It wouldn’t be a proper Christmas without a little holiday cheer from
legendary housing bubble analyst Ramsey Su.  So pour yourself a
couple buckets of egg nog and read on…

These are not predictions.  This is a list that deserves full
attention in 2010.  Not intending to write a book, I am not
including references and links.

 
Short Sales  

In my opinion, short sales are the most equitable solution for all
parties to share the blame while stimulating the market in a
sustainable manner.  The timing is perfect for short sales.
 
For the lender, it minimizes loss severity.
 
For the borrower, it provides a fast route to recovery by limiting
damage to credit scores while repairing household balance sheets with
the elimination of the debt and debt service.
 
For the industry, real estate brokers, mortgage brokers, escrow, title
etc., would all benefit from a growing number of transactions.
 
For the real estate market, it will stabilize prices, determined by
supply and demand.
 
Neighborhoods benefit from not having to be flooded by unsightly
unoccupied REOs.
 
One of the biggest obstacles, the second lien, is being phased out with
time.  Very few loans originated during 2007 and beyond utilized
second liens.
 
Public policy remains an obstacle, such as the recently introduced HAFA
by the Treasury, 43 pages of bureaucratic red tape.
 
If they want to do something constructive, policy makers should, at no
cost to taxpayers, create some safe harbor rules for deficiency
judgment resulting from short sales.
 
Also at no cost to taxpayers, policy makers should assist credit
bureaus in setting a standard of the treatment of short sales so that
defaulting borrowers can be recycled back to the buyers’ pool as soon
as possible.
 
If short sales increase with a corresponding decrease of completed
foreclosures, I think that could be the most bullish signal for 2010.
 
Modifications

Similar to short sales, government should stop HAMPering
recovery.  Give the free market a chance.
 
HAMP does not work because, more often than not, it is not a good deal
for the borrower.  A loan modification is basically a lease with
option to buy.  The break even point is the fair market
rent.  In other words, if the resulting total housing expense
(principal, interest, tax, HOA dues, etc) is equal to the fair market
rent, then the modification is a wash for the borrower.  For
example:
 

 
Borrowers are beginning to understand “prevent foreclosure” actually
means “prevent foreclosure so lenders can minimize loss severity at the
expense of the borrowers”.  They are starting to realize they have
a much better option – walk.
 
HAMP qualifying cut off date is for loans originated before Jan 1,
2009.  Ironically, the loans originated after that date are easier
to modify, since the majority are agency loans with no junior
liens.  Freddie, Fannie and FHA are free to offer anything they
wish without having to deal with private investors and junior liens.
 
Regardless, modifications should remain a non issue in 2010.  It
will be a lot of noise with not much impact one way or another.
 
Interest Rate

Bernanke claimed that he is easing out of the agency MBS
purchases.  He had been buying exactly $16 billion per week for
the last five weeks.  In just over 2 months, we should know if
there are agency MBS buyers to replace Bernanke in this all important
secondary market and, more importantly, at what rate.
 
FHFA and FHA should be analyzing the recent loans to determine what
percentage of the applications would have been denied if mortgage rates
are higher, by each increment.
 
It is difficult for mortgage rates to remain at current levels when the
Feds exit the MBS market.  With the bulk of the activity at the
low end, any increase in rates would impact affordability sufficient
enough to shut off any signs of recovery, forcing the Feds to take
further action.
 
With so much competition from the Treasuries, the probability of
mortgage rates increasing is high.  We should be able to see where
rates are heading no later than February.  If mortgage rates rise
above 6%, the rate before Fed intervention, 2010 would be a very
difficult year.
 
Fixing Freddie and Fannie (and FHA)

Freddie, Fannie and FHA kept the real estate market alive in 2009 by
providing subsidized financing with the help of the Feds and the
Treasury.  This is not sustainable.
 
When the GSEs were placed under conservatorship over a year ago, they
were given $100 billion of play money, and then raised to $200 billion
and there are rumors that it may be increased to $300 billion – each.
 
The GSEs had not been profitable, are not profitable and have no plan
to become profitable in the foreseeable future.  Their losses are
equivalent to a subsidy for the housing market.  How long can this
subsidy continue and what are the ramifications when they are removed?
 
In 2010, the GSEs are supposed to reduce their combined portfolio to
$1.7 trillion.  If there are no buyers for agency MBS after the
Feds exit the market, the GSEs may be forced to increase their
portfolio in direct violation of the terms of the
conservatorship.  The other alternative would be to raise the
mortgage rates until buyers for the agency securities can be found.
 
In 2010, funding for the GSEs can no longer be by the Treasury alone
and will require congressional approval.
 
2010 cannot be business as usual for the GSEs.  Are we going to
see a good bank/bad bank proposal?  Are the GSEs going to be
nationalized indefinitely, along with ownership of Citi, GM and
AIG?  Is there some secret committee working on an exit plan?
 
I opine that the probability of disruption is very high.  The GSEs
will not fail, that is a given.  However, it is a certainty that
the agencies are going to cost the taxpayers a lot of money; the only
question is how much.
 
Foreclosure Outlook

There are two types of defaults, those resulting from the housing
bubble and those resulting from economic conditions such as job
loss.  They are not mutually exclusive.
 
Housing bubble defaults have been worked over with multiple rounds of
modification attempts and moratoriums.  With all the fruitless
attempts out of the way, foreclosures should resume in 2010.  The
defaults caused by economic conditions are starting.  With no
employment, these loans are very difficult to work out.
 
In 2009, there were approximately 900k REOs vs about 5.1 million
existing home sales (unadjusted).  There are 4 to 5 million loans
that are 60 days delinquent and beyond.  Various estimates for
negative equity range from 20% to 30% of mortgages.  The sooner
the hopelessly under water loans are flushed out, the sooner
sustainable recovery can begin.
 
If there are no new government intervention schemes, REO volume could
easily double to over 2 million, which is only a 40% roll rate for the
current pool of delinquent loans.  The roll rate should be high
because most of these delinquencies have exhausted all options.
 
Home Prices

With so much supply over hang, especially in the “must sell” category,
it is hard to imagine that there could be any upward price
pressure.  There should be some job creation in 2010 but caulkers
and census takers are not good home buyers.
 
Interest rate is at historical lows.  Bernanke (if he is still Fed
Chairman next year) would have a tough time keeping the rates at this
level, not to mention driving it down if further stimulus is needed.
 
Low end buyers bidding on properties with multiple offers should have a
much easier time next year when the REOs hit the market.  Higher
end properties depend on move-up buyers who are all stuck with an
existing home that they cannot or are unwilling to sell.
 
The best the market can hope for is support for the low end properties
due to affordability.  As long as the higher end property owners
can afford to hang in there, that sector of the market can be frozen
indefinitely, allowing time to absorb the price corrections.
 
In summary, the real estate
market faces major hurdles in 2010, starting early in the year with the
bench mark 30 fixed rate as the Feds continue to exit the agency MBS
market.  Foreclosures are temporarily postponed till after the
holidays but flood gates should open immediately after the New
Year.  The massive amounts of government intervention have very
little to show for but the policy makers are convinced that the
disaster have already been averted while Bernanke is busying himself to
accept the Time Magazine award.  Not only is there no Plan B,
there is no one in charge of coming up with a Plan B.  It will be
management by panic, similar to Lehman and Bear Stearns if conditions
deteriorate.
 
I will make one prediction for the 2010 government intervention – principal reduction.