'Seller-Funded' Downpayments Lead To Defaults
National
Mortgage News has a report on 'seller-funded nonprofits' and the risk they add to a loan. "Down payment assistance provided by a seller-funded nonprofit can alter the structure of the purchase transaction in important ways. First, when a homebuyer receives assistance from a seller-funded nonprofit, many nonprofits require the property sellers to make a payment to the nonprofit that equals the amount of assistance the homebuyer receives plus a service fee, after the closing. This requirement creates an indirect funding stream from property sellers to homebuyers that does not exist in other transactions."
"Mortgage industry participants reported, and a HUD contractor study found, that property sellers who provided down payment assistance through nonprofits often raised the sales price of the homes involved in order to recover the required payments that went to the organizations. Our AVM analyses found that homes bought with seller-funded nonprofit assistance appraised at and sold for higher prices than comparable homes bought without assistance, resulting in larger loans for the same collateral and higher effective loan-to-value (LTV) ratios."
"Specifically, we found that homes with seller-funded down payment assistance were appraised and sold for about 2 to 3 percent more than comparable homes without such assistance. That is, homebuyers would have less equity in the transaction than would otherwise be the case."
"Loans with down payment assistance do not perform as well as loans without down payment assistance; this may be explained, in part, by the homebuyer having less equity in the transaction."
"With regard to down payment assistance providers that receive funding from property sellers, we recommend that FHA take additional steps to mitigate the risk associated with these loans. These controls include treating such assistance as a seller contribution and, therefore, subject to existing limits on seller contributions."
"Because gifts of down payment assistance from seller-funded nonprofits are ultimately funded by the sellers, they are like gifts of down payment assistance made directly by sellers. We, therefore, continue to believe that assistance from a seller-funded entity should be treated as a seller inducement to purchase."
Low-Income Areas See Most Defaults In New York
The
New York Daily News has the breakdown on defaults in various neighborhoods. "The number of homeowners unable to afford their mortgages is rising in Queens, though foreclosure rates are leveling off or declining in other boroughs. Despite the dip, foreclosures remain highest in the Bronx and Brooklyn, and low-income neighborhoods such as Bedford-Stuyvesant and Crown Heights in Brooklyn and Highbridge and University Heights in the Bronx are still hit the hardest."
"In Queens, the number of foreclosure notices rose in 2004 over 2003 in all types of home categories. 'The question would be, are we beginning to see more predatory lending going into Queens?' said Furman Center director Vicki Been. 'We've seen rampant predatory lending in Brooklyn.'"
"There were 782 notices of foreclosure actions filed for single-family homes in Jamaica and Hollis in 2004, the highest number in the city. For two-to-four-family homes, the highest number went to Bedford-Stuyvesant, with 429. Bushwick had the most large apartment buildings, with 70."
"'About 70% of our work on evictions comes from buildings that have been in foreclosure,' said Rick Echevarria. His group has been working with tenants at a six-family unit on Bleecker St. that went into foreclosure 18 months ago. The building was finally bought by a new owner last month, but many of the rent-stabilized tenants fear they will be forced out by the new owner, who has sent them letters charging they owe thousands of dollars in back rent."
Slowing S CA Markets 'Produce Rise In Defaults'
Another
foreclosure firm found rising defaults in California. "A real estate information publisher reported today that a slowdown in price appreciation in several Golden State markets is producing a predicted rise in mortgage defaults."
"Alexis McGee reported 10,247 Notices of Default for the third quarter of 2005 in the major southern California counties, while in eight of the nine Bay Area counties, the total was 3150. '"Defaults in California's southland are moving off the historic baseline because the hot markets there are finally cooling down,' Ms. McGee said."
"She added that defaults were still low in the Bay area because their price correction had just barely begun. 'We saw a little jump in Sacramento County to 1051 defaults in the third quarter, up from 919 in the second quarter, and that market is definitely slowing, especially at the high end.' She went on to say that when prices cycle over the top, weakness first appears in the most expensive segment of markets across the country."
"We will see an increase in mortgage defaults for several reasons. For example, according to a report by CNBC, 45% of all loans out there are adjustable rate mortgages. As rates rise, their payments will be going up. With little growth in real personal income, those households are vulnerable,' she said."
Defaults Continue Climbing
A
foreclosure tracking firm is reporting post-hurricane numbers. "81,382 properties nationwide entered some stage of foreclosure in October, an 18.6 percent increase from the previous month. 'New foreclosures increased in October to their highest level so far this year,' said James J. Saccaci. 'Some of the increase can be attributed to foreclosure activity ramping up again in Louisiana and Mississippi after being disrupted by the recent hurricanes. But it's possible that increasing interest rates and other economic factors are beginning to move foreclosures closer to their historic levels.'"
"For the second month in a row, Texas reported the most new foreclosures of any state, with 16,386 properties entering some stage of foreclosure. That was a 68 percent increase from the previous month and accounted for 20 percent of the nation's new foreclosures in October."
"New Jersey foreclosure rates were the highest in the country, with one foreclosure for every 422 households, and New Mexico foreclosures ranked third highest, with one property in every 601 in foreclosure."
"Despite a 29 percent decrease in the number of new foreclosures, Colorado's foreclosure rate placed among the five highest state foreclosure rates for the eighth month in a row. The state reported 2,568 properties entering some stage of foreclosure, one for every 713 households."
Foreclosures A 'Growth Business' In Massachusetts
This report from
Massachusetts found increasing interest in foreclosures. "Welcome to the world of the home foreclosure auction, where anything from a shoebox condo to a mansion can be yours for highest bid. For some, the game promises big winnings, while for others, the process contains much risk."
"Facing personal money problems and a slowing real estate market, more people are headed for foreclosure. 'Our business is probably up 30 percent over last year, which was a busy year,' said Stanley Paine, who runs an auction business in Newton. 'As they say, this is a growth business, which is a shame.'"
"For instance, Paine said, a house that was selling for $950,000 in Newton in better times may fetch $825,000 or less now, he said. 'If it's dropping off in Brookline, and Newton, and Wellesley, you know it's tough,' Paine said. Paine said many of the foreclosed homes he sees belonged to people who had bought just a year or two ago."
"The banks also won't give bargains the way they once did, Paine said, often refusing to part with the property for less than 70 percent of its fair-market value. If bidders fail to make acceptable offers at an auction, a bank representative will buy it back. At the Spring Lane home in Marlborough, for instance, the highest bidder was not high enough for the bank, which then bought back the property for a little more than $215,000."
"Successful bidders must also pay back property taxes and other liens. People usually can't go inside the home, can't have it inspected, and have no idea if a structural flaw, mold, pest, or some other expensive problem waits on the other side of the door. Experienced investors prepare by talking to neighbors and researching public records available on the property, said Karl Hanner, a Southborough investor."
"'You can look in the windows if you want, you can do your homework, you can have a good feel for what you're doing,' Hanner said. People with experience can make some educated guesses from what is visible, he said. 'But there is a risk factor.'
"Hanner said he..won't buy an auction property unless he can make $50,000 or $75,000, after costs and repairs. He cautions people from getting sucked into competitiveness or ego clashes at auctions. 'The biggest thing is not to get caught up in the bidding process,' he said."
"These days, Hanner said, quality properties are harder to find. Times have changed since the real estate bust of about 15 years ago, when auction sales were plentiful, he said. 'The party really has been over for several years now, and a lot of people coming in are late for the party,' Hanner said. He has one piece of advice for newcomers. 'Unless you're an investor with a bankroll, don't quit your day job.'"
'People Are Maxed Out With Debt'
The
Associated Press looks at the changing environment for mortgage firms. "With the housing market cooling and loan demand shrinking, banks and other lenders are turning to nontraditional and sometimes riskier mortgages to bring in more business and make up lost revenue. 'We're at a pretty difficult time for the mortgage industry,' said Stephen Rotella, president and COO of Washington Mutual Inc."
"The slowdown in home sales and lending was first apparent during the summer and has become even more evident in recent weeks. To make up for the drop in borrowing, lenders have resorted to what the industry calls alternative payment products, loans designed to lower monthly payments to help borrowers qualify more readily."
"The industry's gravitation toward non-traditional mortgages raises concerns about whether some borrowers will be able to keep up with their payments. 'When the industry is topping out, people stretch to get that last unit of output, and the result is you find yourself in a situation where there will be definite problems in the next six to 12 months,' warned Richard Bove, banking analyst at Punk Ziegel & Co."
"David Olson, co-founder of a Columbia, Md. based firm that tracks the mortgage industry, predicted that mortgage defaults will increase. 'As long as we had the mantra that prices only go up, you could have the most stupid mortgages and it was great,' he said. But going forward, 'the public will see more foreclosures. People are maxed out with debt.'"
San Diego Braces For Defaults
The
North County Times reports on the prospects for defaults in that hot market. "Homeowners, particularly first-time homebuyers in suburban markets such as Southwest County, always face a certain amount of financial distress, John Karevoll said. That's particularly true now, with adjustable-rate mortgage payments rising faster than salaries. The median monthly payment in October was $2,169, up 20 percent from October 2004."
"Banks and other lenders sent 1,266 notices of default to Riverside County borrowers in the third quarter, a move that gives homeowners 90 days to catch up on payments before moving towards an auction. That number is up from 1,121 in the second quarter and 1,116 notices in the third quarter of 2004."
"Still, skyrocketing home values through much of 2003 and 2004 allowed borrowers to avoid default. But with appreciation tapering off, more borrowers are hanging on until the bitter end, hoping to bring loans current."
"Because of the weeks-long periods between the stages of foreclosure, borrowers' financial distress doesn't show up immediately. Karevoll said the slight rise in default notices in the third quarter reflects difficulty in the first three months of the year, when home prices were rising at annual rates of 15 to 30 percent."
"Local real-estate agencies are preparing for clients in such difficult straits, however. Century 21 Wright, for example, recently offered its agents an hour-long seminar on short sales, or sales for less than the outstanding value of the mortgage."
"If the market does weaken, inland buyers may be the first to take it on the chin. First-time buyers in outer suburbs are more likely to go into default or even foreclosure, Karevoll said. They also tend to use more non-traditional loans with lower down payments or that require only interest to be paid off for the first year or two."
"'If you have 20 percent of your property at stake, you'll be much less likely to let it go into foreclosure than if 5 percent is at stake,' Karevoll said."
Exotic Loans 'Too Good To Be True'
The
Associated Press reports on some tough lessons about exotic loans. "Homeowners nationwide who obtained nontraditional mortgages when rates hit historical lows are facing similar challenges as monthly mortgage payments begin to rise. At the same time, the market is softening in some areas, preventing houses from growing in value as quickly as expected."
"'It all leads to questions about how well-prepared consumers are, not only for the payment shock that might be lurking out there but for their monthly payment,' said Barbara Ryan, of the FDIC."
"As soon as Lorie Limbaugh heard about a 1.25 percent interest rate on a mortgage loan, she figured it was too good to be true. Things progressed smoothly with their $275,000 adjustable rate mortgage until the rate began to climb, it's now 6.25 percent, despite what they had been told. Today, they are facing a refinancing penalty and are unable to financially help a son who wants to attend a trade school."
"'We can't believe it,' said Limbaugh, who lives in tiny Larkspur about 35 miles south of Denver. 'We were at 5.7 (percent). We should have stayed where we were at.'"
"About 53 percent of Colorado households cannot afford to buy one of the state's median-priced homes, a rate second only to Hawaii's high-priced housing market, according to a recent FDIC study. In addition, 53 percent of mortgages issued in Colorado in the second quarter were ARMs, second only to California."
"On a recent Saturday morning, Enie and Tony Brooks joined a small group at a foreclosure prevention workshop, hoping to hear a way to save their home of 17 years. The couple obtained an ARM for $146,000 in 2003 and the rate has climbed from 7 percent to 9.5 percent, and could increase up to 11 percent. Today, their payment is about $1,200 a month. 'It's already astronomical what we have to pay,' Enie Brooks said. 'We're not in foreclosure but, you know, paycheck-to-paycheck living. Things are getting rough. We're just trying to hold onto it,' she said."
New Orleans On 'Economic Canvas'
Remember when
speculation was that the hurricanes would create a bonanza in Louisiana? An update, "Loren Scott and LSU economist Jim Richardson went public with the two-year economic outlook they annually prepare. So dismal was the news that Scott was almost apologetic as he announced hurricanes Katrina and Rita 1) wiped out 11 years of statewide job growth, 2) rolled New Orleans' population back to 1965 numbers, and 3) will keep the Crescent City on the economic canvas for the foreseeable future."
"My guess is Scott was unusually glum because he, like everyone else who understands how economies work, knows the financial future of this state is linked to the recovery of New Orleans. Baton Rouge may now be king, but it won't be much of a kingdom if the city that care, and apparently Congress, forgot doesn't come back to life."
"Just wait until early next year when banks come out with their fourth quarter financials. The news won't be pretty and some smaller institutions will fail under the weight of bad debt."
"Tt's incredible to hear state lawmakers complaining about cuts to their local projects as the state scrambled to address a $1-billion shortfall in tax revenue caused by the storms. Moreover, the state faces a $3.7-billion tab from the federal government. Let me ask these numbskulls a question: If you're not willing to give up pet projects in Zwolle or Rayne, how in the hell do you expect a Congressman from Peoria or Walla Walla to give up his pork for New Orleans and Louisiana?"
"Note to Congress: Pass Richard Baker's proposal to create a government-backed corporation that will buy property ruined by the hurricanes and redevelop it. Not only will it return housing to the area, but also it will be a huge help to banks facing huge mortgage defaults."
Austin Area Deals With 'Glut' Of Foreclosures
The Austin
American Statesman has an update on defaults in that area. "A booming housing market helped Central Texas avoid another record year for housing foreclosures in 2005, but the number of people who lost their homes because of overdue payments remained high."
"After two years of essentially flat prices, Central Texas homes appreciated an average of 4 percent for the first 10 months of the year. That increase is giving financially troubled homeowners an escape from mounting debts."
"It's not just rising home prices that are enabling more cash-strapped homeowners to sell their houses. Last year's record number of foreclosures left lending institutions with a glut of homes on their hands. This year, banks have been more willing to allow homeowners on the brink of foreclosure to sell their houses and give the bank less than they owed. That's known as a short sale."
"'A lot of the banks are starting to promote and accept short sales in lieu of going through a foreclosure, primarily because it's less costly for the banks,' (broker) Peter Sajovich said."
"Although this year's decline in postings is a positive sign, the numbers remain high compared with just a few years ago. The number of postings in Travis County this year exceeded those in 2002 by 63 percent, while the number in Williamson County increased by 86 percent."
"Eldon Rude, director of a housing market consulting firm, said the relatively high number of postings in the past few years probably is a delayed effect of the tech bust, which wiped out thousands of jobs. 'There is a time lag between when they get into financial difficulty and the time their home gets in foreclosure, and it could easily be a couple of years,' Rude said."
"With the Central Texas economy once again growing, George Roddy said aggressive lending practices are emerging as a leading cause of foreclosure, as buyers put little to no money down and borrow money for closing and other transaction costs. 'Rather than seeing layoffs and the job issues as being the predominant source, we have seen that switch to the actual types of loans that are being made,' Roddy said."
"The number of postings involving cases where homeowners owed more than the house was worth increased more than 5 percent in Travis County during 2005 compared with 2004, and by 2.77 percent in Williamson County. 'I don't think there is going to be a rapid appreciation of properties,' said (broker) Rick Schulte. 'The ones that are in trouble the latter half of this year I think will probably still be there. I don't think you can count on a strong rebounding market to pull them up to at least the loan balance.'"
Hurricane Defaults In The Pipeline
The
Associated Press reports on the pending delinquencies due to the hurricane season. "Commercial mortgage-backed securities delinquencies are rising in the wake of hurricanes Katrina and Rita, after declining for most of the past year. Though not a surprise given the storms, the uptick in delinquencies nonetheless has thrown something of a wrench in long-term forecasts for the commercial mortgage-bond industry."
"Of the 190 loans that were newly delinquent in October, 119, or 62.6 percent, are located in Florida, Louisiana, Mississippi and Texas, all states affected by the recent hurricanes, RBS Greenwich said. Louisiana alone accounted for $266.7 million, or 25.8 percent, of the $1.03 billion in new 30-day delinquencies in October, the report said. Texas is close behind with $265.1 million, or 25.7 percent, followed by Mississippi with $71 million, or 6.9 percent and Florida with $62 million, or 6 percent."
"Multi-family loans, or loans backed by dwellings built for several families, saw fixed-rate delinquencies rise to 2.59 percent in October from 2.14 percent in September, the RBS Greenwich report said. In hurricane-affected areas, 63 percent of delinquent loans are secured by multi-family assets. 'This is not surprising given the large renting populations in states such as Florida and Texas and the generally lower percentages of office properties, for example, in states like Mississippi and Louisiana,' RBS Greenwich noted."
"Fitch Ratings, on the other hand, said in its report for October that it has not yet seen an increase in its commercial mortgage backed securities delinquencies, but said that is because the ratings agency only measures delinquencies of 60 days or more. Based on those criteria, 'the first time you'll see a big uptick (in delinquencies) is November,' Bach said."
"Fitch rates about $285 billion in commercial mortgage backed securities. Of that, roughly $2.4 billion has some exposure to Hurricane Katrina, Bach said. In the entire commercial mortgage-bond universe, about $4.4 billion in loans have some exposure to Hurricane Katrina, Bach said."
More Accountability For Appraisers
The
Milwaukee Journal has a report on changes in the appraisal process. "America's chief mortgage financiers are rolling out a new weapon in their war on fraud; property appraisal forms that require sales details on all home transactions. 'We expect these forms will result in more accurate and fully supported appraisals,' said Joseph L. Minnich, spokesman for Fannie Mae, the nation's largest mortgage buyer."
"By requiring details about appraisers' market research and the existence of private buyer-seller arrangements called concessions, the lending process 'will at least raise a red flag' about the chances of fraudulent activity, Minnich said."
"Stricter appraisal reporting requirements took effect Nov. 1 for Fannie Mae and Veterans Administration loans and will become mandatory on Jan. 1, 2006, for Freddie Mac and U.S. Department of Housing and Urban Development loans, Minnich said."
"'This is a step in the right direction,' Alan Hummel said. 'This puts the appraiser and (lender) on notice that they're accountable.' Paul Vozar agreed. 'If appraisers are able to do what we're supposed to do, check contract prices, determine the extent of concessions involved, this could really make a difference,' he said. 'If the seller makes a concession of $5,000 on a $75,000 house, it's now a $70,000 house.'"
"The new forms will require that the appraiser ask about behind-the-scenes deals and disclose what they know. 'And if a house is sold twice in a two-month period, with the sale price going from $80,000 to $100,000, you want to know whether improvements were made to increase that value,' added Vozar."
"Regulators can make appraisers ask about private sales terms, but they can't make buyers and sellers answer such questions, said Rick Staff. 'Seller concessions may not be public record. We have a strong confidentiality law in this state,' Staff said. If a home seller decides to keep mum whether the recorded price is the full price, he said, 'our agents have a duty to respect client confidentiality' and not disclose it either."
Foreclosure 'Veteran' Moves Back Into Houston
This report
from Houstin found an old hand is back in action. "Maxwell Drever is back in Houston buying apartment complexes out of foreclosure with plans to flip the properties for profit. The veteran San Francisco real estate broker was an active dealer in distressed properties during the 1990s before selling his portfolio and departing the market eight years ago."
"Once the city's largest landlord, Drever Partners Inc. owned 79 apartment communities with 18,000 units and employed 700 people. Now the 63-year-old Drever has returned for a repeat performance. Two funds controlled by Drever and Omaha-based Magnum Capital have paid $29.2 million to acquire five foreclosed suburban multifamily projects in Texas, three in Houston and two in Dallas."
"The market for foreclosures isn't exactly thriving, says Richard Zigler of a Houston real estate research firm. 'We haven't seen that many properties in foreclosure recently,' says Zigler. Overall, Zigler says, Class C apartments slid to an 86.45 percent occupancy rate during the second quarter of 2005. 'In most markets, anything below 94 percent to 95 percent is pretty bad,' he says."
"The latest five Texas properties were acquired by two funds. Drever contributed 80 percent. Magnum Capital chipped in 20 percent after tracking the five apartment properties for six months from default to foreclosure. The twin funds bought the 1,038-unit portfolio for $28,131 per unit from Dallas-based GMAC Commercial Mortgage Corp., which had foreclosed on the properties in January."
"Like their predecessors, the newly acquired properties will eventually hit the selling block. Says Myra Rega: 'How quickly, we never know. We look at market conditions and when the time is right to sell, we will.'"
Reduced, Repo'd And Foreclosured In Austin, TX
A reader sent in these observations from Austin, Texas. "Last night I picked up the current copy of 'Homes & Land of Greater Austin,' a color glossy freebie at the grocery store. 95 pages, and lots of pages filled with 'Reduced,' 'Bank Repo,' and 'Foreclosure' tagged houses."
"It looks like things are beginning to trend downward here. The interesting thing about all the foreclosures and repos is the evidence that they're moving up the food chain."
"For example:
* Two story, 5 bedroom 3 bath, 3699 sq ft, 2004 Appraised value $565,261. Bank repo listed at $463,400.
* Two story french style, 4 bedroom, 4 1/2 bath, 2 living areas in an exclusive neighborhood. 2004 Appraised value $614,426. Foreclosure listed at $474,930.
* One story, 5 bedroom, 4 1/2 bath, 2 living areas, 5984 sq ft. 2004 Appraised value $645,195. Foreclosure listed at $498,950.
"And those were off *just one page*. This may not be shocking to people used to California prices, but for Austin (even with the inflated prices) $600k homes are probably double the average house value."
"Perhaps we need a contest to find the 'Highest appraised value foreclosure.'"
And my comments, "What people don't understand about Austin is that it had a boom in the late 90's and into 2000. I realize prices have been flat since, but I doubt they are in line with rents. When you look at many listings there, you have to consider that much of the housing stock is old. The newly sprouting subdivisions on the outskirts have soil problems and long commutes."
Dallas/Ft. Worth Foreclosures 'Unhealthy'
The
Dallas News reports that defaults are approaching historic levels. "This year's home foreclosure postings in North Texas rose to their highest level since the Texas real estate bust of the 1980s, according to preliminary figures expected to be released today. Foreclosure Listing Service Inc. cited lenient lending standards and the rising cost of living, from higher gasoline prices to rising heating bills, for the increase."
"'The general cost of living is substantially more today than it was a year ago,' said George Roddy. 'What you have to look at is how that affects people's ability to make the payments on their house.'"
"Residential foreclosure postings in the Dallas-Fort Worth area rose 3.5 percent this year to 32,513. Postings rose by 9 percent in Collin County, the area's biggest jump. They increased by 8 percent in Denton and Rockwall Counties, by nearly 5 percent in Tarrant County and by less than 1 percent in Dallas County."
"Foreclosure postings are still well below their 1980s level. There were 15,250 postings in Dallas County this year, compared with roughly 21,000 in 1989, when the county had a smaller population. Postings are still growing in North Texas, in contrast to some other parts of the state such as Austin."
"'The buildup we've seen in foreclosures in the Dallas-Fort Worth area has been consistently unhealthy for the past three or four years,' Roddy said."
'Dry Fix' Of Equity Withdrawals Hits Essex Co, MA
The
Newburyport Current found rising foreclosures in Massachusetts. "No other community in Essex County has seen a more drastic surge in foreclosures this year than Newburyport."
"Nineteen homeowners so far have been taken to court for falling behind on their mortgage payments compared to six during the same period last year. Although Lynn tops the list of the greatest number of foreclosures, they are not increasing nearly as fast as here. The 217 percent spike propelled Newburyport to the top slot in the county."
"'When you, like in Essex, see a jump from one to three you can't really draw any conclusions, but six versus 19 is significant,' Jeremy Shapiro said. 'People are in deep ... stuff,' said Donald Adler, a local bankruptcy attorney. 'I think we're going to see much more of it, because people buy without a solid financial foundation ... Before, the income had to be able to support the mortgage. That's unheard of today.'"
"Alluring mortgage offers such as no-money down, interest-only loans and adjustable rate mortgages have made homeowners particularly vulnerable to unexpected loss of income. As in other communities, many local homeowners have also taken advantage of the skyrocketing value of their homes by tapping into the equity to do anything from paying off credit cards to building extensions."
"'It becomes like a dry fix, 'I think I'll hit my equity this month',' said Charlie Shachat. 'There's tremendous amounts of money being pulled out of the equity. The question is what happens when the money runs out and you're used to a big lifestyle.'"
"The Provident Bank's vice president of residential lending, Susan Gonis, also said the bank works with customers before it gets too late. Foreclosure is, according to Adler, more likely among obscure out-of-town lenders that are 'very difficult' to reach for the homeowner."
100,000 Potential Foreclosures In New Orleans
The
Associated Press reports on efforts to stem the flood of hurricane-related defaults. "The New Orleans mayor urged Congress on Thursday to provide aid to homeowners hurt by Hurricane Katrina, cautioning that thousands of poor Louisiana residents might not return otherwise."
"The House committee is reviewing a bill to help property owners in areas of Louisiana hit by Katrina avoid massive defaults on home and business loans while working to rebuild communities. The bill would create a federal entity, a Louisiana Recovery Corporation, that would purchase the property of willing sellers and pay off lenders through bond sales. Former owners would have first right to repurchase the lots after they've been restored."
"Rep. Richard H. Baker, R-La., the author of the bill, said the legislation was needed soon to avoid mortgage foreclosure notices on up to 100,000 homes as early as January."
'Arcane' Insurance Leaves Ownership 'Unclear'
The
Toledo Blade reports on a rare type of insurance in a foreclosure. "With the ultimate owner of the landmark One SeaGate building in downtown Toledo in question, the fate of the office tower could make history. If the worst happens in a year and the current landlord defaults on its mortgage, the new owners could be investors in a real-estate trust or perhaps an insurance company."
"The 32-story structure might be the first in the United States where a relatively new type of insurance policy had to pay because the building value declined after 25 years. If the landlord fails to make its final 'balloon' payment of $32 million late next year, an insurance company is obligated to make the payment, or at least pay the difference between the market value of the building at the time and the $32 million."
"'I think it's something of a unique case,' said Stephen Jacobson. 'In most cities the value [of an office building] would go up after 25 years.'"
"At key factor is residual-value insurance, an arcane type that protects lenders in situations of office buildings erected mainly for one large tenant on the hook for all the bills for many years."
"Jack Garraty said such insurance has been around only for a decade or so. 'There haven't been that many cases where the insurance company had to pay,' he said. Who would own the building if Newkirk defaults is unclear."
Commercial Delinquencies To Soar: Fitch
Fitch Ratings has a
report out this morning titled, 'Is This The Calm Before the Storm for U.S. CMBS Delinquencies?' "Although CMBS delinquencies declined slightly in October, next month's levels will likely feel the effects of hurricane-related delinquencies. According to Fitch Senior Director Patty Bach, 'Servicer advances on hurricane-affected properties have been on the rise since September, so the repercussions of Hurricane Katrina, Rita and Wilma are likely to be reflected in Fitch's November data.'"
"Fitch's delinquent loan index includes loans 60 or more days delinquent. A loan reported 60-days delinquent in October has a paid-to-date of July, therefore if payments ceased immediately after Hurricane Katrina, a loan would first appear as 60 days delinquent in November (with a paid to date of August)."
"By property type, multifamily properties represent 31.3% by balance of Fitch's delinquent index, followed by office properties at 18.9%, retail properties at 15.5% and hotel properties at 14.7%. While multifamily and office delinquencies rose dramatically over the first half of the year, third quarter showed some improvement."
Downpayment Help Leads To Foreclosures
The
Columbus Dispatch reports on the unintended consequences of downpayment assistance. "Federal officials are sounding new alarms to home buyers: Beware of down-payment help from charities working with sellers. You’re likely going to pay more for your house, and you’re doubling the odds of falling behind on your government-backed mortgage, according to a soon-to-be-released report by the investigative arm of Congress."
"GAO investigators found that programs such as AmeriDream and the Nehemiah Corp. of America continue to gain in popularity, artificially inflate home prices and operate with little HUD oversight."
"The down-payment providers largely work alike: The charity gives cash-strapped buyers money for a down payment at closing and later gets reimbursed by the homebuilder or other seller, who also pays a service fee."
"'Some of these programs are clearly abusive,' said consumer advocate Bill Faith. 'I don’t care if there’s a nonprofit involved or not. We’re not doing people any favors by putting them in houses they can’t afford.'"
"Investigators found that: Home buyers who used down payments supplied by sellers paid 2 percent to 3 percent more for their houses, essentially the amount of the 'gift,' than those without financial help...Nearly a third of FHA mortgages involved seller-funded down payments last year...Builders use the charities for new houses twice as often as those selling older homes..Foreclosure claims to the FHA insurance fund have increased by 76 percent on mortgages with financial help involving charities."
"Realtor and consumer advocate Mildred Wilkins thinks they all play the same game, with home buyers as the only financial losers. New subdivisions in her hometown of Indianapolis have been ravaged by foreclosures. 'HUD can’t go on indefinitely acting like they don’t know what’s going on,' she said. 'There have been a huge number of losses.'"
Default Lists Artificially Low
There is a reason
foreclosure numbers dipped recently. "Foreclosures are being bought up by investors, Binkley says. People are waiting for the return of housing listings of the Veterans Administration, U.S. Department of Housing and Urban Development (HUD) and Fanny Mae, all of which recently took properties off the market to house hurricane evacuees."
Lenders Leave Foreclosed Homes In Limbo
The
Beacon Journal has this very interesting discovery. "Neighbors and regulators often can't figure out who is responsible for neglected, foreclosed homes because mortgage lenders routinely do not file paperwork documenting their ownership for months or even years, records show."
"The problem has intensified with the recent explosion in foreclosures. Ohio leads the nation in foreclosures, with about 59,000 notices filed last year."
"A review by The Columbus Dispatch of property deeds showed that lenders often don't file deeds on a house they have foreclosed on until they have found another buyer. The delay means city code-enforcement officers can't figure out who to serve with notices and fines for violations."
"Richard Manuel said he often found evidence that rundown houses were owned by lenders who left them in the previous owner's name. 'Then when we'd call the bank, they'd claim they didn't own the house,' Manuel said. 'They would deny even having known of the house. Then we'd find later they sold the house.'"
"A duplex on the city's west side, which was foreclosed on in 2001 and repossessed in 2004, is still in the name of the previous owner. 'Nothing's happened,' said Tamara Maynard, a Columbus code-enforcement analyst, 'still vacant, still an eyesore and still a problem for the neighborhood.'"
"In the two months following the Aug. 26 sheriff's auction of foreclosed properties in Franklin County, only 11 of the 76 deeds transferring ownership to mortgage lenders had been filed with the county recorder's office. Of the unrecorded transfers, 17 properties had pending or recent code violations."
Massachusetts Defaults Continue Rising
The
Norton Mirror reports that more foreclosures are coming in Massachusetts. "Don't look now, but that whistling sound you're hearing is the air leaking out of the housing bubble. Things that are unsustainable, by definition, don't last forever. Recently brokers have seen a distinct slowdown in the market for high-end homes. Those 'McMansions' aren't selling as quickly as they used to."
"More disturbing yet is a sharp rise in foreclosures. Over the first nine months of this year, foreclosures in Massachusetts are up 33 percent over the same period in 2004."
"'We are seeing a big increase, we've seen a steady increase, and there's going to be more going forward,' Jeremy Shapiro. Behind the figures lie several factors. Zero-interest mortgages allowed buyers to borrow more than they could afford. Interest rates are going up, pushing up payments for those holding adjustable-rate mortgages. Families mortgaged to the hilt can't handle it when one earner loses a job or some unexpected expense comes up."
Want An Office Building?
The
St. Louis Post Dispatch has this report. "Two office buildings in west St. Louis County have been foreclosed, but several brokers say it should not be taken as a sign of weakness in the market."
The offices, known have lost major tenants in recent months. In both cases, GMAC Commercial Mortgage held the notes. Both are considered Class B office buildings. 'I don't think you could call those buildings bellwethers,' said Jack Reis."
"The office market in St. Louis has been especially attractive lately to out-of-town investors."
Low Rates Set Up Homeowners For Default
This op-ed piece for
the Hill suggests who should get the credit for the coming foreclosures. "My opinion..is..that it’s not (Alan Greenspans) sluggish pace of quarter-point increases that is hurting this economy but rather that he hasn’t raised rates fast or far enough. On his waning watch, the past several years of dirt-cheap money have resulted in a potential perfect economic storm that could send this country into a tailspin of the type not seen since Black Thursday 75 years ago."
"In a frenzy, Americans have taken on more personal debt than at any time in this country’s history, the lion’s share being home mortgages. Many of these loans appear to be of the sleight-of-hand variety such as interest only, negative amortization or 110 percent financing. Even the grifters have come out of the woodwork, with estimates that upwards of one out of 10 home mortgages has fraudulent components attached to it."
"I’m not sure how this financial dinosaur sees the world anymore. After encouraging casual and, at times, reckless borrowing, he suddenly raises a muted alarm about Americans’ not saving enough. You can’t have it both ways. The reality is, what is the incentive to save? A 2 or 3-percent return at a bank? A crapshoot in the stock market? A risky investment in a preconstruction real-estate deal?"
"The last element in this perfect storm is personal bankruptcies. In fact, cracks are already beginning to appear. The American Bankers Association recently reported that the percentage of past-due credit-card accounts has reached an all-time high."
Declining Values Brings Haste To Bankruptcys
This
educational site has some information on foreclosures. "In an environment marked by rapidly escalating real estate values, readily available and cheap financing and quick sales, it is difficult to imagine, let alone to plan for, a real estate collapse. Yet, that is precisely the concern of some industry experts. Although the precise timing and extent are unknown, a correction in the real estate market is inevitable."
"When it occurs, there are several things that will be associated with or a consequence of a real estate 'correction.' Not only will this 'new world' likely increase the sheer number of bankruptcies, it will have a bearing on the strategies utilized and leverage in bankruptcy cases."
"Courts already tend to move real estate cases at a faster pace than other cases. This is particularly true for cases that involve raw land or partially completed projects. It is not unusual in real estate cases for bankruptcy judges early on to establish a tight schedule for submission and consideration of reorganization plans."
"Indeed, debtors in 'single asset real estate' cases, generally to involve small projects with debt of no more than $4 million, run the risk of losing bankruptcy protection if, within 90 days, they have not either (1) filed a reasonably viable reorganization plan or (2) commenced payments to the secured creditor based on current interest rates and the value of the real estate collateral."
"The recent amendment of the Code enacted in the Bankruptcy Abuse Prevention and Consumer Protection Act goes so far as to require bankruptcy courts to conduct status conferences to assure prompt and economical resolution of bankruptcy cases. It is clear that real estate debtors have been and will continue to be under pressure to perform promptly or lose the potential benefit of bankruptcy. In a market in which interest rates are increasing and values declining, that pressure undoubtedly will be intensified as judges require debtors, in effect, to 'put up or shut up.'"
"If there is no equity cushion there is no right to interest or costs even if they are provided for by contract. In a real estate market in which values are declining, this will lead to careful evaluation of strategy."
"Recognizing that the secured creditor may not be compensated for delays in retrieving its collateral and may not be reimbursed for the fees incurred in seeking relief from the automatic stay, opposing a debtor's reorganization plan or otherwise contesting a debtor's reorganization. This risk may incent some secured creditors to reach an early agreement with a debtor rather than deal with the delay and cost incident to reorganization."
Moratorium Holds Down Foreclosure Numbers
Reuters has the latest from
Foreclosure.com. "According to data released today by Foreclosure.com, 87,794 foreclosed residential properties were available for sale in the United States during October, almost unchanged from September. The total number of new foreclosures listed for sale in October, 21,998, increased eight percent from September."
"'Foreclosure levels in the U.S. remain low compared to the beginning of this year,' said Brad Geisen. 'While there are still pockets of increasing inventory in the Midwest and Northwest, foreclosure levels in most of the country have remained flat during the past six months.'"
"Some states in the southern region of the United States such as Florida, Georgia, Mississippi, Oklahoma, Tennessee and Texas, showed a significant rise in the amount of new foreclosure listings in October. However, the total foreclosure inventory in these states stayed flat or decreased from September to October. Foreclosure inventory in these states remains below pre-hurricane levels."
"In Louisiana and Alabama, foreclosure inventory remains very low because of the federally mandated moratorium on new foreclosures in disaster areas."
Auto Industry Woes 'Waiting In The Wings'
Michigan Live
reports on another city with mounting defaults. "Home foreclosures are on the rise in mid-Michigan, figures show, the result of a brewing convergence of factors. Waiting in the wings are more worrisome developments: potential layoffs and wage cuts at Delphi Corp."
"'It's kind of a trend we've seen over the last two to three years, and the biggest problem is (lenders) are refinancing (mortgages) or making it a little too easy (to get a loan), and people are getting behind the eight ball,' said Kay Kretz, a (realtor) in Saginaw Township. 'The less equity they have in (a home), the more apt they are to walk away.'"
"In Saginaw County, the number of home foreclosures for nonpayment of bank loans alone rose to 450 last year from 409 in 2003, 387 in 2002, and 298 in 2001, county register of deeds statistics indicate."
"'We're concerned,' said Michael J. Buckley, mortgage banker in Saginaw Township. 'We've already had several calls looking for options at this point and, not to single them out, but most are hourly (workers) living off the overtime pay.'"
"The problem: Many employees bought homes under the assumption they would have overtime to pay their mortgages. Now, however, some employers have cut overtime, putting household finances in precarious shape. Banks are moving 'much sooner' than ever to foreclose on homes when owners fall behind in payments, often waiting less than six months, said Midland County Register of Deeds Scott I. Haines."
"Lenders are partly at fault, he said. 'We're seeing people extending themselves (financially) more than they have in the past, and the banks are actually allowing that,' he said."
"People are walking away from their homes in surrounding counties, too. Midland County recorded 104 bank and tax foreclosures so far this year compared to 131 in 2004, 113 in 2003 and 121 in 2002, records show. Tuscola County has had 154 total foreclosures so far this year, surpassing last year's 132. The county counted 187 in 2003 and 156 in 2002, statistics show."
"Historically low interest rates encouraged more people to buy houses, and that's meant more defaults on home loans, said Tuscola County Register of Deeds Ginny M. McLaren. 'You notice the foreclosures first, then your property values start to go down,' she said. 'It just seems like a seven or eight-year cycle we go through.'"
Subprime Loans Lead To Michigan Foreclosures
The
Battle Creek Enquirer reports on burgeoning defaults in Michigan. "The number of foreclosures in Calhoun County has increased more than eight-fold in the past decade, which is consistent with Michigan having one of the nation's highest rates. Easier access to home loans, an increasingly fragile economy and mortgages that are beyond the financial abilities of the borrower are cited as reasons for the climb."
"Freddie Mac reported last year that subprime lending increased 77 percent between 1996 and 2001. In the next two years, it more than doubled, from $160 to $375 billion, the company reported. Subprime mortgages are a growing part of the home-buying market, said Colleen Maire, branch manager for Battle Creek's Amerifirst Home Mortgage. They make up about 35 percent of her business, she said. She expects that to climb to 50 percent next year."
"The foreclosure process, on average, takes a year. Usually, the bank will begin proceedings after the fourth missed payment and the process itself can take two months. Michigan law allows the homeowner an additional six months to make up the payments at that point, which means the bank cannot sell the property until that grace period has ended."
"Audrey Andrews said just recently a woman sent in a list of rates and nobody in the office had heard of a single lender on the list. One of the quotes was for a 51/2 percent, 30-year fixed-rate loan, more than a full percentage point above current rates. Andrews said she has seen people charged exorbitant fees and incur all types of hidden costs by unreputable companies."
"'That's not where the rates are,' she said. 'People need to be very, very wary of trying to get a mortgage over the Internet.'"
No Soft Landing For The UK
Perhaps
you've heard of the 'soft landing' in the UK? "Individual insolvencies in Britain reached an all-time high of 17,562 in the third quarter of 2005, an increase of 11.6 per cent on the quarter and 46 per cent on the year, and the highest since 1960."
"The Britishers piled up more than a trillion pounds in debts aided by reduced borrowing costs and increasing property prices a couple of years ago. But, the interest rate hikes imposed by the Bank of England between November 2003 and August 2005 and a slowdown in the market put the households on a tight leash, which meant defaults in repayment of loans."
"Bankruptcies too registered an all-time hight at 12,043, up 30.9 percent on the year. Individual agreements with creditors also grew 95 per cent on the year."
"There has been a 66 per cent increase in the number of mortgage repossession orders in the third quarter in England and Wales."
Quarter Million S CA Homeowners Have Bad Credit
One new program in southern
California sounds like handing car keys to a drunk person. Titled, 'The World's First Program to Help Homeowners Refinance With FICO Scores Between 350 and 499, and Save Their Homes From Future Foreclosure.' "Laurie Lampkin did some research with Equifax, and the results were astounding. 'There are more than 250,000 homeowners in Southern California who pay their mortgage on time, they have no foreclosures, no bankruptcy, they have 30% equity, or more, and they routinely get denied the opportunity to re-finance. Why? Because they have a low FICO scores. It's a shame, because these are good people, and they are treated poorly by the entire lending industry.'"
"'Because of the equity, and the 'track record' of timely payments, we have been able to create an innovative way to re-finance homes. Once escrow closes, homeowners can consolidate all of their consumer debt, pay off their credit cards, and pay off their car. This gives homeowners financial peace of mind, and rapidly improves their FICO score. Once that happens, we can put them in a Fannie Mae 30 year, fixed rate, low interest loan.'"
'Property Bubble Bursts' In Australia
The fallout from a
housing bubble can be seen in this Australian report. "The property bubble has burst for many high-fliers, as lenders begin to repossess more homes. Arrears are heading towards their highest level in eight years as household debt levels soar. 'I deadset have not seen a mortgagee sale for two or three years, now there are six to seven each week,' said Jamie Burke, who has 20 years experience in the real estate industry."
"'It is not necessarily high-end properties but high-end people who end up with resposessions. The people you would think who have dinner every night at flash restaurants and drive big expensive cars are the people who seem to have overcommitted. All the smarties who have got four cars and a boat under lease and a big house worth $3 million, all mortgaged, are getting caught as their cash-flow dries up.'"
"Mr Burke recently sold a beachfront property, owned by Gold Coast motivational speaker Rob Dale, under the hammer at a mortgagee auction for $5.5 million, $800,000 less than he paid for it a year ago."
"'There is more receiver work coming, definitely more activity now than there has been for some time. This is just the start though I think,' Marcus Weld said. 'The residential developers who didn't have the cashflow to support it that are getting squeezed at bit at the moment.'"
"Credit ratings agency Standard & Poor's said the number of borrowers falling behind in their interest payments had reached its highest level since a spike in 2001, and is closing in on levels not seen since 1997. S&P surveillance analyst Sarah Raisbeck reports the recent data includes low-doc loans that typically had higher rates of default than standard loans."
"Adelaide Bank recently reported a doubling in the amount of mortgage balances that were more than 90 days overdue. Financial Counsellors of Queensland president Gregory Mowle said many families were now at breaking point. 'People are being pushed to the edge of the cliff. Previously the banks would be happy to keep giving people credit or do consolidation loans but they are reining in credit now and people can't keep on borrowing,' he said. 'The word on the street is people are at breaking point. People coming in for bankruptcy advice is significantly on the increase.'"
"According to ANZ, Sydney house prices are overvalued by 23 per cent, Melbourne house prices are overvalued by 14 per cent and Brisbane house prices are overvalued by 29 per cent."
Will Fraud Create Slew Of Repos?
Inman News reports that
fraudsters have a wide open target. "Residential mortgage fraud will cost communities nationwide an estimated $653 million in 2005.. an FBI agent said at a Colorado mortgage fraud summit."
"There are generally two types of fraud cases, FBI agent Dan Bradley said, with the first involving borrowers who intend to live in their houses. These types of fraud represent about 20 percent of cases and are generally low on the FBI's list of priorities."
"The second group of mortgage fraud cases involves industry professionals, and in some cases, the borrowers are completely unaware of the scheme, media accounts said. Agent Bradley called the schemes 'for profit' schemes, where the goal is to make money, not necessarily to provide housing for the borrower."
"Bradley said. 'It takes 24 months to investigate most of these cases and the majority of the cases that were open three years ago are still open today,' the agent said."
"'Because there is no regulation of the industry, the only hammer we have is criminal prosecution,' Bradley said."
Timeshares Are Weak Link In Real Estate
An under-examined
foreclosure opportunity will be in timeshares. Here is some information on a prominent resort operation. "Sunterra Corporation announced today that it sold a $35 million portfolio of consumer receivables to Merrill Lynch Mortgage Lending, Inc."
"Steve West, Sunterra's CFO, said, 'We've been looking for a more efficient way to monetize our mortgage portfolio and this transaction underscores the increasing liquidity and value of our receivables. It's also a validation of the strength of Sunterra's underwriting process and servicing capability.'"
Talk about delinquent! "The pool of 5,250 receivables has a weighted-average seasoning of approximately 4 years and a weighted-average interest rate of 14.6 percent. Approximately 4,200 receivables representing $24 million of the receivables sold, were either originated by Epic Resort Group and subsequently purchased by Sunterra, or were included in Sunterra's former off-balance sheet pools repurchased by the company in fiscal 2005."
To be charging 14%, the 5,000 timeshares must be in penalty mode. And the 'validation of..the underwriting process' means the buyers are firmly on a hook. It's noteworthy as well that
Sunterra is losing money.
"Sunterra is one of the world's largest vacation ownership companies with more than 300,000 owner families and nearly 100 branded or affiliated vacation ownership resorts throughout the continental United States and Hawaii, Canada, Europe, the Caribbean and Mexico."
Massachusetts Foreclosures Surge In 2005
The
foreclosures in Massachusetts are piling up. "The leading provider of Massachusetts foreclosure data..released its October 2005 report today, with data that shows Massachusetts foreclosure filings to be 33% percent above 2004 levels."
"'Foreclosure filings continue to be recorded at levels significantly higher than 2004,' said Jeremy Shapiro. 'Based on our analysis, we expect this trend to continue through year's end, especially with continued interest rate increases prompted by actions such as today's expected rate hike by the Federal Reserve.'"
"The 3rd Quarter of 2005 (July through September) marked the highest quarterly total of new foreclosure filings in Massachusetts (2,945) since ForeclosuresMass began collecting data in 2003; additionally, Q3 2005 was 13.93% higher than Q2 2005."
"Counties with the largest YTD increases are Essex (49% increase, 1000 in 2005 v. 669 in 2004); Suffolk (43%, 835 in 2005 v. 582 in 2004); and Bristol (43%, 718 in 2005 v. 503 in 2004). Counties with the greatest change from September 2004 to September 2005 were Essex (98.55% increase) and Bristol (112.5% increase). Berkshire was up 250% but due to small sample set its numbers are subject to greater fluctuation."
"Towns of note are Lawrence with a 101.54% increase so far in 2005; Lynn experienced a 70.43% increase; and New Bedford, up 54.64% for the year. Some towns are experiencing decreases from 2004 levels, including Whitman with a 42.5% decrease; Agawam is down 24.39%; and Dedham with 13.33% fewer filings in 2005 v. same period in 2004."
"Since January 2003 over 24,000 foreclosures have been filed in Massachusetts."
UK Counting Repossesions By The Minutes
This
report from the UK can be expected in the US soon. "Latest figures from the Department of Constitutional Affairs show a huge rise in the numbers of mortgage possession procedures issued in the county courts. Nationally the number of possession actions entered into in the three months to September 2005 rose to 29,991, up from 19,359 from the same period in 2004, a rise of 55%."
"The number of orders made in the three months to September 2005 rose to 19,687 from 11,682, a 66% jump. Analysis of the data by the Liberal Democrats shows that these figures mean that in England and Wales a repossession order is made every seven minutes and an action is entered into every four minutes."
"Commenting on the figures Vince Cable MP, Liberal Democrat Shadow Chancellor said: 'These figures are deeply worrying. While they are at low levels compared to the early 1990's there are clearly big problems ahead. Banks and building societies need to ensure that when individuals take out mortgages they are fully aware of the risks that are involved."
"'At long last the Chancellor has now accepted there is a bubble in the housing market. Now he needs to recognise that for many homeowners it is sadly bursting and that he needs to take action. These figures demonstrate the complete absence of an adequate safety net in the mortgage market. The government needs to urgently look at the payment protection insurance markets as products are often over-priced and contain too many exemptions.'"
"Regionally a repossession order is made every:"
London: 37 minutes
South East: 45 minutes
West Midlands: 61 minutes
North West: 66 minutes
Eastern Region: 68 minutes
Yorks and Humber: 80 minutes
East Midlands: 88 minutes
South West: 90 minutes
Wales: 122 minutes
North East: 140 minutes
Merseyside: 207 minutes
