and printing new price tags, HA

  2. No Pentagone spending. Exports of bombs are booming or is it, bombing 🙂 Anyways, you can’t trust anything today.
    Where is exactly the boom in exports ?

  3. Looks like Alt-A is being noticed as the snowball rolling down the hill that it is.

  4. […] For more information on foreclosures, check out Mr. Mortgage’s post today HERE. […]

  5. Check out CNBC.COM…..Diana Olick has a story on realty trac. Their numbers without the “shadow inventory” has 1 out of 7 homes for sale is a foreclosure. Damn…thats hurting things a bit. This may rise to as much as 3 out of 7 if things do not change…IMHO. As an appraiser in a somewhat stable market…ATL…I am not seeing typical sellers approaching the marketplace. Most of the homes that actually do close are in actuality “short or distressed” sales. They are not listed as such in the MLLS system but “owner motivated”. The only way to get this information is to actually pick up the phone and call to interview the listing agents. Don’t believe the NAR that the market is picking up. There are almost NO typical buyers and sellers participating in the marketplace right now and the only thing picking up is the fear that prices will fall further and continued tightening credit standards by lenders. I believe this fear is being baked into the market and that existing homes will have stronger than expected sales in the next 12-18 months with all this pent up demand. I truly believe this is an overcorrection on the part of the banks and that they are causing foreclosures to soar with these new guidelines because it is propelling the market downwards at a faster pace. This could be the banks trying to flush the system. CA and all the other severe bubble states are screwed. Markets that went up 150-300% over the past 3-5 years have a LONG way to come down. Most have corrected and the additional drop going forward of 10-15% is due to the lack of ability to borrow from banks or mtg. co’s. If the jobs keep being cut and inflation keeps tracking higher….we ALL will need to live in community housing and forget owing our individual homes because we will not be able to afford to heat and cool them. I am not as bleak as the concensus but the election has to pass before any real improvements will be made because the current leadership is out to lunch or on a permanent vacation. Keep the Faith and remember it is always darkest just before the dawn!

  6. While Case-Schiller pegs the high in SF Bay to late Q2 2006, you are correct imo to observe that a lurch, or hard tilt in price, triggered to the downside starting in Q3 2007. That was my observation.

    From a broader perspective, this is typical of markets in general. (Though, I would always argue that different asset classes have their own, unique behaviours. Houses are not stocks, and stocks are not commodities, etc). That said, you can accord some of this to psychology: a big high in late Q2 2006 transitions into stubborn denial, and then your flood of REOs starts hitting overall supply, and ka-boom.

    I do want to note however that some markets like SD which rolled over first exert a drag on the entire state, and, that Spring 2008 saw at least 2 seasons of supply coming back on the market to merge like traffic with fresh Spring 2008 supply.

    I would like to see you do a post on how some of the crash areas, like Stockton, start to affect price in the areas that became the Last Men Standing (holding their ground in price). My view is that the most distressed people will go to places like the Inland Empire, Stockton, and so on to seek shelter, thus depriving other areas. i.e. there’s a price arbitration that is starting to kick in heavy duty now. And I would love to hear your views on that.

    Final comment: I am actually constructive on Stockton no near term, but longer term, and would potentially be interested in starting to nibble in small bites beginning, say, late next year. I don’t want to live there. But there is an aggie-export play emerging there, imo, that if caught at the right time could be juicy as we emerge into 2010-2012.


  7. I’m not sure how much we can use the past to predict the future here. Those who buy the REOs at a discount WILL bring the values down in their neighborhoods–that is pretty clear. However, I’m not sure that we can expect that 35% of those who NOW go into negative equity will default. In a sense, we might expect that the 35% who have been here so far represent the low-hanging fruit. When their equity went negative, they couldn’t keep their heads above water. However, there are going to be a lot of homeowners in it for the long haul, and their equity position in summer 2008 might not matter to them. And REOs have always been on the market, in good and in bad years.

    What this means to me, though, is that that those rates of converting people into negative equity and those into REOs will matter a great deal. Assume the rates are 25%, 25% and 70%…it cuts the REOs in half. Or, assume 45%, 45% and 75%…and suddenly 10k REOs creates 15K NEW REOs! (Making Mr. Mortgage’s prediction seem downright cheery!). I would guess that the rates might be lower than they have been, because of my low-hanging fruit theory. But a reasonable alternative theory is that some folks (“shadow inventory?”) have been barely treading water until now, and this latest wave will drown the same numbers PLUS some other ones!

    Neither scenario is rosy, but one is bad and the other is dreadful.

  8. Greant thoughts Matt – have to chew on that for a while.

  9. one thing is for sure Gregor, you can buy homes in Stockton cheaper than you can build.

  10. Thanks for that. That’s good to know. Dr. Copper has made myriad attempts to get above 4 bucks a pound, over the last 18 months, so it would be interesting if copper costs in construction were to fall. Steel is another matter. And of course, energy costs to make cement and run tools is going higher. Of course, we could see construction labor costs fall. My point is that we could see replacement costs fall a touch, from here. Probably not that much. I find it really interesting that in each housing bust, many are heard to claim that “price can’t fall below replacement cost.” And yet, in fact, that is often exactly what happens. But, it’s probably not sustainable for too long. I do wonder if 1. we are seeing something close to a price bottom, therefore, in Stockton. But, 2. that this could be a flat bottom and not a V bottom. A bottom that goes along for some time.

  11. Right now the REOs are all in the low priced segment. As Mr. Mortgage points out Alt-A is trending like subprime. The real fireworks will be when jumbo first mortgages start to default in significant numbers and there’s an avalanche of million dollar REOs.

    Is that a likely scenario or is this problem “contained” to just the subprime class?

  12. As the subprime crisis began to emerge, and the RMBS of subprime began to discount the lower prices of the securitization pools, published their history of the ABX Indexes:

    Does anyone know if there is a similar track record being compiled for the Alt-A RMBS pools?

  13. Money Man,
    I believe the “pent up demand” is smart demand. Most of them know the bottom isn’t in. There will be some every month that will be fooled into thinking the bottom is in, but it will not be enough to drive up the price any time soon.

    I know there is a group that has to sell due to life circumstances, but the group that “has to buy” is smaller. This group is deluded to the “don’t throw away money/pay your landlord’s mortgage” mentality. Many who want to buy are just renting houses. They aren’t cramped in an apartment.

    I happily paid my landlord $16,200 last year while he lost $130K in equity, paid $2370 in taxes, and also paid $1500 in other expenses. (Tax deductible does not mean free.) My rent only covered his mortgage so everything else was out of pocket.

    There is no rush to buy when the bottom hits. Appreciation will be non-existent or only match inflation for years.

  14. Ah taxes! They are not going down even if home prices are crashing. No, very vicious circle, you can bet they will be going up instead.

  15. So far,our politicians and the hoards of bureaucrats in townhalls,are in denial of the tax take.Our houses and jobs of any sort are off the cliff,whilst townhalls gold plate their pensions and salaries-talk about eating cake!The cost of this is of course incompetent financial advice to the towhall and its employees,accompanied by a dramatically changing elected structure or a turning away from the American version of democracy.This will be unpalatable,even ex-presidents will meet reality.Hopefully Nu-Fascism will not rise in America to save the people.

  16. Spend spend spend.That’s the beauty of it for them. The problem is that the printing press is about to break down.
    Lend no more will mean spend no more too, even for those politicians in townhall. Expect many town bankruptcies.

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