What’s the real reason that banks aren’t foreclosing?
September 24, 2009 in Banking and Finance, Best Of The Storm, Everything About Foreclosures by Greg Fielding
Daniel Indiviglio writes for The Atlantic The “Shadow” Foreclosure Inventory
…Driving around Fort Lauderdale, it became extremely clear just how big a hit its economy has taken as a result of the real estate market’s collapse. It’s like a different world compared to what it was like just a few years ago: overgrown grass rises above many curbs and sidewalks; homes and businesses sit empty and abandoned; most blocks display multiple “for sale” or “for rent” signs.
…
During my trip to Florida I heard about families who have lived in their homes as long as two years without paying, because the banks haven’t gotten around to foreclosing. And that’s a problem. Until the real estate market recognizes all its losses — including accounting for all foreclosures — it won’t be able to regain real stability and move on. Of course, that has implications for the broader economy as well.
…
But what are the actual numbers as they pertain to this shadow inventory of foreclosures? They’re hard to get exact, given the very nature of the problem — these foreclosures have not yet been completed. But the (Wall Street) Journal does provide some statistics to work with:
As of July, mortgage companies hadn’t begun the foreclosure process on 1.2 million loans that were at least 90 days past due, according to estimates prepared for The Wall Street Journal by LPS Applied Analytics, which collects and analyzes mortgage data. An additional 1.5 million seriously delinquent loans were somewhere in the foreclosure process, though the lender hadn’t yet acquired the property. The figures don’t include home-equity loans and other second mortgages
Moreover, there were 217,000 loans in July where the borrower hadn’t made a payment in at least a year but the lender hadn’t begun the foreclosure process. In other words, 17% of home mortgages that are at least 12 months overdue aren’t in foreclosure, up from 8% a year earlier.
…
So why do we have this shadow inventory? There are three possible causes:
The first is explained in the WSJ piece. It’s taking quite a long time to figure out which borrowers qualify for the Obama administration’s mortgage modification program. It’s also taking time to process the deluge of applications. During the wait, borrowers remain in their houses which, otherwise, would be in foreclosure. Those who don’t get the modification will ultimately face foreclosure.
Second, with so many foreclosures, banks likely just have logistical issues getting them all processed in a timely manner. There’s a heap of paperwork and other red tape involved in making a foreclosure happen. Banks have never experienced a flood of foreclosures like this, so they aren’t equipped to handle so many very quickly.
Third, banks may not want to foreclose on all of these homes immediately. A WSJ source above used the analogy of foreclosures hitting the market like “a fire hose or a garden hose or a drip.” Which do you think would be better for housing prices? The drip.
While it’s clear that the “shadow inventory of foreclosures is enormous, I don’t agree that any of these reasons are the real reason why banks aren’t foreclosing.
First, banks have had plenty of time to sort out who qualifies for a modification. In the couple of months after the modification plan was announced NODs and NTSs began to increase rapidly…indicating that the banks were able to sort through their customers quickly. However, in the last couple of months, NOD and NTS activity has fallen dramatically. See the chart below from ForeclosureRadar. There must be another reason why banks aren’t foreclosing.
Second, banks have been gearing up for the tidal wave of foreclosures for 2 years now. I work with asset management companies that hired and trained new employees in 2007 and 2008, only to let them go in 2009 because the business isn’t coming. And, none of the asset managers I work with at banks are very busy either. Being overworked isn’t the problem.
Third…I think this is where the reporter comes close, but misses the bigger picture. Banks don’t care about home prices. They care about not losing money. Because the government changed mark-to-market accounting rules, the link between low prices and losing money is broken.
Banks make more money by NOT foreclosing on homes. Banks are dragging out the foreclosure process for their own selfish reasons. Until the day they foreclose, the amount of money owed to them is an asset…sure, it’s an asset that isn’t paying interest payments…but it is still an asset. The day they foreclose, a $400,000 asset could become a $150,000 asset and a $250,000 loss.
Multiply that loss by 10, 20, or even 30 times leverage and there are several million dollars worth of new loans that the bank can’t make.
Faulty government programs and doctored accounting rules have produced the fiasco before us: There are roughly 4 million homes that should be foreclosed on but they won’t be any time soon. This enormous can is continuing to get kicked down the road.
Economists are predicting a recovery. They say that our various programs are making an impact. In reality, all they’ve done is kick our can of reckoning a little further down the road.
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Following up with this story…I get a call from an agent I know who works with Wachovia REOs. Their asset manager (Wachovia’s are broken down regionally) is headed out of town.
Good time to take a vacation, they said.
Supposedly, by next Spring, they will be back up at peak REO levels.
I’ll believe it when I see it.
Welcome all of you from Patrick.net…Glad to have you on the site!
If you appreciate patrick.net and some of the other popular real estate blogs out there, then I think you will enjoy what we’re doing as well.
HousingStorm.com just recently launched and we’ll be bringing a bunch more writers on board on the coming weeks. Point is, check back in with us and watch us grow.
Take a minute to read “About HousingStorm” to get a better understanding of what we’re building.
Thank you all again for checking us out,
Greg
P.S. Any thoughts or feedback would be greatly appreciated!
just added you to my “favs” – found you through a link from Patrick.net. Love the real data. Will definitely be checking your site everyday.
BTW – the signs where there as early as 2002 – even to us normal folks who were just paying attention.
Yeah…I remember thinking in 2002 that things were pretty overheated. But it wasn’t until the August of 2005 that I first noticed signs that the bubble was bursting: investors in the central valley started getting cautious. It was pretty easy to call the top.
We’ll see if it’s as easy tall the bottom. FWIW, I’m predicting Spring 2014.
Hey Greg, nice article. I followed a link from patrick.net. Great site!
Peter Benson
Peter, small world!
That’s great you found us. If have any thoughts or feedback that would be much appreciated.
Talk with you soon,
-Greg
Good article. With the ever-increasing group forcing Banks to prove that they “have the note”, and thus are entitled to force the forclosure, I wonder if some of the Banks realize they DON’T have the note. I’m not really sure what happens to a note when it is combined with a bunch of others and mixed up into a CDO Jumbalaya soup and sold off in cupfulls. If anyone knows this please answer. Either way, you probably also saw the recent Kansas court decision regarding MERS not having legal standing to force forclosures. This may slow the banks down even if they weren’t trying to drag thier feet.
Thanks
Yeah…I read that story about Kansas and MERS. To be honest, I’m not sure what to make of it. If it were actually possible that 60 million homes could be free from the threat of foreclosure, that would be front page national news for weeks at a time.
Yet, the story got little play. I’m thinking that the story will fade.
BTW, Thanks for commenting Erik. Glad to have you here!
Check out Dr. Housing Bubble
(http://www.doctorhousingbubble.com/mortgage-electronic-registration-systems-mers-a-system-designed-to-create-the-mortgage-back-security-bubble/#comments
In the comment section “AnnS” has detailed explanations of the entire process. Long, but definitely worth reading.
Great article!
I live in MN (Non-Judicial) and wonder how I go about asking the servicing agency (towne Mort.) to “show me the note”? (Loan is FNMA) Seeing same results on loan mods. Delaying tactics, lost/resubmitted paperwork, so I stopped trying. Now bank with second mortgage is threatening foreclosure, as if they could actually do something before the primary processes.
Have you called them and asked?
Have not yet. Just started seeing articles and blogs indicating this is an option. Since original loan was sold (then refied) from original to FNMA I did not know this was an option until recently.
I, too and wondering if the banks actually have the mortgage notes in hand. If they were sold off in CDO’s, they could be in a warehouse in china for all we know. I will be querying my bank to send me a copy of the original note. Thanks for this article!!
Thank you! Glad to have you on our site.
thanks! I am always being asked “why” and now I can direct people to your article!
Good article!
You could take a ballpark figure of 1.5 million homes yet to foreclose, at $100,000 loss each, multiply to get a $150 billion dollar loss.
And calculate the same 1.5 million homes at $10,000 a year lost on mortgage payments and get a $15 billion dollar a year loss. Taking two, even three years to wait and see if prices go back up is cheaper than foreclosing all now–about a $100 billion dollars cheaper. I think it’s risky but the numbers make sense in the short term for banks to take this route.
why don’t the banks just go half-sies on the equity ?
eg – exchange half the debt for equity. that would give everyone involved skin in the game and could help stop – or at least slow down – this slow and inexorable march into bankruptcy and foreclosure.
at this rate, asset prices are headed to pre-1980 levels in a hurry
I heard of one Florida bank that was not foreclosing because the bank becomes liable for the property tax upon foreclosure. I don’t know if it is true, but it sounds reasonable.
It’s certainly true in Detroit and parts of Ohio. I remember reading news stories about people being upset that the banks refused to foreclose because the back property taxes were more than the house was worth. Then, the homeowners were still liable for the taxes.
That’s a bad situation.
most property taxes, if not paid in two consecutive years, result in a property tax sale, which, if not repaid in the next year, becomes a done deal.hmmmm
I live Lauderdale and know first hand of someone who had been in his house for 11 months(without paying the mortgage)before the bank finally evicted him.
I can’t imagine how bad the banks books will look when all of these properties are disclosed.
Got gold?
In my little neighborhood (50 houses or so) in Danville, CA, I know of 2 houses where payments haven’t been made for nearly 2 years.
Shadow Inventory is HUGE.
From what I’ve been told by asset managers at Wells and BofA, the accounting procedures require they not hold a non-performing asset (“foreclosed property”) longer than 3 months.
This may be due to GAAP or the tax issue mentioned above.
In any case, they want it gone as soon as it’s theirs.
Super post, Need to mark it on Digg
Thank you
Pett
Private homes foreclosed? Commercial real estate is set to blow and blow bigger than the housing market.
The federal reserve is refusing to disclose where the 11.8 trillion went in the bail outs.
The derivative debts are said to be over a quadrillion. China rightfully refuses to pay.
48 of the 50 states are bankrupt. Virtually every city and county across this nation are bankrupt. The FDIC is begging to borrow from bankrupt banks.
The dollar is going to blow Wiemar style probably as soon as November. When it goes, so will every other currency on this planet. China goes, Russia goes, the EU goes in a rapid chain reaction collapse that will stop all trade and bring about the death of millions.
Expect food shortages and outright famine within the USA itself. Nothing this big has ever happened in history. Obama shall be remembered by remaining survivors as a modern day Nero.
Real estate foreclosures are nothing but a single tree in the forest of economic calamity everybody is missing or pretending to ignore.
There is a solution: close the Federal reserve. Reinstate Glass/Stiegal. Let the speculators go bankrupt and throw them into prison. Reinstate the national bank; a bank for the people and by the people. Outlaw all speculation.
This is the only solution, if this is not done you will watch your family starve to death if bandits don’t get you first.
Please explain your comment… “Reinstate Glass.Stieger”… Thanks, and pardon my ignorance.
Stephen,
It appears that world plutocrats are on board with the notion of a gradual USD decline. They are likely to have their way. The US still has a lot of assets backing the USD, including the middle class which has more bleeding yet to do, and a lot of geopolitical influence to be traded for support of the dollar.
As for bandits and starvation, if anywhere there’s a solution to those problems, it’s here. Prepare accordingly, and overcome.
It’ll be interesting to see whether Japan’s electioneering promises of distance from Wall Street and partial eviction of US military will come to pass. I suspect China won’t want Japan be the first out the door, and that Kim might therefore be persuaded to lob another test missile over Japan. With heightened anxiety, politicos can backpedal and keep US ties in place.
Have bookmarked the site and will check in regularly.
I live in So. Oregon in a subdivision of 52 townhouse style homes that were being built in 2005, prices paid at the time for the first few sold were in the 205K range, but fewer than a dozen sold as the housing bubble burst. My house and the identical zero lot line place next door were REO, mine was for sale at 119K in April of ‘08. I thought great, the bubble burst and I can by for an 80 thousand plus discount. It was not quite done yet so I had them do several things to the place and then paid 129,900 with a 100% Rural Development loan.
Fast forward to June of this year, the unit next door was on the market for 129,900, then 119, 109, 99, 89,900, when a woman bought it as an investment – though the tax rolls show she paid 104,500. She rented to unbearable tenants, and I decided I had had enough, the “town” is a slum with little law enforcement and has become blighted. I have not made the July, August, or September payments.
In June my credit and income were good enough to buy a 2009 new BMW 328i, so I qualify for no modification no matter how underwater my mortgage is. Now, rates have dipped to the point where I would stay if I could refi at 4.99% (my note is at 6.5% with Chase, the biggest rip off in US banking today, and funded by Ginny Mae) but having missed those three payments precludes any new financing, and my credit is damaged, though I say again my mental hygiene is more important to me than my Beacon or FICO scores.
There is a house a few doors away here that was foreclosed upon, and the residents moved out of in August of 2008. Subsequent to confirmation that the owners actually left the place the bank stopped the foreclosure. When I go to the county assessors web page and look the house up it still shows the original family that lived there as owners, though they are more than a year gone from the place. This tells me that the bank was willing to foreclose up to the point of having the sheriff go to the house to evict the family, but it was a bluff to get them to leave while not making the bank liable for the property taxes and upkeep. I have tried to contact the original family to let them know, they could after all have been living rent free this whole last year, even rented the place out for income. But, at least they deserve to know what that dastardly bank is doing. Part of the reason I want to leave are the dozen or so unkempt properties that nobody takes care of. And all but 9 of the 52 properties are rented out to people who apparently feel nobody else in the world exists, and that rules are for idiots and suckers.
Now the rub, just since June when I decided to quit paying and rent again, rental prices here have absolutely skyrocketed, to the point where rent controls are being urgently discussed by the powers that be. It no longer makes financial sense for me to rent in the region as rent surpasses my mortgage obligation every month, yet in this neighborhood that has not happened. There are at least 10 vacant rental units. This has left me madder than hell as I worked out an agreement with Chase to resume paying, but now with damaged credit which will stay damaged for years. My only solution is for hyperinflation to give me positive equity at some point even if the buying power of that equity is not negative in real terms of purchasing power. Either that or I can just not pay till I am kicked out, then leave the region for a cheaper venue, or nation, which at this point I am ready to do.
This is called rational default by most bloggers and financial pundits. We are fast approaching some 33% of the under water mortgage market that is on the knife edge of that option as house prices no longer make sense to the owners. In my opinion 2014 might be an early estimate of hitting the bottom, prices could fall by half from where they are now and still be above the historic average in annual price gains over a 50 year period.
There are other reason why they can keep falling too, even with the wild rental price increases many markets like the one I live in still show rental to price multiples well above the traditional 100:1 having peaked a couple years ago at more than 300:1, that is the price of a month’s rent is one 300th the salable price of the house. If a house is worth 90,000 then the rent SHOULD be 900 a month. We reached a point where a 300,000 house was renting for about 850-900.
Another reason is that incomes simply cannot support the mortgage payments, if the average income is 42,000 per year then house payments (PITI) should not exceed 30%, or 12,600 per year, that is just about 1,000 per month, even in double income households you cannot get a house for that unless it is in my subdivision or substandard. It is even worse than this in major metro markets like CA and NY. Also, that 42,000 annual income is I believe badly inflated by averaging over the whole economy which has become skewed by rising income inequality, it only takes a few billionaire bankers to make incomes look a lot higher than they really are. And, in spite of the “tame” CPI, inflation is all around us. I can only provide anecdotal evidence for where I live, but I suspect others feel it as well, I live less comfortably now on 3,600 a month (tax exempt) than I did in 2006 on 2,750 a month (also exempt). Yet the combined inflation for the whole period is officially just about 4.5%.
What I see are imbalances and debt that are so vast and of a scale so inhuman that we cannot even comprehend them at this point. It cannot end well, and the powers that be are only playing for time now, one day soon “out of the blue” it will all come down and there will be either a horrific hyperinflation ala Zimbabwe in which debt can be extinguished via worthless federal reserve notes, or we will have a collapse and deflation that makes 1930 look tame. Third and least likely option is a sovereign default and introduction of a new regional Amero type currency. But do not rule that out, it might end up being the only option in a year or two.
“My only solution is for hyperinflation to give me positive equity at some point even if the buying power of that equity is not negative in real terms of purchasing power. Either that or I can just not pay till I am kicked out, then leave the region for a cheaper venue, or nation, which at this point I am ready to do.”
“Hoping” for hyperinflation is really about all that a lot of underwater homeowners can do…which would obviously be a horrible outcome.
You’ve hit the nail on the head in that there comes a point where the rational, responsible thing for many borrowers to do is walk away. This is something that economists will never be able to quantify until after the fact.
I suspect that once foreclosure activty begins to pick up again and prices clearly resume their fall, you will see a lot more borrowers give up and decide to walk away.
Another reason (that Marcus mentions) for non-foreclosure, is that once the bank owns the property, they become liable for the property – civil and criminal liability. If there are upkeep ordinances, if someone gets hurt on the property, or if it turns into a crack-house, the bank gets dragged into it. If the bank never takes possession, the homeowner of record is still liable whether they occupy the home or not.
Hi, I’m in San Diego, joining the fray here.
I’m an escaped Minnesotan here since 1984.
as a former general contractor/builder/remodeler and a broker/agent I have experienced many different levels of real estate, the players and participants, the joy rides/roller coaster effects and ‘the cycles’.
Someone said recently that housing values are actually positive and stable historically. What changed was ‘the bubble’.
When everybody gets a handle on greed and how it plays out in real estate everybody will be better off, imHo. We all pay for greed in one way or another.
Cork Horner
A couple of subleties which are not specifically mentioned in the article:
Although the change to mark-to-market accounting of financial assets has been delayed by FASB (with pressure from the U.S. Congress and bank lobbyists) if a mortgage owner (bank or investor) forecloses the process for repricing the asset begins. The loss on the asset would then reduce bank reserves and force the regulators to require the bank to add more reserves. This would not be a good thing for the bank, or for the U.S. Government (Also, think GSA insured loans).
Another sublety, as long as the bank allows the borrower in default to stay in the home the mortgage investor is not as greatly exposed to losses from theft, vandalism and gross depreciation of value due to non-maintenace of the property.
Also, by not foreclosing on borrowers in default the lender also avoids becoming the owner of the property and thus avoids property taxes, HOA Fees, and some of the newer municipality assessments being levied against foreclosed property [for instance mosquito abatement fees in some areas of California (Indio, Palm Springs, Mountain House, etc.)]
It’s logical, corrupt, but logical.