Behind the new foreclosure freeze: The fear factor

Conventional wisdom holds that Wall Street is driven by two emotions: greed and fear. Today we see the second of those -- the fear factor -- on public display, in the form of the latest effort to forestall foreclosures.

(Headline for those who missed it: "The Bush administration, trying to deal with a worsening housing slump, announced a new initiative today aimed at helping homeowners about to lose their homes. For qualified homeowners, it will put the foreclosure process on hold for 30 days.")

Banks and lenders are afraid -- afraid of a deepening housing crisis, afraid of the political blowback, afraid of writing down more bad loans, and very, very afraid of being stuck owning foreclosed houses that are declining in value every day. The knife is still falling; banks and lenders do not want to catch it. But don't take my word for it. I get my best stuff from the comment section:

DS: "Truly, the banks are scared.  The are doing what they can in public relations spin to keep more American homeowners from handing them their keys.  They don't want more homeowners to say, 'Thanks for the loan Wall Street, but we are moving.'  And I am sure once the market changes, the banks will be asking for the keys."

jeff: "They know that owning these properties is the worst of the evils and ultimately destroys their balance sheets.  If they can manage to find a way not to have to write off the loan and continue to receive payments then they won't have big writeoffs."

Todd: " Ain't going to work. It just ain't. People do not want their home, which has severely declined in value."

perks: "This has NOTHING to do with helping out buyers.  It has EVERYTHING to do with the fact that the banks are so buried in defaults and foreclosures that they need the breathing room."

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: L.A. Times

Comments

[Joseph...The Real Estate Guy]

What a joke!!!

How about a 365-DAY-STAY?

They instigated/created the problem.

[kat]

Maybe someone out there can answer a question for me because my personal opinion on this mortgage "crisis" is that about 90% of it is fueled by the media.

Are banks really that "scared"?

Even though default rates have quadrupled because of these stupid sub prime borrowers the overall default rate is deminimus in light of the lending industry as a whole. I saw a guy from my bank and asked him how he was weathering the foreclosure crisis (jokingly) and he said they did not have one singel mortgage in default.

Since this very bizarre episode in real estate history is mostly confined to real estate pustuls of greed such as southern California, Vega, Florida and other areas of the country (where people think mortgage payments are contingent on whether the value of the home goes up) is it really enough to throw the country into a Wall Street fueled depression

The rest of the people in this country - 96% of us - are paying our mortgages like we were long before all this started and will be doing so long after it's over. So even are more than 90% of the Californians living in the epicenter of this mess.

Are these deadbeats really enough to bring down the economy in light of the fact that the overwhelming majority of us pay our mortgages?

[CD]

The system is broken. In a "Gravitas" way.
It will never be the same. Moral Hazard is what killed it.
Those guys want us to play by rules that Bankers do not obey. This is a middle class revolt. We are in a dead end. This only shows their desperation and their fear.
Paulson is an idiot.

[Tombstone Realty]

I like Warren Buffett's announcement that he would *graciously* insure the insurers - with the exception of the real estate hogwashery.

Stock market is soaring despite that last bit on the end thar.

Flailing in the dark, and hoping to hit a light switch - that's all this is.

[Dave]

I have no sympathy, everyone was in on the swindle.
1 The buyer thinks he can get a bigger house on a loan he can't repay and doesn't understand the terms of.
2 The real estate agent gets a percentage of the selling price, so of course he wants the price up.
3 The broker, same thing.
4 The mortgage company thinks they'll get tons of interest on the loan, and if the 'owner' defaults, they can resell and profit.
5 Wall street likes MBS's doesn't care what happens in the end.
6 The local government gets property taxes based on the valuation, so they like high prices too.
7 The federal govt. likes the illusion that all this money creates of a 'booming' economy.

Everyone deluded themselves.

[Maggie Knowles]

I think it's great that banks are finally acknowledging that it's better to work it out with a new loan with affordable terms rather than foreclosing. I just hope that it's not too little too late. If they qualified people based on teaser rates, then they should give the folks the teaser rates (fixed) for the term of the loan. Not sure if that's what will happen, but it should. That's what the lenders and Wall St. get for being greedy. They knew what they were doing.

[NationalBubble.com]

This plan is not going to work either. Somebody who owes 100K more than what his house is worth, why is he going to try to keep paying the mortgage. It might take several years for his home to come back in price. Most of these people bought we little or no money down, they have very little to loose. Just they credit history and if you are a subprime borrower, obviously you don't care much about your credit history.
It is much easier to just walk away and let the bank take the loss.

http://www.nationalbubble.com/

[JW]

What amazes me is that ANYONE is still buying a home in SoCal or any other bubble market while all of these knives are still falling around them. This mess has a looooooong way to go before prices hit the bottom and anybody that buys a home in a bubble market before 2012 is throwing a lot of dollars right down the toilet. The politicians don't have a clue about how to stop this runaway train and frankly, the only answer is to let it run until it runs out of steam and slows on it's own. Until then, either rent or move to a non bubble market if you must buy a home where you can find good homes that are priced properly to buyers incomes.

[Cal]

I think DS summed it up perfectly. Especially that last line..

The reason it is using Hope and Lifeline is that they dont want homeowners to feel like they dont have any options but walk away. They want them to feel like they should go through all the effort to keep the home and that they will make it easy to do so. Even owners paying 75 cents on the dollar is better than a house sitting there paying nothing on the dollar. In the end it will be sold by the bank anyways, they just dont want too many too soon.

I think many parts of all these plans will have the unintended consequence of encouraging defaults. All the programs are only helping if you arent paying (except FHA secure), once you stop paying the good deals really happen. The worst case scenario is giving the house back to the bank if they dont give you a good enough deal. Sounds like a win-win for the homeowner with the subprime loan.

[Dave]

This is like throwing out the sandbags when your big beautiful balloon is going down. It's merely making the crash a little later, a little slower, a little less frantic. It also nicely pushes back the real pain until after the November election.

The banks aren't stupid. If they can keep Joe and Mary Homeowner paying a $500K mortgage on a house worth $400K, they've stuck someone else with the hot potato. Yes, the receipts are lower, but they're not left holding the potato.

(Okay, I wildly mixed metaphors with the balloon and the potato, but you get the point.)

[sunsetbeachguy]

Per Tanta at Calculated Risk, the entire difference between business as usual versus what was announced today.

A letter to the borrower. That is it!

Banks don't have the loss mit/REO staff to deal with it.

They are wishing for some time.

An old Texas saying:

Wish in one hand and Cr@p in the other and see which one fills up first.

[GDC]

I have been seeing some real bargains out there recently. The ones priced right are definitely selling. A recent sale in Encino (in a good neighborhood) has this sales history from Zillow. Talk about huge swings in price the past 10 years.

01/25/2008: $1,100,000
09/11/2007: $1,490,074
07/29/2005: $1,835,000
05/14/2004: $1,280,000
08/25/1999: $450,000

WOW. Anyone have similar info on recent sales?

[Lou]

I have a great foreclosure plan:

Let the "homeowners" write off paying for the boxes they're going to need when they move out of the home they could never afford in the first place.

[aaron Kramer]

Kat and Maggie,
Kat - This is not a small local problem but extends to every corner of the country from LA to Detroit, St. Paul to Miami with Chicago, Atlanta, Houston
and New Orleans in between. Google any of these cities and foreclosure and you'll see all the evidence you need.

Maggie - Your right Wall St. is greedy and they are motivated by greed which is why you should question why they are doing this now! They don't want to repossess homes that are decreasing in value, it is that simple. Why do you want people to stay in homes that are decreasing in value when they have the right to walk away?

I've been stating for months that we are headed to a Depression and this just proves that my forecast is accurate. We are in big trouble and many banks are insolvent so beware false media reports and the knee jerk reaction to run to socialism to cure all that ills society.

[sfvrealestate]

"Perks" is right. It's taking three to six months to get the banks to even approve short sales. They just don't have the staff (nor do the asset management companies) to handle this.

[JohnnyB]

Kat wrote: “Are these deadbeats really enough to bring down the economy in light of the fact that the overwhelming majority of us pay our mortgages?”

It’s actually a really broad-based, widespread and systemic problem where everyone along the line maximized their profits through unregulated, fragmented and flawed incentive structures at the expense of long term sustainability for homeowners.

From borrowers -> brokers -> appraisers -> lenders -> banks -> wall street -> ratings agencies -> derivatives investors -> government.

The dynamics are now more a function of over-valued homes and corresponding income levels rather than monthly interest rates – although rates are certainly a short term factor. Ultimately it comes down to paying of the principle on the loan and folks simply cannot afford to do that based upon how much they earn. Especially considering declining home prices.

It’s not several thousand deadbeats representing a few billion dollars in delinquent mortgages. It’s millions and millions of homeowners all across the country who took out over-priced mortgages, refinanced existing mortgages and tapped home equity lines of credit to the tune of multiple TRILLIONS of dollars.

These flawed mortgages were taken off lending bank’s balance sheets, mixed together into derivative based gobble-de-gook by wall street investment banks and sold throughout the world with the backing of lap dog rating agencies erroneous seals of approval (SEC allowed this improper bank to rating agency relationship). Investors it seems couldn’t purchase them fast enough. Most realize now that this was essentially a big Ponzi scheme.

The current valuations are built from a house of cards and there’s no way to rebuild the weak structure into a solid structure without first collapsing it and rebuilding the foundation from the ground up.

The solid foundation rests upon the proper valuation of assets and risk. From homes to investment products.

There will be much pain along the way…

[Michael Snyder]

A close look at Warren Buffet's offer to insurers reveals it to be suicidal for any takers. Municipal bonds are the only portion of the portfolios he's interested in and even those will cost 150% of their current rates to insure. His proposal is actually a reflection of the weakness in the bond market as he's specifically excluded any instrument linked to subprime and real estate. I'm hoping the market's positive reaction today is more a reflection of buying into weakness than Mr Buffet's offering. On the bottom line it's the leveraging of mortgage backed securities that has the banks running scared. Even in a depressed market that 50 cent on the dollar loss on the initial loan ( worst case after resale of the property) is peanuts in comparison to the ten, fifteen, up to thirty to one margin calls on the CDOs backing those loans. That's why they're scared. Without time to raise some serious capital these ratings firms are toast.

[EKG]

Please tell me when the people who have paid - and continue to pay - their mortgage payments on time, every month, are going to be given a 30 day free pass?

[socal]

I'm a pessimist about the market, yet I'm about to buy a home. The reason is I think it is starting to look somewhat affordable now. The agreed price is 25% below mid-2005 price. So I will be moving from a rental condo to a house almost twice the size and have roughly $600 more in monthly expenses. Am I crazy??

[MyLessThanPrimeBeef]

Socal, you will be crazy if you don't immediately not pay the first 3 month mortgage payments so that you can get the 30 day freeze in order to get the lender to lower your monthly expenses to more than say $200 more, instead of the $600 more as it stands now.

[FromHouseFlipperToBurgerFlipper,]

This is absurd, and very desperate. I wish I could vote for giving the flippers, speculators and dead-beats a 30 day reprieve. I would vote NO!

I exercised, and still exercise, responsibility on how much house and debt I can afford. Why do the people that gambled and LOST get government help while the responsible get nothing?

L.A. housing prices are going to fall a lot further.

[Ace]

FromHouseFlipperToBurgerFlipper,

Your name cracks me up! Thanks for the laugh!

[Fourth Generation]

Look at it this way. The banks are just trying to keep the people in their overvalued houses paying something rather than holding an empty devaluating property. As you can see this is another scheme by the lenders/banks to save their rears, not to help the homeowners that were way over their heads purchasing houses they cannot possibly afford.

[Michael Snyder]

Upon further reflection; and reading the entire transcript from Warren Buffet's interview this morning on CNBC I've come to the conclusion that old fox is going to rock the boat so hard the market will have to adjust. http://www.cnbc.com/buffet watch
In insuring the ratings of municipal bonds Buffet covers BerkHath's investments in those bonds as they are held by their insurance subsidiaries, neatly increasing the value of his entire portfolio while charging a tidy fee for the service. Good work if you can get it.
As for his offer it's certainly a choice between the frying pan or the fire. Either way he's effectively calling the player's bluff on the subprime tainted investment instruments and they will likely run their course much faster as a result of Warren's end run.

[tew]

GDC posts that s/he is seeing "some real bargains out there" including a home bought in 8/99 for $450k that just sold for $1.1M in 1/08.

That's over an 11% annual increase over 8.5 years. That doesn't sound like sustainable price appreciation in an economy with low single digit inflation.

Maybe the structure was demolished and something very nice was built after the 8/99 sale. Otherwise, the logic that this is a "bargain" because it is down from even higher prices is like saying that dot com stocks were a bargain after they fell 25% in early 2000.

Many dot coms went to zero. It's unlikely a home price will fall to zero (but it does happen and is happening now in depressed areas). However, like stocks, home prices ultimately revert to what fundamentals will support. The more they are driven up by frenzy and margin-fueled speculation, the more they ultimately fall.

[Kat]

These deadbeats need to be allowed to die a natural death. Otherwise we have the economic equivilent of a Terry Shiavo on our hands.

[Owen Thomas]

At the risk of being engulfed with flame, I have to ask:
what is the big deal with being upside down in terms of ones house value. Given the fact that by the time one has paid off a mortgage he/she will have paid (with interest and principle) at least twice what the purchase price was. Doesn' t this means a mortgaged purchase is by definition upside down until some break even point far in the future?
Car loans are typically upside down through a good portion of their lives and yet one doesn't see parking lots full of abandoned cars.

[Aaron Kramer]

Owen,
Car loans are recourse loans, mortgages are not. With a car loan a lender can go after your assets in order to be made whole. They can repossess your car and take you to court for the remainder of the note.

[luca brasi]

if the economy was a ship, it would be named the 'Hillary Clinton' we could end up in a Depression over this. I made my green, but it's 'losers in last get the shaft'

[Larry]

Remember that banks were forced to purchase that subprice crap to show they don't discriminate.

The 30 day relief makes no difference at all. If they couldn't do anything for 3 months, one more want make a difference.

[l.a.guy]

This will be a good program for some borrowers. People speak of the mortgage mess in broad generalizations as if there is only one scenario: Minimum wage earner got a zero down loan for a $550,000 home that's now worth 350,000.

I'm sure some loans fit that profile. There are others where people of good will got a bad ARM, can't afford the reset and maybe they're 50K underwater right now. For those people why not work with them and negotiate a better rate so they can stay in the house. Even if their house has lost 20% in value, if they live in it for 10 years eventually it will recover that value.

Is it in the banks interest to do this? Absolutely. Is there some reason they shouldn't be trying to do damage control? They'll still pay a price for their indiscretion in the form of lower returns on the loan.

One thing I would worry about if I were the people taking the banks up on the offer; If these are in effect refi's then I believe they become recourse loans, so they are giving up the option to walk away from the house in the future if the new terms don't work out. Buyer beware.

[SGV]

To luca brasi --
You Clinton-bashers are getting pretty desperate aren't you? Remember that all of this unregulated shenanigans happened under a Republican administration.

[Cal]

Larry: "Remember that banks were forced to purchase that subprice crap to show they don't discriminate."

You have no idea what you are talking about.

[sfvrealestate]

Good point, Owen Thomas! And when you own, you get to paint the walls whatever color you want.

[Laker]

Larry wrote: " If they couldn't do anything for 3 months, one more want make a difference."
Larry, Well said, two thumbs up!

I'll tell you this, the more crazy bailout plans are introduced the more panic the banks are in that translates to faster declines as more people get scared from this too.
Market will get to mean (market price sustained by incomes). The only question is how fast / how long / how hard is the way to that point...

SOCAL,." Am I crazy??"
Simply check what was this property worth in 2001. If specifically this place was not sold during that time, look for comparable size, square footage, lot, etc. If your offer price is close to 2001 price (within 10%) I say it is a good deal in the long run albeit you might find yourself upside down for a while. If you offer 20% more than 2001 price, sorry, you are crazy.

[Angela Fuentes]

Luca Brasi--if the economy was a ship, it would be named the "George W. Bush." Why don't you lay blame where it belongs and take the irrational HIllary hate elsewhere.

[Laker]

Angela Fuentes, Dick Clinton (ohh sorry Bill Clinton) was the president that pushed the tax free capital gains on housing flipping ! check you facts first.
Had there been a democratic president like Billary or Obama, bailouts will be introduced on a daily basis, and your tax dollars will be worth less than the paper i use in my bathroom...
Bush is not perfect, but it could have been much worse!

[EconE]

GDC posted the supposed "deal"

01/25/2008: $1,100,000
09/11/2007: $1,490,074
07/29/2005: $1,835,000
05/14/2004: $1,280,000
08/25/1999: $450,000

yes...I'm seeing this also. Primarily with bank owned homes. Take note on the dates and amounts. Now this is a big guess...but it looks like it was purchased in '99, '04 and '05 by "people" and Mr. '05 potentially defaulted and the '07 "purchase" was where Mr. Bank bought it from Mr "Trustee" for the amount of the loan. (That is the reason for the "uneven" number).

"Mr. Bank" then put the house on the market and sold it a little over 4 months (and who knows how many price reductions) later for the nice even price of 1.1M to the person who I (and possibly the bank) view as "Mr. Knife Catcher".

Sooo...what's it worth?

1999...450K (could that be a bubble price for the time due to all the tech bubble money?)

2009/10...most likely MUCH less than "Mr Knife Catcher" is my guess.

[RIPOFFBYMORTGAGECOMPANY]

Well, I hate to say it but I was ripped off by a mortgage broker lady for my house.
I was told that if I did the ARM that she set up for me I would be able to RE-Finance my home which was on a VA Loan.
She promised me that I could get my home refinanced and then after signing and completing the ARM's She would see to it that I could refinance my home again under a VA loan as I'm a 100 Percent Disabled Veteran.

She told me that I would be able to get the same if not lower interest rate on a new VA loan.

Well, I hate to say it but I was hoodwinked into this deal and now I'm about to loose my home and if this happens I'm almost 60 years old and can not ever afford to purchase another home. I never missed a payment on my other VA loan. I feel like the world is caving in on me and I can't do anything about it.

The former Mortgage company was Century Mortgage and they went bankrupt. Then a company called Saxon Mortgage took over the loan. When I called to see if I could get it refinanced they simply laughed at me when I told them the story.

Saxon Mortgage is just one of the worst companies and you can check on the internet to see what they do to people.

Well, since I can not do anything to recover from this as I was lied to, I guess I will just be homeless within the next few months.

I hope that everyone of these mortgage brokers that have been doing this will be put in jail for what they have done with people.

I for one will miss all the things that came with owning my home and now my wife that is also 100 percent disabled and me, will just be out in the street.

I'm at a loss to know what to do.

[GDC]

Regarding the Encino house (which is south of the boulevard), my point is that if a house is priced right, it will sell in this environment. I looked at the info on Zillow and thought it was worth discussing on this board since many of us are on the sidelines waiting for prices to fall. There are comparable homes currently listed for $1.5m - $1.8m and I think these sellers are delusional. But to suggest that 5bd/5ba, 3500 sq ft remodeled homes in a very nice neighborhood with great schools will go back to 1999 prices (almost 10 years ago) is wishful thinking. Why? Because there are many, many good income buyers out there that will pay what THEY "perceive" to be reasonable. Remember, not all people are as economically minded and frugal as most on this board - otherwise this bubble would never have happened. I happen to think that this house is worth around $1m (which with even 4% appreciation since 1999 is not overly inflated; btw 1999 was about the lowest point of the housing correction in high end areas). I am personally looking to buy in the next year or two and was wondering if anyone else was seeing this type of dramatic drops from 05 or 06.

[aaron Kramer]

L.a. guy,

The refis are recourse loans and the FHA loans force the borrower to stay in the home for 5 years. What a scam but at least the media is reporting on the new scam and fraud being perpetrated. NOT!

[sandiego]

Not article related, but, Peter, have you seen the new DQ numbers for San Diego?

Another low.
Second lowest sales...ever.

New consstruction housing price up, however.

http://www.signonsandiego.com/news/business/
20080212-1129-bn12housing.html

[Ann]

I'm at a loss to know what to do.

Posted by: RIPOFFBYMORTGAGECOMPANY

Contact the Housing Authority for your state They can put you in touch with financial counselors who may be able to help you refinance elsewhere and/or get back into a VA loan.

Look up ACORN on the web and find the office nearest you. They are doing some good work in counseling and refis as well.

DO NOT BELIEVE THE MORTGAGE COMPANY

[Laker]

GDC, The reason the $1.1M for this house is too much is that rents do not cover the 30 yr fixed rate mortgage for this loan. Sure not the property taxes and upkeep.
This house is not a $400,000 house but more like $600,000 actual value.
I found a house similar like yours in woodland hills.
01/22/2008: $1,290,889
09/21/2006: $1,525,000
05/21/2004: $1,075,000
05/22/1998: $510,000
Now for sale for $930,000
Mr 98 is original owner bought brand new cashed out half Mill. Mr2004 paid $1,075,000 lived for two years (thank you mr clinton) and cashed out $500,000 tax free....
Mr 2006 (deadbeat) paid $1,525,000 and got forclosed in about one year. Mr 2008 is the bank that took back at $1,290,889 and now trying to unload as REO for $930,000.
It has multiple offers (multiple knife catchers) that would probably get it for $1M.
So is it a deal???

[CaptHowdy]

Owen Thomas wrote:

"At the risk of being engulfed with flame, I have to ask:
what is the big deal with being upside down in terms of ones house value. "

Here's the flame you requested :-)

Where have you been Owen? Many, many, many of these subprime and option-ARM borrowers have been counting on their houses going up in value in order to re-finance and hold off the day of reckoning. That gets a lot harder when your house isn't worth what you paid.

Also, what if you have to move because of your job? What if you have to sell because of an illness or divorce? Now multiply your having to bring a check to closing by the experience of sellers in cities, counties and regions all around the country, and you have a whole lot of pain. Pain that wrecks economies, and makes life tougher for everyone.

There's more, but this should at least help you get started towards understanding why "being upside down" is such a "big deal."

And don't listen to sfvrealestate - she'd LOVE to sell you a house that will be worth less the day after you bought it.

Remember buyers... DON'T BUY YET! Patience, patience, patience... :-)

[GDC]

Laker,

Great example. I thought there were many REOs like the Woodland Hills and Encino homes and I hope many more like these will come out. I would like to see if there are more examples such as these. It will set much lower comps in these areas for the future and the downward momentum will make buyers and seller adjust.

I don't quite agree with you that house prices are always tied to rents. Interest rates and differnt mortage products have a big impact. Also, prospective buyers for million dollar homes will pay a premium to avoid being a renter. They also larger tax deductions (45% Fed and State). Finally, some sideline buyers just can't wait until 2010 to buy due to family size, proximity to jobs, etc. Buyers come in different breeds. Some buy the new model plasma TVs and high speed computers when they first come out knowing they are paying a huge premium. Some (like me) wait about a year to get a 40% discount on these. Others will wait 3 years and get an 80% discount at discount stores not caring that it's an outdated model. That's what makes the economy, stock market, housing market so difficult to predict - human behavior is diverse and irrational.

[former glendale realtor]

alot of good posts, i like what tew said way up, and GDC, laker, ditto.
i think theres alot of factors that average people dont understand, and even people steeped in the market dont truly understand, but i think you dont have to understand them to know they exist.
my theory for example is that if banks have money available and willing to make loans prices will stay high, if banks get seriously tight on money, which i think they will, then even someone with a 9k monthly wage and 25% down payment may get turned down for a loan. then the prices will drop to maybe the lowest they have been since the 70s, i hate to predict how low but i think to around 100k for the median home.
for one does anyone really know why they went so high, i think it had alot to do with china pumping money into the us economy, and other countries as well, now chinas starting to feel the crunch even more so than us and the money is drying up, then if the democrats win theres no telling what will happen, i dont think it will affect it that much but it could trigger it to fall more.
also banks are losing money they dont even have, so you know they wont be able to give it away. ill be waiting for the 100k with gdc