About Me 0089: foreclosure sales

Amherst Securities, whose mortgage research is well respected, published a new article on Monday which gives a sobering reading of the prospects for the housing market. It gives a detailed analysis of default rates among performing and non-performing mortgages, and concludes that the outlook is far worse than most investors assume.

The big source of risk is what they call the “non-agency” market, which is often called the “private label” market. They’ve argued in the past that 11.5 million homeowners are at risk of losing their residences. They contend that where other analysts and investors are missing the boat is by focusing primarily on loans that are already in trouble. Loans that have always been current but where the borrower has significant negative equity also have a reasonable risk of default.

Amherst Mortgage Insight January 3, 2011

One caveat about this report: it notes that once a borrower gets in arrears, the odds of the loan getting back on track, even with a mod, are low. Note that this is an indictment of the current way mods are done rather than mods in general. As Adam Levitin and Tara Twomey point out in a recent paper:

…servicers‘ compensation structures encourage them to stretch out defaults, but not too long. In other words, servicers want to keep borrowers in a default ―sweatbox to collect late fees and other junk fees, but only until the profit maximizing point. This may explain why servicers often do not vigorously pursue foreclosure at first, but instead allow foreclosure filings to lapse or defaults to linger for a year or more.

After hitting the profit-maximizing point on the cumulative net income curve (or more precisely, just before hitting it), the profit-maximizing servicer should want to foreclose and sell the property as quickly as possible before its cumulative income is eaten away by the rising cost of making servicing advances. Servicers are therefore incentivized to engage in quick foreclosure sales and REO sales, even at low prices, because they are indifferent to the amount of the sale proceeds due to the seniority of their claim while they are sensitive to the speed of the sale.

In addition, many so-called mods are mere payment catch up plans (and some require the borrower to make higher-than-normal payments). Servicers very rarely offer deep principal mods, even though that would be a win-win for the borrower and virtually all bond investors. The so-called “permanent mods” under HAMP were a mere kick-the-can-down-the-road strategy of five year payment reductions, with the shortfall typically added to principal. Why should a borrower try hard to save his house if even after his effort, he still faces a big loss upon resale?

Until investors and policymakers get out of denial and start to consider ways to cut the Gordian knot of the housing crisis, mounting foreclosures will exact a large toll on families and communities.

Nov Existing Home Sales totaled 4.68mm annualized, below expectations of 4.75mm. With the foreclosure disruption hitting in late Sept, Nov closings were likely influenced by this but it’s still the best level of sales since June and up from 4.43mm in Oct. All regions saw a rise and the gain was led solely by the single family sector. Distressed sales made up 33% of sales, in line with prior months but that may be impacted in the months ahead because of the foreclosure delays. Months supply fell to 9.5 from 10.5, the lowest since June but still remains well above a healthy level of 6 mo’s and some speculate that including shadow inventory, the level is more like 2 yrs. The listed # of homes for sale was 3.71mm, an 8 month low. The median price rose .4% y/o/y. Bottom line, while encouraging that sales are bouncing, they are still near levels last seen in 1997 with a lot more inventory ahead to plough through.

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1 comment:

AnonymousNovember 29, 2011 at 7:57 AM
Buying foreclosed homes on sale presents an opportunity like few other for locating huge savings using a wide array of housing. In many cases, informed buyers might make investments any where from 30 to 60% below the market valuation on a specific property. This could certainly lead not only to immediate savings, but also to the greater possibility of profit with a long or short-term investment.

West Palm Beach Foreclosure Attorney

Thursday, January 6, 2011

foreclosure sales

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