In short sale negotiations, we often run into a very difficult situation when there is a 1st and 2nd lienholder on a property: The 1st agrees to provide a small sum to the 2nd from the proceeds of the short sale, but the 2nd tells us that they will not agree to release the lien unless they get thousands more. The 1st refuses to provide any additional funds and tells us that they don't care where the money comes from for the 2nd, but it isn't coming from them. The seller is broke, the buyer wants a bargain, and consequently the property cannot be sold without the 2nd getting more funds. If the purchase price increases, the funds to the 1st increase, but the amount for the 2nd stays the same. No deal = Foreclosure.
These funds have to come from somewhere, and the 2 lenders are asking us to work within some very challenging and grey areas. We work for the seller and we need to get the home sold, so this requires creative solutions and, very often, financial sacrifices on our part to get it closed. If only the lenders could be cooperative and honest with each other to get these off their books.
Thursday, June 25, 2009
Tuesday, June 23, 2009
The Mortgage Industry's 'Shadow Inventory
The Mortgage Industry's 'Shadow Inventory'
Due to our extensive experience with handling short sales, we encounter a wide variety of interesting situations involving lenders and their distressed properties. Some are surprising in a good way, but others are just surprising. Especially in the $500k+ end of the market, we have recently seen some unique situations that beg the question: What are the lenders up to?
A client for whom we had listed a short sale called us a week or so before his auction date saying that he no longer wanted to wait for the sale to go through and that he wanted the bank to take the home back and file bankruptcy. Complying with his wishes, we informed the prospective buyers that this sale was not going to go through and that we would soon cancel the listing. Through no action of ours, a curious thing happened: The bank did not foreclose, they postponed the date 30 days. Normally our sellers want us to postpone their auctions so that we can continue negotiating the short sale, but this was a unique situation. He was upset at us, thinking that we had done the postponing, but we let him know that this was done directly by the lender. What's their motive here?
Some of our clients have not made mortgage payments in a year, two years even. No auction date, no foreclosure. To foreclose or not to foreclose is usually a question based in math for the lenders when considering a short sale. They look at what is the most cost effective action to take that helps their bottom line. But to delay foreclosure, or not even start the process for certain higher end properties seems to reveal one consistency: Just because the lender forecloses doesn't mean that getting it off their books is going to be inevitable or timely. Few homes are bought at auction, so most go back to being bank owned. And they may continue to own it for a while...
The 'Shadow Inventory' is a nice way of describing the homes that the banks take back but have not listed for sale. The numbers are staggering, with RealtyTrac estimating it at over 600,000 homes nationwide. Clearly, if they listed them all at once, inventory would skyrocket and prices would spiral down. On the other hand, not listing them temporarily and artificially inflates prices, which is manipulating the market.
So perhaps the lenders are onto something. Don't foreclose on valuable homes and at the same time, drag your feet when considering short sales. Anyone that's attempted to negotiate a short sale or loan modification knows that the red tape and time line are enough to make you scream. If the big picture for them is really to let delinquent homeowners stay in these expensive homes, waiting for the inventory to decrease and prices to rebound, they must have a math equation at the heart of it. Perhaps that's because they are collectively controlling the market's 'Shadow' and can imagine and create the future by doing so.
Below I have included the article from the San Francisco Chronicle.
The San Francisco Chronicle:
Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. And foreclosures, which banks unload at fire-sale prices, are a major factor driving home values down.
“We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market,” said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. “California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You’d have further depreciation and carnage.”
In a recent study, RealtyTrac compared its database of bank-repossessed homes to MLS listings of for-sale homes in four states, including California. It found a significant disparity - only 30 percent of the foreclosures were listed for sale in the Multiple Listing Service. The remainder is known in the industry as “shadow inventory.”
The number of foreclosures is not going to decrease any time soon. Sean O’Toole, Founder and CEO of ForeclosureRadar.com, told me that out of the 9 million mortgages in California, 2 to 3 million are upside down, which means their houses are worth less than what they owe on the bank. On top of that, anywhere from 700,000 to 900,000 households have stopped making payments and somewhere around 250,000 are scheduled to be foreclosed.
This adds up to a staggering number: a total of 3 to 5 million homes, one quarter of the 12 million households in California, are going to flood the market very soon. Nationwide, there is a two-year supply of unsold homes, twice what official statistics estimate.
To put it simply: banks are limiting supply in order to keep inflating the bubble. Keeping properties off the market makes sense for two reasons: it allows banks to engage in another round of brazen ripoffs by selling at least some of their properties at artificially high prices to a new wave of sucker investors (many of which are first-time home buyers). But more importantly, it allows the banks to avoid recording a loss on their balance sheets, making them look more profitable then they really are
It looks like the banks are all in on this racket together. Earlier this year, the industry had accounting rules changed to make this kind of market manipulation possible (meaning, profitable.) That’s what those new “mark-to-model” accounting rules back in April were all about. Instead of having the market determine prices, the changes allowed banks to value their assets based on a future projected worth to be determined by the banks themselves.
The change was pushed through with an aggressive lobbying campaign by the financial industry. For a measly $30 million in lobby fees, banks inflated their worth by tens of billions of dollars, instantly. Wells Fargo said the change boosted its capital by $4.4 billion in the fist quarter. In the second quarter, it is expected to increase banks’ earnings by an average of 7%.
It might be legal now, but it’s still fraud and flagrant market manipulation.
Here’s an account by the WSJ of how it went down:
The rules had required banks, securities firms and insurers to use market prices to help assign values to mortgage securities and other assets that don’t trade on exchanges — to “mark to market.” But when markets went haywire last fall, financial firms complained that the rules forced them to slash the value of many assets based on fire-sale prices. That contributed to big losses that depleted their capital and left several of the nation’s largest firms on the brink of failure.
Earlier this year, financial-services organizations put their lobbyists on the case. Thirty-one financial firms and trade groups formed a coalition and spent $27.6 million in the first quarter lobbying Washington about the rule and other issues, according to a Wall Street Journal analysis of public filings. They also directed campaign contributions totaling $286,000 to legislators on a key committee, many of whom pushed for the rule change, the filings indicate.
Rep. Paul Kanjorski, a Pennsylvania Democrat who heads the House Financial Services subcommittee that pressed for the accounting change, received $18,500 from coalition members in the first quarter, the second-highest total among committee members, according to Federal Election Commission records. Over the past two years, Mr. Kanjorski received $704,000 in contributions from banking and insurance firms, the third-highest total among members of Congress, according to the FEC and the Center for Responsive Politics.
The one obvious connection that is not being made is that this change in accounting, linked up with the shadow real estate inventory, is the shady base supporting our entire economy. Without the new rules, banks wouldn’t be able to pad their books in order to appear profitable. And without fudging the numbers, banks would never pass Geithner’s “stress test” or ever hope to to appear even slightly solvent.
It’s a twisted sort of logic, but it’s legal. It’s also very frightening. To think that all these empty homes I see around me are what’s keeping the US economy from total meltdown… If they had For Sale signs on them, the economy would tank even further. For now, these zombie homes don’t officially exist.
Ain’t the free market great?
Due to our extensive experience with handling short sales, we encounter a wide variety of interesting situations involving lenders and their distressed properties. Some are surprising in a good way, but others are just surprising. Especially in the $500k+ end of the market, we have recently seen some unique situations that beg the question: What are the lenders up to?
A client for whom we had listed a short sale called us a week or so before his auction date saying that he no longer wanted to wait for the sale to go through and that he wanted the bank to take the home back and file bankruptcy. Complying with his wishes, we informed the prospective buyers that this sale was not going to go through and that we would soon cancel the listing. Through no action of ours, a curious thing happened: The bank did not foreclose, they postponed the date 30 days. Normally our sellers want us to postpone their auctions so that we can continue negotiating the short sale, but this was a unique situation. He was upset at us, thinking that we had done the postponing, but we let him know that this was done directly by the lender. What's their motive here?
Some of our clients have not made mortgage payments in a year, two years even. No auction date, no foreclosure. To foreclose or not to foreclose is usually a question based in math for the lenders when considering a short sale. They look at what is the most cost effective action to take that helps their bottom line. But to delay foreclosure, or not even start the process for certain higher end properties seems to reveal one consistency: Just because the lender forecloses doesn't mean that getting it off their books is going to be inevitable or timely. Few homes are bought at auction, so most go back to being bank owned. And they may continue to own it for a while...
The 'Shadow Inventory' is a nice way of describing the homes that the banks take back but have not listed for sale. The numbers are staggering, with RealtyTrac estimating it at over 600,000 homes nationwide. Clearly, if they listed them all at once, inventory would skyrocket and prices would spiral down. On the other hand, not listing them temporarily and artificially inflates prices, which is manipulating the market.
So perhaps the lenders are onto something. Don't foreclose on valuable homes and at the same time, drag your feet when considering short sales. Anyone that's attempted to negotiate a short sale or loan modification knows that the red tape and time line are enough to make you scream. If the big picture for them is really to let delinquent homeowners stay in these expensive homes, waiting for the inventory to decrease and prices to rebound, they must have a math equation at the heart of it. Perhaps that's because they are collectively controlling the market's 'Shadow' and can imagine and create the future by doing so.
Below I have included the article from the San Francisco Chronicle.
The San Francisco Chronicle:
Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. And foreclosures, which banks unload at fire-sale prices, are a major factor driving home values down.
“We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market,” said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. “California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You’d have further depreciation and carnage.”
In a recent study, RealtyTrac compared its database of bank-repossessed homes to MLS listings of for-sale homes in four states, including California. It found a significant disparity - only 30 percent of the foreclosures were listed for sale in the Multiple Listing Service. The remainder is known in the industry as “shadow inventory.”
The number of foreclosures is not going to decrease any time soon. Sean O’Toole, Founder and CEO of ForeclosureRadar.com, told me that out of the 9 million mortgages in California, 2 to 3 million are upside down, which means their houses are worth less than what they owe on the bank. On top of that, anywhere from 700,000 to 900,000 households have stopped making payments and somewhere around 250,000 are scheduled to be foreclosed.
This adds up to a staggering number: a total of 3 to 5 million homes, one quarter of the 12 million households in California, are going to flood the market very soon. Nationwide, there is a two-year supply of unsold homes, twice what official statistics estimate.
To put it simply: banks are limiting supply in order to keep inflating the bubble. Keeping properties off the market makes sense for two reasons: it allows banks to engage in another round of brazen ripoffs by selling at least some of their properties at artificially high prices to a new wave of sucker investors (many of which are first-time home buyers). But more importantly, it allows the banks to avoid recording a loss on their balance sheets, making them look more profitable then they really are
It looks like the banks are all in on this racket together. Earlier this year, the industry had accounting rules changed to make this kind of market manipulation possible (meaning, profitable.) That’s what those new “mark-to-model” accounting rules back in April were all about. Instead of having the market determine prices, the changes allowed banks to value their assets based on a future projected worth to be determined by the banks themselves.
The change was pushed through with an aggressive lobbying campaign by the financial industry. For a measly $30 million in lobby fees, banks inflated their worth by tens of billions of dollars, instantly. Wells Fargo said the change boosted its capital by $4.4 billion in the fist quarter. In the second quarter, it is expected to increase banks’ earnings by an average of 7%.
It might be legal now, but it’s still fraud and flagrant market manipulation.
Here’s an account by the WSJ of how it went down:
The rules had required banks, securities firms and insurers to use market prices to help assign values to mortgage securities and other assets that don’t trade on exchanges — to “mark to market.” But when markets went haywire last fall, financial firms complained that the rules forced them to slash the value of many assets based on fire-sale prices. That contributed to big losses that depleted their capital and left several of the nation’s largest firms on the brink of failure.
Earlier this year, financial-services organizations put their lobbyists on the case. Thirty-one financial firms and trade groups formed a coalition and spent $27.6 million in the first quarter lobbying Washington about the rule and other issues, according to a Wall Street Journal analysis of public filings. They also directed campaign contributions totaling $286,000 to legislators on a key committee, many of whom pushed for the rule change, the filings indicate.
Rep. Paul Kanjorski, a Pennsylvania Democrat who heads the House Financial Services subcommittee that pressed for the accounting change, received $18,500 from coalition members in the first quarter, the second-highest total among committee members, according to Federal Election Commission records. Over the past two years, Mr. Kanjorski received $704,000 in contributions from banking and insurance firms, the third-highest total among members of Congress, according to the FEC and the Center for Responsive Politics.
The one obvious connection that is not being made is that this change in accounting, linked up with the shadow real estate inventory, is the shady base supporting our entire economy. Without the new rules, banks wouldn’t be able to pad their books in order to appear profitable. And without fudging the numbers, banks would never pass Geithner’s “stress test” or ever hope to to appear even slightly solvent.
It’s a twisted sort of logic, but it’s legal. It’s also very frightening. To think that all these empty homes I see around me are what’s keeping the US economy from total meltdown… If they had For Sale signs on them, the economy would tank even further. For now, these zombie homes don’t officially exist.
Ain’t the free market great?
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