San Diego Housing Bubble News and Analysis

Well, it certainly seems like that's what is happening right now, and I don't see a reason for it to stop any time soon. I've given up on the idea of buying a house for now. The idea of "investing" in what is clearly a game controlled very tightly by the house (the banks) is not to my liking. It's like going to a casino that you know is run by the mob, where all the slots are rigged and every game is fixed.

I'll keep renting...

Slightly off the topic but the whole "stress-test" is a joke. But it did accomplish one thing: now that the government is the conspirator of the banks to hide those shadown inventory, or else it will contradict itself. We are going down the same route as Japan.

sdduuuuude is absolutely correct, this is going to happen. As for the carrying costs of all these dead assets, well the bailouts will help. They may choose to rent some of them out or do loan reworks that basically turn "homeowners' into renters. There will also probably be some mysterious fires from time to time that take care of some of the unoccupied ones. Home prices may come down but it won't be because of these foreclosures. The values of homes must be kept high! It's just like the Soviet Union pretending that their harvest are at record yields while all of the store shelves are empty; the party line doesn't reflect reality, everyone knows it but we just keep playing along. Be brave, comrades!

I gotta say I strongly believe this to be the case as well. It is not like it is gonna happen, it IS ALREADY HAPPENING.

The numbers posted at foreclosure forum are not made up. If we don't see hard evidence in the form of increased foreclosures in the next few months it is going to be very troublesome.

Without inventory prices do not collapse. It is pretty basic.

It seems that the NODs are a massive quantity, but the foreclosures just trickle in. The banks are definitely reluctant to release them for whatever reason. Some say too busy, but I'm more inclined to believe they don't want to take the loss on the books, which sucks b/c our tax dollars were supposed to help the banks' loss and get the inventory resolved.

It's like neither is happening. You hear about a trickle of places that got mod'ed and a trickle of bank owned on the market. Nothing en masse. I don't hear about massive loan modifications. Yet I see places sitting empty for a long time. Of course the epitome is the destruction of the houses in Victorville.

That makes sense.

And so does this.
http://piggington.com/foreclosures_comin...

So what is one to believe?

ox
...riding along on a carousel, trying to catch up to you...

I'm starting to feel like we are up against the Mob. The govt is showing how they can manipulate this game and it feels like we are a player in there chess game.

Or maybe this makes more sense
Sun Tzu the art of war

Apparently there ARE loan mods en masse.

It's still pretending. You can change your accounting rules to pretend it does not cost you anything but reality will find an unpleasant way to manifest itself. Some way, some how. Once you start treating money like it is not real, it will eventually act that way.

No matter how much they don't like it, real purchasing power of the market is going down hard and fast and borrowing money to try and pretend like it is not is counter productive and WILL at some point blow up in everybody's faces. 1 years, 10 years it will happen and probably at a much higher cost than everybody thinks.

The cheaper way to accomplish the same thing is to just put a floor under pricing. Have every home get assessed and that is the floor price, it can't sell for any less. Ridiculous, really? That is what they are trying to do anyway. Lets just do it at a cheaper cost to society and get it done with rather than allocating so much time and energy towards it.

I agree duuuuude. I still see last summer's foreclosures sitting vacant or just coming to market. And all the "insider" predictions of an imminent "flood" of REO properties have come to nothing.

One scenario I see: Prices propped up, but zero real appreciation for the next decade or so.

Another scenario: Deliberate inflation, more with houses released to market as the inflated prices near the break-even point.

Another scenario: Deliberate inflation, more with houses released to market as the inflated prices near the break-even point.

Inflation with no job growth will not necessarily make home prices go up.

Clearly lots of confusion here. There are shenanigans that banks can play with loan valuations, but... not to the degree, or in the manner that you're suggesting with respect to SFRs.

When a loan goes on non-accrual (that is, the loan is 180 days past due) the bank has to set aside reserves (through a "provision") to cover for any estimated loss (admittedly, this number is generally too low if the loan then goes to REO post-foreclosure). Once the bank forecloses, it has to mark the property to market (and provision the difference between the loan value and the expected recovery) and the loan becomes Real Estate Owned (REO). Now, if there is an additional loss beyond what was expected (likely these days), then there is an additional charge off. But, it's not as though a bank keeps an SFR loan on the books at $200K until the property is sold post-foreclosure and then wakes up and says, "Oops! Gotta charge off $100K!" The vast majority of that charge off has already occurred by the time the property is sold out of foreclosure. And, more importantly, most SFR loans aren't held by directly by banks. They're in securitizations held indirectly by banks and the servicers are making the foreclosure decisions, not the lender itself.

So, yeah, plenty of shenanigans can be played at banks. But the main reason that foreclosures gum up the system is that servicers are understaffed relative to the work to be performed. And the various anti-foreclosure laws are also monkeying with the process.

Good details, davej. Thanks for the insight. That's why I posted it as a theory for discussion and not fact.

Does this mean the banks have more incentive to do loan mods - to keep houses out of foreclosure and keep that market value away?

Also - do the securities themselves track this mark-to-market charge-off ?

The securities' actual cash-flow performance tracks the charge-offs (with a slight lag), but the PRICES of the securities in the market reflect the market's collective opinion regarding (1) future cash flows, and (2) opinions on the securities' future prices. To summarize number (2) and to paraphrase Keynes: Most near-term price movements in asset markets are the result of guessers guessing what the other guessers will guess about price action in the future. That is, there's lots of speculation, but that speculation is generally anchored around something fundamental going on.

The bank's incentive is pretty simple: maximize the value of the loan. These days, that probably means a combination of lowering principal (just take a charge-off already!) and lowering the rate as well.

I'll use the example of a $200K loan on a $220K property (at origination). Let's say that the value is now $132K (down 40%) and the borrower has fallen behind. It's probably best for the lender (I don't care whether it's the "bank" or some other holder of a security) - to reduce the principal to, say, $165K - that is, meet them half way - and lower the rate a bit so that these folks stay in the home. I think MOST folks would view that as a good deal. And clearly it's a good deal for the bank because foreclosure is going to cost them considerably more between getting a lower price and all the costs involved.

Now, a bank can do that easily. But within a securitization it gets tricky because the servicer has to show discretion on the part of the securities' owners. That's where things get messy. The servicers want cover from lawsuits before they're going to just start reducing principal balances en masse. And then there are the seconds. Anyhow, my point is that, unfortunately, a lot of the problem with both doing loan mods and getting foreclosures processed and sold is due to the structure of the industry - specifically, the securitizations. It's just a major pain in the ass to modify loans and foreclose on properties that are held in securitization trusts.

Excellent. Thanks !

This is why deflation is such a slow grind, as in Japans case. Everyone fights death. With every tool available. Even survival is not growth. Unemployment and downward wage pressure will continue despite the banks reluctance/inability to efficiently clear their non-performing assets. This is a precarious position. When you're walking on a tight rope, all you can hope for is to not fall off.

dave, is it true that all loan principal mods have the catch-22 that if the home is ever sold, the written-down amount of the mod must be paid back?

Seems like there must be some analytical answer to the question - "Why don't banks ramp up the staff ?"

I mean, if the situation is still "whoever panics first wins" (or loses the least), why don't they staff up and manage it. Everyone is hurting for work. They could staff up pretty cheap.

Maybe the banks see appreciation in these properties over the next few years, or maybe peterb is right - it isn't growth, so why fund it ?

peterb, I don't think it is really because of "deflation" itself.

I was kind of naive, thinking that deflation will be easy to solve as well: you just let the price drop and at certain point it will attract buyers and market will recover.

However, I failed to consider the political side of the "deflation". The way I look at, deflation is really bad for the rich people (banks included) because they are the ones who are holding the assets when the music stops. (On the other hand, inflation is bad for ordinary folks as they dont' have much bargaining power over their assets, mainly the labor costs) So naturally, the rich will fight back as a political force in time of deflation to drag onto their status as long as they could.

We should have let all the banks go bankrupcy and let the home prices drop to really affordable levels. But the banks wouldn't let us and they are getting their ways. So like Japan, we will too have a very prolonged recovery process since the society can not efficiently clear the non-performing assets to restart again.

I think this is a really bad way to view things. Deflation is really bad for those who own assets and for people who owe lots of money.

Think about that for a minute. The asset holders are probably wealthy, but the ones who owe lots of money are just as likely to be poor or middle class as wealthy.

Conversely, deflation is good for those who have lots of savings or have few if any debts and people on fixed income. Again, think about it. The ones who are likely to have savings are probably wealthier, but those will little debt could be anywhere on the spectrum, and those on fixed income are usually retired or on disability (generally not what I think of as wealthy).

So, it seems to me that trying to define this issue in terms of class is fairly unsupportable when you think it through.

XBoxBoy

I don't know. It's a good idea in theory. But I'm not sure if that keeps people who would otherwise default (because they're too far underwater to want to stay) wanting to stay in their homes.

But, I don't know.

This is a good question. And I don't know the answer.

I suspect, however, that there are two different reasons for the two primary servicing bodies.

For pure servicers (that is, they don't own the assets - they're just servicing them), I think they are hesitant to hire more folks because (1) it cuts into their profit margins (to the extent that most are probably losing money at this point) - and recall that before foreclosing, the servicing fees are basically fixed; and (2) they are not confident that if they hire a bunch of folks to help with foreclosures that they will get reimbursed. Prior to foreclosure, the servicer collects a fixed fee. After they foreclose, the servicer can bill these additional expenses back to the securitization trust. But... if they are not sure that they are going to get reimbursed (because the security owners revolt), then they will be hesitant to add more staff. In other words, they're bleeding and gun shy... and not even sure what the rules are. I'd hate to be a mortgage servicer right now.

For the banks that own the mortgages outright, I think it's just more of an issue that handling REOs is not a profit center - it's a cost center. Also, I suspect that some banks are waiting to see if the govt comes up with some new plans to help keep folks in their homes. So, they're dragging their feet a little hoping that someone throws some of their customers a lifeline.

Exactly - no one know what the current happenings is a good idea or end up with much worst?. I never thought past fewer bad implementations would result this much confusion to us. Blame it on ??

You're wrong here. Wealthy people owe a lot of money. They got rich thanks to leverage, especially if they did so in just one generation.

Leverage can send rich folks to the poor house just like leverage made them rich.

No one here has found an address that has been foreclosed on and NOT been put up on the market at some point...it might take months and months and months, but they always are put up for sale.

Yes, there's a "shadow" inventory, but not because of some right wing conspiracy cooked up by wall-street.

And, yes, all NOD's will either be refinanced or evicted and sold, and yes, this will take a while.

I'm sure jpinpb can find some listings for you that haven't made it to market

Ummmm.... I think you misread what I wrote... I think it clearly says that people who owe money can be poor, or middle class or wealthy.

Also, I will take exception with your blanket statement "Wealthy people owe a lot of money" if by that you mean All wealthy people. Some wealthy people do owe a lot of money. Some do not. I personally know a couple of very wealthy people that don't have any debt whatsoever.

For what it's worth, most people that I've known who got rich in one generation did so by starting their own company and making a success out of that. Leverage had very little to do with it. I'm sure it's different on wall street but by no means is wall street the only road to wealth.

XBoxBoy

I can and there are. If you go to SDL and do a search on a few ZIP codes, I noted in the comments section of the particular property:

"NOD filed, but not listed."

And there are many. The ZIPs I watch are 92109, 92110, 92117, 92037, 92106, 92107, 92103, 92104, 92116, 92122, 92130. I don't track condos in all the ZIPs, but I do on SFH and I'm quite certain that there were many places that had NODs that weren't even listed or attempting to sell.

Now, since there, a handful have listed. But the others are twisting in the wind.

Give me an address or two...92130, please.

There's really no argument here. Some banks are slow as rap, but they are either refinanced or come back on the market.

If you're a net debtor, you hate deflation. Paying back a debt with more costly money makes paying it back more difficult and it takes more of your resources to do so, at a time when you're probably collecting less revenue as well...think state and local govt. The govt is the biggest debtor. They dont want deflation. But it remains to be seen whether or not they will get their wish. Savers and holders of money benefit the most from deflation.

I think a very likely scenario will be that all these unemployed people will probably be less likely to pay their car loans, credit card loans, student loans and mortgages,etc.. as they remain unemployed. This will fuel another wave of defaults. And we're back on the deflation cycle once more.
I think it's a very important thing to consider where employment will be growing to fuel an economic recovery. Next month over 100K college grads will be looking for work as well as the all the unemployed we've been racking up for the last 6 months...and continue to add to the ranks.