New Mortgage Disclosure Rules Will Delay Closings

The Housing and Economic Recovery Act amends the Truth In Lending Act and takes effect July 30th, 2009. Wells Fargo just issued a fact sheet. Here are the most important points:

1. The earliest any home purchase transaction can close is 7 business days from when the homebuyer is issued their initial mortgage disclosures from their lender.
2. Other than a credit report fee, no other upfront fees can be collected by the lender until the day after the homebuyer receives their disclosures. Effectively, this means that the appraisal will be delayed by 2-5 days.
3. The homebuyer must receive a copy of their appraisal a minimum of 3 days prior to close of escrow.
4. Any increase of more than 0.125% in the Annual Percentage Rate from the initial Truth In Lending Disclsoure requires a revised TIL Disclosure to be issued to the homebuyer at least 3 business days before closing.

Basically, more 30-day escrows are likely to turn into 35-day escrows. Buyers need to make sure they are protected if closing runs late. Sellers need to expect unexpected delays…especially if they are trying to time the sale of their old home with the purchase of a new one.

Condo Association Bankruptcies Begin

From the Daily Business Review $1 million debt sends condo association into Chapter 11

In a move an increasing number of condo associations are expected to follow, the Maison Grande in Miami Beach has filed for bankruptcy.

Facing almost $1 million in claims by unsecured creditors, a troublesome recreational lease, and at least 100 unit owners delinquent on payments of their fees, the association filed a Chapter 11 petition last month in U.S. Bankruptcy Court in Miami.

As one of the first condo association bankruptcies of the current economic crisis, “it’s definitely cutting edge,” said attorney Mark Schorr, a solo practitioner in Fort Lauderdale who represents the Maison Grande association.

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Kaye represents a Tamarac condo association that is considering bankruptcy. With half of its 280 unit owners delinquent on their maintenance fees, the association is in the red to the tune of $50,000 per month, he said.

Kaye also represents a Palm Beach County condo association that is likely to file for bankruptcy after losing a court case against a roofing contractor.

A judgment of $130,000 could grow to more than $300,000 after attorney fees and court costs are added, he said.

“They can’t afford that, and 20 percent [of 120 unit owners] already are delinquent in paying fees,” Kaye said.

These associations, which he declined to name — and many more — are likely to file for bankruptcy protection as they run out of funding options, he said.

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Meanwhile, unit owners in foreclosure have no incentive to pay their association fees, said Miami attorney Douglas Snyder, a solo practitioner who represents the 220-unit Greenwich condo in North Miami in its Chapter 11 bankruptcy filed in March.

Snyder said the association had been sued by service providers for non-payment of about $750,000. The court ordered the association to begin making payments “and it was bleeding them dry,” he said. “This way, they can handle everyone at the same time.”

About 20 percent of the unit owners are in foreclosure. Association president Lidia da Cunha did not reply to an e-mail seeking comment.

The financial crisis that is pushing condo associations toward bankruptcy is only going to worsen, said Martinez Molina.

The situation is rough the the HOAs, but the dire situation for the condo owners is only going to get worse. With 15% or more of the HOA dues delinquent, Fannie, Freddie, and FHA will not make loans for purchases in the complex. When future sales now need to be cash-only, low prices will plummet much-much lower.

Expect many condos to cut services, raise fees to existing payers, and for prices to plummet.

Foreclosure Moratoriums Helped 4%?

HousingWire reports Foreclosure Freeze Had Little Impact: Report

Widespread foreclosure freezes that began in late last year and ran through the first quarter of this year appear to have done little to change the outlook for troubled borrowers — and may even have made things worse, for everyone involved.

A report released recently by due diligence and surveillance specialist Clayton Holdings, Inc. highlights the early returns of various moratoria put into place by servicers ahead of the Obama administration’s Making Homes Affordable (MHA) modification and refinance programs. A number of the nation’s largest servicers had released statements earlier this year announcing their intent to suspend foreclosure sales until details of the program were released, generally until the end of March.

According to Clayton’s data, halting foreclosures did little to improve the outlook for most troubled borrowers: of the loans that the firm’s analysts estimated would have otherwise had foreclosure sales completed during the “freeze” period, 93% remained in foreclosure or were moved into REO status by April among those servicers that implemented a widespread moratorium on foreclosure activity. In comparison, among servicers that did not implement a large scale freeze on foreclosures, 89% of loans estimated to have progressed to foreclosure sale by the end of March either remained in foreclosure status or had been moved into REO.

…

The data seem to illustrate just how little freezing foreclosures really helped matters: Among servicers implementing a moratorium, just 7% of borrowers facing imminent foreclosure were “helped,” either in the form of repayment plans, modifications, reinstatements, or short sales. That number actually grew to 11% among servicers that did not implement a foreclosure freeze — a result that is clearly at odds with reports in the popular press, which have painted the freezes as a needed step to help troubled borrowers.

Servicing executives that HousingWire spoke with suggested that the real problem is negative equity, or borrowers who have seen the value of their homes drop precipitously in the most troubled housing markets. “Negative equity puts borrowers into a precarious situation,” said one servicing executive, who asked to remain anonymous. “Borrowers are over-leveraged, on homes, cars, and everything else, to begin with.”

And, of those few who were actually “helped", an alarmingly high percentage has ended up back in default. Depending on time frames and the pool of properties in the study, I’ve seen figures in the 60-75% range.

Required Reading: Wednesday, July 8th 2009

L.A. County's May default rate double last year – The Los Angeles Times

May's 9.5% delinquency rate for L.A. County was up from 5% of mortgages late by 90 days or more in May 2008. First American bases its foreclosure analyses on public records.

Credit card firms try end run around new federal rules – The Los Angeles Times

The law would restrict interest rate increases unless a credit card has a variable rate. So at least two major lenders are switching their cards with fixed rates to -- you guessed it -- variable rates.

"It's completely unfair," said Linda Sherry, a spokeswoman for Consumer Action. "It's an end run around the intent of the new law."

U.S. Housing Market Is Cursed by Brain Freeze: John F. Wasik – Bloomberg

Our loss-aversion fears are so powerful that they override our logic circuits. We tend to ignore economic reality because we are emotionally anchored to our homes and values based on boom-era prices. It’s like holding on to a favorite stock long after it has tanked.

Banks Reject California's IOUs – Minyanville, Andrew Jeffrey

Battle Lines Form Over "Son of Stimulus" – Mish

Tell Wells Fargo, Bank of America, JP Morgan, and Citigroup to Go to Hell - Mish

Every one of those blood sucking banks was bailed out by taxpayers (California taxpayers too) and now will not take an IOU from the State of California for the citizens of California. This is disgusting.

If you have an IOU that the big banks will not cash, I recommend closing your accounts and putting them someplace that will. Please tell Wells Fargo, Bank of America, JP Morgan, and Citigroup to go to hell.

Sale shows San Francisco property values in free fall – The San Francisco Business Times

A downtown San Francisco office building that sold for $400 a square foot in 2006 has traded for just $172 a square foot, a 57 percent decline that industry experts see as an important milestone in establishing new, recession-era values for financial district property.

PMI Expects Lower Housing Prices in 2011 – Housingwire

In California, Even the I.O.U’s Are Owed – The New York Times

LOS ANGELES — The only thing worse than being issued an i.o.u. rather than a check from the State of California may be not getting the i.o.u. at all — at least in time to meet the deadline of your bank.

But across California on Tuesday, many vendors who had been told they would receive the i.o.u.’s instead of actual money said they had not yet received them. And if they do not arrive soon, they may be hard to turn into cash.

Equity, Not Quality – A Re-Examination of the High-End

In the beginning that this was a “subprime” problem. Marginal buyers leveraged themselves into homes they couldn’t really afford, and then lost them as payment adjusted. These were the canaries in our very deep and complex mine of global finance.

Payment changes were highlighted early on as the prime culprit. Certainly, payment shock for the least-qualified played a role in getting us where we are today, but that role may be less then previously believed.

First of all, Government-induced low rates have eliminated (for now) the impact of mass payment changes. For many, payments have actually gone down.

Second, mass payment recasting (ex: a payment change for an option-arm loan) hasn’t really started yet. We’re another year or more away.

Economists assumed that homeowners would do everything that they could to keep their homes. Policy so far has been focused on two main points:

1. Keep rates low to help people refinance from adjustable to fixed mortgages, reduce payment-adjustment shock, and to encourage new buyers into the market.
2. Modify existing loans to help people afford to keep their homes, even if it meant deferring payments or extending their loan terms.

Current Policies Have Failed

Policymakers rely on recommendations from economists. Economists rely on models. Models, apparently, believed that real estate prices could go up indefinitely, at a faster pace than incomes. Neither the economists nor the policymakers had the common sense to ask “What if these models are wrong?”

Models cannot take into account geo-political conflict, currency collapse, Iceland or Latvia, Honduras. They can’t account for declining tax revenues or mass bankruptcies. They can’t account for changing social attitudes towards luxury goods and debt. And, they didn’t expect homeowners to actually want to walk away from their homes.

In the Wall Street Journal, Stan Liebowitz presents New Evidence on the Foreclosure Crisis - Zero money down, not subprime loans, led to the mortgage meltdown.

The analysis indicates that, by far, the most important factor related to foreclosures is the extent to which the homeowner now has or ever had positive equity in a home. The accompanying figure shows how important negative equity or a low Loan-To-Value ratio is in explaining foreclosures (homes in foreclosure during December of 2008 generally entered foreclosure in the second half of 2008). A simple statistic can help make the point: although only 12% of homes had negative equity, they comprised 47% of all foreclosures.

Further, because it is difficult to account for second mortgages in this data, my measurement of negative equity and its impact on foreclosures is probably too low, making my estimates conservative.

What about upward resets in mortgage interest rates? I found that interest rate resets did not measurably increase foreclosures until the reset was greater than four percentage points. Only 8% of foreclosures had an interest rate increase of that much. Thus the overall impact of upward interest rate resets is much smaller than the impact from equity.

To be sure, many other variables -- such as FICO scores (a measure of creditworthiness), income levels, unemployment rates and whether the house was purchased for speculation -- are related to foreclosures. But liar loans and loans with initial teaser rates had virtually no impact on foreclosures, in spite of the dubious nature of these financial instruments.

My thoughts: I would agree for reasons discussed above that these liar/teaser loans have had little impact. However, if interested rates were not artificially manipulated lower, their impact would be much greater. For some, temporarily-low rates may only serve to delay the eventual foreclosure.

Instead, the important factor is whether or not the homeowner currently has or ever had an important financial stake in the house. Yet merely because an individual has a home with negative equity does not imply that he or she cannot make mortgage payments so much as it implies that the borrower is more willing to walk away from the loan.

The difference in policy implications is enormous: A significant reduction in foreclosures will happen when and only when housing prices stop falling and unemployment stops rising (see chart nearby).

My thoughts: House prices will stop falling and unemployment will stop rising when the bulk of the foreclosures are behind us. If people feel that their homes are likely to appreciate in value, then they are more likely to stick it out.

Although the government is throwing money -- almost $2 trillion and counting -- at the mortgage markets with the intent of stabilizing house prices, its methods are poorly targeted. While Federal Reserve actions have succeeded in reducing mortgage interest rates, low interest rates induce refinancings more than they do home purchases.

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Other government policies are likely to be even less effective in reducing foreclosures. The Obama administration's "Making Homes Affordable" plan focuses on having the government help lower obligation ratios (the share of income devoted to house payments) down to 31% from levels somewhat above 38%. But my analysis finds that mortgages having such obligation ratios at closing did not later experience high foreclosure rates. This suggests that reducing these ratios is not likely to significantly improve the foreclosure problem.

Understanding the causes of the foreclosure explosion is required if we wish to avoid a replay of recent painful events. The suggestions being put forward by the administration and most media outlets -- more stringent regulation of subprime lenders -- would not have prevented the mortgage meltdown regardless of their merit otherwise.

My thoughts: Nothing would have prevented the housing bubble from bursting other than it not having been inflated in the first place.

Rather, stronger underwriting standards are needed -- especially a requirement for relatively high down payments. If substantial down payments had been required, the housing price bubble would certainly have been smaller, if it occurred at all, and the incidence of negative equity would have been much smaller even as home prices fell. A further beneficial regulation would be a strengthening, or at least clarifying at a national level, of the recourse that mortgage lenders have if a borrower defaults. Many defaults could be mitigated if homeowners with financial resources know they can't just walk away.

My thoughts: Clarity of the legal process is always good. But people will still walk away because it becomes the economically prudent thing to do.

On The Edge of a Cliff?

Much has been made of the disconnect between High-End and Low-End markets, with the low-end suffering the greater percentage drops so far. Now, there is much debate over the fate of the High-End.

The disconnect is real. Here is the East San Francisco Bay, Low-End areas are off 60-70%, while some High-End areas may only be 25-30% below their peak.

Over the last 18 months or so, sales velocity has shifted. Low-End areas are booming, while High-End areas are seeing very few transactions. Price follows volume…so, in the short term at least, we can see what communities are falling and which could be beginning to stabilize.

Here are two sample charts from July’s East Bay Housing Review.

If Stan Liebowitz is correct, then the classic mortgage reset charts that have been popular on this site and many others, carry less weight moving forward.

Negative equity will induce some High-End homeowners to walk away, pushing down prices and creating greater negative equity for even more borrowers. As it becomes more common, walking away will become more socially acceptable. If that happens, then…look out below.

Mass Principal Reductions

If one is going to attempt to “solve” this problem, then it is abundantly clear that The Powers That Be must come up with a plan to reduce the principal balances owed on homes in trouble. (Of course, then just about every homeowner would suddenly find themselves distressed and needing a reduction.)

The problem we have is defining the “problem.”

Falling house prices aren’t the problem, they are the solution.

Foreclosures aren’t the problem, they are the solution.

Bankruptcies aren’t the problem, they are the solution.

Excessive debt is the problem and the only solution is to destroy it.

If The Powers That Be feel the need to regulate this debt-destruction process to make it orderly and defined…to avoid the chaos of a global financial meltdown…then this is the next logical step for them to take.

Field Check Group Update

Mark Hanson discusses the disconnect between the high-end and low-end housing markets in 7-1 May CA Housing Update — Mid-to-High End Capitulate

…Here we sit again but this time with the mid-to-high end properties staring into the abyss. They (high end) 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.

Take a look at the high and low-end graphs from July’s Housing Review. High-end volume is way down. To this, Mark adds:

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.

I would add to this that there are certainly a large number of would-be buyers (and their agents) who do actually believe that the housing bottom is near. With stocks up, a stories of multiple offers on properties, and a stimulus package about to start stimulating, many are feeling optimistic.

However, with a huge backlog of foreclosures and rapidly-rising unemployment, this will likely prove to be a false-bottom. Fading optimism could lead to a bloody second half of 2009.

Required Reading: Monday, July 6th 2009

The Great American Bubble Machine – Rolling Stone, Matt Taibbi

Matt Taibbi on how Goldman Sachs has engineered every major market manipulation since the Great Depression

UBS: ‘The disaster in Spain will continue’ – Credit Writedowns

The (mythical?) housing wealth effect – VOX

Coffee 'may reverse Alzheimer's' – BBC News

Drinking five cups of coffee a day could reverse memory problems seen in Alzheimer's disease, US scientists say.

Ryanair to make passengers stand – The Telegraph

The low-cost airline would charge passengers less on "bar stools" with seat belts around their waists.

US lurching towards 'debt explosion' with long-term interest rates on course to double – The Telegraph

The US economy is lurching towards crisis with long-term interest rates on course to double, crippling the country’s ability to pay its debts and potentially plunging it into another recession, according to a study by the US’s own central bank.

California’s Nightmare Will Kill Obamanomics: Kevin Hassett – Bloomberg

The California morass has Democrats in Washington trembling. The reason is simple. If Obama’s health-care plan passes, then we may well end up paying for it with federal slips of paper worth less than California’s. Obama has bet everything on passing health care this year. The publicity surrounding the California debt fiasco almost assures his resounding defeat.

Another wave of foreclosures is poised to strike – The Los Angeles Times

"Absolutely," Chase Bank spokesman Tom Kelly said when asked about an impending surge in foreclosures. Since April 6, Chase has approved modifying 138,000 loans under Obama's program. But an undisclosed number of other Chase borrowers didn't meet modification eligibility, and many of those homeowners face possible foreclosure.

Separate from that group, Kelly said, Chase is proceeding to deal with an additional 80,000 borrowers in default whose foreclosure process had been voluntarily halted by the lender starting late last year.

Court Ruling Clears Path for G.M. to Restructure – The New York Times

Offices: Rising Vacancies, Falling Rents – Calculated Risk

Unemployment Rate and Part Time Employees – Calculated Risk

A Second Stimulus Plan? – Calculated Risk

High-rises on hold: What to do with empty lots? – The San Francisco Chronicle

Lobster Prices And Subprime Lending – Matrix

Basically, lobster prices have maintained a high price level for the past decade until the past year because a large portion of the catch was diverted to processing plants in Canada keeping supply of fresh lobsters restrained. These plants were mainly financed by Icelandic banks, who were ultimately driven under because of the subprime mortgage meltdown and now abundant production of lobsters are driving down the price for us.

Sound familiar?

The unemployment timebomb is quietly ticking – The Telegraph, Ambrose Evans-Pritchard

The Centre for Labour Market Studies (CLMS) in Boston says US unemployment is now 18.2pc, counting the old-fashioned way. The reason why this does not "feel" like the 1930s is that we tend to compress the chronology of the Depression. It takes time for people to deplete their savings and sink into destitution. Perhaps our greater cushion of wealth today will prevent another Grapes of Wrath, but 20m US homeowners are already in negative equity (zillow.com data). Evictions are running at a terrifying pace.

A Brand-New Arbitrage Market for California's IOUs – Minyanville, Scott Reeves

“If you are receiving a California IOU and need cash immediately, please contact me,” reads a posting on Craigslist. “I may be of assistance.”

Five Things: The Eventual Upside of Risk Aversion – Minyanville, Kevin Depew