That much talked about "next wave" of foreclosures is on the horizon, according to a report by The Times' Don Lee:
Amid rising unemployment and falling home prices, mortgage defaults have surged to record levels this year. Until recently, many banks have put off launching foreclosure action on the troubled properties, in part because they had signed up for the Obama administration's home-stability plan, which required them to consider the alternative of modifying loans to make it easier for borrowers to make payments.
Just how big the foreclosure wave will be is unclear. But loan defaults are up sharply. And with many government and banks' self-imposed foreclosure moratoriums expiring, the biggest lenders indicate that they are likely to move more aggressively to clear up a backlog of troubled mortgages.
... rising foreclosures will depress home values, pushing more homeowners underwater. Mark Zandi of Moody's Economy.com estimates that 15.4 million homeowners -- or about 1 in 5 of those with first mortgages -- owe more on their homes than they are worth.
Out-of-work homeowners aren't going to qualify for loan modifications.
California accounts for an outsized share of mortgage loan defaults. A stunning 135,431 homeowners in the state were hit with notices of default in the first quarter, an increase of 11% from the earlier peak in the second quarter of 2008, according to real estate information service MDA DataQuick.
On top of state IOUs, budget woes and a statewide moratorium on housing foreclosures, California will be working its way through this for a long time.
-- Lauren Beale
Thoughts? Comments?
Photo: A sign promotes free bus tours of foreclosure properties outside a real estate office in Victorville on June 15, the first day of a 90-day moratorium on foreclosures. The California Foreclosure Prevention Act pressures lenders to work to keep borrowers in their homes. Credit: Robyn Beck / AFP/Getty Images
A debt-forgiveness plan being floated by the Milken Institute in Santa Monica is the subject of Tom Petruno's column today. Here's how it would work:
Say an owner's mortgage is worth $400,000 but his house is valued at $300,000. The government would refinance the $400,000 loan with two new loans. Fannie Mae, the mortgage financier now under government control, would provide a first loan for the market value of the house, in this case $300,000. The Treasury would issue the second loan, in this case for $100,000.
The Treasury loan would be interest-only and would provide the vesting part of the program. For each year that the homeowner keeps up payments on both loans, one-fifth of the Treasury loan would be forgiven.
The Milken folks say the cost to taxpayers to save 1.5 million homes from foreclosure -- or people walking away -- would be in the $75-billion to $100-billion range. And, if I'm reading it correctly, this could spare lenders from having to take "haircuts on their loans." Anybody have a problem with that?
-- Lauren Beale
Thoughts? Comments?
Even with loan modifications and refinancing programs moving forward, the end of the foreclosure crisis is not around the corner, a panel of government officials and consumer advocates told real estate reporters and editors at a recent conference.
Among the factors slowing progress are loan servicers still gearing up for the task, the recession and for-profit foreclosure prevention firms handing out misinformation.
With about three-quarters of mortgage servicers onboard, Deputy Treasury Secretary Seth Wheeler said the administration's loan modification program "is not performing up to expectations yet." About 150,000 trial modifications have been completed and, as servicers work to beef up their staffing and training, tens of thousands are in the works. The goal is 9 million reworked mortgages over the next several months, Wheeler said.
Economic conditions, however, are working against refinancing, said John Walsh, chief of staff of the Office of the Comptroller of the Currency.
"The continued decline in home prices of course makes refinancing more difficult," Walsh said. And unemployment is "only beginning to take its toll now." The agency is tracking data and will report on progress at the end of the month. A 52% failure rate was reported in the fall for mortgage modifications.
David Berenbaum, vice president of the National Community Reinvestment Coalition, called on newspapers to stop running ads by "for-profit racketeers who charge on average $2,900 to consumers for poor advice." Examples he cited included counsel to not pay the mortgage or contact the service provider. HUD-approved counselors will help consumers for free.
Among organizations administering foreclosure-mitigation counseling services is NeighborWorks America, a congressionally chartered nonprofit network of more than 240 community development and affordable housing organizations.
Ken Wade, chief executive officer of NeighborhoodWorks, said there needs to be "transparency on results" and more information on people who are getting assistance "to see what's working."
If the new programs can keep up with the changing nature of the nation's housing problems, he said, they "have a better chance at working."
-- Lauren Beale reporting from Washington
Thoughts? Comments?
Why not let foreclosures run their course so the home market can reset to a sustainable level -- a sentiment often expressed on L.A. Land comment boards -- was among questions asked of Shaun Donovan, secretary of the Housing and Urban Development Department, Thursday at the National Assn. of Real Estate Editors conference in Washington. His keynote address came on the heels of President Obama's announcement of major changes in rules governing financial institutions.
 "Foreclosures were a part of the problem," Donovan said, "rather than a path to a solution."
Taking no action and allowing more foreclosures to occur "wasn’t going to lead to a bottom but to a much more substantial decline," he said.
Programs underway to help homeowners who are not yet in arrears refinance their loans or to modify the loans of borrowers who are in default are just part of the government's plans to stabilize the housing market. Also in the works as part of the president's overhaul plans are simpler loan terms, requiring originators to keep a 5% stake in their mortgages and increased efforts to stop fraud, he said.
The HUD secretary acknowledged government efforts have their limits.
"Clearly some families are in homes they can’t afford," Donovan said. "We can’t stop every foreclosure."
OK, L.A. Land you heard the man. Opinions?
--Lauren Beale, reporting from Washington
Thoughts? Comments?
Photo: HUD Secretary Shaun Donovan. Credit: Melissa Golden / Bloomberg News
ForeclosureRadar, the online seller of mortgage default data, has more evidence of a foreclosure backlog in its monthly data, released today: In May, a record 111,824 California homes were scheduled for foreclosure sales, but just 16% were auctioned. By comparison, last May, sales were held for 49% of homes slated for foreclosure. Of last month's postponed foreclosures, 40% were delayed at the request of the lender; an additional 33% were postponed by agreement between the lender and borrower. ForeclosureRadar CEO Sean O'Toole's take on this: “The data actually shows that lenders are doing everything possible to delay foreclosure. The reality is that we have very few homeowners being foreclosed on when viewed as a percentage of those scheduled to be foreclosed on, in default, delinquent, or upside down in their mortgage." Notices of default -- the first stage in foreclosure, which occurs when a borrower has missed several payments -- were down 4% in May from April and down 3% from the same month a year ago, to 40,870 filings statewide. Foreclosures taken to auction were down 30% in May from a year ago, to 17,871. Of those homes, 84% had opening bids set below the outstanding loan amount. The average opening bid for these properties was 59% of the loan amount. For instance, if a house with a $100,000 mortgage went to auction, the average opening bid would have been $59,000. Of homes going to auction in May, 88% were taken back by the lender. When a home is not sold to a third-party bidder at auction, the lender takes it back, typically to sell on the open market or through private auctions. The top 10 counties in foreclosures, per capita: Merced, Stanislaus, Yuba, Riverside, San Joaquin, Solano, Kern, Madera, San Bernardino, Sacramento. San Diego ranked 27th, Ventura 38th, Los Angeles 44th and Orange 46th. San Francisco had the fewest foreclosures, per capita. Aren't they special ? --Peter Y. Hong
Back in August, I posted on this 2,300-square-foot Pasadena house that was listed for sale at $875,000. It had been on the market then for about six months with numerous price reductions, but was still clearly over-priced for the time. It had sold for $898,000 in 2006.
This looked like a good "indicator house" showing the lockup in that slice of the market. The sellers couldn't cut their price to market level because that would be below what they owed; lenders weren't being aggressive in moving properties through short sales.
In August, the agent at the time said the sellers were current on their mortgage, but would not be able to afford a looming jump in mortgage payments and were trying to get out. The house was pretty tricked-out by its last owner, with a Viking range in the kitchen, nice pool, marble and granite everywhere. But it lacked what it needed to sell -- a price appropriate to the market.
Eventually, the house was listed as a short sale, and a couple of months ago the price had come down to, I think, $760,000 -- still too high, apparently.
It was foreclosed last month, with the lender owed $650,250.
So for more than a year, the seller and the bank could pretty much see they had an asset not worth the stated price, but no one was able or willing to do anything that might cut their losses swiftly.
It's now back on the market at $727,650. I'll let you know if it sells. If this is what it takes for the market to find a bottom, we're in for a long, inefficient crawl.
Full disclosure: I live within walking distance of this house.
--Peter Y. Hong
The Santa Rosa Press Democrat noted this weekend that many Alt-a mortgages, a type of variable-rate mortgage sold to people typically better off than subprime borrowers, are now heading into foreclosure in that area. The paper says 18% of Sonoma County mortgages are Alt-a's.
Such loans were a staple of failed Pasadena lender IndyMac Bank. They served people with good credit but without the income or down payment traditionally required for the amounts they borrowed. As their rates reset, many can no longer afford their monthly payments.
As Calculated Risk notes in its analysis of the trend, when these borrowers are foreclosed, it may be harder to find buyers for their mid-range houses than for the bottom-end properties that now dominate the foreclosure market. That's because there are fewer "trade-up" buyers who sell a lower-priced home then buy a more expensive one. Sellers of low-end homes today aren't people moving up, but banks clearing out repossessed inventory.
"The foreclosure crisis will now be moving up the value chain," CR predicts.
-- Peter Y. Hong
Consumer advocates expressed some skepticism today about a Fitch Ratings study predicting a high redefault rate for mortgages that are restructured to avert foreclosure.
The study, which I wrote about in today's Times, looked at mortgages bundled up on Wall Street during the housing boom to back debt securities. It projected that 65% to 75% of subprime mortgages in these loan pools would be at least 60 days delinquent within a year of when they were modified.
Center for Responsible Lending officials said the study doesn't adequately account for the more drastic lowering of payments expected as Obama administration loan-mod programs kick in. The buzzword here is "sustainability" -- getting the loan payment to a level at which the borrower can realistically be expected to afford it over time.
The Obama programs aim at persuading lenders and loan investors to reduce payments on first mortgages to 31% of a borrower's income. The initiatives include financial incentives for mortgage customer-service firms to accomplish this by lowering interest rates, extending loan terms and sometimes suspending interest payments on part of the principal of the loan.
"The Fitch report applies to non-Obama plan mods," Center for Responsible Lending spokeswoman Kathleen Day said in an e-mail. "So this just shows the need for real sustainable mods."
Any thoughts on whether Fitch was overstating the potential problems?
-- E. Scott Reckard
Los Angeles, get ready for another wave of foreclosures.
First American CoreLogic, which has a vast store of data on actual mortgages, reports today that Los Angeles County mortgages delinquent by 90 days or more in March were up to 8.9% of the total -- more than double the percentage of March last year.
Foreclosure filings, the next step in the foreclosure process, were issued on 2.3% of L.A. County mortgages in March, up from 1.9% in March 2008.
Repossessions, the final step in foreclosure, which results in a property being taken by the lender, were done on 1.6% of L.A. County mortgages in March, up from 1.2% in March 2008.
In recent months, the spike in default notices has not been matched by a proportionate number of foreclosure filings and repossessions. We don't know if lenders are simply too swamped to process the defaulting loans or if there is a deliberate effort to control the pace of foreclosed homes hitting the market.
First American CoreLogic notes, however, that a 12-month look shows foreclosure filings have ramped up. From April 2008 through March 2009, L.A. County averaged 412 foreclosure filings a day, compared with 228 a day during the previous 12-month period.
— Peter Y. Hong
Orange County's median home price remains the highest among the six Southern California counties -- at $390,000 in March, according to MDA DataQuick. That was down 23% from the previous year, also the smallest drop among the Southern California counties.
But like the rest of Southern California, previously foreclosed houses are driving the market. Aliso Viejo broker Steven Thomas notes that as of the end of April, the number of foreclosed homes and short sales -- those offered for sale at a price below the mortgage amount -- has dropped substantially. Thomas estimated the total of forecelosures and short sale properties on the market in Orange County in April was down 37% from its peak level in August. As many commenters and readers of this blog are aware, there's a widening gap between loan defaults and actual foreclosures, suggesting the system is clogged. Whether lenders are simply overwhelmed or there is a deliberate effort to prevent flooding the market further with repo properties remains a mystery.
Even with foreclosures down, however, the percentage of distressed properties among homes for sale in several Orange County communities remains astonishingly high. Thomas' data, through April, shows Santa Ana leading the county with a for-sale inventory that is 79% foreclosures or short sales. Foothill Ranch is next with 75% of its inventory distressed. Garden Grove and Anaheim each have about 70% distressed inventory, while in Lake Forest, La Habra, Rancho Santa Margarita and Buena Park, foreclosures and short sales exceed 60% of homes for sale.
The county's very high end still has relatively few foreclosures. Seal Beach's distressed inventory is only about 1% of its total, according to Thomas' stats, and in Laguna Woods, Corona Del Mar, Laguna Beach and Newport Beach foreclosures and short sales still comprise less than 6% of homes for sale.
-- Peter Y. Hong
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