Wednesday, June 9, 2010

RealtyTrac: Most Foreclosures Have Positive Equity

From HousingWire:

Of all of the foreclosures in the RealtyTrac online database, less than 50% have mortgages worth less than what is owed, said Rick Sharga, senior vice president at RealtyTrac, during a session at REO Expo, which concludes in Dallas Wednesday….

The overall unemployment rate dropped slightly to 9.7% in May, from 9.9% in April, mainly due to the labor force shrinking by 322,000, according to the US Department of Labor Bureau of Labor Statistics. This has caused foreclosures to increase in places previously thought safe from the crisis, including Provo, Utah and Portland, Ore….

The overall unemployment rate dropped slightly to 9.7% in May, from 9.9% in April, mainly due to the labor force shrinking by 322,000, according to the US Department of Labor Bureau of Labor Statistics. This has caused foreclosures to increase in places previously thought safe from the crisis, including Provo, Utah and Portland, Ore.

Yves here. Note that this may not mean what it seems to mean. The hidden assumption is that the houses being foreclosed upon are representative of the pool of hopeless delinquencies. But we may have selection bias. One possibility is that banks are moving faster to foreclosure in homes that have positive equity. That could be a function of bank reluctance to take further writedowns (which might call their marks on mortgage assets in question) plus the fact that the markets with the steepest real estate price declines (such as the most stresses areas of Florida, California, and Arizona) may also have the most clogged court and bank processing pipelines. From a recent article in the New York Times:

The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics….

More than 650,000 households had not paid in 18 months, LPS calculated earlier this year. With 19 percent of those homes, the lender had not even begun to take action to repossess the property — double the rate of a year earlier.

Yves again. There is another reason this pattern is not a positive development from a bank/investor perspective. Servicers advance interest payments and real estate taxes while a property is in default, and recoup it when the property is sold. So longer time to foreclosure means greater eventual losses. Moreover, as more homeowners are fighting foreclosures, it increases loss severities. For instance, one case I am familiar with will show at least a 400% loss severity.

Tom Adams contributed to this post.

Topics: Banking industry, Credit markets, Health care, Investment outlook

Email This Post Email This Post Posted by Yves Smith at 7:23 pm

27 Comments » Links to this post

27 Comments:

  • lily says:
    June 9, 2010 at 8:22 pm

    We have a crazy uncle in our family. He lives up in Oregon. He hasn’t made a mortgage payment in more than a two years. He thinks that the banksters have forgotten him. He is happy as a lark. He’s actually been able to save up quite a bit of cash. When the banksters finally do forclose and repossess his house, he’ll have considerable savings to put into another one. I had thought that this was a “one off” story. But now, with this post from Yves, I see that the statistics show that this scenario is perhaps rather common in America today? Now I’m intrigued: Does anyone else have a crazy uncle?

    • Vinny says:
      June 10, 2010 at 6:02 am

      Your uncle does not sound crazy to me. I know prople in Chicago who have not made a mortgage payment in 2 years or more.

      Let’ all give them a round of applause now… :)

      Vinny

    • monday1929 says:
      June 10, 2010 at 7:40 am

      I have an Aunt who is a bit strange.

  • Evil plan says:
    June 9, 2010 at 8:38 pm

    You know what would be great to have now?

    If those people who doesn’t pay, somehow can make their freebie houses “absolutely unattractive” to sell

    oh, fake report… haunted house, asbestos, infestation, murder … lol
    You’ll live in that house for free…FOREVER!

  • mort_fin says:
    June 9, 2010 at 8:54 pm

    has realty trac merged information on 1st and junior liens? Or is this calculation just telling us that the first lien is for less than the estimated house value?

    The other form of selection bias is the noise in the house value estimator. Consider 2 $99,999 mortgages. If the estimator says the houses are each worth $100,000, the one with a positive error (the house is really only worth $90,000) is much more likely to be in the foreclosure set than is the house with the negative error (the house is really worth $110,000). Given that most house price estimates have a standard error of at least +- 10%, this form of selection bias is probably pretty important. If the case that is actually underwater is in foreclosure, the “estimate” would say that of 2 houses with equity, 50% are in foreclosure, but the 50% figure would come from noise in the house price estimator, not from weird borrower behavior.

  • JPM says:
    June 9, 2010 at 9:36 pm

    BTW: I have aunts and uncles who told me this exact behavior occurred during the Great Depression. Banks would foreclose on anything that had equity and ask for pay-what-you-can to the hopeless cases.

  • giggity says:
    June 9, 2010 at 11:02 pm

    This is a ridiculous keyboard puke of non-sensical, wide-reaching disinfo claptrap.

    There’s no Jewish conspiracy, despite there being a politically overpowered Israel. Nice “rah, rah” for Nazis at the end there.

    To me, this is probably a DailyKossack or some other pseudo-liberal, acting like a nutty conspiracy-theory racist, to discredit and muddle.

    Really though, this whole posted is a muddled mess of words and vague references.

    • Vinny says:
      June 10, 2010 at 6:10 am

      Wow! Such an incoherent comment. Would you kindly lay off the booze, and when you sober up repost your thoughts… In English, please…LOL

      Vinny

      • giggity says:
        June 10, 2010 at 7:49 am

        I was responding to a neo-nazi post above, which it looks like Yves removed. So now I look incoherent :)

  • Charlie Brigante says:
    June 9, 2010 at 11:18 pm

    400% loss severity? How is that possible? A complete loss plus treble damages for fraud or other bad behavior by the note holder?

    • Yves Smith says:
      June 10, 2010 at 12:05 am

      Mind you, that’s if they SETTLE, and now that I put it together, that’s light.

      They foreclosed (there was a hearing, a Legal Aid type represented the owner). There is a limited time frame in which to sue for wrongful foreclosure. The Legal Aid guy ran across an attorney who had been pursuing an angle that Legal Aid was not aware of. So they sue for wrongful foreclosure (mind you, that means the owner’s side has the burden of proof).

      Hearings were roughly two days. The owner’s side brought in two expert witnesses, one of whom was particularly devastating. The bank side’s only expert was from a sub servicer, he was proven to have perjured himself on several issues. Another judge has subsequently pulled one of the owner’s attorneys aside, it appears that many of the judges in this courthouse are aware of this case and the signals are strong that they are in agreement with the theory used by the lawyers representing the owners.

      Legal costs for the bank/servicer side is already 3x the value of the mortgage.

      So the math of settling is:

      1. 3x value of mortgage in legal fees plus

      2. Very deep mod of mortgage plus

      3. Reimbursement of costs of owner’s side (you can guess what those are).

      Now it is not clear how those costs would be apportioned among the attorney for the bank, the servicer, the trustee, and the trust (investors). Everyone is presumably going to try to dump it on the trust (the investors).

      If they don’t settle and the judge voids the foreclosure, the owner gets the house free and clear and his attorneys can sue for wrongful foreclosure. Would be an pretty open and shut case. That state automatically trebles damages awarded by a jury. And the precedent (the issue on which the judge will rule) would be very damaging.

      • attempter says:
        June 10, 2010 at 4:02 am

        Your first reference to the “owner” momentarily confused me, since it made me think, “wouldn’t the burden of proof in this case be on the debtor, and not the bank?” Then I realized by “owner” you meant the debtor.

        Since we’ve previously discussed the propriety of using loaded terminology, may I propose that the way we use the term “ownership” in this context abets the enemy?

        It’s the ideologues of the “ownership society” who want the debtor to see himself as the owner and not the bank. They want him to identify his rat race slaving not as “paying off my debt” but as “accumulating equity”, or even just flat out that “I’m an owner, damn it, not some filthy worker, so I should identify with the rich!”

  • Lisbeth Salander says:
    June 9, 2010 at 11:30 pm

    I am the crazy aunt in my family. I am going to let the insurance lapse on my house, burn it down, buy an Airstream trailer and travel the country stalking and shooting certain bank CEOs and hedge fund managers.

    Nominations for my hit list cheerfully accepted and given due consideration.

  • Bill says:
    June 10, 2010 at 1:34 am

    I find it amusing that the banks are foreclosing faster on homes above water . Those with equity built . Attacking now, those who were responsible but have fallen on hard times. Typical . A pox on the banking industry . And a curse on the TBTF banks that aren’t banks cept for the Feds sprinkling of pixie dust . Damn crooks all !

  • Scott says:
    June 10, 2010 at 1:39 am

    Hi Yves:

    I think “selection bias” here is gratuituous. It insinuates a behavioral action that is not necessarily rational. The recent trend in behaviorial finance supports that proposition, at least at this level. I prefer “cherry picking” for what you say is “selection bias”. That is a rational decision and if that is “selection bias”, then “adverse selection” and “moral hazard” are just “overconfidence bias” in different forms.

    I still may be a complete fool and may have idiot bias if I’m wrong. If you were commenting on the commenters then maybe they selected choice stats, but that is not clear from one post. Just some thought.

  • Moopheus says:
    June 10, 2010 at 7:37 am

    Not long ago I was looking at a paper from the Boston Fed that said that foreclosure with positive equity was impossible. It actually used that word: impossible. I do not think it means what they think it means.

  • really says:
    June 10, 2010 at 8:51 am

    The people who do this are bums. At the end of the day it will cost taxpayers through Fannie and Freddie, who are behind 95%+ of new mortgages today. And, this isn’t even counting the problem-riddled HFA. Also, I pity the people who live near these bums, as it eventually drives down values in even very good neighborhoods. Think about it, these people could be sending their kids to schools in these neighborhoods and not be paying a dime in taxes. If these people lost their livelihood I have some sympathy, but if they overleveraged they were just stupid (even if a bank was equally stupid to give them a loan). These banks that did these loans could have and may go out of business, but these problems these bums created will remain with good tax paying citizens. If you want to see if your neighborhood’s infected, take a free week on realtytrac. I did. It will shock you.

    • 4horsemen says:
      June 10, 2010 at 11:33 am

      @really

      Beautiful. Thank you. It is about time someone mentioned the elephant in the room – that is, the OTHER cause of the whole problem: greedy people biting off more than they could chew!

      Why should they get rewarded with free living at OUR expense?

  • Armand G Eddon says:
    June 10, 2010 at 9:47 am

    I am no friend of the banksters whatsoever, yet cannot fathom the degree to which the general commentary ignores the role of borrower greed and irresponsibility. Many, many knowing people paid way too much and were giddy to do so, then as soon as possible financed even more ‘equity extractions’. This is where the true moral hazard lies … Armand G Eddon

    • 4horsemen says:
      June 10, 2010 at 11:39 am

      Absolutely agree.

      I hope these people get theirs when the collectors come calling. They weren’t too smart when it came to overextending themselves, so I doubt they are smart enough to avoid the MANY angles that banks/collectors have to recouping losses.

      Right now, they are waiting in the weeds until these delinquents build up some cash. Then, they’ll come knocking.

  • Mark says:
    June 10, 2010 at 3:05 pm

    I have a crazy uncle too. Apart from being under on his home his issue is that he got divorced, had his salary cut, and took in a family member that lost their job. His goal is to stay in the home (kids/schools), but he couldn’t get the banks to talk to him until he stopped paying the mortgage.

    I understand what “really”, “4horseman”, and “Armand” are saying, but personal responsibility only goes so far in a system where the banks get bailed out, and can dump their losses into an accounting cesspool of made up numbers made available only to Wall Street (http://markmartinezshow.blogspot.com/2009/12/wheres-our-financial-toilet.html). The point is, we shouldn’t be quick to blame individuals for gaming a system that provides protection and legal favors for the banks, but no longer promotes the kind of market integrity that rewards hard work and other activities that make market capitalism work. Record profits and record bonuses for Wall Street while Main Street loses jobs, their homes, and sense of dignity is a slap in the face to all Americans. A long history of favorable legsilation, bailouts, subsidies, write-offs, etc. have slowly worked to undermine the integrity of the market, while making a cruel joke of personal responsibility.

    The moral justification of capitalism is slowly crumbling. We shouldn’t be surprised – or point fingers – when Main Street starts following Wall Street’s lead. In fact, as a recent post here suggests (http://www.nakedcapitalism.com/2010/06/guest-post-default-please.html) strategic defaults might be a good thing in the long run, for all of us.

    - Mark

  • Art Vandeley says:
    June 10, 2010 at 6:19 pm

    @ Armand, Really, and 4Horsemen – Most of the borrowers didn’t set out back in 2004-2007, when they bought or refinanced their home at an inflated price, to pay on-time for 3 years, then purposely default, living rent-free for 2 years or more. They all expected the best and couldn’t fathom a 40-400% drop in home prices. Nor did they expect to lose their jobs like they did. They didn’t have the luxury of Nassim Taleb’s Monte Carlo projections to hedge against the inevitable housing crash.

    I’ve liquidated hundreds of hyper-defaulted mortgages the last 3 years. 99% of BWR’s experienced death, divorce, disability, drugs, job losses, sick children, etc. They’re just average people with very little financial sophistication, who now find themselves broke and scared of the inevitable loss of their home.

    The only borrower abusing the system I had was a Wall Street banker who was pulling all kinds of shenanigans to delay the foreclosure on a vacant condo in Miami that was 18 months past due.

    Before condemning the “bums,” look to the judicial foreclosure states like New York & New Jersey, where it can take a lender up to 20 months to get a FC sale date. And on the sale date, a borrower can file CH 13, get kicked out of BK four or five more times, extending the eventual FC sale another 3+ years.

    Trust me, most all BWR’s just want life to be back to normal with a good job to pay for housing, food, kids activities, retirement savings, etc. The bums are writing the laws, not those living by them.

  • JC says:
    June 11, 2010 at 8:23 am

    Yves says “Note that this may not mean what it seems to mean. The hidden assumption is that the houses being foreclosed upon are representative of the pool of hopeless delinquencies. But we may have selection bias. One possibility is that banks are moving faster to foreclosure in homes that have positive equity.”

    Interestingly, I have a friend in Daytona, underwater, who has not paid his mortgage in about 2 years.

    My brother passed away last year in Boca Raton, two years left on his 30 year mortgage. Due to a little confusion as to who was taking care of the payments during the dissolution of the estate, we got two months behind with his mortgage and the same bank as above put us in foreclosure immediately (we successfully fought them off).

    Clearly they saw positive equity and swooped in like the vultures they are.

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    June 21, 2010 at 7:32 am

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