Field Check Group: Real Estate & Finance

March New Loan Default Summary

• Total CA Foreclosures — At 1.5 Year Lows
• Total CA new Defaults – Surging
• Subprime -- Declining
• Alt-A  — Constantly Rising
• Pay Option ARM – Surging, Despite Wachovia being on Moratorium
• Jumbo Prime – Relentless
• Super Jumbo – Surging
• Fannie – Freddie – Surging

CA House Prices are Bottoming – But for the Wrong Reasons

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The mortgage default and foreclosure news flow has been heavy over the past couple of weeks. But aggregated news is tough to make sense of or trade. At Field Check Group we can break down the default and foreclosure data hundreds of different ways including by originating and foreclosing lender, loan type, loan amount, present property value, MSA/City/State/Zip and more making it easy to understand.

Below are various looks at the default universe by loan type. When breaking it down this way, what has happened to date and going to happen in the future becomes much clearer.  It also gives a clear picture of the task at hand the Administration has with respect to its new foreclosure prevention plans, as the loan default wave is a mile high and they are swimming into it with a canoe.

-Total CA Foreclosures — At 1.5 Year Lows

In March, new foreclosures were at 1.5 year lows. Actually in Q1 2009, foreclosures were much lower than in Q1 2008 due to broad market legislation and bank-specific moratoriums. This has kept distressed inventories at a low and allowed the low-end housing market — the only segment getting any action — time to consolidate a bit. But remember, supply is everywhere. Although foreclosure-related sales are 50%+ of the market in the bubble states it is only about 35-40% of total supply at this point in CA. The rest of the supply comes from Ma and Pa Organic homeowner who is being squeezed out or can’t sell due to epidemic negative equity. Of the 60-65% of supply that is organic, 50% are typically listed as a short-sale.

-Total CA new Defaults — Surging

New loan defaults – of which a large percentage will turn into foreclosures 5-7 months following the notice month — are surging. In the past that would be indicative of a major foreclosure wave coming. Now with aggressive moratoria and mortgage mod initiatives in place, the eminent wave may not break all at once. It will break, but could be stretched across more months than typical. One thing is for sure, there is a pig the size of Godzilla in the python right now that has worked its way to the lower intestine.

Subprime Defaults — Declining

New Monthly Subprime notice-of-defaults have eased off considerably. This is because the mortgage crisis started with Subprime, and mortgage mod initiatives and moratoriums are most targeted to Subprime loans.

Alt-A Defaults — Constantly Rising

New Monthly ALT-A notice-of-defaults have surged along with total defaults but not with such an aggressive rate of change. This is because mortgage mod initiatives and moratoriums are most targeted to Alt-A and Subprime loans.

Pay Option ARM Defaults — Surging

Pay Option ARM defaults are continuing to surge despite one of the nation’s largest Pay Option holders — Wachovia — remaining on near full moratorium.

Jumbo Prime Defaults — Relentless

The Jumbo Prime default chart is absolutely unique but increasing steadily along with total defaults. Within this category supply this high can’t be absorbed into the housing market because sales over $417k are so slow.

Over $750k Loan Amount Defaults — Surging

Defaults on original loan amounts over $750k are surging with total counts higher than total sales in this segment. Supply from foreclosure is about to hit hard in the mid-to-upper end housing market. And remember, foreclosure supply is only one form and account for only about 35% of total supply.

When we look back at 2009 on December 31st with Champagne bottles in hand, we will reflect upon 2009 as being the ‘year of the mid to upper end house price collapse’.

Fannie-Freddie Monthly Loan Defaults — Surging

This goes hand in hand with the FHFA report put out yesterday showing new GSE loan delinquencies and defaults are surging.  This is what the low-to-mid end of the market can’t handle right now — it has finally reached a point of decent supply-demand with help from mortgage mod initiatives and foreclosure moratoriums kicking the can down the road.

A surge in GSE defaults and foreclosures will bring around round 2 of the low-to-mid end house price fall.  Many are hopeful that Obama’s new mortgage mod plan focused upon GSE loans will prevent this.  But given that the GSE’s at present have 1.229 million delinquent and defaulted loans and were only able to pump out 9k mortgage  mods in January, I believe that is wishful thinking.

House Prices Are Bottoming — But for the Wrong Reasons

Present values of properties at the notice-of-default stage are clearly rising due to the shift in the mix of loans/properties going into default from lower to higher.  This ‘mix-shift’ effect may push up median house prices in 2009 creating the appearance that the market is improving when in reality it is because more higher-value properties are defaulting, being foreclosed upon and reselling through the Realtor network.

This is the last look at prop values before they become REO and are listed for resale. Present values of props at the actual foreclosure stage have stabilized but are not yet increasing as they are at the NOD phase shown previously. Given 60% of all resales are from this foreclosure stock, this does not indicate prop values in CA will rise in the near-term.

For any of you that play MSA based house price futures, this chart series nails the Case-Shiller.

**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

Below is an MSA level look at the default, foreclosure and housing market in San Diego from a recent report of all CA MSA’s.  All CA MSA’s look the same.  Even down to the street and city level, foreclosure pipeline supply is greater than present demand and pipeline supply is only one form.  In the mid-to-upper end, the numbers look just like the lower end did back in 2007 when the Subprime universe was buckling in earnest — right before median house prices began their catastrophic slide. Mark

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- San Diego – Looking Ahead of the Housing Market
- San Diego Sales – Stabilizing at Low Levels
- Foreclosure Supply About to Overwhelm Market
- Prices May Stabilize — even increase — as Market Worsens

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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. Best, Mark Hanson

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San Diego – Looking Ahead of the Housing Market

Be careful believing that the housing market is ‘improving’. While the price depreciation has gotten ‘less worse’ at very low price range, the CA housing market is by no means ’strong’ with total sales far below levels seen from 2003-2006.

All-important move-up buyers are non-existent and the market is being carried by it’s historically weakest participants — the investor and first time home buyer. At present sales levels, the market may have reached a point of maximum demand from these two segments.

There are four primary forms of housing supply – they are:

• Ma and Pa Organic (includes short sales) — 65% of supply / 40% of sales
• Foreclosure (REO) — 35% of supply / 60% of sales

Harder to measure but equally as important to the supply/demand balance is:

• Foreclosure pipeline supply (Notice-of-Defaults and Notice-of-Trustee Sales that will become supply in one to nine months)
• Pent-up (those that want to sell but values fell too quickly through their strike price taking them out of the market)

• New Home supply, permits etc are virtually meaningless in this market environment.

Although REO sales make up 60% of total sales in most bubble states, REO listings make up only 35% of total listings and Ma and Pa Organic make up the rest. Of the Ma and Pay Organic listings, roughly 50% are advertised as short sales.  Due to epidemic negative-equity and tough financing — especially in the mid-to-high end — Ma and Pa Organic don’t stand a chance against the REO.

I would argue that pent-up supply makes up the greatest amount but that is impossible to quantify as it is a percentage of the total listings pulled from the market over the past two years as house prices declined. If house prices were to climb even ever so slightly homeowners that tried — but were unable to sell in the past due to suddenly finding themselves in a neg-equity position — will come out of the woodwork feeling lucky that they can finally get out. This inventory, which very few even think about, could keep a cap on the market indefinitely by itself.

When you add in Ma and Pa Organic, foreclosures and foreclosure pipeline supply it is obvious that the housing market — particularly in the mid-to-high — is highly unbalanced with supply outpacing demand at levels never seen before. Read the rest of this entry »

Distressed Whole Mortgage Loans & Real Estate

Every day across the nation investors purchase properties that go to courthouse foreclosure sales — trustee sale. Sadly, due to lack of third-party interest — mostly related to the opaqueness of the foreclosure market and process — most properties are taken back as REO by the bank/servicer. In CA over the past several months over 90% of foreclosed properties went back as REO.

Those that are taken back as REO get listed with a real estate agent and resold some day at some price point. Tracking the public market resales of foreclosed properties and backing into distressed valuations is a bad gauge of the actual value of the assets for a variety of reasons.

However, those that do sell to private party investors at the courthouse steps provide a valuable near real-time look at what price professional investors are presently paying for distressed real estate assets.

Because the database tracks all elements of each foreclosure we can drill down and extract near real-time market values for distressed real estate and mortgage notes recently acquired by professional investors at every courthouse auction. If you are a bank analyst — translated another way, this report can provide a near real-time look at loss severities provided the bank still owns the note. But even over a wide body of a specific bank’s originations it will provide a very close indication.

The chart below shows the aggregate monthly discount to the present amount-owed on residential mortgage notes/properties taken to foreclosure sale in CA. Essentially, this is the note discount level it took to attract third-party investors/buyers through the courthouse foreclosure process.

Higher on the chart are more of the Subprime lenders with 100% loans on lower-end properties coming through. In the mid to lower range are more of the 80% original loan-to-value deals. Either way, in March the note discount it took to attract investors when factoring in 80% loans was in the 60%’s, or 30-40 cents on the original note amount. BUT…

If one wanted to extend these findings out to distressed residential mortgage notes somewhere still in the foreclosure process — time to foreclose, property rehab, time/cost to resell, carrying costs and profits would have to be additionally discounted from here. Remember, the percentage discount to the amount owed on the notes at which sales occurred as displayed in this chart resulted in the investor taking the property at that point. Therefore, displayed here is best case scenario.

**Note — this report is pulled by servicer not originating lender. We can pull by originator in order to drill down on a specific bank’s origination universe if necessary.

**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

- Forward Look at Defaults, Foreclosures and Balance Sheet Losses
- Wells & Wachovia Defaults & Foreclosures Highlighted
- Home Sales are not as Strong as Most Think
- Negative Housing y-o-y Comp Sales Likely Soon

** For those of you that Twitter – my name is MrMortgageTRUTH
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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. Best, Mark Hanson

Data in partnership in ForeclosureRadar.com
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If Wells Fargo’s pre-announcement is any indication (which is a stretch), in Q1 the banks benefited from a perfect storm of low mortgage rates spurring increased mortgage activity; foreclosure moratorium pushing out losses and reserves alike; and massive government capital backing. The question going forward is can earnings outpace losses?

If the economy and housing have indeed bottomed and new loan defaults have peaked then perhaps the banks will do very well. But if Q1 was more of an ‘eye of the storm’ then can banks — relying upon consumers and business — out earn the losses at a time when consumers and businesses are experiencing increased balance sheet stress.

The following charts show why some banks may out earn their residential credit losses in Q1.  But it is not about what happened in Q1 with the mortgage lender-banks and housing – it’s about going forward. Judging from the hard data over the past several month’s, real estate and mortgage have in fact been the eye of a storm that carries us from the Subprime Implosion to the overall Mortgage and Housing Implosion.

Read the rest of this entry »

Foreclosures About to Soar Near-Term — Easily Back to All-Time Highs

Are you ready to see the future? Ten’s of thousands of foreclosures are only 1-5 months away from hitting that will take total foreclosure counts back to all-time highs. This will flood an already beaten-bloody real estate market with even more supply just in time for the Spring/Summer home selling season – great timing!

For months prior to March, banks/servicers were on and off of foreclosure moratoria with many on a complete hold awaiting Pres. Obama’s plan to save the housing market and homeowners. We track each foreclosure start through the entire foreclosure process individually and in aggregate — also by originator and servicer — and as soon as the Obama plan was made known, banks/servicers shifted their Notice-of-Default and Notice-of-Trustee Sale machines into overdrive.

Read the rest of this entry »

- Mid-to-Upper end Housing Market Default/Foreclosure Update p.1 – 2…going into the all-important summer selling season, mid-to-upper end housing supply coming from the foreclosure pipeline alone is greater than present sales demand. But foreclosure-related supply only accounts for 33% of for-sale listings. Ma and Pa Organic — that make up the lion’s share of for-sale listings — do not stand a chance. Across the higher end, this will lead to major house price depreciation and soaring negative-equity which then leads to more loan defaults, increased foreclosure-related supply, further house price depreciation and so on and so on…

- Mark-to-market / Geithner Plan Sidebar p. 3…the distressed whole loan market is booming just not at the price the sellers are willing to take. This proves that just because the prices are depressed does not mean the market is distressed.
Read the rest of this entry »