Field Check Group: Real Estate & Finance

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– Will loss reserves decrease again in Q2?

– Long-term default trends broken

– Prime, Jumbo Prime, and Option ARMs leading the way

– FL and NV – 1 in 5 homeowners in default or foreclosure

– 637k NEW mortgage delinquencies in May

– Q1 new loan production down slightly from Q1 2008

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Our mission is to provide our clients a significant edge. This is done by turning the daily, market-moving real estate and mortgage news flow and events into old news by the time it makes headlines. – Mark Hanson

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**We chose one of many weekly research reports and notes for this blog. For more information on our variety of absolutely unique research offerings please see the website.

First published in The Mortgage Pages research – July 5th 2009

With earnings on tap, one of the major pro-financials arguments I have been hearing lately is the continued reduction of loss reserves. I just assumed that everyone was in the ‘reserve building’ camp this quarter.  Non-performing assets and core earnings will be key this quarter.  And the fact is, defaults are rising across the board. With respect to residential real estate, defaults and foreclosures were up over 20% in Q1 relative to Q1 our data show.

A couple of weeks ago Lender Processing Services put out its monthly mortgage performance observation report that I skimmed through. The charts and results looked a lot like our data, so I filed it away in the mental hard drive and moved on. But upon closer examination over the past few days, the report was very enlightening. They also show that conditions continue to worsen, but only in the past couple of months long standing seasonality trends were broken and mortgage performance turned markedly worse.

Defaults, Foreclosures and Seasonality Trends Broken

May month-over-month default increase over 300% above the average for past four years.

Foreclosure inventories across Pay Option, Subprime and Alt-A continue to surge — up 88.3% y-o-y. This shows how lagging foreclosures actually are. The foreclosure resales for sale today are from 30-day loan defaults that first happened from 1 to 1.5 years ago — the heart of the Subprime Implosion. This highlights how much housing supply is in the foreclosure pipeline at any given time.

As explained in the previous chart, the massive default surge in higher grade paper over the past 6 months shown below will not produce foreclosure-related housing supply for months down the road…even longer with mortgage modifications in full force that extent out the default and foreclosure crisis.  This will keep supply/demand fundamentals strained indefinitely, especially with lending outside of $417k still extremely tight relative to 2002-2007.

ONE in FIVE properties in FL and NV are in some stage of foreclosure. Now that is what you call supply.

This number even shocked me -- this equates to 1.3% of ALL mortgage loans in the country becoming delinquent in May alone. This is out of control. We track from Notice-of-Default, which is at 90-days typically. At 90-days most borrowers don’t cure. But as values come down, jobs continue to be lost and financing remains tight, more and more 30-day delinquencies are making all the way to foreclosure. Therefore, this 637k number is now very important and comes into play.

What happened in April and May? A complete break of trend can be seen here. This is significant.

The same significant trend break can be seen here.

The perfect mortgage credit crisis — the perfect borrowers, many that don’t need the help and that will not spend their $100 month refi savings, are the only ones able to borrow.

The epidemic mortgage mod re-default rate averaging 60%-70% will keep foreclosure-related housing supply on the market for years.

This is another great example of why mortgage mods are ineffective – they are addressing the problem far too late in the process. As a mortgage mod bear, this data is a positive to me. But if they wanted to make mods more effective, they would hit the borrower with force at the 30-day late mark.

Best Regards,

Mark Hanson

Mark@MHanson.com

This document is for your private information only. In publishing research, Mark Hanson and M Hanson Advisors are not soliciting any action based upon it. Mark Hanson and M Hanson Advisors publications contain material based upon publicly available information, obtained from sources that we consider reliable. However, Mark Hanson and M Hanson Advisors does not represent that it is accurate and it should not be relied on as such. Opinions expressed are current opinions as of the date appearing on Mark Hanson and M Hanson Advisors publications only. Mark Hanson and M Hanson Advisors are not liable for any loss or damage resulting from the use of its product. Mark Hanson and M Hanson Advisors are Limited Liability Corp registered in CA.

First published in The Mortgage Pages – June 19th 2009

- SF Bay Area Median House Price Jumps 12.3% — Mid-to-high end sellers begin to capitulate

• More transactions will reduce prices for the mid-to-high end price bands
• Mid-to-high end transactions increasing substantially as a pct of total, may put continued pressure on Case-Shiller

- CA May House Sales Anemic — only 2.9% m-o-m. Half of sales are foreclosure-related

• Organic sales languishing down 70% from peak levels
• Y-O-Y sales inflection point coming in July

- Mid-to-high end market cracking. Bid and Ask prices never wider

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**We chose one of many weekly research reports and notes for this blog. For more information on our variety of absolutely unique research offerings please see the website.

It’s Groundhog Day — feels a lot like 2007 with respect to mid-to-high end housing. In 2007 sales slowed considerably in Q4 through Q1 2008 when all lenders pulled exotic loan programs at the exact same time.  House prices were hovering near record highs and the market was immediately re-priced according to the much lower affordability offered by the new vintage loan programs. As sales picked up, prices fell catastrophically — down 55% from the peak mid 2007 within 18-months. The wash out from this fall will be felt for years through loan defaults and foreclosures due to the epidemic negative equity in created.

Here we sit again but this time with the mid-to-high end properties staring into the abyss. They have not fallen anywhere near what the low-end has mostly because high-end borrowers were given more exotic, high-leverage loan programs such as Pay Option ARMs, 5/1 interest only loans, and 100% HELOCs to live off of.  Arguably they have more reserves and better jobs, which have kept them paying for the depreciating asset much longer than with Subprime borrowers.   The Alt-A and Jumbo Prime borrowers simply have loans that afforded them more time.  But that has all changed and defaults across this space are surging. Foreclosures are coming, but not before the market begins its slide that ultimately will take the mid-to-high end market down 50% to 70% from its peak 2007 levels.

May CA Home Sales Anemic

This morning, DataQuick’s CA May home sales report was released to show an anemic 2.9% m-o-m increase in total sales to 39,051. It was the weakest May m-o-m reading in years.  A total of 19,950 were foreclosure resales and 19,091 were organic sales — me selling a home to you.

Organic sales gauge the true health of the housing market and are off 70% from peak levels. Since the beginning of 2009, CA has enjoyed double digit y-o-y comp sales increases but the gap is narrowing and an inflection point is coming in July unless sales can find a way to increase sharply going out of the busy season. I think many will be surprised when the media is reporting negative CA comp sales in July through year end.

Below is a chart of 2006 through 2009 CA house sales. Yes, 2009 (red) is above 2008 (yellow), but 2008 was one of the worst years ever…2006 (blue) was a good year. Total 2009 sales are not as strong as they should be with all of the stimuli being thrown at the housing market.

When overlaying new Notice-of-Defaults, which are averaging 45k over the past 6-months and foreclosures, which have been held artificially low for the past 6-months, it is obvious that supply is everywhere. And foreclosure-related supply typically only accounts for 35% to 40% of total supply — the bulk of housing supply is from organic sellers trying to sell in order to move and re-buy. With foreclosure-related and potential foreclosure-related supply alone still greater than total sales, a true market bottom is not near.

The chart below highlights the sales mix — foreclosure resales vs. organic sales (blue). Organic sales near an all-time low underscore the epidemic negative equity in the state and are a leading indicator for the mid-to-high end market. Remember, most have to sell a home in order to re-buy.

- SF Bay Area Median House Price Jumps 12.3% — Mid-to-high end sellers begin to capitulate

Additionally, this morning DataQuick put out a report on the Bay Area house sales showing a price surge of 12.3%. DataQuick attributes the spike to more Jumbo houses selling. This is the first definitive sign that the mid-to-high end housing market is going through its dramatic revaluation period. The takeaways are:

• Total Bay Area Sales at 7447 in May vs. 7139 in April — up 4.3%
• Median price rose 12.3% to $341k from $304k
• Median price down 33.9% from $517k in May 2008 and down 48.6% from July 2007 peak
• 25.5% of home sales were in Jumbo category
• 983 properties over $800k were sold — 13.2% of total. In April only 699 props over $800k sold or 9.8% of total

Until a few months ago, sales at the mid-to-high end were very low and foreclosures almost non-existent — sales are still much lower than new Notice-of-Defaults in the Jumbo price bands.  Coming into this year, most mid-to-high end homes that did sell were the best of the best — those that could afford to buy, bought the house they wanted.

Sellers by and large have been unrealistic about their ask prices and remain that way. But over the past few months, transactions are finally occurring because of the more stable Jumbo financing, lower rates, tax benefits, short sale opportunities and massive supply to chose from. The National Assoc of Realtors recently cited high-end housing supply at 40-months nationally.

The chart below show the ask prices and where sales occurred for Danville, CA. For those not familiar with Danville, it is the city where the pilot who landed the plane in the Hudson is from. It is a SF bedroom community with average list prices still over $1.3 million but sales are going off in the mid $800k’s. The price point at which sales are occurring is the market and where values will gravitate as sales occur. This is a big problem.

Remember, volume precedes price. Mid-to-high end sellers remain unrealistic about the values of their properties — likely because so many owe so much more than the homes are worth. But those with equity that are ok with the past 20-years of price appreciation or who know that they can steal a home in another area are accepting offers this selling season far below list prices. Others are opting for short-sales to which the banks are warming up. With rates down and prices down finally, two years of pent up demand in the mid-to-high end market is manifesting in more transactions. This is having the effect of pushing up median prices.

The chart below shows how prices crumbled as sales volume increased in 2007/2008. In Jan/Feb 2008 values were only down 20% from the peak. As sales picked up and first timers and investors bought all the way down, values plummeted another 45%.

This is the exact dynamic we will see with the mid-to-high end market. Transactional volume will drop prices considerably but because of a relatively stable demand for low-priced foreclosure-related properties, the sales mix will have the effect of pushing up median and average house prices. However, because the Case-Shiller looks at pairs sales, as mid-to-high end transactions increase as a percentage of total sales it should have the effect of pushing down the index. Is anyone prepared for rising median and average prices and a plunge in the CS?

Bottom Line: Mortgage and housing news flow is about to get really interesting.

Ps — Something to keep an eye on…in every mid-to-high end area that I have studied there is an overwhelming number of once listed properties coming up for rent.  The thought process is “lets rent for a year or two and sell when the market comes back”. We know that won’t happen — but what will happen is that the massive supply of mid-to-upper end rentals priced very reasonably relative to the cost to buy and own will pull prices down faster and further.

Best Regards,

Mark Hanson

Mark@MHanson.com

The foreclosure wave is here — look beneath the headlines

• Notice-of-Trustee Sales are up 100% from Feb to May and subsequent foreclosures are up 75% from March to May.

• CA foreclosure activity outpaces total house sales by 100% – infinite supply

**We chose one of many weekly research reports and notes for this blog. For more information on our variety of absolutely unique research offerings please see the website.

In early April I was digging around my default and foreclosure database reviewing servicer and originator specific foreclosure numbers and noticed that a couple of the nation’s leading servicers were acting funny. At that point, most servicers had been ratcheting up Notice-of-Defaults for three months while scaling back sharply on filing new Notice-of-Trustee Sales. Subsequent foreclosures had been bouncing off of year and a half lows since October. Based upon the evidence from the two previously mentioned large-bank servicers, I then made the call about a wave of foreclosures about to hit.

The wave is here even though it did not show up in the aggregate numbers released by RealtyTrac yesterday morning. In their report, CA aggregate foreclosure activity was reported down 4.46%. That is not accurate.

There are three stages of foreclosure, which we track religiously every day. Because each stage is separated by a period of up to 4-months, the mix can change dramatically causing the aggregate to move in the opposite direction of present conditions. Additionally, back in 2008 most servicers all did things the same way at the same time. Now, each bank and servicer has their own agenda so the monthly numbers are much more volatile, which can lead to misinterpretation.

In May, aggregate foreclosure activity was not down 4.6%, rather up 13.5%. On a more granular level, the takeaways are that Notice-of-Trustee Sales are up 100% from Feb to May and subsequent foreclosures are up 75% from March to May – these are significant events. Especially when considering that the housing market at the low end has been benefiting in part by the lack of inventory caused by the Q4 2008 – Q1 2009 moratoria.

The Waves

The chart below shows aggregate foreclosure activity of all three foreclosure stages. The red and yellow lines — Notice-of-Trustee Sales (stage 2) and actual foreclosures (stage 3) respectively — are the wave. In the past three months NTS and foreclosures have surged, as evidenced by the red and yellow growing twice as large. Again, notice-of-Trustee Sales are up 100% from Feb to May and subsequent foreclosures are up 75% from March to May.

So, why aren’t foreclosures up 200% – 300% from March and back to all-time highs, as the March through May Notice-of-Trustee Sales surge would indicate? It’s because of capacity and timing.

We know for a fact the GSE’s and several servicers came off moratorium around the time that Obama made public the Home Affordable mod and refi programs at the end of March. From there the servicers had to make the decision to participate, integrate the new borrower modification and loan decisioning and slotting technology and train staff. If this took 6 weeks, which would be incredibly fast, then in the second week of May they would have started re-qualifying and contacting the back log of distressed borrowers with the new loan mod, workout and refi offers. Then they have to give the borrowers a reasonable time to accept or deny. It is only June 11th — there simply has not been enough time. But early foreclosure numbers for June show the foreclosure ramp remains intact.

The chart below breaks out only the Notice-of-Trustee Sales and actual foreclosures, stages two and three. When viewing it this way, the surge in NTS and foreclosures since Feb and March respectively is obvious – each stage up 100%!

The Notice-of-Trustee Sales and foreclosures will continue to come. Notice-of-Defaults — the first stage of foreclosure and the earliest leading indicator of everything mortgage, housing and balance sheet related — have been hitting record highs since December.

The past 6-month NOD average is 45k…the 6-month average for the worst time in the summer of 2008 was only 43,500.

The subsequent foreclosures that come from this latest 6-month NOD surge will hit about the same time a mortgage mod re-default surge from the 2008 NOD surge does. At this point if new NOD’s have leveled out or even fallen by 50%, the re-defaults from bad loan mods made when mods were new and even more reckless than today will keep foreclosures as headlines through next Spring at least.

The following chart is of monthly Notice-of-Trustee Sales (second stage) showing the bleed over from the Notice-of-Defaults in the previous chart. NTS are back at all-time highs. Holding back all of these foreclosures will be an impossible task through modifications alone. This is the wave.

The chart below is of actual foreclosures. Foreclosures follow the NTS stage by 14-60 days. From the March lows to May, foreclosures have almost doubled. This highlights the bleed over from NTS that will continue.  Early June results already show a 10-month high foreclosure run-rate of in the low 20k’s.

Lastly, the following shows total CA house sales vs. total CA foreclosure activity. The blue lines reflect total foreclosure activity and red lines, total sales. This chart clearly highlights how much of a supply problem that foreclosures are and why there is such a push to kick the can down the road through moratoriums and by modifying America.

**We chose one of many weekly research reports and notes for this blog. For more information on our variety of absolutely unique research offerings please see the website.

Best Regards,
Mark Hanson
Mark@TheFieldCheckGroup.com
Data provided to Field Check Group Real Estate & Finance by ForeclosureRadar.com

The Age of False-Bottoms in Real Estate is Here

The Anatomy of a Housing Market at a Potential False Bottom

I do a significant amount of work for distressed funds and thought this research would be interesting to share. This is only the San Diego MSA but most other MSA’s in the state look very similar. Mark

I was on CNBC several weeks back with Erin Burnett and she asked if there was any chance for the Case-Shiller to suddenly spike one month in the near-term. I said ‘no major spike — but there absolutely will be price leveling and even rising in some the hardest hit MSA’s’.  It’s time to revisit this.

In my April 30th report entitled ‘Housing (bottom) Update’ I highlighted the reasons why some of the hardest hit MSA’s might do well over the near-to-mid term:

• artificially depressed supply through gov’t and bank-specific foreclosure moratoria;
• artificially low rates and temporary tax benefit;
• foreclosure mix-shift creating an artificial skew higher in reported median and average prices;
• And fleeting seasonal demand.

Essentially, everything is artificial and so should the bottom that comes out of it. I have been looking for this false bottom phenomenon to play out for months and believe it is here.

The San Diego MSA is a perfect example of a market experiencing a false bottom.  It is a very interesting and unique market that I believe will show a bottom in reported house prices as soon as the next Case Shiller report.  It may even report a decent sized increase in median and average house prices.

San Diego MSA – The Anatomy of a False Bottom

San Diego is not unlike most other hard hit MSA’s. Prices are down significantly, sales have increased year-over-year creating excitement and speculation, and the majority of the sales are happening at the low end. The mid-to-upper end is languishing.  For various artificial and temporary reasons, there is only a couple of months supply at the low and literally ‘years’ of supply at the high.

San Diego total sales are hovering around 3k per month. This is up sharply from the lows of 18-months ago when prices were still near the highs and all of the exotic loans went away suddenly creating a sudden and violent sales trough.

But sales are nowhere near robust in a historical context especially when considering that median house prices are down 44% from the peak and rates are at historic lows. If this market was truly on the mend, sales would be much higher especially now, during the peak season. Sales actually dropped 10% from April to May.

Some will argue that low sales reflect low inventory, which I do not necessarily agree with.  But, if that is the case we should see a price surge in the near-term that proves it.

Prices have also fallen sharply in the past 18-months. The sudden fall coincides perfectly with the sudden loss of all exotic loan programs in Q3 2007.  Please note the series of events that took place during the dramatic house price slide from over $500k in June 2007 to a low of $280k in Jan 2009.

The 2008 surge in foreclosures shown below kept this market over-supplied in all of 2008. This accounts for much of the relentless home price slide through the end of 2008 as pictured above. Then, foreclosure moratoria beginning in Q4 2008 (below) kept foreclosure-related resale supply at a bare minimum…much less supply than demand for low priced properties.

When you combine a median price decline of nearly 50% with artificially low rates and a genuine lack of supply through moratoria, it will create support — and it did.  But as noted in the first chart showing sales counts, it has not created a surge in sales.

The average present value of properties entering the REO supply pool as shown in our data below, revealed a price turn in March. We highlighted this in our April report entitled ‘San Diego Housing Market Alert’.

But because REO resales only make up only about 35% of total sales vs roughly 60% statewide, they are not as much of an influence over pricing as in other hard hit MSA’s around the nation. This may point to the loss of exotic loan programs as more of a problem for this market initially than foreclosures.

But even with foreclosure-related sales running lower than the statewide average in this market, they will still influence prices. And the shift in the value mix of properties entering the REO resale pool to higher priced properties will influence median and average house prices going forward.

Shown below — the low priced band (blue) is shrinking relative to total new REO supply from the upper price bands. As this higher priced property mix is resold, it will have the effect of lifting median and average values. In other MSA’s where the percentage of REO to total housing is much greater, the mix-shift has a much greater effect.

The following chart of monthly bank owned properties is the last look available at the pool of REO resales before they are listed with a Realtor and resold. These data are unique and totally proprietary to ForeclosureRadar.com and The Field Check Group.

At the Notice-of-Default stage, the mix shift is even more pronounced and occurred earlier. This is because the REO chart above is made up of loans that may have gone into default as long ago as a year — during the heart of the Subprime implosion.  Subprime loans were lower in loan amount attached to lower priced homes generally.

The Notice-of-Default mix-shift chart below shows real-time monthly loan defaults containing a much greater number of higher loan amount Alt-A, Jumbo Prime and Prime loans on higher priced homes.

Much More Supply Coming

But before you get too excited about the prospects of San Diego real estate and put in an order for a pool of REO’s to flip or notes to work out, a wave of foreclosures is coming.

In the past three months alone, Notice-of-Trustee Sales are back at near peak levels of 2500 per month. An NTS is the second stage of foreclosure that comes 14-60 days prior to the property being taken to the courthouse and sold.

With most loss mit and mortgage mod plans known to servicers now, there is little reason to file an NTS unless in fact the property has a good change of going to foreclosure. With San Diego sales at about 3k per month, 2500 NTS per month could cause a serious supply/demand imbalance that must be absorbed for this market to become and remain healthy. This will be especially difficult considering that the peak sales season ends in August and Notice-of-Defaults (two charts down) that feed NTS, have also surged recently. Judging by the flow, recent NODs will feed foreclosures perhaps through the end of the year — that is as far out as we can see.

This NTS surge is especially troubling considering that foreclosure related supply only presently makes up approx 15% to 20% of total housing supply and Ma and Pay Organic homeowner make up the rest.  With 3000 monthly sales and supply coming at a rate of 75% of total sales, that does not leave a lot of demand for organic sellers.  First timers and investor can’t carry this entire market on their own. Organic sellers must be able to sell and re-buy in order to keep demand stable and strong.

Notice-of-Defaults – the first stage of foreclosure that occurs after a borrower misses 3-4 payments — have surged in the past five months. The dip down in 2008 was solely due to a CA moratorium law — SB1137 — that had the effect of kicking the can down the road.

There have been more new Notice-of-Defaults each month for the past five months than properties sold. NOD’s turn into foreclosures within 5-8 months — this is not a great sign.  The new mortgage mod initiatives had better work well.

Mid-to-High end Trouble

Mid-to-high end loans and the home attached to them are where the real trouble lies in the near-term. The two charts below show the monthly new loan defaults and foreclosures for mid-to-high end properties.

Mid-to-high end NOD and foreclosure counts stand between 35% and 40% of total counts but account for only about 20% of total sales.  This means that foreclosure-related pipeline supply is 100% greater than demand in this segment. This is a major supply/demand imbalance that will bring serious trouble to this market over the near-term. Especially considering that this particular foreclosure related supply only makes up approx 10% of total mid-to-high end supply with Ma and Pay Organic homeowner once again making up the rest.  

In this market segment especially, first timers and investors have little impact — organic sellers need to be able to sell and re-buy in order to keep demand stable and strong.

This will promote significant house price and rent compression over time that may put in jeopardy the low-price housing stability seen today.

Jumbo REO has also been held artificially low due to moratoria. With only 300-400 units entering the resale pool each month since the moratoria kicked in and more exotic and longer-term loans left over from the bubble years, the mid-to-upper end market has not gone through the same tragic price melt-down as the lower end — yet.

Lastly, third party professional investors/buyers at San Diego courthouse foreclosure sales have not stepped up what they are willing to pay like the retail buyer has. Price declines in this segment have decelerated and may show stabilization soon, but after only one month it is too early to call.

With rents tumbling and the primary purchasers at the courthouse foreclosure auctions being professional investors, I think this chart is very telling.

Bottom Line: Headlines are about to get wild, as the age of false bottoms in real estate is upon us.

At Field Check Group, we do highly granular work on every CA  MSA and other states upon request.

Best Regards,

Mark Hanson

Mark@TheFieldCheckGroup.com

Data provided to Field Check Group Real Estate & Finance by ForeclosureRadar.com

After the Rate Spike — Mortgage Operations Turmoil…Kick out the Dead Loans Now

Rates are all over the map as lenders assess the damage and price cautiously.  Now, it is a mad dash to only focus upon the loans that are locked and have a chance of funding. If the locked loans are not funded quickly and the interest rate complex continues to experience this extreme of volatility, serious losses can occur.

The letter below was just sent by a national bank’s wholesale department this afternoon. This is the mortgage operations nightmare I highlighted in Thursday’s report.  In a nutshell, they are kicking aside everything that is not locked or not a purchase in contract.

This is the desperation move that overworked, understaffed mortgage divisions have to make in order to salvage what can be salvaged and fund the loans that can fund in the shortest amount of time possible — preferably before the end of the rate lock.

Kicked aside could be at least half of their past two month’s of unlocked, unfunded originations that may ultimately parish if rates don’t come back quickly…or if the borrower can’t be coaxed into an 3/1 or 5/1 intermediate-term hybrid ARM, which are now at about the same interest rate level as a 30-year fixed was at the beginning of the week. Shortening duration is now an option where two months ago it was not.

GSE Jumbo Loans Were Totally Blown Out – Try 6% – 7%. Not Good for Mid-to-Upper end Market Already on the Ropes

GSE Jumbo fixed rate loans were decimated on Wednesday. This market is highly volatile to begin with — a move like this blows rates out until conditions settle down quite a bit. Anyone with an unlocked GSE Jumbo loan that was hoping for the 5% rate available when the application was taken is out of luck. Jumbo fixed wholesale rates are now 6% to 7% depending upon which lender the loan is with. Even if bond yields and rates don’t come back down, but volatility settles down a bit, GSE Jumbo rates will tighten up to conforming loan rates over the next month offering some relief.

Levering Up on Bubble-Year’s Favorite — the 3/1 & 5/1 Hybrid Intermediate-term Interest Only ARM

Some borrowers with an unlocked purchase or refi that want to go through with the deal — but either find 5.5% unacceptable or can’t qualify at that high of a rate — will migrate to the 3/1 and 5/1 loan products.  These are long-term fixed rate alternatives offering much lower pricing than today’s 30-year fixed rates.  I highlighted how these programs have made a comeback in my 5-15 report:

5-15 Bringing Back a Bubble-Year, High-Leverage Loan Favorite

Over the past few weeks as 30-year fixed rates have soared, some application volume has moved to a few lenders offering hybrid intermediate-term 3/1 and 5/1 interest only ARMs because of their preferred rates and low monthly payments. Just like during the bubble years, a 5/1 interest only is about 100bps lower in rate than a 30-year fixed. With a spread that large and the benefit of interest only payments, volume will continue to move to this program line if rates stay up. These are the loans that got the housing bubble really going in 2003. From here, the housing bubble was born.

5-15 GSE’s  — Re-levering Borrowers Through Exotic Loans as Fixed Rates Rise

Rates this aggressive on this program line are something brand new and not offered by all lenders. The 5/1 ARM was first made mainstream by Wells Fargo in 2003. It quickly became the top high-leverage loan choice and stayed that way until late 2005-2006 when short rates took its pricing to levels that made it cost-prohibitive. From there, the Pay Option ARM took over but that is for a different report.

Although the 3/1 and 5/1 interest only loans of 2003-2006 were on a different level of exoticness than today’s 5/1’s, they didn’t start that way. This re-introduction of ultra-low rates on a favorite ‘bubble-years’ loan program may be the first sign of re-inflating the mortgage bubble by these means.

It is obvious the Fed can’t keep rates down making higher leverage loan programs is easiest way of countering negative affordability from rising rates.

Aggressive 3/1 and 5/1 conforming interest-only hybrid intermediate-term ARM rates are being offered from a variety of lenders…that long of a name just sounds exotic, no?  That is because they are. At present the mid-to-high 4% is still available – about the same rate as a 30-year fixed a month ago.

With 30-year fixed rates loans the top choice this time around, these bubble-year’s favorites have been avoided like the plague.  However, some that were caught off guard and that must fund a purchase or refi will opt for these. If short rates stay down and long up, these just may get real popular again as they were in 2003-2005. However, if long rates keep moving higher or the market gets even more volatile, I would not expect these to hang around these levels for too long.

For borrower’s that can deal with an ARM, CITI was leading the pack yesterday. If 30-year rates stay up, ARM rates down and the refi-boom shifts to short duration 3/1 and 5/1 financing, what are we setting ourselves up for in three to five years.

Best Regards,

Mortgage Rates – It Could be as Bad as You Can Imagine

With respect to yesterday’s in the mortgage market — yes, it is as bad as you can imagine. No call can be made on the near-term, however, until we see where this settles out over the next week of so. If rates do stay in the mid 5%’s, the mortgage and housing market will encounter a sizable stumble. The following is not speculation. This is what happens when rates surge up in a short period of time – I lived this nightmare many times.

Yesterday, the mortgage market was so volatile that banks and mortgage bankers across the nation issued multiple midday price changes for the worse, leading many to ultimately shut down the ability to lock loans around 1pm PST. This is not uncommon over the past five months, but not that common either. Lenders that maintained the ability to lock loans had rates UP as much as 75bps in a single day.  Jumbo GSE money — $417k – $729,750 — has been blown out completely with some lender’s at 8%. I have seen it all in the mortgage world — well, I thought I had.

A good friend in the center of all of the mortgage capital markets turmoil said to me yesterday “feels like they [the Fed] have lost the battle…pretty obvious from the start but kind of scary to live through it … today felt like LTCM with respect to liquidity.”

The consequences of 5.5% rates are enormous. Because of capacity issues and the long time line to actually fund a loan in this market, very few borrowers ever got the 4.25% to 4.75% perceived to be the prevailing rate range for everyone.

A significant percentage of loan applications (refis particularly) in the pipeline are submitted to the lenders without a rate lock. This is because consumers are incented by much better pricing to lock for a short period of time…12-30 day rate locks carry the best rates by a long shot. But to get this short-term rate lock, the loan has to be complete enough to draw loan documents, which has been taking 45-75 days over the past several months depending upon the lender’s time line.  Therefore, millions of refi applications presently in the pipeline, on which lenders already spent a considerably amount of time and money processing, will never fund.

Furthermore, many of these ‘applicants’ with loans in process were awaiting the magical 4.5% rate before they lock — a large percentage of these suddenly died yesterday. From the lows of a month ago to today, rates are up 20%. To make matters worse, after 90-days much of the paperwork (much taken at the date of application) within the file becomes stale-dated and has to be re-done with new dates — if rates don’t come down quickly many will have to be canceled out of the lender’s system.

To add insult to near-mortal injury, unless this spike in rates corrects quickly, a large percentage of unlocked purchases and refis will have to be denied because at the higher interest rate level, borrowers do not qualify any longer. For the final groin kicker, a 5.5% rate just does not benefit nearly as many people as a 4.5%-5% rate does. Millions already have 5.25% to 5.75% fixed rates left over from 2002-2006.

This is a perfect example of why the weekly Mortgage Applications Index is an unreliable indicator of future loan fundings and has been for a year and a half with the market so volatile. As a matter of fact you will see this index crumble over the next few weeks at the same disproportional rate as it increased over the past several months if rates don’t settle lower quickly.

With respect to banks, mortgage banks, servicers etc, under-hedging a potential sell-off with the Fed supposedly having everybody’s back was a common theme. Banks could lose their entire Q2 mortgage banking earnings and middle market mortgage banker may never recover or immediately have to close shop.

Lastly, consider sentiment — this is a real killer. This massive rate spike may have invalidated hundreds of billions spent to control the mortgage market literally overnight. This leaves the mortgage and housing market very vulnerable.

Mortgage loan officers around the country are having a very very bad day today explaining to their clients why their rate was not locked and how rates are going to come right back down.  They are also taking calls from borrowers with locked loans to confirm that the loan is indeed locked, inquiring as to when it will be approved or fund, and to rush the process in order to fund the loan by end of the lock-in term. This creates a customer service log-jam that chews through lender capacity quickly making the loan process even longer.  Loans with second mortgages that need to be subordinated, are in a world of their own. Essentially, everything becomes a rush. Subsequently, loan officers will not feel like getting too aggressive taking new loan applications at least for the next month unless this corrects quickly.

Press surrounding this event will be the talk of Main Street immediately and cast a serious doubt over the housing recovery story that has been the common theme for months. An overnight housing market sentiment killer wildcard is something that nobody was factoring in.

We have to see where all this settles over the next few days before making a near to mid-term call on the outright damage because at this point, Fed or Treasury shock and awe is almost certain — another common theme has been ‘if it doesn’t work throw much more money at it’.

Obviously they have been following this closely for the past few weeks, as conditions began to deteriorate, and have likely been waiting to see where the upper range was before shocking in order to get maximum benefit…that would be a humongous short squeeze in Bonds driving rates lower. The problem is…if they do shock her and it is sold into with the same fury that we have been seeing, there may not be an act two.

The bond and mortgage market got complacent with the ultimate in moral hazard’s — the Fed’s got my back.  Complacency is a killer. Where we stand in two weeks in unknowable.

Re-leveraging Through Exotic Interest Only Financing

Those that must close a loan, who were not locked and who need a rate in the 4%’s will be forced into an Agency 3/1 or 5/1 fully amortized or interest only. Obviously, interest only affords the most leverage but is in part what got us here in the first place.  Maybe that is the plan behind all of this — today’s rates for good borrowers are still in the high 4%’s.

Best Regards,

- Gridlock: CA Organic House Sales — No Increase in 18-months
In order to chew through supply and balance the market, homeowners must be able to sell and re-buy. Move-up/across/down homeowners have always carried the market in the past. Now the market is dominated by its weakest participants — the first timer and investor — who are at a point of maximum demand, as supply is about to hit hard once again.

- Examing the Foreclosure-Related Resale Market — At the Point of Maximum Demand
Despite consensus that house sales are surging, they remain very weak as highlighted in this segment and chart.

- Total Sales vs Foreclosure Supply – Heavily Imbalanced with Infinite Supply
It is the tale of two markets with one at a point of maximum demand and one languishing. This, while massive supply is about to come online.
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With proprietary default and foreclosure data only available to a select number of firms in the nation and decades of mortgage and real estate experience, we are able to provide high-level and granular broad-market and company-specific insights never before available – sometimes months ahead of public news and events. Looking ahead of the mortgage and housing market and into bank’s residential mortgage portfolio and balance sheet is now much easier.
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The CA housing purchase market is at a point of critical gridlock. And it’s not from too many buyers. It’s just the opposite — there are not enough of the right type of sellers that after sale, become the right type of buyers.

The organic move-up/across/down buyer is not an active participant in the market and has not been for 18-months. Coincidentally, 18-months ago marks the exact point at which lenders pulled the plug on all of the exotic first and second mortgage loan programs.

This is the tale of two housing markets; each vastly different with respect to its different players and fundamentals with one at a point of maximum demand and one languishing.

CA Organic House Sales Near All-Time Low — No Increase in 18-months

CA organic home sales are near all-time lows. They have not increases at all in the past 18-months and are down from peak levels between 60% and 75% in 2009.

The chart below depicts the total sales broken into ‘organic’ and ‘foreclosure-related’ sales. The blue portion represents Ma and Pa Organic selling a property either to re-buy a new property or to rent. The red portion are first-timers and investors slugging it out for a $200k foreclosure-related property.

Unless the organic group can sell and re-buy, the housing market will continue to be controlled by its historically weakest participants — the first timer and investor group. With financing tight, economic conditions questionable, and rents tumbling these groups can’t carry the market especially at the mid-to-upper end which will feel the most pain in 2009-2011.

Epidemic Negative-Equity – Average $201k on Each Foreclosure in April

Remember, the US was near a 70% homeownership rate entering this mess. It has fallen a few percent since, but by and large the homeownership rate left over from the bubble years is massive. As values plummeted equity was evaporated and negative-equity has become epidemic. Negative equity is so problematic in CA that the average negative equity for all foreclosures last month was $201k.

With respect to house sales, negative equity takes away the largest segment of the market…the organic move-up/across/down buyers.

Unless more homeowners are able to sell and take away a large enough down payment for the new vintage loan; rent their present residence for enough to cover the debt-service; and/or come up with a large enough down payment out of savings in addition to having the income to qualify for a new loan, the housing market will continue to be dominated by a bunch of speculators slugging it out for a $200k foreclosed property. Therefore, further price depreciation, interest rate decreases or the re-introduction of exotic financing will be needed to boost sales from here.

Examing the Foreclosure-Related Resale Market – The Supporting Factor but at a Point of Maximum Demand

Below shows where the action is — the foreclosure-related resale market. The green line represents total monthly foreclosure-related resales relative to actual foreclosures (blue) and Notices-of-Defaults (red), which are essentially foreclosures in the pipeline waiting to happen.

Over the past 8-months — due to govt and bank-specific foreclosure moratoria — demand for foreclosures was higher than supply supporting prices. But as foreclosures come through from the recent surge in NODs (red), the same supply imbalance seen from Jan 2007 through Oct 2008 will occur. That is of course unless first timers and investors step it up a notch, which is highly unlikely if they were unable to do so over the past year as prices and rates plummeted.

It is also important to note that the supply shown here is only foreclosure related supply, which accounts for only 35-40% of total supply. This underscores how lopsided the supply/demand fundamentals really are.

Total Sales – Weaker Than Most Think

When adding foreclosure-related and organic sales together, total sales are very weak at approx 38k in April (green line below). Together, there were a total of 55k new Notice-of-Defaults and foreclosures in April. When backing out foreclosure-related resales, organic sales are down an average of 70% in 2009 from the robust markets of the bubble years.

When including all of the organic MLS listed supply (60% to 65% of total supply), with the foreclosure-related supply (60% to 65% of total sales demand), CA has an infinite amount of supply.

Ultimately, this will not only continue to put pressure on the low end that recently has shown signs of stabilization, but also decimate the mid-to-upper end, which not shown any signs of coming back to life with respect to sales over the past two years.

Bottom Line

There are not enough buyers.

**For more information in our default/foreclosure related research including real-time mortgage default, foreclosure and loss tracking across large-named publicly traded companies please email me at the address below. Looking ahead of the housing and mortgage market and into bank’s residential mortgage portfolios and balance sheets is now much clearer.

Best Regards,
Mark Hanson
Mark@TheFieldCheckGroup.com
Analysis by Mark Hanson, Field Check Group Real Estate & Finance
Data provided by ForeclosureRadar.com

-April Foreclosure Action — Preview of Market-Moving Headlines This Week
-Potential False Bottom as Servicers Game the System in March
-Nearly Half of the Decrease in April NOD’s was caused by Chase Gaming the System
-Mortgage-Mod Recidivism Update — We Can’t Modify Our Way Out of This
-Loan Mod Re-Default Rates at 80% at Countrywide and WaMu
-Large Bank Origination Default & Foreclosure Performance
-Large Servicer Action

Food for thought on housing: 50% of buyers in the bubble states are first timers buying at the low end of the market, vacating a rental. The majority of the remaining buyers are investors tripping all over themselves trying to get a deal — just like they have done all the way down — in hopes of renting the property to the very same renters (first time buyers) buying the low end properties. DOH!

Nowhere to be found are move-up buyers at the mid-to-upper end that is experiencing a default crisis identical to the beginning stages of the Subprime crisis with respect to supply/demand fundamentals. As the surge of for-sale listing of mid-to-upper end properties hits for the busy season and the major mid-to-upper end default wave — that began in earnest in Dec — turns into REO supply, an exact repeat of the beginning of the housing crash that began in 2007 with the Subprime sector and its housing supply will occur.

Most assume that because the low end is stabilizing after a 50%+ price drop that the mid-to-upper is also stabilizing. The fact is they are not connected and will bottom independently. The crisis yet to befall the mid-to-upper end will take its participants — the mid-to-upper end earners — through the same painful housing led de-leveraging as their Subprime counterparts. The macro economy can’t handle the sequels…Subprime Returns, The Son of Subprime and Subprime vs. Alt-Zilla.

Total April Foreclosure Activity Down M-O-M as Servicers Game the System in March, but Actual Foreclosures Rise

The April, market-moving popular foreclosure reports from RealtyTrac and others will be out this week and do much to confuse people — especially in CA.  This, as new laws are planned for, moratoriums ceased, Administration plans kick into gear and banks and servicers continue to spin out of control managing the volume.  Needless to say, getting a handle on what is really happening is difficult even if you have all of the data.

The West will see an aggregate drop in total foreclosure activity but only because in March we saw an artificial spike in Notice of Defaults due to a new law hitting the books July 8th dubbed ‘The CA Foreclosure Prevention Act”.  This new law essentially stretches out the foreclosure timeline by adding three months between the NOD and NTS stages.

Because of the present timelines servicers had until the end of March to stuff the mailboxes with new NODs in order to get the NTS out under the July 8th law enactment wire. I estimate that about 15% of March’s total NOD count surge was due to front-running the new law.

Still, when all is said and done April’s NOD counts will be roughly 44k, down only 11k from March’s all time high of 55k and in-line with 2008 and 2009 highs.

April Notice-of-Trustee Sale counts also fell but less sharply than NODs — down only about 15%. This is because NTS are not constrained by the new law time line and are simply a function of how many properties servicers plan to take to the courthouse for sale.  With no new laws or regulations in place since Obama rolled out his plan, there is little reason to fill the mailboxes with NTS unless the borrower does not qualify or does not want saving. The past two-month spike in NTS should be a fairly accurate near-term leading indicator of what is to come with respect to CA foreclosures.

The wave of foreclosures that I keep harping about is coming to shore — we saw signs of that in April as actual CA foreclosures jumped about 40% over March. Similar stats were seen in other significant foreclosure states.  Expect to see actual foreclosures to continue to rise — likely sharply in May — going into the summer just in time for the busy real estate season. What a coincidence.

Drop in Notice-of-Default & Trustee Sale Counts Caused by Only Four Servicers – Chase (WaMu) Accounts for Nearly Half as They Game the Calendar

The chart below shows the monthly NOD counts for each top servicer that showed a significant month-over-month decrease. The four below account for the total 11k month-over-month decrease with Chase pulling a fast one.

In the month of March, Chase fired up the NOD machine at WaMu servicing for one month only in order to get more borrowers on record ahead of the new CA Foreclosure Prevention Act to be enacted on July 8th.  The new law effectively stretches out the CA foreclosure process by 90-days. Borrowers that were not on NOD-record by the end of March could benefit by the new law.

When adding Chase and WaMu together, Chase now holds the record for the most NODs ever filed by a single company at nearly 12k in the month of March.

Mortgage-Mod Recidivism Update — We can’t Modify Our Way Out of This

Yesterday, FHFA director Lockhart was on CNBC talking about how they have to get even more aggressive with mortgage modifications. He shot down Bill Ackman’s GSE plan and scoffed at him within 30 seconds of laying out his plan — you should watch the clip.

How much more aggressive should they get with such terrible results attempting to re-lever homeowners?  It is proving painfully obvious that mortgage mods are more exotic than the actual loans that put the homeowner in default in the first place and their effectiveness even at the margin questionable at best.

The Obama-mod does the same as most other mods — it turns the homeowner into an underwater, over-levered renter for life unable to sell, re-buy or refi.  Modifications with combined loan to values of 150% to 200% are not uncommon. Many borrowers would be better off walking away today because their credit will be hurt for a shorter period of time than they will be underwater in their home.  As a note — I think the Obama 105% GSE refi is a good thing but doubt many will fit into the tight box especially in the regions that need the most help.

Wide scale mortgage modifications will ensure that housing remains a dead asset class for years — every time a homeowner gets a mod they are taken out of the mortgage and housing economic equation indefinitely.

Below is a great chart taken out of a very interesting Barclay’s Securitized Products Weekly. This shows just how bad mortgage mods are even for borrowers that go into a mod current on their payments.

Bottom Line — after seeing these latest figures I am more convinced than ever that the next step is wide-spread principal balance reductions that will reduce the massive negative equity burden in America and be a first-step to solving the mortgage and housing crisis once and for all.

Large Servicer Action

For those of you that are interested in tracking what the large servicers are doing, the data on several are below.

Bottom Line — Notice-of-Defaults for the past 5-months have been massive. NODs turn into NTS’s within 4-5 months so in the past 2-months NTS counts have seen a sharp spike. Actual foreclosures/REO have been negligible but based upon the recent surge in NTS, the foreclosures are coming. When viewing like this it is easy to see.

Notes on chart above

Countrywide: New Notice of Defaults in past 4 months have surged. New Notice of Trustee Sales are growing rapidly. REO taken back from the foreclosure courthouse sale almost nil. This wave will break shortly and result in a massive foreclosure spike at Countrywide.

IndyMac: Perhaps the most interesting and a leading indicator because the loans are not owned by a large commercial bank any longer.  New Notice of Defaults in Dec through March surged as the new portfolio owners made up for all of the wasted time during the FDIC ownership and sale process. There were a couple of months in 2008 leading up to the sale when they sent out very few Notice of Defaults. Actual foreclosures are ramping up hard — this chart pattern is what you are likely to see across other large servicers beginning in May.

Chase: The top servicer with respect to total volume in the nation. On the past 6 months Notice of Defaults have surged and are working their way to foreclosure. This can be seen in the last 2 month surge in Notice of Trustee Sales. However, actual foreclosures/REO have been very low for the past few months as they have also been on a moratorium awaiting the new Administrations plans.

Wachovia: On near-full moratorium for all stages of foreclosure.  If you have one of the $122 billion in Wachovia Pay Options you are in no eminent danger of losing your home to foreclosure. If you are a Wells Fargo shareholder, don’t look for loan losses on their portfolio either because they have to foreclose in order to rack up losses. That is of course unless they continue to give principal balance reduction modifications which they are doing now. But I am certain they are only giving principal balance reductions that are within the limits of their forecasted merger losses.  Ultimately this will not have the desired effects on modification recidivism they are looking for because most homeowners will remain trapped even with the principal balance reduction.

WaMu: This is very interesting. The WaMu servicing platform is virtually out of business after the Chase buyout. However, in March we saw Notice of Default surge as Chase fired up WaMu’s NOD machine in order to front-run the new CA Foreclosure Prevention Act. This was a one month event that effectively doubled the amount of new Notice of Defaults that Chase sent out to homeowners.

Wells Fargo: Wells has never really conformed with respect to moratoriums or what their peers are doing. They do things their own way. However, in the past 6 months their NODs have soared, in the past two months their NTS counts have spiked meaning foreclosures will follow in the next couple of months.

**Financial Institutions: For more information in our default/foreclosure related research including real-time mortgage default, foreclosure and loss tracking across large-named publicly traded companies please email me at the address below.  Looking ahead of the housing and mortgage market and into bank’s residential mortgage portfolios and balance sheets is now much clearer.

Mark@TheFieldCheckGroup.com
Analysis by Mark Hanson, Field Check Group Real Estate & Finance
Data provided by ForeclosureRadar.com

Special REO Investor Report — Why Buy Bulk REO?  The Servicers Are Giving Them Away…If You Know How to Look

In CA at the courthouse steps very few properties sell because you need to be an absolute pro — especially with respect to due-diligence, figuring out approx opening bid pricing early and knowing which servicers consistently offer properties under market. With my data, research and tools I can see exactly what is happening with every property from every servicer at every courthouse in the state on a daily basis. What I found in April was interesting – MANY SERVICERS HAVE RECENTLY BEGAN PRICING FORECLOSURES VERY AGGRESSIVELY.

Over the past year, only between 2% and 10% of properties have typically sold to 3rd parties at the courthouse while the rest go back as REO. In March about 10% were bought by 3rd parties but in absolute terms, we have seen more. However, in April we saw a record high of 1,622 properties sell to 3rd parties. Upon closer examination, it is because many servicers got very aggressive.

3rd party sales at the CA courthouse steps in April surged 60%.

THE MONEY CHARTS

Below is a list of the top servicers and their specific aggregate foreclosure action and pricing (REO or 3rd Party Sale). The servicers toward the top of this chart are blowing properties out as evidenced by the far right column. The companies are bundled into the parent companies so as not to give away my shop, but tier-1 Field Check data service subscribers can drill down into each name and find all specifics.

All About Buying Foreclosures at the Courthouse

The worst part about buying foreclosures at the courthouse is that the beneficiary releases their opening bid price the morning of the courthouse sale in most cases. This gives investors very little time to rush down and buy the property if in fact the price given to the courthouse by the beneficiary the morning of the auction is acceptable. Therefore, investors may have to do due-diligence on 100 properties at the time of the Notice-of-Trustee Sale and if they are lucky, they will a buy only a few. My data provider www.ForeclosureRadar.com has done more than anyone in providing transparency to this market but obtaining opening bid data is illusive in most cases even to them until just before the sale.

But as a distressed investor, you can get around that by tracking which servicers are consistently offering properties priced under the present value. We have noticed over the months that some servicers consistently price properties far below while others price far above on purpose or by accident.

Foreclosure Pricing/Discounts at the Courthouse Steps — Why Buy Bulk?

The master column to the left shows the number props that went back as REO and the discount or premium to the present value of the property the transaction occurred — this is typically the opening bid. If the opening bid is too high or there is no 3rd party interest it goes back as REO. As you can see there is an effort by many to hug the neutral line.

The master column to the right shows every property sold to 3rd parties and the discount or premium to the present value that the transaction occurred. This is the money shot. Look at those discounts! For example, at the top of chart is GMAC — they discounted the 57 properties that they sold to 3rd parties during the sampling period by 46.41%. This either means they are trying to blow out properties or they have a bad valuation system. Either way, the buyers got great deal.

Loss Severities

For you bank analysts looking for loss severities and feeling left out, this is the same chart above with the sale prices compared to the amount owed providing you with loss severities. This can be drilled down to the street level if needed.

Note — this is listed by servicer and by no means reflects loans on the balance sheets of the banks listed here — we have other charts for that!

**For more information in our default/foreclosure related research including real-time mortgage default, foreclosure and loss tracking across large-named publicly traded companies please email me at the address below. Looking ahead of the housing and mortgage market and into bank’s residential mortgage portfolios and balance sheets is now much clearer.

Best Regards,
Mark Hanson
Mark@TheFieldCheckGroup.com
Analysis by Mark Hanson, Field Check Group Real Estate & Finance
Data provided by ForeclosureRadar.com