Mr Mortgage: NO-SPIN October CA Foreclosure Report

Posted on November 16th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

he default and foreclosure scene in CA remains a mess.  And now due to SB1137 that went into effect in early Sept and a yet new proposal that Schwarzenegger is pumping, performing meaningful analysis is difficult for most. However, due to my proprietary data and research I am able to shed a little light not available elsewhere on the happenings.

SB1137 recapCA Foreclosures Fall 90%…Problem Solved? No Way!

Given the interruptions that Schwarzenegger’s efforts have caused, I have included many more charts this Oct CA foreclosure report because I feel they speak much louder than my typical 10-page report.

This report will also give you a heads-up on the popular national foreclosure reporting services, which will report their findings this next week.  As with last month, they are likely to report that foreclosures flattened out but at lower levels than a few months ago. They may or may not report the real reason why. Luckily a few in the financial press such as Diana Olick from CNBC reported this accurately last month.

LEGISLATURE MESSING WITH THE FORECLOSURE NUMBERS

CA Notices-of-Default (NOD) and Foreclosures have fallen sharply since SB1137 went into effect on Sept 5th. This does not mean that borrowers are not missing payments and defaulting, rather banks are just not sending out notices while they get into compliance.

A few weeks ago, Governor Schwarzenegger proposed even more legislation requiring a ’90-day stay of foreclosure’ for those in default (link below). This initiative does involve re-underwriting the loan but to a fat 38% housing debt-to-income ratio, which is a nightmare. Add on ‘other debt’ and the borrower is still spending more than they are earning every month.

The key problems with Arnold’s proposal is the same with all the others – they keep the borrowers underwater, highly leveraged and unable to sell the home, save money or refinance. These programs turn the owners into long-term, trapped renters.

This is their objective by the way because is does thwart foreclosures to some degree and it may make it cheaper on a monthly basis for some to stay than walk away and rent. But if home owners really think about the ramifications of staying upside down in a home for decades, hopefully they will not chose this route. This is not a solution, rather a disaster for anyone who signs up. See quote below – this is what got us into this mess in the first place.

Schwarzenegger Makes Proposal to Keep Homeowners in their Home

“Whenever possible, the administration wants lenders to rewrite loans in default so that borrowers would pay no more than 38 percent of their income toward their housing expenses, which typically include mortgage, insurance and taxes. To meet that goal, lenders could opt to reduce the loan’s interest rate, lengthen the term of the loan to 40 years, or defer some portion of the unpaid balance to the end of the loan term.”

Folks, a 38% housing DTI will ruin you especially if Obama raises taxes. It is better to walk away in most cases than do a loan mod at 38% DTI that lumps principal at the end of the loan. Why not walk- your credit will be trashed for 5-7 years but that is nowhere near as long as the real estate market will be trashed nor how long you will be stuck upside down in your home.

OCTOBER CA FORECLOSURE REPORT

Notice-of-Default (NOD): This chart represents the monthly NOD’s filed in CA by institutions since Jan 2007 – the early stages of the foreclosure crisis.  NOD is the first stage of foreclosure typically filed after 3-4 months of missed monthly payments. Most of 2007 consisted primarily of Subprime defaults.  But in the past several months, as the Subprime implosion hit a plateau, higher paper grades such as Alt-A led by the Pay Option ARM, Jumbo Prime and Prime loans defaults began to surge filling the void. NOD’s remained flat at record highs through the summer then tumbled in Sept when CA passed the SB1137 foreclosure prevention bill. This requires foreclosing institutions to do far more with respect to attempting to modify the loan than in the past. In my opinion, this simply kicks the can down the road because most mortgage modifications are not done as a permanent solution with a full re-underwriting of the borrower.

Note how the NOD problem looked to be taking off again in August before this bill was passed. If this wasn’t passed I shudder to think of what NOD’s would look like today.

Notice-of-Trustee Sale (NTS): This is the second stage of foreclosure and comes about 3-4 months following the NOD. This notice tells you your home will be sold at auction on a specific date. As you can see despite NOD’s staying flat for the month, NTS grew sharply. I would assume that as institutions got into compliance they focused their attention on the defaulted borrowers earlier n the process figuring these had the greatest chance of repair – newer delinquencies have the best chance of being workout out.

Another thing to notice on the NOD v. NTS chart is the cure rate of NOD’s has gone way down. This is especially evident when you compare April NOD’s to July NTS…90%+ made it from NOD to NTS. That is a record.  In the past the majority of NOD’s could be cured through a refi, sale, heloc etc. Now, the majority of NOD’s make it to the NTS stage and subsequent third stage of foreclosure, the foreclosure sale.

Bank Owned (REO): This is the final stage of foreclosure at which the home is actually sold at the Trustee Sale to either a third party or back to the bank as REO.  The chart below shows actual REO taken back by the bank.

Actual foreclosures were up nearly 1000% from Jan 2007 through Summer 2008. As with the previous two charts, the numbers have fallen sharply. Since the foreclosure auction stage is not governed by SB1137, this drop is a result of the institutions own actions, likely awaiting a final-final on TARP. I am sure most thought they would be able to sell distressed assets such as REO to the program. After hearing what King Henry said this week, I would expect REO to pick up significantly this month. I will keep you updated.

In the last three months, 95-97% of all properties that went to Trustee Sale were bought back by the foreclosing institution for the opening bid due to the lack of third party interest. This compares to a year ago when 50% were cured and never made it to the court house steps. These properties go back to the bank as REO.

Sold to Third Party: The chart below shows the number of  properties sold to a third party at foreclosure auction. Even as prices are tumbling and institutions are discounting to 50% of the foreclosed note amount, very few sell at auction. Most go back to the banks as REO due to lack of third party buyer interest.

Cancelled Auctions: Below shows cancelled auctions. This is where your missing REO for October is. The cancelled auction count jumped nearly 100% from Sept to Oct.  This means a) banks can’t handle any more REO b) banks are likely giving borrowers more time to work out a terrible loan modification that keeps then as underwater, over-leveraged renters in their homes for life.

Of Note – Loan Amounts: In recent months, unit dollar volume has moved much higher. Last year the average NOD was roughly $350k as Subprime loan amounts are typically smaller. Earlier this year the moved to the $425k and in October 2008 the average loan amount was over $450k. This is representative of the default crisis moving into higher paper grades in addition to the high percentage of negatively amortizing loan balances being foreclosed upon.

Data: Courtesy of The Field Check Group Real Estate & Finance in partnership with Foreclosure Radar

If you are an investment fund or research firm looking for much more detailed information on the housing, mortgage or credit markets please contact me at MrMortgageTruth@gmail.com

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23 Responses to “Mr Mortgage: NO-SPIN October CA Foreclosure Report”

  1. Appreciate your input on this blog. What do you think about the following statement from Sean O’Toole?:

    “It would be a mistake to conclude declines in foreclosure activity indicate an end to the foreclosure crisis,” said ForeclosureRadar CEO Sean O’Toole, echoing comments made by many industry observers in recent weeks amid falling foreclosure statistics within the state. But O’Toole also suggested that lenders themselves may be slowing the foreclosure roll within the state, as they look to modify more loans.

    While CA State Senate Bill 1137 — which added 45 days to the borrower notice period for defaults — clearly has impacted foreclosure sales in California, O’Toole said the significant decline in sales should really be more accurately attributed to servicers’ own voluntary efforts. “There were nearly 60,000 properties scheduled for sale at the beginning of October over which the law had no affect [sic],” he said in a press statement. “The drop in foreclosure sales, therefore can only be reasonably attributed to changes introduced by the lenders themselves.”

    Original Article:
    http://tinyurl.com/62y7rw

  2. Sean is absolutely correct. The drop in foreclosure sales, therefore can only be reasonably attributed to changes introduced by the lenders themselves.”

    I would say that they through the auctions into the ‘cancelled’ category while they figure just what the hell is going on. I would suspect a lot of it is due to the banks thinking they can sell REO to TARP for more than its worth.

  3. does this modification change the obligation from non-recourse to recourse? if so, it is really the fraud of the century. if not, why not go along for the ride and see what happens. hyperinflation might give these folks an almost free house. if not, they can still walk away later. as always, thanks for the good info and cogent analysis. dennis

  4. a 38% housing DTI will ruin you especially [if] Obama raises taxes.

    That’s the true wildcard. It was obvious that his “only raise taxes on those making >$120k” wasn’t true, but it goes much deeper than that. No matter who won the election, taxes have to go up across the board. My fear is that we’ll start adding massive social programs, completely ignoring the state of the economy.

    This is absolutely not the time to increase government spending. This is the time to make deep “to-the-bone” cuts in government, raise taxes, and stabilize our currency and country. Relieving future generations of a huge debt burden (thanks boomers!) is also a Good Thing.

  5. Not to nitpick, but people making $75K don’t pay anywhere near 40% in taxes, especially if they have a mortgage deduction.

  6. Obama ran on the promise that he would not raise taxes on families making <250k. to backpedal on that would be political suicide and all but guarantee a single term presidency. Do you really honestly think he would do that? He will raise taxes, no doubt about that, but he’s not an idiot.

  7. He won’t raise income taxes but can create some problems by raising payroll taxes and his “refundable credit” welfare program. Probably leave marginal rates the same for AGI under $100k but $150K plus look out for a tax increase.

    My advice to everyone (including myself) is that you should never go above 28/36 unless it is a house that you think you will be there for 10 years plus and is fairly valued. The serial movers (buy/sell houses every 3-4 years) are killed right now because their loans were basically ticking timebombs.

    Of course, I believe in 28/36 on a 15-year note so most consider me too conservative.

  8. Just a note in regards to Oct-Nov foreclosures in CA; in checking on foreclosureradar there are more muti-family (2+ units) in the foreclosure process now. For example, in Los Angeles city there are currently 26,000+ for all properties in the 3 stages of foreclosue, in checking only multi-family there are 22,000+ in the 3 stages of foreclosure which, to me, indicates the new bill does not have any affect on the multi-family units, at least if they are not owner occupied. Does anyone know or have comments on this?

  9. Even is income tax is not raised, there are many other ways to increase revenue..i.e..increased “fees” on all types of transactions as well as capital gains tax, sales tax, ownership taxes and fees. Think about all the ways the govt grabs at your money besides income tax. It’s a lot and will probably be increasing in coming years.

  10. peterb, well here is the CA problem. These are 2006 that I snagged off the EDD. Personal income tax is going to sux as well as corporate income. Since the top three are going to get rocked, it is looking pretty slim. I wonder what bank and corp profits will be lol, that is looking mighty shaky, cross that off the list of increases, nothing from nothing leaves nothing. Most likely they will will jack sales tax and other. Look out because here comes the French fry tax.

    Personal Income Tax $53,318,287,000
    Retail Sales and Use Taxes $32,669,175,000
    Bank and Corporation (Income) Taxes $11,157,898,000
    Misc. Minor Revenues $10,772,938,000
    Motor Vehicle Fuel Tax $3,432,527,000
    Motor Vehicle Registration Fees $2,849,952,000
    Motor Vehicle License (In-lieu) Fees $2,297,389,000
    Insurance Gross Premiums Tax $2,178,336,000
    Cigarette Tax $1,078,536,000
    Alcoholic Beverage Taxes and Fees $333,789,000
    Horse Racing (Parimutuel) License Fees $37,527,000
    Estate, Inheritance and Gift Taxes $6,348,000

  11. mr mortgage , in my world it was nice when we made 75 large but now uniployment is 500wk for 6 or 8 mo it goes down like this 225wk for food family of 4, 400 mo gass, 100mo insurance, 236.78 car payment , 100 cell phone ,cable 75.00 40.00 rubbish,100.00 taxes, visa 100.00mo, water 35.00mo where is the mortgage , rent, savings, education,vacation?? thats real life and with 10-15 mill job losses on the way brace for impact

  12. So with all the backlog that keeps getting larger, does that mean the length of time between deciding to stop paying your mortgage and when the sheriff comes and escorts you out of your home is increasing?

    Being able to live rent free for an extra few months is worth thousands of dollars to a lot of people. Milk it for all its worth.

    I did some plotting on a graph, comparing annual house appreciation of 3% versus outstanding principle as you pay down your mortgage. If your home has lost 50% of its value of the mortgage, then it would take 10 years of mortgage payments before you were back in the black.

    It would also take 23 years of positive 3% appreciation before your home regained the 50% loss, and after 23 years, you can be sure with inflation, the purchasing power of your home would pale in comparison to 2005.

    Look on the bright side, if you defaulted at the beginning, you already have 2 years under your belt of bad credit, and will be primed and ready to purchase when home prices have reached bottom.

  13. 15 reasons the US economy will get worse: Link Here

  14. I have to give this original article and the posting by many of you credit. It is right on target. If restructuring the loans to 38%DTI with a still underwater mortgage in effect makes the consumer an renter, its a very bad rental agreement. They are obligated to pay higher than market rent and have mortgage balance hit on their credit report that is sure to drive their credit score substantially lower.

    My Father use to always say, “your best loss is your last one…” In other words, stop the loss today and be done with it. If consumers were to double or triple the number of walk aways from what they are now, real modifications would come out of the wood work as the lenders would finally understand that it is time for them to be fair for total self preservation purposes. If less than 10% impact today, just imagine the power of 20%? The financial institutions lobbyists are pulling the strings of congress today. In effect, the American homeowner should engage in their own Boston Tea Party… start dumping your homes overboard.

  15. Mortgage Litigation Expert

    It is kind of like this. You’re playing a game of Texas Hold um at a table with 8 players. You buy your house, you look at your hand and you are holding an Ace King. The flop comes down, Jack, Queen King and you glance at your cards. WTF!! The two cards that were formally an Ace King in your hand have turned into the 2 of diamonds and 8 of clubs!

    The 2 and the 8 have nothing going on with the three cards in the flop. Trying to stay in the game and fighting raises until the river card turns is absolutely just throwing money down the drain.

    Yeah you got money in the pot but let’s face it, it is fold um time. You are never going to win with this hand, it is just throwing money away. You need to stop your losses right now because trying to hang on will only have a bad outcome.

    The current modification programs are like this. The government comes along and says “We will take that lousy 2 of diamonds you are holding and replace it with a 7 of diamonds! The government is going to throw 100’s of billions in this program! The government could throw 2 trillion at this kind of a program and a year from now they will still have 2 Trillion in the program.

    Now lets look at the Hope for Homeowners program. 150 billion and when we checked a month ago they had helped something like 79 homeowners. Whooohooo!

    Now when the government offers a program to the bankers, it is quite a different story now isn’t it? They are lining up and even turning into a bank holding company to get a slice of that pie! There must be an obvious reason for this kind of behaviour and that is the banker can see a clear benefit while the homeowner cannot.

    The other problem is that when congress goes out to do one of these bills to save the day, is that they really do not know the mortgage business. What do they do? They call their Tactical Advisory Committee (TAC), which is made up of industry experts. The industry experts of course are bankers! The TAC solutions to the problem all revolve around the principle balance of the loan being GOD and everybody knows you don’t mess with God. The principle balance is sacred ground and therefore nothing will ever come out of government to change the home holders cards. The home holder is still left with a hand that is not worth staying in the game.

    Even if they do bring it down to current market is it worth it? If we look at the loans issued in the prior years we can see that loans are set to blow up all the way through 2011. Even when 2011 rolls through, there is still going to be this big stack of unsold inventory overhang. Chances are a mod at market today will be underwater again when our earliest bottom hits in 2011.

    Who in their right mind really can look at the loans, look at the resets and not expect the median home price to drop perhaps another 20% easy by the time 2011 rolls around? This basically means that the average person buying a house today will have the entire 20% down wiped out before or during 2011.

    I think that this is pretty much what Mr. Mortgage sees in the market, and why he is saying that everything needs to be reset, because we are not going to get away from minimum projected 2011 bottom, because we are not going to have any buyers lined up even on foreclosure properties. Everybody is going to wait until they see the resets are starting to clear the market.

    People will come out to buy when they think the bottom is in, not before. When everyone can look at the data and see the clouds parting and a sliver of blue sky, people are gong to start getting their feet wet, not before.

    This minimum bottom in 2011 is what makes walking the best solution. Let’s throw the math into it. Let’s call today’s value 100. A 20% loss in median value would be 80. To gain back to 100 from 80 you need a 25% gain. The average gain in a normal market is 3%. If you bought a house today, you are likely to lose through 2011 and then would break even in the year 2018-2019. That turns out to be a decade.

    We just got through throwing away an entire decade! If you reset your loan to current market as I have shown, you are most likely going to be throwing away yet another decade of dead money at your house, which by now you are very tired of coming home to and being reminded of anyway.

    Taking several months of free rent and walking seems to be a head and shoulders financial strategy over a mod principle reset to current market.

  16. hence… the Boston Tea Party. 😉

  17. “Folks, a 38% housing DTI will ruin you especially if Obama raises taxes. It is better to walk away in most cases …” WHAT KIND OF RECKLESS ADVISE ARE YOU SPEWING. Do you ever stop to think about what you are doing to people. Never mind the tax deduction of a mortgage payment, the financial catastrophe your advise would have on a small businessman trying to borrow on an expanding market later. The fact that when everyone else is renegotiating their loan the supply of resale homes will dramatically drop (while prices go up) The people who “walk” will be stuck out of the market for 7 years. They will NEVER get back into home ownership. Or, whats left out of your advise, is the capital gains tax which you can’t WALK away from. . FOLKS, TALK TO YOUR ACCOUNTANT BEFORE TAKING MR MORON-MORTGAGE’s ADVISE.

  18. BertDilbert, HOPE has worked for a huge amount of people. How do you think the banks are renegotiating with their borrowers, its with FHA loans

  19. AC,

    You assume that prices will go up when loans are renegotiated – where do you get that assumption? Underwriting is going to be totally different going forward and the prices of homes are going to revert back to their true affordable value, not stay where they are with “owners” who are really renters. Yeah, there is a mortgage interest tax break but for most at the lower income levels the break isn’t as great as advertised as you need to compare taxes with AND without itemizing which makes the real benefit smaller at say, less than 100K per year income.

  20. AC

    I believe that the point that Mr. Mortgage is making is that the 38% DTI ratio is too high. The time tested 28% DTI is the safe area where the mortgage is likely to be paid without disruption and continual payment problems. It may not seem like much but going out from 28 to 38 is a 35% increase above the comfort zone and is not going to remove financial stress.

    The DTI is against gross income. When we are dealing in increases in the DTI from 28 to 38 and say it is a 35% increase, that is not the real story. The real story is what happens when you move these numbers against net income.

    Bottom line is if you move it out of the “safe zone” the rewritten mortgage has a high chance of future default, all the while leaving a family in a financially stressed condition.

  21. When a home is in REO, does the bank pay property taxes? Who picks up the tab? Thanks

  22. 2 notes:

    1) Instead of using your “proprietary” database which seems to not paint a complete picture, one could use either the LoanPerformance or McDash database to view the total amount of delinquent loans in addition to the charts you present. That way, one could see how much delinquent, but not foreclosed, inventory is coming.

    2) It’s not accurate to say that a 38% DTI won’t work. You are making the same error that Lockhart and Bair are making. It’s the amount of income left over after paying all the bills that matters. A 38% DTI for someone making $4k/month is a much different thing than a 38% DTI for someone making $10k/month.

  23. In my workshops I educate the homeowners on their options, including foreclosure. My favorite option is a TILA violation with a NOC to the lender and make them do a proper loan modification with a principle write down. Hold on here come the Alt A’s!!!!!

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