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October 18, 2010

A Tempest In A Teapot

by Brad Warbiany

Resolved, that The Powers That Be™ believe the following:

  1. Foreclosures are bad.
  2. Falling house prices are bad.
  3. Banks losing lots of money is bad.

It’s not hard to understand why. Politicians sell a version of The American Dream where it’s all lollipops and homeownership, and people getting tossed from their property or deeply underwater on their mortgage have a very personal understand that they’ve been lied to. Likewise, they’ve been selling access to Tim Geithner’s glory hole for years, and they know that if banks have no money, there’s nobody left to buy that access.

So they blow the mortgage robosign scandal WAY out of proportion, keeping supply off the market and thus prices inflated. There have been a few isolated instances of improper foreclosure, but the VAST majority have been people who are in default on their property losing them to the banks. The banks aren’t exactly the good guys here, but neither usually are many of the people who spent their housing ATM all the way up the bubble and now wonder why the party ended.

Not only that, they keep non-paying residents in homes upon which they’ve defaulted while prudent renters that are waiting for a chance to buy calmly pay their bills every month. It’s gotten so bad that one publicity-seeking lawyer is now advising clients to break back into the foreclosed properties they once lived in and drag the legal battles out even longer. It’s a sad day when the vast majority of us realize that the country has become a place where following the rules makes you a sucker.

We have political month-from-an-election grandstanding about a full-scale moratorium on foreclosures (yay, gift to the squatters!) and banks who will gladly halt their foreclosures in order to avoid actually realizing the mortgage losses on their balance sheets.

And, of course, in what seems like a continuing effort by the political system to screw me personally, this all happens RIGHT at the time that my wife and I are looking at property, finally ready to make the jump back into home ownership. And the two places we’ve identified as desirable? Both short sales. As if short sales weren’t maddening enough, now we have to worry whether we’ll have some trepidation on the part of the bank or some nutjob lawyer advocating questionable legal tactics to muck it up.

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6 Comments

  1. “The banks aren’t exactly the good guys here, but neither usually are many of the people who spent their housing ATM all the way up the bubble and now wonder why the party ended.”

    Looking at the number of foreclosures, when purchased and the market values of these houses, it is hard for me to believe this statement.

    Comment by VRB — October 24, 2010 @ 5:26 am
  2. VRB,

    Yes and no. Granted, I’m looking at California housing, which is one of the worst cases, but I see a mix of short sales these days:

    1) Short sales that were last bought in 2004-2007 for anywhere from 20-40% above current list price.
    2) Short sales that were bought 2002 or earlier that are now being sold at or above their last sale price.

    (Redfin.com offers sales history on properties).

    Anyone who bought 2004-2007 is now selling likely for less than they owe. They made a dumb financial decision by buying when they did, but I can’t fault them for “spending the housing ATM”. Those who bought in 2002 or earlier, though, and are in short sale situations now, have definitely spent the housing ATM. If they’d been paying down their mortgage over time, they’d be in positive equity right now and could sell for more than they owe. But they absolutely must have been borrowing up over the course of the bubble and are screwed now.

    In the market right now, it’s a mix. But there is a decent percentage of short sales that should be equity sales if the “owners” hadn’t spent their housing ATM.

    Comment by Brad Warbiany — October 24, 2010 @ 8:09 pm
  3. I do think location has quite a bit to do with it. There has not been very much deflation in prices, if at all. The foreclosures I see seem to be in very stable communities which have not been subject to boon or bust over the decades. Granted I don’t have the facts to support this, but I think it has to do with employment. It may have to do more with people who have come to live paycheck to paycheck than those who use their house as an ATM.

    I would think that the banks would have a glut of housing they couldn’t sell, from looking at how long homes have stay on the market. There doesn’t seem to be the renters in waiting here. I think there is a certain amount of fearfulness in moving forward.

    Comment by VRB — October 25, 2010 @ 3:58 am
  4. Here in Florida, there were many people who borrowed the maximum amount possible against their homes at the peak of the market. Many of those are having difficulties now, some are “flippers” who overextended on multiple houses that now won’t sell at such inflated prices.

    I have a friend in Lee County who had a home in a gated community who sold his house for a tidy profit of $100,000. He then turned around and bought a house in a newer gated community using the $100,000 as a down payment resulting in a mortgage for $300,000. Six months later homes in the same community were being offered for $125,000 and not selling. He just recently got his trim notice and found that his home with a $300,000 mortgage is valued at $12,000 for tax purposes. At the moment, he is renting a home in another neighborhood while the builder replaces the Chinese drywall that was used for part (first floor) of the home.

    I didn’t think he made a wise decision at the time, and in fact, advised against it. He and his wife really thought they were making a great move and could not be dissuaded.

    There are many of these stories from that particular county, which I believe has the highest foreclosure rate in the country.

    Comment by John222 — October 25, 2010 @ 3:48 pm
  5. VRB,

    I definitely agree that location is a big part. The “sand states” (FL, CA, AZ, NV) typically had bigger bubbles than elsewhere, more insane borrowing than elsewhere, and today are having a higher percentage of their foreclosures be due to being underwater rather than simply due to jobs.

    Elsewhere in the country, I’d say jobs are a bigger factor, as there wasn’t quite the same run-up in prices.

    BTW the banks DO have a glut of housing. The big story in housing has been the “shadow inventory”, defined as property that is foreclosed but not on the market, property that is in default but not yet actually foreclosed, and property so far underwater that it is expected to foreclose because there’s no hope of a price recovery. Many of the big banks have a lot of 2nd mortgages, HELOCs, etc on these underwater properties, and if the properties are foreclosed, those loans are wiped out. Pushing the shadow inventory through the system would destroy bank balance sheets, so they are stalling.

    Comment by Brad Warbiany — October 25, 2010 @ 3:57 pm
  6. Full disclosure: I refinanced my own home at about the same time. I had two mortgages totaling $147,000 at rather high variable interest rates. My home was valued at the time at $320,000. I did not borrow against that value, I was actually astonished at the figure. I ended up with a single mortgage at 5.5% and my home is currently valued at a little better than $150,000.

    Comment by John222 — October 25, 2010 @ 4:00 pm

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