Matrix Blog

Distressed Housing

Wrapping Up Foreclosure Properties, Literally

July 7, 2009 | 12:06 am | |

Did a lot of boating this weekend and there seemed to be a lot of boats still under “wraps.” So today I saw an interesting article in The Real Deal/Miami (hat tip to WSJ Developments Blog) Foreclosures could put houses in plastic

Foreclosures, dried-up financing and simple bad timing means countless South Florida construction projects now sit unfinished and all but abandoned. In the subtropical climate, the wood develops mold and degrades and the metal rusts.

…the company has wrapped three homes in the past several months, and is working with a group in Pennsylvania to begin wrapping 240 homes in the Northeast.

It’s a growing problem – not sure this is the answer but perhaps it beats the alternative.



One In Four Mortgage Defaults Are Strategic

June 28, 2009 | 11:52 pm |

In the current edition of The Economist magazine, the article: Can pay, won’t pay with subtitle “It is easier to dump a home loan if a friend has done so too” discusses the paper Moral and Social Constraints to Strategic Default on Mortgages.

Here are the results:

  • 26% of the existing defaults are strategic.
  • No household would default if the equity shortfall is less than 10% of the value of the house.
  • 17% of households would default, even if they can afford to pay their mortgage, when the equity shortfall reaches 50% of the value of their house.

Anger about bail-outs of banks or carmakers does not weaken the moral barrier to default. But people who live in neighbourhoods where home repossessions are frequent are more likely to welsh on loans. Homeowners who know someone who has defaulted strategically are 82% more likely to say they would do so, too. The likelihood of strategic default rises more quickly once the rate of local home foreclosures reaches a critical level. That hints at a vicious cycle of foreclosures that both depress home prices and weaken the social and economic barriers to further defaults. To break the cycle, policymakers need to address the problem of negative equity, not just unaffordable interest payments.

“Speaking of” carmaker bailouts and being strategic: My wife’s family has a long heritage associated with Detroit and the auto industry. To brush up before their visit this week, I listened to this fantastic discussion about the crazy auto franchise system – closing the dealerships as part of the bailout never made sense to me – now it does. Have a listen.



[Getting Graphic] Quality Is Not Job1: Why Home Mortgage Underwriting Is So Strict

June 1, 2009 | 11:23 am | |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).

Source: NYT

Click here for full sized graphic.

It’s 2 out of 3: GM joins Chrysler on the bankruptcy production line, so my take on Ford’s advertising slogan seems relevant.

Bank and automakers’ similarities end with GM and Citigroup being removed from the Dow Jones Industrial Average today.

Automakers WANT to sell cars.

Banks DO NOT WANT to make loans.

Here’s a compelling reason for banks’ recent need for self-preservation.

In Floyd Norris’ column this weekend titled Troubled Bank Loans Hit a Record High

OVERALL loan quality at American banks is the worst in at least a quarter century, and the quality of loans is deteriorating at the fastest pace ever, according to statistics released this week by the Federal Deposit Insurance Corporation.

Bank underwriting is notoriously difficult right now and who can blame them? They have to make loans in an economic environment where:

  • Housing prices are declining
  • Mortgage defaults are rising
  • Unemployment is rising

Banks are in survival mode at the moment.


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Good Memories of Kemp, Cram-down Fall-down

May 3, 2009 | 10:16 pm | |

Ok, so I’m not a Buffalo Bills fan (go Jets!) and I didn’t vote for Jack Kemp when he ran for president in ’88, but I did admire him, especially his stint as Secretary of Housing and Urban Development under Bush I.

He was on the cutting edge on the topic of home-ownership and tenant-own thinking even though his stint as HUD secretary didn’t accomplish what he set out to do:

As a bleeding-heart conservative, Kemp was a logical choice for Bush as the Secretary of Housing and Urban Development, whose job would be to foster public sector and private sector methods to meet the demands of public housing. However, the scandals of Reagan’s Secretary of Housing and Urban Development Samuel Pierce and the neglect of the president were obstacles from the start, and Kemp was unsuccessful at either of his major initiatives: enacting enterprise zones and promoting public housing tenant ownership. The goal of these two plans was to change public housing into tenant-owned residences and to lure industry and business into inner cities with federal incentives. Although Kemp did not affect much policy as HUD’s director, he cleaned up HUD’s reputation

In addition to opposition in Congress, Kemp fought White House Budget Director Richard Darman, who opposed Kemp’s pet project HOPE (Homeownership and Opportunity for People Everywhere). The project involved selling public housing to its tenants. Darman also opposed Kemp’s proposed welfare adjustment of government offsets. HOPE was first proposed to White House chief of staff John Sununu in June 1989 to create enterprise zones, increase subsidies for low-income renters, expand social services for the homeless and elderly, and enact tax changes to help first-time home buyers.

Kemp wrote a position piece on bankruptcy in early 2008 that covers the issue as it relates to home ownership and low and middle income families called Bringing bankruptcy home

Bankruptcy law is wildly off-kilter in how it treats homeownership. Under current law, courts can lower unreasonably high interest rates on secured loans, reschedule secured loan payments to make them more affordable and adjust the secured portion of loans down to the fair market value of the underlying property — all secured loans, that is, except those secured by the debtor’s home. This gaping loophole threatens the most vulnerable with the loss of their most valuable assets — their homes — and leaves untouched their largest liabilities — their mortgages.

Sometimes good ideas never see the light of day because of political disconnect.

The housing rescue plan was dealt a blow last week when the Senate killed the cram-down legislation that was a centerpiece of Obama’s housing recovery plan because investors and banks were worried they would be wiped out.

A cram-down is:

a term used in bankruptcy law to refer to the Chapter 13 provision that allows debtors to retain collateral as long as they offer repayment of the “secured portion” or fair market value of the collateral in their repayment plan.

The Senate was likely afraid that the bill would give bankruptcy judges to much sway over modifying outstanding mortgages and would indemnify servicers. Here’s a summary of the version the House passed.

On a merely a practical level, I was never sure how the services would handle the cram-downs since the mortgages were sliced up into many tranches.

According to DataPoints, a Moodys.com blog:

Without the incentives provided by the reform bill, we now estimate that 475,000 fewer voluntary modifications will occur, and with judicial modifications we project an additional 1.725 million foreclosures this year. This will significantly increase the inventory of unsold homes and place additional downward pressure on already-weak house prices. Equity values will erode further, leading to more defaults and placing greater pressure on prices, thereby prolonging both the depth and duration of the housing market correction.

In other words, when the commercial banks still hold sway over Washington, despite their financial condition and debt and the net result of this failed legislation may very well be worse.

Business as usual.


CNBC Original – House of Cards

February 11, 2009 | 3:54 pm |

CNBC is premiering a special documentary tomorrow night that explores the relationship between risk and reward in real estate.

There have been a number of specials on this topic but it is always good to review what is happening on the ground right now and reflect on how we got here. I watched the trailer and it is compelling.

CNBC sent me the announcement about the special tomorrow:

Was reading your blog and thought the upcoming documentary on CNBC might interest you and your readers…

Tomorrow (Thurs Feb 12), the CNBC Original “House of Cards” will premiere at 8p ET / 9p PT on CNBC. “House of Cards” explains how we got into today’s economic mess – with inside accounts from key players from home buyers to mortgage sellers to Alan Greenspan.

The documentary launch page.


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[Canceled/Reconfigured] Developers Forced To Confront New Reality

February 5, 2009 | 11:06 pm | |

The Real Deal Magazine is relentless in its coverage of the New York City real estate economy (and other markets), warts and all – one of those areas is getting a lot of attention lately is the new development market. We are seeing new types of selling techniques.

One of the significant issues is shadow inventory and the change in plans that many developers are forced to initiate/accept with the fall off in demand and increased difficulty in obtaining mortgages.

Here are a series of maps which shows the status of a number of new developments in New York City.

The federal government might be a good suitor – apparently they have no qualms about overpaying for assets.



[Housing RX] It’s The Principal Of It

February 4, 2009 | 12:49 am |

A lot can be said for getting to the bottom of things by not propping them up. It’s looking more and more like toxic mortgages have to be dealt with before things begin to improve on the lending so that liquidity will return:

According to new research, loan modifications without write-downs will not lead to the end to the credit crisis. There has been a tremendous amount of negative press about modifications because in many cases, the payments are not much less, with the additional fees and principal moved to the end of the term.

In a fascinating research paper by economists Patrick Bajari, Sean Chu and Minjung Park called Quantifying the triggers of subprime mortgage defaults that explores what drives borrowers to default on their mortgage.

First, default amounts to the exercise of a put option that limits the downside risk when the value of a house falls below the value of the mortgage. Thus, one strand of research has focused on how net equity or home prices affect default rates. Other studies have examined the importance of financial frictions; households may be liquidity-constrained and temporarily unable to pay, especially if they have low credit quality.

The two reasons are equal in their impact on default rates. Here’s their influence on default rates:

Based on the importance of illiquidity as a driver of default, the observed deterioration in borrower pool quality is consistent with the notion that lenders loosened their underwriting standards over time, perhaps due to flaws in the securitisation process. Because lenders do not hold mortgages that they have securitised, they do not bear the consequences of risky mortgages at the point in time when they go bad, even as they continue to generate income by originating such loans. This agency problem, coupled with the general underestimation of default risks by financial markets at the height of housing boom, gave primary lenders an incentive to lower their lending standards. Thus, a key policy implication is that future waves of default can be made less likely by measures that reduce originator moral hazard.

Write downs in principal, ie mark to market, will need to enter the recovery equation soon.

Because we find empirical importance for both illiquidity and net equity as drivers of default, this suggests that effectively mitigating foreclosures would require either some combination of policies targeting each cause, or a single instrument that targets both. For example, loan modifications that merely increase payment affordability by extending loan lengths would not be very effective as a standalone measure, as they would leave borrowers’ equity positions unchanged. On the other hand, write-downs on loan principal amounts would address both causes simultaneously, with the reduction in loan size serving both to increase the borrower’s net equity as well as reduce monthly payments.


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[Housing Investor Redux] Asking For Seconds, Or Getting Just Desserts?

January 12, 2009 | 11:35 pm | |

One of the success stories of the housing market malaise has been the California real estate recovery, in terms of transactions. Prices are down 30 to 40% on average, depending on the source, and transactions are up 55% over last year.

Why?

Southern California home sales outpaced last year for the fifth consecutive month in November, when 55 percent of buyers in the resale market chose repossessed homes. The abundance of discounted foreclosures helped push the median sale price down a record 35 percent from a year ago, a real estate information service reported.

A colleague of mine, who is a senior executive at a real estate brokerage company in California quipped “nearly 60% are foreclosures?…I’ll bet the other 40% are short sales.”

California lenders have had two years to come to terms with the market and are pricing properties at market levels.

Houses in certain markets in other markets like Detroit and Cleveland can be purchased for a $1,000.

Here’s the problem.

Much of the purchase activity is believed to be by speculators.

“Regular homebuyers are excluded from the foreclosure market because the rules favor professional investors and that lack of competition is driving down prices,” Baker said. “This is a place where the government could step in and stop housing’s downward spiral by encouraging a more user-friendly process.”

Banks that have received federal bailout funds should be forced to sell foreclosures in a way that gives homebuyers a fair chance, said Stiglitz. Lenders repossessed about 850,000 properties in 2008, according to RealtyTrac.

“In past housing recessions, we didn’t see as many mortgages under water, so it didn’t matter if the focus was on speed and not on maximizing value,” Stiglitz said. “Now, the same banks that created the problems by mismanaging their risk are mismanaging the disposal of their assets.”

Deja vu all over again.

Once the housing market begins to recover, these investor units will enter the market as flips and may keep prices suppressed by competing with owner occupied units. If mortgage rates rise, the problem is exaggerated because the investors are, in theory anyway, less financially solid.

Investment in housing properties is not a bad thing – it’s only bad when there is a disproportional amount of it…and a 55% foreclosure market share in California is too much of a good thing.

Note: a math-related bonus by my recently discovered fav musician.



[New Fannie Policy] Renters Rewarded For Meeting Obligations

December 15, 2008 | 1:02 am | |

Don’t fulfill your contractual obligations and you get bailed out.

Fulfill your contractual obligations and you get evicted.

That’s the way the process has played out.

Chauntay Barnes, 30, moved into a single-family home with her two kids in November 2007 on a quiet street in Hamden, Conn. She never missed a payment on her $800 rent — never had so much as a late fee — and yet in mid-September she opened her mail to find an eviction notice.

If you are going to solve the housing crisis, you can’t treat tenants who met the their obligations as a throwaway. Fannie Mae is going to work with some tenants to prevent eviction. Still, only a fraction of the evictions will be prevented.

In a move that provides relief to thousands of renters who face eviction but draws the federal government even deeper into the housing market, the loan giant Fannie Mae said Sunday that it would sign new leases with renters living in foreclosed properties owned by the company.

In recent months, skyrocketing foreclosure rates have exposed as many as 70,000 renters to evictions, even though many never missed rent payments, according to analysts who track housing data. In many cities and states, renters can be evicted after their home goes into foreclosure, regardless of how long their lease stretches into the future.

Yes, properties may be easier to market when vacant, but the reality is the property will likely see extended marketing times with the surplus inventory levels. Why not keep income coming in to the taxpayer while the market finds it groove?

“We’re not in the business of managing rental properties, and we’re not in the business of being a landlord,” said Thomas Kelly, a spokesman for JPMorgan Chase, which owns about two million loans. “Clearly the renter is caught in the middle in cases like this. When a property is in foreclosure, we follow the law.”

When will the renter stop being treated like a second class citizen? Is the American dream of homeownership myopic?

Aside: The National Community Reinvestment Coalition, a consumer advocacy group has an amazing public relations sensibility. I would guess that coverage of this issue in the NYT and WSJ was a perfectly placed pitch. Kudos to them on this important issue.


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[Fore-Stalling-Closure] Delaying Doesn’t Solve The Problem

December 2, 2008 | 1:20 am | |

One of the techniques employed to delay or ease the foreclosure problem has been to place a moratorium on foreclosures. I for one didn’t understand the concept. I still don’t. Usually the delay is 3 to 9 months.

Is that enough time to allow the homeowner to get back on their feet and start making payments again?

The economy is eroding (and now officially a 1-year recession), unemployment is still rising and credit is still frozen. For many it would seem to be an illusion or false hope. To some of course, the delay to keep lenders at bay is helpful and effective.

It is sort of ironic (I am seeing irony in just about everything these days) that delaying the foreclosure process was necessary by many who delayed the process (of paying for things).

Julie Satow at The Daily Beast (a terrific new Tina Brown – created site) brings us evidence of the false-positive that is foreclosure moratoriums in her article: New York’s Impending Real Estate Doom.

Back in August, state legislators in Albany set a 90-day freeze on foreclosures that’s created a backlog of foreclosure filings. The 90-days are up next month. Banks will be bringing foreclosure filings “by the wheelbarrow,” said one court officer in Queens, where the number of filings dropped to just 60 per week from a rate of 150 per week before the law took effect.

California, Florida and Connecticut are proposing moratoriums while Massachusetts already has one.

One of the first to enact a foreclosure delay was Massachusetts. It set a three-month freeze in May, creating a backlog in foreclosures that built up to August. In the end, foreclosure filings ballooned 456% between August and September, according to RealtyTrac, a site that tracks foreclosures nationally.

It seems to me that a delay, while well-intentioned, doesn’t do anything but compress more properties into foreclosure at the end of the moratorium, ultimately creating more listing inventory at the same time, placing even more distress, ultimately, on property values.

There is some speculation that the foreclosure phenomenon in California is starting to ebb, perhaps because they have been seeing heavy activity for nearly two years.

And yes, like construction permits, demolition permits are plummeting in New York.

And yes, we are now realizing that we have been in a recession for a full year (one of the longest since the Great Depression) and we haven’t yet seen two consecutive quarters of negative GDP growth. Apparently rising unemployment, falling real personal income, falling industrial production as well as falling wholesale and retail sales declines somehow reflected a weaker economy. Call me crazy.

Aside: Noted economics blogger Tanta passed away on Sunday. She was a terrific writer for one of the best financial/econ blogs out there, Calculated Risk. Cancer has hit close to home in my family and it is never fair. In fact, it sucks.



[Mark To Market] To Buy A Fat Pig

October 2, 2008 | 12:29 am | | Radio |

Dan Gross over at Newsweek/Slate makes a great case for the argument that the bailout is a lot like a hedge fund.

It’s massively leveraged, It’s buying distressed assets, It’s taking equity stakes.

Mother Goose probably had no idea that she was to be in the conversation of hedge funds, equity investors investment banks and commercial banks.

To market, to market, to buy a fat pig,
Home again, home again, dancing a jig;…

Ok, ok so I tweaked the wording a bit, but the whining associated with the mark to market pricing concept of mortgage backed securities comes to mind. Apparently now accountants are to blame for the credit crunch because of Statement No. 157: Fair Value Measurements.

Mark to market explained: In accounting, mark to market is the act of assigning a value to a position held in a financial instrument based on the current market price for the instrument or similar instruments.

Much like market value estimates of properties derived from a typical residential mortgage appraisal, the state of the market at the present time frames the value of the asset. But what if there is no value because there is no market? We had this situation come up in Manhattan just after 9/11 because there were no sales. How do you estimate market value if there is no activity? I have long held that there is no market at that moment in time and therefore a value estimate is moot.

One of the biggest issues and the driver for the bailout is to be able to move the toxic mortgage junk off the balance sheets of lenders so they will not have the same capitalization requirements, which will free up capital to re-enter the markets to provide more mortgage money to homeowners.

Well the US Senate tried again and succeeded in passing the bailout wednesday, which was described as having more “lard” added to it (ahem… pork). Say what you want about Senator Dodd and his poor judgement in accepting favorable mortgage rates from Countrywide, he sounded pretty sharp even with the obligatory political posturing in this interview with IMUS just before first bailout bill vote.

And nearly every politician is fired up about mark to market in Washington and reversing the 50 year trend toward fair value accounting.

the big complaint at the moment is that markets for some mortgage-related securities have so totally broken down that marking them to market dramatically understates their value and makes banks’ finances look much shakier than they really are.

In Justin Fox’s Curious Capitalist blog over at Time he concludes in his Suspending mark-to-market is for zombies.

investors and regulators and reporters and corporate executives need to learn not to take any financial reporting numbers, whether marked-to-market or not, at face value. The health of a bank or any corporation can never be adequately measured by a single bottom-line number. Understanding the assumptions and uncertainties inherent in accounting numbers is crucial to understanding how to use them.

Think of it as a balance sheet with lipstick.


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[Decade Of The Dude] Bowling Without The Carpet, Foreclosing On Housing

September 15, 2008 | 3:04 pm | |

This year is the tenth anniversary of the Coen brothers’ The Big Lebowski about an LA slacker named “Dude”.

Maude Lebowski: What do you do for recreation?

The Dude: Oh, the usual. I bowl. Drive around. The occasional acid flashback.

I’m not suggesting that the unprecedented events in the financial industry over the weekend were “Dude-like”. However, it does show how the regulatory structure was manned by “slackers” while the industry pissed on the carpet (sorry, but a fundamental movie reference).

I was at a meeting last week, and a senior mortgage type person was basically suggesting that the credit crunch was nearly over now that the GSEs were taken over and all should be resolved by the end of the year. I piped in that we have a long way to go – nothing concerning fixing the credit markets had been resolved by the GSE bailout, but it was an important step at coming clean, in order to restore confidence in the financial markets.

The activities of this weekend showed this assessment to be accurate. There is a lot of unwinding to do before credit, and ultimately housing can get back on track.

While it is interesting that Frannie now serves one master (hint: the taxpayer) and may go easier on those entering foreclosure than the GSEs could or did, the pipeline is already flowing with foreclosures.

Foreclosures represent 0.6% of all US properties. This doesn’t sound like a lot until you realize this number hasn’t been reached since the Great Depression. I am not suggesting we are going into another Great Depression, but rather the scope of this financial crisis is not modest (Dude translation: far out, like it’s huge).

Foreclosures represent 1.2% of all mortgages. Here’s a chart from Bloomberg about the market share of foreclosures for properties with mortgages. This is twice the total ratio of all housing and the amount is significant.

And more importantly

That rug really tied the room together.


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