Do you work in a jurisdiction where housing prices continue to fall? Check out this report at Clear Capital to see if your jurisdiction can expect more problems. Housing prices continue to fall due to foreclosure sales and continued unemployment but some area are harder hit than others. Areas with a lot of REOs are especially troublesome. The report found that:
…..every spike in REO saturation (REO saturation calculates the percentage of real estate owned properties sold as compared to all properties sold in the last rolling quarter) has corresponded with a decline in home prices, and vice versa.
The report was not all gloom and doom, finding that some areas of the country are doing better in 2011. But it looks like our problem with foreclosed homes is not going to go away anytime soon.
I just finished reading a terrific book about the economic crisis which I’m recommending to everyone who wants to understand why we’re in such bad shape. It’s The Big Short by Michael Lewis. It helped me understand why such terrible housing loans were made by the financial sector. The lenders never expected to be paid back on these subprime loans. The way to make money was to sell them, trade them, bet against them, and then, when there weren’t enough loans to do that with, create “synthetic collaterial debt obligations” to sell, trade and bet against. It seems like hardly anyone expected to make money collecting payments from homeowners. It also showed me how there’s no correlation between the huge amounts of money made by people on Wall Street and their competence. People are still making money off of the crisis and in one article I read, the investor is actually helping homeowners. http://online.wsj.com/article/SB10001424052748704720004575377022447064474.html?mod=WSJ_hpp_MIDDLETopStories The investor buys loans for a cheap price and he then offers the homeowners a reduction of the principle on their loans so they can remain in their homes. He can afford to do so because he’s buying loans for 50 cents on dollar and then charging the homeowners 70 cents on the dollar. One can only hope that 2011 will be a better year where people use all of their creative ability for good and not for greed.
After writing this morning’s post, I came across a chart that someone had made to show who was the actual owner of his mortgage. You can find it at http://www.zerohedge.com/article/just-when-you-thought-you-knew-something-about-mortgage-securitizations One of the comments on the article says it looks like the wiring design on a hybrid car. Unbelievable.
We are all yearning for stability in the housing market so inspectors no longer have to deal with foreclosure issues and bank owned properties. However, it doesn’t appear that could happen anytime soon. In my classes around the country I’ve tried to explain how the real estate market got so bad with the sub-prime loan mess. I’ve explained that a real estate mortgage is not held by one lender but by thousand of investors who own a tiny piece if it after it has been bundled into a security sold on Wall Street. The robosigner scandal shows that the lenders really don’t have a clue as to where all of the paperwork from these loans is located. In some cases, there isn’t a person anywhere who can sign an affidavit to support a foreclosure because the paperwork is simply lost in the black hole of the mortgage securities hidden fortress. There is a fear this is going to drag out the crisis as lawsuits and investigations continue to find out what the financial industry was really up to in creating these monstrous financial inventions. There’s a good analysis of the potential problem at http://www.huffingtonpost.com/2010/11/16/robosigners-foreclosures_n_784098.html?utm_source=DailyBrief&utm_campaign=111610&utm_medium=email&utm_content=NewsEntry&utm_term=Daily+Brief
I just read a terrific book about how we got into this financial mess, The Big Short, by Michael Lewis. Hardly anyone expected these subprime loans to be paid back and they didn’t care because that wasn’t how people in the financial sector were making money. They made their money selling the loans, trading the securities that made up the loans and betting against those securities, in other words betting that they were worthless. When the amount of loans weren’t sufficient to fuel the market, they created “synthetic collateral debt obligations” that bore some relationship to the loans but weren’t made up of them (don’t ask me, they didn’t even understand them). Some people are still making money off of the mess. One investor is buying up loans at a discount and then turning around and offering to reduce the principle of the loans to the homeowners for a modest markup, thereby reducing the amount of their monthly payments. It’s an interesting approach which you can read about at http://online.wsj.com/article/SB10001424052748704720004575377022447064474.html?mod=WSJ_hpp_MIDDLETopStories
What struck me in learning about all of this was how incompetent most major players were on Wall Street. There was no relationship between the money they raked in and their smarts. The only value was greed.
It seems that whenever I travel to conduct trainings, I find interesting items in the local press for this blog. My trip to Troy, Michigan last week for SEMBOIA was no exception. The Detroit Free Press had a very good article about using demolition wisely to target high crime areas. http://www.freep.com/article/20100421/NEWS05/4210312/Vacant-Detroit-homes-where-crime-thrives-the-first-to-go It seems the local agencies worked to determine which vacant buildings were located in areas with the highest concentration of homicides, assaults, rapes, robberies and arsons. Instead of tearing down vacant buildings here and there throughout the city, this approach recognizes that vacant buildings breed crime and that targeting specific areas is a better use of the funds available. At a time when funds for demolition quickly run out, it’s an approach that is very smart.
There is a very disturbing report, The Multifamily Housing Market and Value-at-Risk Implications for Multifamily Lending, just released by DePaul University’s Institute for Housing Studies regarding the impact of recent property price declines and foreclosure on multi-family housing mortgages in Cook County, Illinois. The study found that 42% of small rental buildings (2 to 6 units) are in danger of default because they are upside down on their mortgage debt. The study said that if the trend is similar across the nation, it would be on par with the subprime mortgage meltdown. In Cook County, the property value of small rental buildings have fallen to 46%. Few lenders want to provide financing for these types of buildings leaving only Freddie Mac and Fannie Mae as lenders of last resort. For many owners, the income from their buildings are less than the operating expenses. Here’s what’s of concern for local jurisdictions:
The point, in any case, is that a significant amount of disinvestment could occur in this environment, particularly in
those markets where the housing inventory has been vastly overbuilt. The usual argument is that negative equity
and declining rents will fuel foreclosures, which in turn will force down multifamily property prices, setting off a
downward spiral, particularly if credit is tight and lenders (including Fannie Mae and Freddie Mac) are unwilling
to make loans. A side implication, of course, is that, other things equal, as rents decline, the quantity of space
demanded should increase. But where there are requirements that multifamily units meet some minimum building
standards, investors will generally find operating these units financially infeasible when rents fall below this
operating cost threshold level. Thus, at or below this point the property will generally be vacated or abandoned.
You can download the entire report at http://ihs.depaul.edu/ihs/
There are 2 interesting trends in the foreclosure crisis. One involves people walking away from properties even though they can pay the mortgage. Their homes are no longer worth what they were and they’ve decided it’s no longer financially wise to continue to pay off their debt. http://rismedia.com/2010-03-30/fed-up-homeowners-who-can-pay-the-mortgage-dont/
The other group of people are hiring attorneys who specialize in delaying foreclosure judgments. Terry Savage, a financial reporter for the Chicago Sun-Times reported yesterday that many buyers have sought to renegotiate their mortgages only to run into an maze of difficulties with their lenders. They are turning to attorneys who know the tricks of the trade in slowing down the process such as demanding to see the original note. Because of the convoluted ways the mortgages have been packaged, it’s often difficult for the lender to produce it. http://m.suntimes.com/suntimes/db_10085/contentdetail.htm;jsessionid=10E297B0365455E3B8572667CA7882FA?contentguid=8Vu8eLDC&detailindex=16&pn=0&ps=20&full=true
Both groups feel morally justified in taking the route they have because of the actions by the lenders in creating this crisis. Some borrowers feel that lenders are still going about their business making money and receiving help from the government to stay in business. People who feel they were duped by predatory lending, feel justified in fighting back.
The result of this type of behavior remains to be seen for those of us involved in preserving neighborhoods.
I’ve been wondering for awhile when we’d begin seeing overcrowding issues crop up because of people losing their homes and moving in with relatives and friends. The Chicago Tribune has a good article at http://www.chicagotribune.com/classified/realestate/ct-met-overcrowded-housing-0328-20100327,0,476974.story With 3 and 4 families in space meant for 1, we’re bound to see some tragic results. Given the economic situation in this country, are local jurisdictions looking the other way in some cases?
Inspectors need to be concerned with more than foreclosed properties because more and more people are calculating the numbers and walking away from their homes and mortgages because the house is worth less than the mortgage. These are people who can afford to pay their mortgages but figure it makes more sense to leave it behind. The Chicago Tribune describes this at http://www.chicagotribune.com/classified/realestate/sc-biz-0318-walkaway–20100317,0,3899914.story
