The Mortgage Bankers Association is reporting that nearly one in ten households with mortgages are at least one payment behind.  That is a record, my friends. And it certainly means we cannot believe house prices have permanently stabilized.

The New York Times says:

The delinquency figure, and a corresponding rise in the number of those losing their homes to foreclosure, was expected to be bad. Nevertheless, the figures underlined the level of stress on a large segment of the country, a situation that could snuff out the modest recovery in home prices over the last few months and impede any economic rebound.

Unless foreclosure modification efforts begin succeeding on a permanent basis — which many analysts say they think is unlikely — millions more foreclosed homes will come to market.

Translation: there are a lot writedowns in residential real estate still coming. This is one reason bank credit is not going up significantly despite zero interest rates. Remember when I wrote about “extend and pretend?” This is the kind of thing that is holding up bank balance sheets. The article I wrote in October on short sales in North County San Diego highlights the issues involved. But at some point banks will have to take the hit (unless house prices magically go up to near previous levels – what everyone except renters wants).

Ivy Zelman has the same sinking feeling I do here; we don’t think house prices are necessarily heading up permanently. She even throws in a mixed metaphor to get her point across. She says:

I’ve been pretty bearish on this big ugly pig stuck in the python and this cements my view that home prices are going back down.

Look, the fake recovery is now in full swing.  But I expect the recovery to hit a brick wall by 2011, if not earlier. While the proximate cause of my concern is the likelihood of increased taxes and/or reduced spending by the Obama Administration, it is jobs that concern me. See Calculated Risk’s post showing the correlation between unemployment and mortgage delinquency and you see the connection. The fact is we have a record number of foreclosures and that is a direct result of rising unemployment. Unemployed people don’t have any money, so they don’t pay mortgages. It’s as simple as that.

The interesting bit about the New York Times article was this:

The number of loans insured by the Federal Housing Administration that are at least one month past due rose to 14.4 percent in the third quarter, from 12.9 percent last year. An additional 3.3 percent of F.H.A. loans are in foreclosure.

The fact is the F.H.A is the next Fannie Mae. If you’re looking and wondering where the next bailout will be, take a good look at the F.H.A. Not only is this agency guaranteeing hugely delinquent loans, but the Economic Stimulus Act of 2008 doubled the maximum loan that it could insure to $729,750 in order to cover jumbo mortgages common in cities like New York, San Francisco or D.C.. The purpose was to give liquidity to the frozen jumbo market in high-cost cities.  However, the net effect is that the F.H.A was expanding at exactly the time when loan quality was falling. There will be significantly more losses as delinquencies mount.

To make matters worse, the F.H.A. has an abysmally low 0.53% insurance reserve ratio – that’s the lowest ever. Yes, this ratio includes expected future losses, but you don’t have to be a rocket scientist to know any downside wipes these guys out. And that means more taxpayer money will be forthcoming.

Is this a pretty picture? No. But, is this what is going to happen? Of course it is.  So when the bailouts come because the foreclosures begin again in earnest and politicians start saying, “who could have known?” you will have every right to be disgusted.

Related posts:

• UK home prices fall in June
• A Home Price Firewall
• Can I borrow the full amount and an extra 25% too?
• Foreclosures hit a record in April
• Extend and pretend and the growing divide between delinquencies and foreclosures

The long-coming commercial real estate bust has arrived in the U.S. and elsewhere, a result of sky-high prices met by a severe downturn.  Prices could only work in a best-case economic scenario and large busts are now coming (see my posts on Stuyvesant Town and Capmark Financial).

This bust is certainly another major impediment to a sustained recovery – along with a host of other wild cards like unemployment, trade conflict, and oil prices. But, the most worrying aspect about the CRE market is the marks on the balance sheets of our capital-constrained banks, which do not reflect the level of distress evident in the marketplace. And since securitization plagues the CRE market, some analysts expect bankruptcy to be the only workout option for many troubled deals. You will recall, this problem with securitized assets is a dynamic which has also plagued residential real estate (see posts here and here).

The video below explains how this real estate bust is different and what it will mean for the U.S. economy and likely bank failures. (Sorry that it starts automatically. If the wrong video pops up, see the link below).

Related posts:

• Circuit City as canary in the coalmine for commercial real estate
• Commercial Real Estate bust
• Commercial real estate is next
• Commercial poperty ‘im Visier’
• Commercial real estate: down even more than residential

Annaly Capital Management’s blog has a good piece up on foreclosures, inspired by yesterday’s Case-Shiller data (hat tip Scott). If you missed it, The S&P/Case-Shiller index showed a pretty steep 1.2% month-on-month increase in U.S. house prices in its latest figures (for August 2009). This is the fourth consecutive month of increases, signaling to some that residential real estate prices have bottomed (see my post on Case-Shiller here).

Not so fast. First, we need to see this trend hold through the winter months after incentives have dissipated and after the summer selling season is less of a factor driving sales.  But, there’s something more ominous lurking in the data, and Annaly points this out. It’s the growing gap between delinquencies and foreclosures.

The S&P/Case-Shiller Home Price Index grew 1.2% month-over-month, and expanded for the third month in a row, according to data released this morning.  It would appear that the housing recovery is upon us.  To maintain this sunny outlook, we advise readers to please stop their analysis of the health of the housing market right there.  For braver souls, LPS (a provider of data and services to mortgage lenders and servicers) releases its Monthly Mortgage Monitor in the middle of every month.  The growing disparity between delinquencies and foreclosure starts is in focus in the chart below, from October’s release.

As the graph illustrates, delinquencies are rising, but foreclosure starts are not.  As of September 2009, 90+deterioration more than doubled actual foreclosure starts.  LPS has dubbed this “shadow foreclosure inventory.”  Higher unemployment begets delinquencies and defaults, but foreclosures aren’t flowing through due to modification efforts and various moratoria.  Depending on the success of programs like HAMP, more than a few of these loans are still destined for foreclosure.

This is the result of what is known as extend and pretend because a rolling loan gathers no moss or credit writedowns, but does gather fee income.  On the one hand, a lot of home owners are finding it difficult to get loan modification terms. But, on the other hand, mortgage delinquencies have more than doubled since the recession began, so the absolute number getting modifications has risen. The question is not so much whether enough modifications are being done, but rather under which circumstances are lenders modifying loans.

The Annaly data and graph above suggest that lenders are actually modifying a decent number of mortgages that fall delinquent – so much so that foreclosure statistics understate the overall distress in the housing market. So, this is a little bit of damned if you do, damned if you don’t as far as banks are concerned. On the one hand, they are getting pilloried for not modifying loans. Yet, on the other hand, in modifying loans they can be accused of “delay and pray” tactics in order to avoid writedowns. Both accusations seem fair given the enormous increase in foreclosures. Nevertheless, you can understand the dilemma. If you want a real-life story about how extend and pretend works in practice, see my post, “Short Sales in North County: “Feeding Frenzy” as banks pretend and extend.”

These cases are where the shadow inventory everyone keeps talking about comes from: houses that have not been foreclosed but where delinquencies show an increased probability of foreclosure, especially in a weak economic environment.

For banks looking to husband capital, it makes sense to extend and pretend where one thinks there is a reasonable chance that this will result in fewer loan losses. But, at the same time, given the securitized nature of the mortgage market, it is mortgage servicers which have an increased measure of control in loan modifications. And their incentives do not appear to align with those of the mortgagees. Time will tell how all of this impacts house prices.

Source

Who Knows What Evil Lurks In The Hearts of Men? – Annaly Salvos

Related posts:

• Prime Foreclosures greater than subprime
• Ivy Zelman: “Home prices are going back down”
• Case-Shiller: House prices up for second month
• Subprime, Alt-A Delinquencies Rise
• Consumer loan delinquencies paint bleak picture

The latest data from the S&P/Case-Shiller house price indices shows house prices increasing in 17 of 20 major residential markets. The overall composite index are up for the fourth month in a row but year-over-year comparisons still show a double-digit decline in prices. A snapshot of the data is provided below.

The three lagging markets are Charlotte, Las Vegas and Cleveland. Otherwise house prices appear to have stabilized at 2003 levels, which in real terms is quite a loss of wealth. As the summer selling season is now over, we will soon begin to get a better indication of how permanent this price plateau is.

Source

S&P/Case-Shiller Home Price Indices – Standard & Poor’s

Related posts:

• Case-Shiller: U.S. home prices up for third month in July
• Case-Shiller shows a further decline in prices
• Case-Shiller: House prices up for second month
• Case-Shiller: Price increases in 14 of 20 markets
• Case-Shiller Home Price index shows a 17% fall

Three years ago, MetLife agreed to sell the community of Stuyvesant Town (Peter Cooper Village) to Tishman Speyer and BlackRock for the exorbitant sum of $5.4 billion at the top the market. That deal has now gone completely pear-shaped and bankruptcy is expected soon in another bizarre chapter in the history of one of the most iconic 20th century planned communities in America.

Brief History of Stuyvesant Town

Stuyvesant Town was born in controversy. The Stuyvesant Town Wikipedia entry gives a fairly even-handed description of the events surrounding its development (more history found in the NYTimes article from 2006 second in the links at the bottom).

Due to a housing crisis building since the Depression, Stuyvesant Town was already being planned as a post-war housing project in 1942-43, some years before the war’s end. Provision was made that the rental applications of veterans would have selection priority.

Stuyvesant Town was controversial from the beginning. It was championed by Parks Commissioner Robert Moses, who, at the behest of Mayor La Guardia, sought "to induce insurance companies and savings banks to enter the field of large-scale slum clearance" (Moses, Letter to The New York Times, June 3, 1943). It was enabled by various state laws and amendments which permitted private companies to enter what was previously a public field of action. The new public-private partnership, and the contract entered between the city and the developer, the Metropolitan Life Insurance Company, were the source of much debate.

Among the issues at stake were use of the power of eminent domain for private purposes; the reversion of public streets and land, such as public school property, to private ownership; the 25-year tax exemption granted by the contract; and the rights of the company to discriminate in selecting tenants.

When the $50 million Stuyvesant Town plan was approved by the City Planning Commission on May 20, 1943 by a five to one vote, discrimination against African Americans was already a significant topic of debate.

Let’s call this redlining. Just as an addendum to this factoid on the ignoble beginnings, I should also add that Robert Moses  used his coercive power as Triborough head on slum clearances throughout New York City to make way for progress in the form of roads, bridges, and development (see the eponymous mid-70s book, “The Power Broker” for more – a true testament to coercive power in an advanced democracy). Another notable slum clearance of a similar nature was the Park West Village which went up in the Bloomingdale District of Manhattan just west of Central Park. Thousands were displaced in these actions and while Stuyvesant Town is a notable architectural achievement, Park West Village is not a wonder of post-War architectural design.

The bubble and the end of rent control

But Stuyvesant Town eventually thrived and developed a vibrant community of renters. When Tishman Speyer and BlackRock took over the days of below-market rents were over as the companies needed to get market prices to finance the enormous debt used to purchase Peter Cooper Village. See last year’s NYTimes article “Renters Forced Out of Stuyvesant Town” for more. However, this move was blocked on Thursday in court and now the New York Times is reporting that Stuyvesant Town is about to go bust.

Despite all the wailing and celebrating by opposing parties, it may be years before landlords and tenants in New York City know the full impact of a decision by the state’s highest court on Thursday that the owners of two major residential complexes improperly charged market-rate rents for thousands of apartments.

The New York Court of Appeals ruled that the owners of Stuyvesant Town and Peter Cooper Village, adjoining complexes in Manhattan with 11,227 apartments, improperly raised rents and deregulated 4,400 apartments while receiving special tax breaks from the city.

Landlords immediately criticized the decision, saying its impact would throw thousands of building owners who did the same thing into financial distress. At the same time, tenants looked forward to rent rebates going back years and damages worth tens of thousands of dollars.

But lawyers on both sides of the issue said on Friday that it could take years of litigation to determine if the owners of Stuyvesant Town and other landlords must repay tenants for years of rent overcharges, or simply adhere to the court’s decision from now on.

By that time, this property will be bust because there is no way this top of the market purchase is affordable with rent control and under anything but the the best of economic circumstances. All of the top of the market mistakes are eventually going to come a cropper. Consider this in that vein.

Other Sources

The Upscaling of Stuyvesant Town – NYTimes, 28 Jan 2001

Megadeal: Inside a New York Real Estate Coup – NYTimes, 31 Dec 2006

Big Landlord Found to Have Wrongly Raised Rents – NYTimes, 6 Mar 2009

Related posts:

• Circuit City as canary in the coalmine for commercial real estate
• Manhattan real estate now getting decimated
• Banks can do ‘You Walk Away’ too
• Looking for a bottom in Manhattan real estate
• Muncipalities can tear up contracts

There is mounting evidence that bubbles are forming again everywhere across the globe as easy money makes itself felt in asset prices. The latest evidence comes from Sweden where Europe’s lowest home loan rates have pushed up the price of residential property.

At issue is the extremely loose monetary policy in Sweden that is an outgrowth of both recession in Sweden and a massive exposure by Swedish banks to the Baltics which are presently in depression. Sweden’s central bank, the Riksbank, has cut interest rates to near zero and is charging banks interest to keep reserves on deposit. Meanwhile, the bank has also embarked on a policy of quantitative easing in order to get credit flowing again.

In my July post, “Sweden: negative interest rates and quantitative easing,” when Sweden went negative on interest rates, I wrote:

Pretty aggressive plan, if you ask me. Will it work, though?

Well, first of all, most every major central bank in the world, certainly the biggest: the Americans, the Eurozone, the British, the Swiss, and the Japanese, have rates near zero and are printing money.  The world is awash in money and the incentive to borrow is huge.  So, is the Swedish announcement qualitatively different?  On some level, it is not.  Nevertheless, it is the most aggressive policy and the fact that they are charging negative interest rates for deposits is unprecedented.  This does make events in Sweden something to watch.

So, if you have been watching, what you have seen is a financial sector which is still critically weak – so much so that the federal government has been having secret meetings with the banks to get together a game plan in a worst-case scenario in Latvia, the worst of the lot in the Baltics.

But, even so, while the real economy is in recession, one has to conclude that the aggressively expansionary policy by Sweden’s central bank is reflating asset prices in a major way. Experts are now sounding the alarm as house prices hit new highs.

Below is a translation of yesterday’s Dagens Nyheter article reporting on the warning.

Experts warn: Sweden risks housing bubble

Europe’s cheapest home loans, tax cuts and a continued housing shortage. These are some of the reasons house prices are rising to new record highs in Sweden – right in the middle of a raging recession. Now a growing number of experts warn of a new housing bubble.

Swedish mortgage customers are sitting pretty. The Riksbank’s key interest rate of  0.25 percent is unique in Europe. By comparison, the corresponding rate is 1.25 percent in Norway and Denmark, 1.0 percent in the euro area and 0.5 percent in Britain.

Variable interest rates in Sweden are currently about 1.6 percent. As DN Economics related a couple of weeks ago, short-term rates are 2-3 percentage points higher in countries such as Denmark, Germany and Britain.

Swedish low-cost mortgages are the main cause of the housing rally. House prices fell sharply after investment bank Lehman Brothers’ bankruptcy caused the financial crisis in September last year. But since the start of the year, they have risen again. Prices of flats are now 5 percent higher than a year ago. And house prices have gone up 2 percent.

Reduced income tax and the abolished property tax have also contributed to the housing rally. Likewise concerning the shortage of housing.

In 2008, there was construction of 21 500 apartments in Sweden, which was considered low. This year, new construction is expected to decline by one third, according to Swedish Construction Federation.

Six months ago many experts warned that rising unemployment could lead to falling prices in the housing market. Now they are warning of a housing bubble instead.  Nordea Chief Economist Annika Winsth has repeatedly warned of inflated prices, and SEB’s CEO Annika Falkengren said recently that she felt that both house prices and the stock market have risen too fast in the past year.

In its monetary policy report last Thursday, the Riksbank wrote, "there is evidence that house prices at present are slightly above the level that is sustainable". It also speaks to the dangers of "over-optimistic expectations about interest rates" and "more expansive lending".

Despite the warnings the banks’ barometers tell of housing prices that will continue to rise in Sweden for many months to come.

I see this ending in a very bad way.

Source

Experter varnar: Sverige riskerar bostadsbubbla – Dagens Nyheter

Related posts:

• Property more overvalued in Sweden than in US
• Denmark: the latest victim of falling house prices
• Estonia and Latvia: headed for the rails
• House prices in the U.K. up for first time since Oct 2007
• Nationwide: UK house prices down 14.6%

This is probably my fourth post on the tangled web woven by securitization, which puts a considerable distance between home owners and mortgagees which own a mortgage.  The issue is causing huge problems in bankruptcy and foreclosure in courts around the U.S. 

This morning, Gretchen Morgenson has another good piece out describing how a judge nixed all claims by mortgagee which refused to modify a home owner’s mortgage.

The debtors’ revolt is on.

For decades, when troubled homeowners and banks battled over delinquent mortgages, it wasn’t a contest. Homes went into foreclosure, and lenders took control of the property.

On top of that, courts rubber-stamped the array of foreclosure charges that lenders heaped onto borrowers and took banks at their word when the lenders said they owned the mortgage notes underlying troubled properties.

In other words, with lenders in the driver’s seat, borrowers were run over, more often than not…

But some judges are starting to scrutinize the rules-don’t-matter methods used by lenders and their lawyers in the recent foreclosure wave. On occasion, lenders are even getting slapped around a bit.

One surprising smackdown occurred on Oct. 9 in federal bankruptcy court in the Southern District of New York. Ruling that a lender, PHH Mortgage, hadn’t proved its claim to a delinquent borrower’s home in White Plains, Judge Robert D. Drain wiped out a $461,263 mortgage debt on the property. That’s right: the mortgage debt disappeared, via a court order.

I see this as a watershed case in jurisprudence surrounding mortgage-related bankruptcies and foreclosures.  The reason this is huge is that it echoes the case in Kansas I have written about in two previous posts:

• “Why mortgages aren’t modified and what a ruling stopping foreclosures means”
• “What are the legal rights of lenders and homeowners in foreclosure?”)

At issue is the question of what legal rights do lenders or their agents have in foreclosure in the new byzantine world of securitized mortgages.  In the New York case the judge nixed the entire claim as the mortgagee could not prove it had legal claim to the mortgage note. With the mortgagee unable to show ownership, the homeowner might even be able to stay in his home mortgage-free, Morgenson attests. That’s huge – and we should definitely expect an appeal.

In the Kansas case, MERS, a mortgage registrar, and a second-mortgage mortgagee were not informed of the homeowners bankruptcy and disposition of assets and claims before judgment was made. Nevertheless, the district court, the appeals court AND the Kansas supreme court all upheld the original summary judgment arguing that MERS was not contingently necessary.  While I would expect this case to be appealed because of the precedent it could set, I don’t see how it can be overturned after affirmation in every court – that is except through a politicization of the verdict.

Notice how PHH and MERS, the two lender agents in each cases, are not the actual owners of the mortgages. They are the servicers of the mortgages. This is why these cases have a lot to do with securitization

See also: How much money is Wells Fargo really making? for how some of this affects earnings at money center banks.

Morgenson had another article of merit on this topic last week. See her piece The Mortgage Machine Backfires.  This could get interesting.

Related posts:

• What are the legal rights of lenders and homeowners in foreclosure?
• Why mortgages aren’t modified and what a ruling stopping foreclosures means
• Citi agrees to do cramdowns
• Almost all biggest subprime lenders have received bailout money
• What would an alternative to bailouts have looked like?

This is good. H/T Michael Panzner.

Related posts:

• TurboTax: targetting ads to Obama’s team problems
• Michael Panzner: regional banks in trouble
• Darwin: Very gradual change we can believe in
• Hedge Funds
• GM gets the green light on its section 363 bankruptcy

After I published the recent story on the case against servicing agent MERS in the Kansas Supreme court, I noticed a lot of chatter about some mortgage servicing line items in Wells Fargo’s earnings report. So I wanted to quote a few blurbs from the Kansas Appeals Court and Supreme Court decisions as background for another post on future mortgage service revenue streams in banking.

The Appeals Court case had a narrow focus as to whether MERS was a ‘necessary party’ in this particular foreclosure case. The finding was that MERS was not. The Kansas Supreme court agreed that MERS was not “contingently necessary.” They went further in concluding that the fact that MERS neither possessed the promissory note or had authority to assign it may mean it cannot file suit.

However, because this is not a comprehensive judgment as to MERS’ role as nominee, clarification is needed. Given the number of foreclosures in the US, I expect this case is going to the Supreme Court.

Here are the facts.

Landmark National Bank v. Boyd A. Kessler summary

My summary of the case is as follows:

A homeowner based in Kansas came into economic difficulty, causing him to fall behind on his mortgage and file for bankruptcy on 13 April 2006. While he could have exempted his house in discharging his personal liabilities in bankruptcy, the homeowner opted instead to surrender the house.

Three months after he filed, on 27 Jul 2006, the bank with his primary mortgage decided to foreclose. It did not inform MERS (the central repository which tracks changes in mortgage ownership and servicing rights). Nor did it inform the bank holding the secondary mortgage.

On 6 September 2006, the district court then entered a default judgment and ordered a sale on 29 September 2006. Notice of the sale went out into newspapers and a couple picked up this foreclosed property on the cheap on 14 November 2006. So far, so good.

Except that very day, a full seven after the bankruptcy filing, the secondary bank filed a petition to set aside the district court opinion, arguing that MERS was a “contingently necessary party.” It wanted the money it was owed. And on 16 January 2007, MERS joined the bank in filing.  By 1 February 2007, the district court denied the petition to vacate the original default judgment.

The case was appealed to both the Kansas Appeals and Kansas Supreme Courts

Here are some of the issues:

• Is MERS as a mortgage servicing registry a “contingently necessary party” in this particular or any bankruptcy involving a property in its database?
• In what instances can MERS act as a nominee for the mortgagees in court to enforce a foreclosure?
• If MERS can act as a nominee, does MERS have to produce the original mortgage promissory note in order to foreclose?
• If MERS can act as a nominee, can a homeowner sue MERS or the mortgage servicing agent for the original lenders’ alleged predatory lending?
• Is the mortgage servicing agent a nominee or agent of the mortgagee or even a principal? If so, what are the obligations of the servicing agent to help affect a mortgage loan modification?

All of these questions arise because of the convoluted process we have for mortgages as a result of the mortgage-backed security market.  These questions have only become acute because the rise in foreclosures has made them a serious issue.

Excerpts from the Kansas Appeals Court decision

• A party is not contingently necessary in a mortgage-foreclosure lawsuit when that party is called the mortgagee in a mortgage but is not the lender, has no right to the repayment of the underlying debt, and has no role in handling mortgage payments.
• In a mortgage-foreclosure lawsuit, a district court does not abuse its discretion when it denies a motion to intervene that is filed by an unrecorded mortgage holder or its agent after the mortgage has been foreclosed and the property has been sold
• What is MERS’s interest? MERS claims that it holds the title to the second mortgage, not the real estate. So it does, but only as a nominee. In terms of the roles that we’ve discussed in the mortgage business, MERS holds the mortgage but without rights to the debt. The district court found that MERS was merely an agent for the principal player, Millennia. While MERS objects to its characterization as an agent, it’s a fair one.
• MERS had no right to the underlying debt repayment secured by the mortgage; MERS did not even act as the servicing agent to receive the payments and remit them to the lender. MERS’s right to act to enforce the mortgage was strictly limited: if "necessary to comply with law or custom," MERS could foreclose the mortgage or enter a release of the mortgage. MERS certainly could not act at odds to its principal, the lender. Its role fits the classic definition of an agent: one "’authorized by another to act for him, or intrusted with another’s business.’" In re Tax Appeal of Scholastic Book Clubs, Inc., 260 Kan. 528, 534, 920 P.2d 947 (1996) (quoting Black’s Law Dictionary 85 [4th ed. 1968]).
• Kansas law does require through K.S.A. 58-2309a that a mortgage holder promptly release a mortgage when the debt has been paid; MERS could be required as a matter of law to file a mortgage release after a borrower proved that the debt had been paid. Other than that, however, it is hard to conceive of another act that MERS—instead of the lender—would be required to take by law or custom.
• We do not attempt in this opinion to comprehensively determine all of the rights or duties of MERS as a nominee mortgagee. As the mortgage suggests may be done when "necessary to comply with law or custom," courts elsewhere have found that MERS may in some cases bring foreclosure suits in its own name.

Excerpts from the Kansas Supreme Court decision

• K.S.A. 60-219(a) defines which parties are to be joined in an action as necessary for just adjudication:

  "A person is contingently necessary if (1) complete relief cannot be accorded in his absence among those already parties, or (2) he claims an interest relating to the property or transaction which is the subject of the action and he is so situated that the disposition of the action in his absence may (i) as a practical matter substantially impair or impede his ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of his claimed interest."

• The relationship that MERS has to Sovereign is more akin to that of a straw man than to a party possessing all the rights given a buyer. A mortgagee and a lender have intertwined rights that defy a clear separation of interests, especially when such a purported separation relies on ambiguous contractual language. The law generally understands that a mortgagee is not distinct from a lender: a mortgagee is "[o]ne to whom property is mortgaged: the mortgage creditor, or lender." Black’s Law Dictionary 1034 (8th ed. 2004). By statute, assignment of the mortgage carries with it the assignment of the debt. K.S.A. 58-2323. Although MERS asserts that, under some situations, the mortgage document purports to give it the same rights as the lender, the document consistently refers only to rights of the lender, including rights to receive notice of litigation, to collect payments, and to enforce the debt obligation. The document consistently limits MERS to acting "solely" as the nominee of the lender.
• The Missouri court found that, because MERS was not the original holder of the promissory note and because the record contained no evidence that the original holder of the note authorized MERS to transfer the note, the language of the assignment purporting to transfer the promissory note was ineffective. "MERS never held the promissory note, thus its assignment of the deed of trust to Ocwen separate from the note had no force."
• "MERS does not take applications, underwrite loans, make decisions on whether to extend credit, collect mortgage payments, hold escrows for taxes and insurance, or provide any loan servicing functions whatsoever. MERS merely tracks the ownership of the lien and is paid for its services through membership fees charged to its members. MERS does not receive compensation from consumers." 270 Neb. at 534.

My reading of these statements is that MERS is a nominee and not much more. This should limit its ability to act on behalf of a mortgagee in foreclosure.  How much and in what ways due process is at stake has yet to be decided in the courts, the reason I expect this case to receive a look from the Supreme Court.

Sources

Landmark National Bank v. Boyd A. Kessler, Kan 2009, No. 98,489 – Kansas Courts Documents

See my post “Why mortgages aren’t modified and what a ruling stopping foreclosures means” for the Appeals Court decision.

Related posts:

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• Why mortgages aren’t modified and what a ruling stopping foreclosures means
• Habeas Corpus and the Supreme Court
• Why pro-choice Dems have nothing to like about John McCain
• Chrysler dissident lenders lose fight and disband

In August, the Kansas Supreme Court issued a ruling against a mortgage tracking service which may prove very costly to banks in foreclosure, leading to massive writedowns. It could be a life saver for many trapped in the foreclosure process. The case goes to the core of the functioning of massive markets in securitization and derivatives and has wide-ranging importance.

The service, MERS (Mortgage Electronic Registration System), is a privately-owned registry set up in 1997 by Fannie Mae, Freddie Mac and several large banks including JPMorgan Chase, Citigroup and Bank of America. In foreclosure, MERS is often the party which files on behalf of the lenders behind the mortgage against homeowners. The Kansas ruling effectively blocks MERS from bringing legal action on the lenders’ behalf in certain foreclosure situations, potentially putting the kibosh on  MERS’ legal authority on the more than 60 million mortgages it holds and subjecting the lenders to huge losses.

This is a complicated but important case I want to break down for you below.

Securitization at fault

The crux of the case has to do with mortgage-backed securities and the process of securitization. In a bygone era, almost all mortgages were held as loans on the books of the originating banks.  In this case, if a mortgage went past due, it was a matter to be worked out between an individual homeowner and an individual mortgage holder.

However, when the mortgage-backed securities (MBS) market took off, mortgages were sliced and diced into tranches and packaged into securities and sold on to investors.  These same securities were then sliced and diced and packaged with other securities into collateralized debt obligations (CDOs). CDOs were often then sliced and diced further still into CDOs-squared – that is CDOs of CDOs.

Often times, the underlying mortgages in these instruments were high-risk, sub-prime mortgages. But the ratings agencies could still give them AAA ratings, which made them eligible for investment by risk-averse investors like teachers’ pension funds or municipalities. So, these securities were then sold on to investors around the world into remote places like small towns in Norway and banks in Germany. However, when the housing market fell, the value of these securities plummeted; and they fell much more than the house prices as the securities are derivatives and leveraged against the value of the underlying asset. The result was a financial crisis of epic proportions.

Making matters more complicated for the homeowner, the originating lender is often not the servicing agent of a mortgage. Payment from the homeowner and to investors who are the ultimate owners of the security is handled by a mortgage servicer who collects a fee for its work.

What this has meant is that there is considerable distance between a homeowner and a mortgage holder, such that in the event of foreclosure, it is not a matter of picking up the telephone and calling Mr. Smith at the local Bank. Often times, there is a byzantine web of originating bank, mortgage holder (if loan is sold), mortgage servicer, MBS pooling/securitizing agent, and investors. Needless to say, the average person doesn’t have a clue as to who to call in order to get relief to avoid foreclosure. The obvious port of call is the mortgage servicer, who is the one party with whom a homeowner has ongoing contact.

Mortgage Servicer

Below is a research report written by the National Consumer Law Center just this past month on why consumers in jeopardy of suffering foreclosure cannot get loans modified.

It starts:

The country is in the midst of a foreclosure crisis of unprecedented proportions. Millions of families have lost their homes and millions more are expected to lose their homes in the next few years. With home values plummeting and layoffs common, homeowners are crumbling under the weight of mortgages that were often only marginally affordable when made.

One commonsense solution to the foreclosure crisis is to modify the loan terms. Lenders routinely lament their losses in foreclosure. Foreclosures cost everyone—the homeowner, the lender, the community—money. Yet foreclosures continue to outstrip loan modifications. Why?

Once a mortgage loan is made, in most cases the original lender does not have further ongoing contact with the homeowner. Instead, the original lender, or the investment trust to which the loan is sold, hires a servicer to collect monthly payments. It is the servicer that either answers the borrower’s plea for a modification or launches a foreclosure. Servicers spend millions of dollars advertising their concern for the plight of homeowners and their willingness to make deals. Yet the experience of many homeowners and their advocates is that servicers—not the mortgage owners—are often the barrier to making a loan modification.

See the problem?  This is exactly why loan modifications are not happening in large enough numbers.  This goes to incentives – mortgage servicers are not incentivized to make modifications. In fact the incentives go the other way – foreclosure.

Servicers have four main sources of income, listed in descending order of importance:

• The monthly servicing fee, a fixed percentage of the unpaid principal balance of the loans in the pool;
• Fees charged borrowers in default, including late fees and “process management fees”;
• Float income, or interest income from the time between when the servicer collects the payment from the borrower and when it turns the payment over to the mortgage owner; and
• Income from investment interests in the pool of mortgage loans that the servicer is servicing.

Overall, these sources of income give servicers little incentive to offer sustainable loan modifications, and some incentive to push loans into foreclosure. The monthly fee that the servicer receives based on a percentage of the outstanding principal of the loans in the pool provides some incentive to servicers to keep loans in the pool rather than foreclosing on them, but also provides a significant disincentive to offer principal reductions or other loan modifications that are sustainable on the long term. In fact, this fee gives servicers an incentive to increase the loan principal by adding delinquent amounts and junk fees. Then the servicer receives a higher monthly fee for a while, until the loan finally fails. Fees that servicers charge borrowers in default reward servicers for getting and keeping a borrower in default. As they grow, these fees make a modification less and less feasible. The servicer may have to waive them to make a loan modification feasible but is almost always assured of collecting them if a foreclosure goes through. The other two sources of servicer income are less significant.

If servicers’ income gives no incentive to modify and some incentive to foreclose, through increased fees, what about servicers’ expenditures? Servicers’ largest expenses are the costs of financing the advances they are required to make to investors of the principal and interest payments on nonperforming loans. Once a loan is modified or the home foreclosed on and sold, the requirement to make advances stops. Servicers will only want to modify if doing so stops the clock on advances sooner than a foreclosure would.

Worse, under the rules promulgated by the credit rating agencies and bond insurers, servicers are delayed in recovering the advances when they do a modification, but not when they foreclose. Servicers lose no money from foreclosures because they recover all of their expenses when a loan is foreclosed, before any of the investors get paid. The rules for recovery of expenses in a  modification are much less clear and somewhat less generous.

In addition, performing large numbers of loan modifications would cost servicers upfront money in fixed overhead costs, including staffing and physical infrastructure, plus out-of-pocket expenses such as property valuation and credit reports as well as financing costs. On the other hand, servicers lose no money from foreclosures.

This is a very important document for anyone looking to do a loan modification. I strongly suggest you read it, download it and act upon it.

By the way, the largest servicers are:

• Bank of America: $2.1 trillion, up from $530 billion a year earlier (via its acquisition of Countrywide – this is WHY bank of America bought Countrywide)
• Wells Fargo: $1.8 trillion, up from $1.5 trillion a year earlier
• JPMorgan Chase: $1.5 trillion, up from $795 billion a year ago (thanks in large part to its acquisition of Washington Mutual)
• CitiMortgage (a division of Citigroup): $792 billion, down from $799 billion a year earlier. Citi is hurting i everywhere)
• ResCap: $391 billion, down from $449 billion in the first quarter of 2008.

As you can see, consolidation has meant the big are getting bigger. Despite a recession, servicing fees are increasing, not decreasing.

You should DEFINITELY read my post “How refinancing helps the likes of Bank of America and Wells Fargo” because this demonstrates why these banks are going to rack up monster fees in mortgage servicing.

Landmark National Bank v. Boyd A. Kessler, Kan 2009, No. 98,489

That brings us to the Kansas case. According to the Kansas City Business Journal, the case can be summarized as follows:

A Ford County man went into bankruptcy in 2006. He had taken out two mortgages on the same property, one to Landmark National Bank and one to Millennia Mortgage Corp. Landmark foreclosed on its mortgage. Millennia had sold its mortgage, which eventually landed at Sovereign Bank, though that transaction never was recorded in Ford County.

Neither MERS nor Sovereign received notice when Landmark filed its foreclosure. That’s because the notice went to Millennia, still registered in Ford County, which is like telling someone that a stranger’s car is about to be towed.

Landmark won a default judgment, essentially wiping out Sovereign’s mortgage. MERS and Sovereign sued to set aside the judgment, arguing that MERS should have received notice. They lost at trial and on appeal.

Supreme Court justices had a difficult time accepting what MERS was and why it would be entitled to receive notice of a foreclosure when it was not a lender and had no stake in the property behind the mortgage. In addition, the court found, the original mortgage required notice only to the lender, not MERS.

This case was decided on 28 August 2009 in favor of the homeowner Boyd Kessler (Document and link below). The issue was predatory lending.  But there was more wrong here. MERS does facilitate liquidity in the MBS market, but it does a lot of other things that could harm consumers

• MERS also acts as a “corporate shield,” protecting lenders from legal action in cases of predatory lending.
• MERS can foreclose even though it is not the financial party with interest
• Because MERS is a distant intermediary, foreclosure can proceed without even producing an original mortgage note
• With MERS in control, consumers cannot access publicly available information to adequately determine who the holders of their note are.

If MERS is blocked from filing suit in many cases, there will be large losses accumulating at the holders of these notes. Expect to hear more about this very important case.

Landmark Bank v. Kessler, Kansas Appeals Court (MERS), 2008

Sources

Landmark National Bank v. Boyd A. Kessler, Kan 2009, No. 98,489 – Kansas Courts Documents

Why Servicers Foreclose When They Should Modify and Other Puzzles of Servicer Behavior (pdf) – National Consumer Law Center

The Mortgage Machine Backfires – Gretchen Morgenson, NY Times

The Next Financial Crisis Hits Wall Street, as Judges Start Nixing Foreclosures – Counterpunch

60 Million Fatally Flawed Mortgages – The Classic Liberal

Landmark Decision Promises Massive Relief for Homeowners and Trouble for Banks – Peace Options

Related posts:

• What are the legal rights of lenders and homeowners in foreclosure?
• Wow, judges now nixing lenders’ foreclosure claims entirely in court
• How refinancing helps the likes of Bank of America and Wells Fargo
• McCain repackages bailout proposal and labels it his own
• Subprime good, prime bad

Jim the Realtor is back with a bunch of foreclosures, REOs and short sales on the market in North County San Diego.  Some of these places look pretty nice.  In this particular video, the property is in Carmel Valley and on the market for $1.249 million. It is interesting for a couple of reasons.

The guy in the house has been on the foreclosure roles for a long time.  Apparently, he ran up loans 15% over the original amount, which suggests he may have been using the house price as an ATM when prices were going up. But now he is making partial payments to avoid being foreclosed.  The interesting thing is that by making a partial payment, the owner can get off the foreclosure roles and stay in his home.. until he misses another payment, which in this case has happened several times.

This is called “extend and pretend” otherwise known as “delay and pray.” Banks love this because they don’t have to write down the value of the loan immediately and the owner is looking for an exit strategy that doesn’t put him out on the street. It’s all good, right?

Obviously, the inventory levels would be a lot higher if short sales like these were foreclosed.

Another interesting factoid is that this place got multiple offers over list – and we’re talking cash buyers here. Jim’s prospective buyer came in with 50% down as well – and lost.  Jim calls this a “feeding frenzy.”

Clearly, record-low interest rates are doing the trick to reflate house prices in San Diego, a canary in the coalmine for the rest of the country (they led on the way up the first time and on the way down). This reflation is exactly why you delay and pray. For this particular seller it worked out as well as it could.

Related posts:

• Extend and pretend and the growing divide between delinquencies and foreclosures
• Cruising foreclosures, REO and short sales with Jim the Realtor
• Banks can do ‘You Walk Away’ too
• Manhattan Q2 Apartment Sales down 22%
• Case-Shiller Index: Less bad, but three markets cut in half

Further proof that the reflationary efforts of policy makers is taking hold comes from London in the form of record high house prices.  The Guardian reports:

Property asking prices in London have broken through the record high set in November 2007 as the drought of homes for sale around the country continues to distort the market. New research out today shows that the average asking price in London jumped 6.5% to £461,157 in the four weeks to 10 October, sailing through the high of £412,731 set in November two years ago.

The survey by the property website Rightmove also shows that asking prices in England and Wales are now higher than a year ago, after climbing 2.8% in the past month.

Back in March, when the global economy was flat on its back, I suspected that policy makers saw only one way out of this mess: another asset bubble.

Their efforts point in four directions:

1. Increase asset prices. If the assets on the balance sheets of banks are falling, then why not buy them at higher prices and stop the bloodletting? This is the purpose of the TALF, Obama’s mortgage relief program and the original purpose of the TARP.
2. Increase asset prices. If assets on the balance sheet are falling, why not eliminate the accounting rules that are making them fall? Get rid of marking-to-market. This is the purpose of the newly proposed FASB accounting rule change.
3. Increase asset prices. If asset prices on the balance sheet are falling, why not reduce interest rates so that the debt payments which are crushing debtors ability to finance those assets are reduced? This is why short-term interest rates are near zero.
4. Increase asset prices. If asset prices on the balance sheet are falling, why not create Public-Private partnerships to buy up those assets at prices which reflect their longer-term value? This is what Geithner’s Capital Assistance Program is designed to do.

So I lied, there is only one direction the government is headed: increase asset prices (or, at least keep them from falling). Read White House Economic Advisor Larry Summers’ recent prepared remarks to see what I mean. (Summers on How to Deal With a ‘Rarer Kind of Recession’ – WSJ)

The same was certainly true in Britain as well. With share prices up well over 50% and property again at a new high in London, the government has succeeded beyond anyone’s wildest dreams.

Mind you, the real economy is still in a shambles, with manufacturing taking the slowdown especially hard.  But, the employment market is not nearly as dire and the economy seems to be leaving recession.

Things are a lot better in the City than in the real world because the increase in asset prices is a huge boon for the banks. Expect bankers in the City to reap the benefits in the form of record pay packages this year.

Unfortunately, if you are a renter looking to get onto the property ladder, it is going to be rough sledding.

Related posts:

• Random Musing: London house prices
• If the UK economy is still in recession, why are London house prices hitting new records?
• Nationwide: U.K. house prices down 16.6%
• US Home prices down 16% over last year
• Denmark’s house prices fall

Here is some anecdotal evidence of the return of euphoria  in housing via Jim the Realtor.  Check out these videos of Carlsbad (North County section of San Diego) and the surrounding community to see what I mean – many but not all of these are going for well over list price. All of these are foreclosure sales.

It looks like we may just have hit bottom on the lower end. Will it trickle up?  We’ll see.

Related posts:

• Existing home sales add to the parade of bullish data
• Cruising foreclosures, REO and short sales with Jim the Realtor
• Case-Shiller: U.S. home prices up for third month in July
• Nationwide: U.K. house prices rise for second time in three months
• Case-Shiller Index: Less bad, but three markets cut in half

The Halifax reports that UK house prices rose for the third consecutive month in September, up 1.6% from August levels. Key to the rise has been a lack of supply coupled with increased demand (100% mortgages have helped as well).  Last week, Nationwide had pointed to a rise in ‘accidental landlords’ who did not wish to sell into a soft market as a reason for the limited supply.

Nevertheless, house prices are still 7.4% lower than they were at this time last year, according to the Halifax.  What I find curious, however, is that the Nationwide data released last week show house prices flat with year ago levels.  Below is a BBC News graph showing the growing discrepancy between the two major UK house price indices.

As in the U.S., I would like to see how these figures hold up in winter time, especially giving the huge disparity in the two indices.  Moreover, Britain has shown a considerable degree of economic weakness of late. Manufacturing data released today showed industrial production at the lowest levels since 1987, leading many to believe the UK has yet to shake off a nasty recession.  If economic weakness lingers, expect it to also be reflected in home values.

Sources

More signs of house price rises – BBC News

House Prices Now At Same Level As September 2008 – Nationwide

Related posts:

• UK house prices up for third time in fourth month
• Nationwide: U.K. house prices rise for second time in three months
• Nationwide: U.K. house prices resume their descent
• Nationwide: UK house prices rise for fourth month
• House prices in the U.K. up for first time since Oct 2007

The most recent data from the widely-followed S&P/Case-Shiller Home Price Indices was made available today. These data from July show house prices in the U.S. increasing for the third month in a row, suggesting that house prices have stabilized. Moreover, the trend was broad-based with only Seattle and Las Vegas showing house price declines in July amongst the top 20 metro areas.

Overall, U.S. house prices are at 2003 levels even before adjusting for inflation. Moreover, as housing is quite seasonal, we will need to see evidence that this trends holds through the slower winter months as well. The Composite-10 Index of the largest U.S. metro areas is still down 12.7% from a year earlier, while the Composite-20 index is down 13.2%.

Related posts:

• US Home prices down 16% over last year
• Case-Shiller: home prices fall even further
• Case-Shiller Home Price index shows a 17% fall
• Case-Shiller: House prices up for second month
• Case-Shiller shows further improvement in U.S. house prices

A number of new films have been produced chronicling the misadventures in America’s residential property markets and financial system.  One such story is American Casino. 

I have yet to see the film.  However, below is a clip from the filmmakers Andrew and Leslie Cockburn on one unforeseen consequence of the recent financial crisis. Abandoned homes in newer California sub-divisions are a breeding ground for mosquitoes, increasing the threat of West Nile virus.

Related posts:

• Foreclosures hit a record in April
• Cruising foreclosures, REO and short sales with Jim the Realtor
• The Housing Bubble and Bailout
• WHO: Swine Flu Pandemic is imminent
• First Swine Flu death in Texas (video)

Data on existing home sales were significantly above expectations with a seasonally-adjusted annual rate of 5.24 million sales registered according to the National Association of Realtors (NAR).  The NAR released a statement on the figures, an excerpt of which is below.

For the first time in five years, existing-home sales have increased for four months in a row, according to the National Association of Realtors®.

Existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 7.2 percent to a seasonally adjusted annual rate1 of 5.24 million units in July from a level of 4.89 million in June, and are 5.0 percent above the 4.99 million-unit pace in July 2008.  The last time sales rose for four consecutive months was in June 2004, and the last time sales were higher than a year earlier was November 2005.

Lawrence Yun, NAR chief economist, said he is encouraged.  “The housing market has decisively turned for the better.  A combination of first-time buyers taking advantage of the housing stimulus tax credit and greatly improved affordability conditions are contributing to higher sales,” he said. 

The monthly sales gain was the largest on record for the total existing-home sales series dating back to 1999.

The increase in existing home sales may be underpinned by a heavy inventory of forced and foreclosure sales, but a sale is a sale.  I see this as a bullish data point which will further the view that the economy has rebounded or will soon do so.

Related posts:

• New home sales and durable goods: economic reports
• Case-Shiller shows home price plunge
• Manhattan Q2 Apartment Sales down 22%
• Nationwide: UK house prices up strongly for third month
• Case-Shiller Home Price Index for April 2008 out

UK house prices have now risen for three months consecutively and four months in five according to statistics released by Nationwide Building Society this morning. The rise for July was a very robust 1.3% month-on-month, which translates into almost 17% on an annualized basis. Clearly, housing is doing very well during this summer selling season.

While prices could still fall during the slower Fall and Winter time frame, the recent rise in prices is beginning to look like a bottoming.  To be sure, prices are still down 6.2% year-on-year, but the index is within striking distance of the October and November 2008 figures, suggesting we may move into positive year-on-year territory if this trend holds through to Fall.

Nationwide’s Chief Economist Martin Gahbauer had this to say about the figures (emphasis added):

The price of a typical house rose for the third consecutive month in July, increasing by 1.3% on a seasonally adjusted basis. The 3 month on 3 month rate of change – generally a smoother indicator of the near term trend – rose from 1.0% in June to 2.6% in July, the highest level since February 2007. House prices are still 6.2% lower than 12 months ago, but this represents another sharp improvement from the 9.3% year-on-year decline in June. Even if prices were to remain unchanged for the rest of 2009, the year-on-year rate would continue to improve since prices were falling very sharply in the second half of last year. For the first seven months of 2009 as a whole, prices have risen by a cumulative 1.3%, suggesting there is now a reasonable chance that prices could end the year slightly higher than where they started. Only a few months ago, such an outcome would have appeared unthinkable.

I should also note that mortgage applications have been increasing strongly, evidence that first time home buyers are coming back to the market.  This underlying demand may be buoying prices.

Overall, the data cannot be seen as anything but bullish.

Source

House prices up for third month in a row – Nationwide website

Related posts:

• Nationwide: U.K. house prices resume their descent
• Nationwide: U.K. house prices down 16.6%
• Nationwide: UK house prices down 14.6%
• UK house prices fell another 1.7%, now down 12.4% annually
• Nationwide: UK house prices rise for fourth month

Yesterday, I mentioned that the housing data, while generally positive (the first uptick nationally in 34 months), contained some negative news due to seasonality.

The crux of the problem lies in the strong tendency for house prices to increase in the spring and summer because that is when demand for housing is greatest. Add in the fact that we have seen some distortions due to a rise in distressed sales in higher-income brackets due to the jumbo loan market meltdown.  All of this means that one month’s data should be taken with a large grain of salt.

Nevertheless, the increase is the first uptick in prices nationally for some 3 years and it is broad-based.  This has to be recognized.

For my part, I don’t like seasonal-adjustments because it adds in statistical noise.  My preference is to look at trends via movements in year-on-year rates of change.  And the trend here shows a clear plateauing.  In January, year-on-year changes were 19.0%.  Since then, the year-on-year changes have become progressively less negative.  The change is now 17.1% year-on-year.

Does this mean house prices have hit bottom?  Hardly, year-on-year declines are still massive at 17.1%. And the graph clearly shows the change in direction is rather slow.  But, it does mean that house prices are bottoming because we have seen a trend in year-on-year changes from January through May that looks likely to continue into the present day.  If this trend (of less negative data) holds for a few more months, say through September or October’s data, you could say that the housing market has stabilized.  By next summer, the year-on-year numbers would be positive.

But, it is early days yet.  At a a minimum, I would like to see the next few months data.  However, the ultimate confirmation will come through the Winter 2010 data from a far less buoyant time of year. And this won’t be released until next Spring.

I should add that we are talking about nominal prices here, not inflation-adjusted prices where we could see declines for much longer.

Related posts:

• Case-Shiller: U.S. home prices up for third month in July
• Case Shiller points to a grim U.S. housing market
• Case-Shiller offers up another depressing spectacle in U.S. housing
• Case-Shiller Index: Less bad, but three markets cut in half
• Case-Shiller: green shoots, yes but pretty grim nonetheless

The S&P/Case-Shiller Home Price Indices for May 2009 were released today and the data showed a marked contrast to previous months. Fully 14 of 20 markets showed an increase in home prices in that month, making it the first time since July 2006 that the overall index has risen month-to-month. On a year-over-year basis, home prices are down 17.1% in the Composite-20 markets.

Clearly, we are seeing a bottoming in US house prices, just as we have done in UK house prices.  While the stock market is down this morning and analysts remain cautious despite this news, these data can only add to what is looking like a more favorable picture for residential real estate in the US.  Just yesterday, the new homes data showed similarly positive news. Analysts were cautious then as well. If we string together a few months of similar numbers, this would in all likelihood signal a bottoming of house prices in the US.

However, it bears remembering that we are in the heavy spring/summer selling season (seasonally adjusted pries are down – see spreadsheet), so things could look very different come Winter.

Source

S&P/Case-Shiller Home Price Indices – S&P Website

Related posts:

• Case-Shiller Home Price index shows a 17% fall
• Case-Shiller shows further improvement in U.S. house prices
• Case-Shiller: House prices up for second month
• Case-Shiller: U.S. home prices up for third month in July
• Case-Shiller Index: Less bad, but three markets cut in half

If you haven’t seen any of Jim the Realtor’s videos over at Calculated Risk, you are not getting a feel for what’s happening in residential real estate in America.  The guy really gives the whole housing problem in California a look you wouldn’t have unless you were a real estate agent living it. His videos do have a certain twisted voyeuristic appeal to them.

In the videos below, Jim cruises around looking for REO properties.  All of this stuff is ‘shadow’ inventory, meaning it’s not really on the market.  There aren’t any for sale signs in the front yards. You can only imagine the shattered lives behind these videos. It gives you a good idea of how much more inventory is out on the market and the distress that creates for people selling. In the first video, Jim does say there isn’t a ton of shadow inventory yet, though.  He works in North San Diego County.

Since foreclosures are flooding the market in places like California, it pays to do your homework because some of these houses are being unloaded by the banks for ridiculous prices.

Just in case you don’t know what an REO is, here’s a great primer from the bloggers at roost.com:

Real estate owned or REO is a class of property owned by a lender, typically a bank, after an unsuccessful sale at a foreclosure auction.^[1] A bank will typically set the opening bid at a foreclosure auction for at least the outstanding loan amount. If there are no bidders that are interested, then the bank will legally repossess the property. As soon as the bank repossesses the property, it is listed on their books as REO – Real Estate Owned – and is categorized as an asset (non-performing).

As soon as a property goes into a distressed status (the borrower/home owner misses mortgage payments) the bank will want to determine the amount of equity that the property has. A popular method to determine the equity is to obtain a Broker Price Opinion BPO or order an appraisal. Based on the amount of equity that is determined from the BPO, the bank will decide to try for a short sale or to allow it to go through the foreclosure process. If the bank is able to sell the property through a short sale or at a foreclosure auction, then the property will not become a REO property.

After repossession and the property becomes classified as REO, the bank will go through the process of trying to sell the property on its own. It will remove some of the liens and other expenses on the home and try to resell it to the public, either through future auctions or direct marketing through a real estate broker (REALTOR). Generally speaking, bank REO properties are in poor shape in terms of repairs and maintenance; however, real estate investors will often go after these properties as banks are not in the business of owning homes and so, in some cases, the low price can more than compensate for the condition of the property.

Once a property is REO, the bank or lender will try to get rid of the property by either selling it directly themselves or through an established broker. Many larger banks such as Bank of America and Wells Fargo have REO/asset management departments that will field bids and offers, oversee upkeep and handle sales. The majority of REO properties that are on the open market are listed in MLS by the broker/REALTOR that performed the BPO.

And now for the clips.

Shadow REO Tor 1

I should mention that all the data for these houses is right there on the Internet.  Here’s the page at Zillow.com for the 2nd house from the previous video and here again on Redfin.com.  It’s pretty amazing how much reconnaissance you can do without even leaving your home.  Scary, actually.

Here’s video 2. Shadow REO Tour 2

Shadow REO Tour 3

Shadow REO Tour 4.

Related posts:

• Existing home sales add to the parade of bullish data
• Short Sales in North County: “Feeding Frenzy” as banks pretend and extend
• Manhattan Q2 Apartment Sales down 22%
• Banks can do ‘You Walk Away’ too
• Baker-Samwick trial balloon floated by Obama

I supported a proposal to help foreclosed homeowners by Dean Baker and Andrew Samwick back in June (see “Why not protect the homeowner?”).  Apparently, the Obama Administration likes this proposal and is floating a trial balloon via Treasury Assistant Secretary Herb Allison (hat tip Marshall Auerback).

A top Treasury Department official told a Senate panel yesterday that the government is considering a proposal to allow homeowners to stay in their home as renters after a foreclosure.

If enacted, the plan would attempt to address the glut of vacant properties in neighborhoods across the country, helping drag down home values. It would be yet another acknowledgment by the Obama administration that some borrowers cannot be saved from foreclosure despite government and industry efforts.

"It’s certainly an idea we’re thinking about," Herbert M. Allison, assistant secretary for financial stability, told the Senate Banking Committee. A Treasury spokeswoman said that the proposal was being studied but that no decision had been made.

Felix Salmon has been talking a lot about this proposal (see his recent posts here, here and here) and whether it is a viable plan.  I believe it is.  It certainly reduces housing inventory on the market. But, even more importantly, it prevents unwanted evictions in a period of economic distress.

Some find fault with the proposal. According to the Washington Post, a similar program launched by Freddie Mac has had few takers, suggesting the benefits of such a program could be meagre.  Moreover, lenders probably want to become landlords with tenants even less than they want to become residential real estate moguls. However, there is nothing in the proposals preventing lenders from selling foreclosed properties.  They merely protect former homeowners from a precipitous eviction.

I would actually like to see this proposal include renters of foreclosed homes as there have been a number of cases of foreclosed owners renting out their property without properly informing the new tenants of the pending foreclosure. The tenants are then evicted in short measure with nowhere to go. A video of evictions in Las Vegas below including an immediate eviction of rental tenants at about 6:00.

Related posts:

• Wow, judges now nixing lenders’ foreclosure claims entirely in court
• Treasury Considers Plan to Halt Home Price Slide
• McCain repackages bailout proposal and labels it his own
• Why not protect the homeowner?
• Treasury to Consider Further Measures to Halt Housing Slide

My translation below is of an article from the website Finanzas.

House prices accelerated their decline in June, down 10.1% over the same month of 2008, which is three tenths more than the previous month, when housing fell 9.8%, according to an Index of Spanish real estate market (IMIE) from Tinsa.

This fall, which is typical at the beginning of the year, adds to those ongoing since December 2007, a date from which the cumulative decline in the price of housing is 13%.

The IMIE shows further that this past June two of the five regional sub-indices showed decreases greater than the overall average.

Thus, house prices in the Mediterranean coast fell by 12.3%, while in the capitals and big cities, it fell by 10.5%. Still, in metropolitan areas the price of real estate declined by 9.9%, below the 10.1%.

Cumulative decline of 17.7% in coastal housing

For their part, house prices fell by 9.3% in the case of the Balearic and Canary islands, while the drop was 9.8% in the category of the remaining municipalities.

Based on the cumulative decline from the peaks of each subs-index, the Mediterranean coast, with a correction of 17.7%, and the capitals and major cities, reaching 14.3%, and the municipalities of metropolitan areas, with a fall of 13.6%, stand out.

What you should notice here is that the decline in house prices in Spain is much less than the declines we have witnessed to date in Britain or the United States.  Some might see this as a positive sign regarding the Spanish economy.  However, given the huge run-up in prices during the boom, I see this as a warning that declines in prices have much further to go in Spain.  The resulting losses will be catastrophic for the savings banks in the region. Therefore, developments in regards to Spanish house prices bear watching, in particular because the ECB had been instrumental in providing liquidity to the savings banks (debt owed by Spanish banks to the ECB hit a new record in June above €70 billion – see Spanish-language article here).  I suspect this liquidity is no longer on offer and that means the cost of larger problems in the banking sector will fall on Spanish taxpayers.

Source

El precio de la vivienda acelera su caída en el último mes y baja un 10,1% - Finanzas

Related posts:

• Case-Shiller shows home price plunge
• Case-Shiller index: Across the board declines in U.S. housing
• Consumer credit down a massive 33% in Spain
• Hypo Real Estate need for 10 billion also reveals huge problems in Spain
• Nationwide: UK house prices up strongly for third month

R.W. Baird downgraded Starwood Hotels (HOT) from Neutral to Underperform, saying it was downgrading estimates on hotels across the board. This comes via Barrons:

Starwood’s former strengths are now weaknesses. During the boom Starwood’s world-class real-estate holdings, higher-end brands and international growth allowed significant multiple expansion. Today, each of these former positives exposes the company to higher-than-average risks, for which we do not believe investors are compensated at present levels.

Starwood’s brands cater to high-end corporate and group travelers, the two weakest segments in the industry today. We believe the recovery in these segments will also lag, as corporate restrictions won’t ease until after positive signs have emerged.

You may recall that in the links last month I highlighted a bankrupt Starwood Hotel, the W Scottsdale, which exemplified the problem at the luxury end of the spectrum (See Phoenix Bears the Brunt of Hotel Market’s Steep Downturn from the Wall Street Journal).  In May, I also indicate that the implosion in commercial real estate will see the hotel industry under stress (“Hotel industry getting crushed along with CRE”).

When you think about property, you should really be looking at its worth as the present value of future cash flow streams.  This is true for residential, commercial, rental or travel property.  One reason is that property is fungible, meaning what is a owner-occupied primary residence ca just as easily be a rental accommodation. It might even be a Bed & Breakfast.  What is a hotel today can always become a condo, like New York City’s Plaza Hotel.  An apartment building can become a condo conversion as well.  It is this fungibility that creates an arbitrage opportunity when one property market gets out of whack with the others as the residential property market did.

Now that residential property is coming back to earth, it is increasingly apparent that other markets like commercial real estate (CRE) were also bid up to unsustainable levels.  Hotels are another area of excess where there is going to be a lot of pain.

Clearly, this is the case now with RevPAR (revenue per available room) down 20% across the board at hotel chains.  Higher end places are suffering even more.  Hence,the downgrade to Starwood.

Related posts:

• Hotel industry getting crushed along with CRE
• Folks trade down and shift to house parties to get a buzz

This comes via the Nationwide website:

As a responsible lender which aims to support its borrowers Nationwide has responded to market conditions and made an option available which enables some existing customers in negative equity to move home. This is not available to new customers. The maximum LTV for existing customers taking a new deal at Nationwide remains at 95%.

Nationwide remains a very prudent and cautious lender with a track record of low arrears, low possessions and has a low LTV (loan-to-value) mortgage book. As the borrower is required to put down a deposit of at least 5%, under this scheme, the LTV and the risk to Nationwide will reduce as a result of the transaction.

Nationwide introduced this option on 10 June 2009 for existing customers only in the following particular circumstances:

• they are in negative equity
• they need to move home
• they meet our strict lending criteria and
• they have a good credit record.

The Society does not anticipate, and has not seen, a great demand for this service.

Borrowers in these unique circumstances are simply able to transfer part of their existing negative equity with them when they need to move home – as illustrated below the actual value of the negative equity and the LTV will reduce in all circumstances.

The maximum LTV available is 95% on the new property plus the remaining negative equity amount carried forward from the current property. The customer will need to pay a 5% deposit on the new property from their own funds, for example:

Current property value	£200,000	New property value	£250,000
Current mortgage	-£220,000	5% deposit required	-£12,500
Negative equity amount	=£20,000	Negative equity carried forward	+£20,000
Current LTV	110%	New mortgage	=£257,500
		New LTV	103%
		New negative equity amount	£7,500

Both the main loan and the associated negative equity top-up are restricted to three and five year fixed rate products to protect the customer from potential payment shock over the short term and are only available on a repayment basis.

Rates available on the main loan match those available to existing customers not in a negative equity situation who are moving home with a 95% LTV and are currently:

• main loan up to 95% LTV: 6.73% (3 year fixed) and 7.48% (5 year fixed)
• top-up loan covering 100-125% LTV: 7.23% (3 year fixed) and 7.98% (5 year fixed).

Andy McQueen, director of mortgages at Nationwide said: “Nationwide is a responsible lender and our negative equity policy is an appropriate and prudent response to market conditions and demonstrates our continued commitment to supporting our customers.”

Related posts:

• Nationwide brings back 125% LTV mortgages
• Home Equity Lines Pulled
• Nationwide looking to buy targets in UK mortgage market
• Nationwide: British home prices now higher than a year ago
• Nationwide: U.K. house prices down 16.6%