It’s that time of the month again, folks! The July monthly CA foreclosure report is ready, data courtesy of Foreclosure Radar. It was another record-breaking month, which when speaking of foreclosures, is not a good thing.
The real news in here is that banks took back $12.55 BILLION in loans, which is up about 25% over last month. However, in a the area of new Notice-of-Defaults (NOD) we continue to see a ‘leveling-off’’ at historic and amazingly high levels over 40k per month. To put this into perspective, 2-years ago NOD’s ran between 3k and 7k per month.
The big news with NOD’s is THE DECLINE IN NOD’S CAN MOSTLY BE ATTRIBUTED TO ONE LENDER, COUNTRYWIDE. “91 percent of the NOD decline can be attributed to them. Why did Countrywide/Bank of America’s NOD’s suddenly fall off of a cliff? I am going to dig into this one. Sean O’toole, ForeclosureRadar founder says “this is is most likely due to the challenges of integrating two companies the size of Countrywide and Bank of America, than it is a fundamental shift in foreclosure activity”.
Despite the Countrywide anomaly, NOD’s ‘leveling-off’ is considered to be positive by many, but sometimes that’s not really the case. For example, if retail sales ‘level-off’ going into December, it is not a good thing because sales should accelerate in the Holiday’s. This is analogous to what happened in the foreclosure arena in July. Although NOD’s have leveled-off for the past four months, the foreclosure situation is continuing to worsen.
Another record set this month was that banks took back $100 billion in properties in CA alone since Jan 2007 with half coming this year alone.
One thing is for sure, this report confirms what I have said for months, that the REO market is now ‘the real estate market’ and the banks are ‘the market makers . For the first time in history, the seller controls the price and not the buyer, which is responsible for pile-driving prices throughout the state and nation.
Leading up to July, CA lenders took back between $10.2 and $10.6 billion in properties from the foreclosure auctions throughout the state. Last month banks took back $12.55 bb. If the banks are lucky and sell the properties for 60 cents of the NEW appraised value, which could be as little as 30-40% of the value at the time they initially lent on the property, then this could represent another $7.5 bb+ in losses for the nation’s largest lenders in one state for one month. In case you were wondering, CA represents roughly 30-35% of the total foreclosure count and 40-45% of the total foreclosure volume of the entire nation.
Just think how many second mortgages were completely wiped out. In bubble states, when a first mortgage is foreclosed upon and there is a second mortgage in place, typically the second mortgage is totally wiped out. Big banks like Wells Fargo, Citi, Chase, BofA, Wachovia etc have yet to be realistic about the potential loan losses from their second mortgage portfolios. Across portfolios, vast percentages of these loans are now underwater making them essentially unsecured and the bank losses all in most foreclosure situations and loses most in the case of a short sale, FHA bailout refi or mortgage modification. Second mortgage are now nothing more than big, unsecured credit cards that the borrowers can no longer use and will suffer little consequences other than a credit ding if they quit paying.
Urgent Note – When other national foreclosure data providers put their reports out later this week, they may show foreclosures have fallen slightly. This is because they bulk together NOD, NTS and Foreclosure Sales at auction and feel that a) new CA legislation regarding NOD’s b) New MA legislation regarding thier 90-day ‘grace period’ and c) New NY legislation regarding their 90-day ‘preforeclosure window’ will have an impact. Judging by what we are seeing in CA I don’t think it will.
Let’s get back on topic and break down this month’s foreclosure report.
1. Notices of Default (NOD), the first step in the CA foreclosure process when borrowers go down 90-days in payments, were down just 4.6% to 40,219 filings. This is also an 88% increase from a year ago. These are from people who first began missing payments in March and April. But is this small drop a positive? For the reasons listed below in addition to the Countrywide anomaly, I think I believe conditions are actually worsening.
First, in January through early March, there was a mini refi-boom, as rates fell sharply. If not for that, the NOD count could have been much worse. Since then, rates are up sharply and mortgage application volume has been consistently falling. This means more people may be missing payments right now due to the lack of financing options, which will lead to an increase in NOD’s over the next few months from these already historically high levels.
Second, beginning around January we began seeing a fairly significant decrease and leveling-off in subprime defaults and subsequent increase in Alt-A and Prime defaults. In addiiton, we are in an ‘in between’ period where the bulk of the 2/28 ARMs reset and we are awaiting the bulk of the 3/27 ARMs. This transition may have caused a temporary decrease in NOD’s. The disturbing part about this is that the Alt-A and Prime universes individually dwarf the subprime universe. If Alt-A and Prime defaults continue to increase at the rate we have seen for the past 4-5 months, once the seasonal effects of the summer selling season subside, it will bring trouble.
Third, mortgage modifications are really kicking into high gear thanks to companies like Green Credit Solutionswho have soup to nuts solutions for private private sector workouts. Check them out. This could have also helped to reduce NOD’s.
Last but not least, the summer selling season brings ‘hope’. Nearly every listing you see lately says ‘potential short sale’. Seasonality factors likely kept NOD’s down a bit, as people kept themselves below the 90-day late threshold for the summer in order to try to sell the home during the busy time of year. Come September, if these people’s homes do not sell, NOD’s could spike going into year-end.
I believe the NOD counts would have been much higher if not for the reasons listed above. These various and unique circumstances have masked the underlying problem and come September and the end of the selling season, the market could get hit hard as it did last Sept, which was the beginning of the 30% median home price fall in CA over the past 12-months.
The vast majority of NOD’s are first mortgages because second mortgage holders quit filing NOD’s months ago, due to values falling to levels that make it futile. If you are a second mortgage holder and there is no value in the property, there is no reason to foreclose because the first mortgage holder gets it all. For this reason, second mortgage loan defaults are soaring and the loans are essentially worthless. Borrowers know that lenders have to use more traditional means of collection and are not paying on their second mortgage. A second mortgage lender is usually completely wiped out when a home goes into foreclosure. This problem will not go away.
Roughly 75% of NOD’s make it all the way through the foreclosure auction stage and end up on banks’ balance sheets. This number is continuing to rise as fewer people chose to cure their default due to having no equity in the property. About 25% of NOD’s are cured by various means by the time auction hits. If you combine the past 3 months’ NOD’s the total is 125,350. At a 25% cure rate, 94,013 homes will be auctioned and most taken back by banks from Oct through Dec, which are historically poor sales months. There is little chance buyers will swarm at this time of year.
2. Notice of Trustee Sales (NTS ), on average filed 105 days following the NOD, were at an all-time record high of 39,010 new filings from 35,554, representing a 9.6% increase over last month’s record. This is huge. This means much fewer people are curing their NOD’s than in the past. The July NTS figure is primarily from NOD’s 3-4 months prior, as the NTS can be filed 90-days after the NOD. However, due to the back log, the average time it took a lender last month to file the NTS was 105-days. Lenders can take a home to auction 21-days following the NTS.
In February, NOD’s were 42,704 so the percentage that made it from NOD to NTS was 91.53%. This is a new record by a long shot. If you go back a year, many more were able to cure their default by refinancing, borrowing money, selling their home etc. For the record, June 2008 NTS were up 215% over June 2007.
3. Total homes that went to auction, as mentioned in the first paragraph, surged nearly 20% to a total of 28,795 properties. Of these, 27,817 or 96.6% received no bid higher than the lenders opening bid and became lender owned (REO). This number is much higher than expected and comes despite a) banks delaying foreclosure auctions longer than the typical 21-35 days, which has been the typical time frame in the past several months, b) short-sale approvals taking so long it has stretched out the final leg of the foreclosure process.
4. Discounts at auction were at a record. The average discount across all sales at auction was 33% at the opening bid. Last month, 80% of all homes were discounted an average of 30%. Nearly 25% were discounted by 50% OR MORE! Opening bids exceeded 40% in the largest subprime areas such as Sacramento, San Joaquin, Stanislaus and Merced. Remember, most first mortgages were at an original 80% loan-to-value or less, so the actual discount from the original sales price or appraised value is much less.
For those of you who live and die by the monthly existing and new home sales report, remember that in most cases, bank REO sales that are sold through licensed Real Estate professionals are counted in the existing sales number each month. Therefore, when you see banks taking back more and more inventory each month, chances are the discounts to Main Street will continue to increase and ‘home sale rise’, so be careful to read between the lines.
Although ‘total sales’ may have increased negligibly in the past two months, so did foreclosure sales, which means ‘organic’ sales actually decreased. I cover this concept in my Monthly Home Sales Report. As a matter of fact, Data Quick reported that 42% of last month’s total CA existing home sales were from the foreclosure stocks. I refer to this as shadow inventory.
With so much new foreclosure inventory entering the system and discounts getting deeper each month, there should continue to be more bank REO sales of existing homes in the future, making it seem as the housing crisis is ‘leveling off’ or improving. This is the primary problem with so many analysts’ positive housing predictions.
But, how can you truly judge sales and inventory numbers when the banks are taking back close to as many homes at auction as sell each month? Remember, the ‘month’s supply’ number is calculated using ‘listed’ inventory and a very small percentage of bank REO inventory is listed. The amount of ‘non-listed’ bank REO, or shadow inventory, is staggering. In my most recent May CA Home Sales Report, I have a chart that identifies the actual inventory burn rate and calculates a more accurate month’s supply figure.
What is most frightening is how quickly values are dropping as a result of the shadow inventory. With as much bank REO inventory selling for as deep of discounts as we are seeing, it is forcing an immediate and swift mark-to-market change in values of entire neighborhoods all over the state. We have never seen a real estate market in which one seller (banks) controls so much inventory and has the ability to sell it for whatever it takes to move it quickly.
If a few of these REO homes sell at 20%-30% below the most recent comparable sales within a mile radius of your home, your value will be negatively impacted. Very quickly, America’s real estate is being marked-to-market by the bank’s shadow inventory, accelerating a natural process that should take years. This causes even greater numbers of home owners to go into a negative equity position, causing even more loan defaults. It is a vicious cycle that has never been seen before. -Best, Mr Mortgage
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