Hip Hip Hooray!

Bank of America today announced its decision to agree to permit principal forgiveness for certain Countrywide loans which are severely underwater.  This decision will affect some 45,000 borrowers who have “sub-prime and pay-option” loans.

This is fantastic news for those who are affected, as negative equity or being under-water, is one of the biggest reasons why some borrowers face foreclosure.  Of course, the fact that some of these borrowers are voluntarily choosing foreclosure and walking away probably has something to do with BofA’s announcement today as well.

Countrywide issued a lot of sub-prime and  option ARM products to consumers in California, could it be that they are acknowledging they were questionable products?

Whatever the reason, this is good news for all distressed property owners as this may be the first step and other lenders may follow Bank of America’s steps.

Are we out of it yet?  Of course not. Have we by-passed the worst of it?  Probably.

However, as long as Silicon Valley’s unemployment rate remains above 11% and the dreaded shadow inventory along with the toxic option ARM fiasco about to recast in the coming couple of years, things will not be back to normal and we will not be completely out of the woods for a few more years until the market fully corrects itself by ridding itself of the excess capacity of distressed properties.

But, I don’t want to imply that there is only gloom in the horizon.  According to newly released sales data from CAR (California Association of Realtors), we here in Santa Clara County did fairly well in the past 12 months: the median price of our homes increased by 17%! I am quite certain that increase was largely fueled by the First Time Home Buyer Tax Credit Incentive program.

We went from $515,000 in November 2008 to $605,000 in November 2009. (Chart A)  That is certainly a step in the right direction towards price stabilization on the one hand, but a bit disconcerting because the affordability index has now fallen for two consecutive quarters and is now on a declining slope.   (Chart B)

I personally don’t believe it is in our best interest to get back to the peak prices of April 2007 when the median home price reached $868,410 (Chart C) and only about 25% of the first time homebuyers in California could afford to buy a median priced home (keep in mind that the median price in California is significantly less than Santa Clara County).  As the data in Chart C demonstrates, the median home price is inversely proportionate to the Affordability Index.   It is better for us to have lower prices so more people can afford to become home owners.  But regardless of what I think, the market will dictate prices.   We will see next year how the market reacts to the changing economic factors.

Here is one of my favorite bloggers who writes often about a topic very close to my heart: the option ARM fiasco brewing in California. He has access to and extrapolates some amazing data.  I wish I had access to such data.   In this particular post, he lays out simply why option ARMs will be the next big wave of foreclosure headache coming down the road.  And the incredible fact is that according to him, 78% of these time bombs have yet to recast. On top of that, the bulk of these (58%) problem loans originated in California.   

Talk about a problem coming down  the  road…..

Read this post.

CAR’s data regarding activities in Sub-Prime and Alt-A loans for 2009 revealed some disturbing trends in the coming months.

Look at the numbers of Alt-A loans out in the market: 632,215 or 5% of all loans in California. And of those, 70% are ARMs or adjustable rate mortgages – meaning their teaser rates will reset some time in the future.   The bulk of the Sub prime mess has already reset and in the coming future only a small number is scheduled to reset in the next 24 months (15.6%).  But look at Alt-A by comparison.  Only 46.9% have already reset and look at the bomb that is ready to reset within the next 24 months as of May 2009!  40.4%! Unfortunately, there were no dollar figures associated with this graph. And buried in that number is the truly toxic Option ARM which is almost a guaranteed foreclosure simply waiting to happen. If people think the sub-prime mess is over, they are probably correct.  But look at the beast that  is coming down the road; we may only be half done.

From Jeff Geoghan MBA – Lancaster PA Real Estate Expert (The Jeff Geoghan Realty Group, Coldwell Banker Lancaster PA):

This is one of those posts where I wish I didn’t have to write it, but felt it was so important to my readers that I would be remiss not to at least talk about it.

Everyone out there probably knows somebody who is behind on their mortgage payments, looking for alternatives and likely also just finding out that their home’s value has dipped below what their loan amount is.  I know some within my own personal circles.  It’s a tough situation for me to advise them as a professional because it’s such a personal challenge to their pride and self-worth, not to mention their plans and dreams for the family. The question we’re asking is “when is this going to stop and where are we heading?”

I’m going to put up a few graphs that show the trends nationally with regards to mortgage delinquincies:

This chart is by quarter – Single-family mortgages set a new record delinquency rate in the second quarter of 2009, according to a quarterly survey by the Mortgage Bankers Association. Those of us in the real estate business see the foreclosure process (just visit the local Sheriff Sale docket to see the current numbers) but the looming delinqency-to-foreclosure issue is far, far larger.

The Wall Street Journal on 8/3/09 reported the following quote: “While subprime mortgages sparked the first round of housing problems two years ago, now “troubles are lurking further up the food chain,” says Joshua Shapiro, chief U.S. economist at MFR Inc. White-collar job losses have accelerated while more adjustable-rate loans to prime borrowers are resetting to higher payments. ‘You put all that together, it leads me to believe that the next leg down on home prices is going to come from the top,’ he says.”

The first objection someone may have would be to say “yes, but historically those who are delinqent usually get their act together and come current on the mortgage after a while”.  That WAS true, but not anymore!  We call that the “Cure Rate”, that is the rate of delinquencies that go back to current.  The Wall Street Journal reported on 8/24/09 about a Fitch analysis that found that the Cure Rate from 2000-2006 was 45% (which means about half of people fix their delinquency).  However, as of July 2009 the rate had dropped to just 6.6%!  That means that over 90% of delinquent customers are going to foreclosure.  Take a look again at the above chart…

The next thing someone will say is “well, that’s the ‘sand states’ and not my area”.  Here’s the chart for all 50 states showing the same breakdown of delinquencies and foreclosures.  Guess what – most states have a significant problem, especially compared to historical figures.

Now the next thing someone may say is “aren’t those loans going to get ‘fixed’ by a loan modification?” I know several people right now who are applying for a Lancaster County loan modification but are waiting and waiting.  I hope it works out for them…

In reality, loan modifications are hardly making a dent. To me, that’s a burning question.  Why arent banks being more aggressive in giving customers the option to extend their loan and/or reset to a lower rate?  Why are they being SO difficult? The people I know don’t want to be foreclosed.  They CAN make payments.  They just need the terms redrawn to allow them to catch & keep up.  Loan modifications are not helping us get this crisis under control.

What are the causes of all these delinquencies?  Here’s a chart that is enlightening:

We hear a lot about adjustable rate mortgages being the culprit, but the reality is that it’s the loss of jobs and the tanking real estate market that’s the perfect storm.  See my previous post on unemployment in the nation, the state and Lancaster County.

Keep in mind, this post is not intended to give us “good news”.  You may be experiencing good things in your market and that’s great.  My intent is to get us thinking about the challenges that aren’t going away and how we’re going to address them as homeowners, agents and professionals.  I’d love to hear your ideas!

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I have been of the opinion, that our next wave of problem mortgages will be the option ARMs.  Here is a situation where many homeowners took a chance at a gamble and failed; and the bill is coming due very soon with most being unable to meet their obligations.  If this is not a recipe for disaster, I don’t know what is……..  None of these homeowners will be eligible to re-finance these loans, so their future is laid out for them already.

Finally some hard data for the Bay Area has been revealed.  Between 47,000-57,000 loans with a value of $28 – $31 Billion in option ARMs are located here in the Bay Area.  The bulk of these are set to re-cast between 2010 – 2012.   Here are some additional details.

Please read this Article

As a San Jose Short Sale Agent, I am a firm believer that the second wave of foreclosures will be triggered by multi billion dollars worth of Option ARMs recasting in the next few years. The problem has been brewing quietly and is the big secret in the industry today.   It is the pink elephant that no one has been speaking about, but with the passing of time, it continues to grow and becomes too difficult to ignore.   The above article actually put numbers behind the problem that the country and affected homeowners will be facing in the coming years.  Make no mistake about this, option ARM will be a huge problem affecting the mortgage market and the subsequent impact it will have on foreclosures. Homeowners who own these types of loans will have a huge wake-up call in the coming months and years.

This is the ridiculous mortgage that people were offered during the crazy heydays of “anyone can get a mortgage” era of a few years back.   Simply put, several payments options were given to the borrower, but the one that was selected most often was the low teaser rate option to pay less than the interest payments and have the deficiency tacked on the end mortgage; hence, the principal actually increases with time, rather than decrease!   This was also referred to as the negative equity loan: your equity was actually decreasing rather than increasing.  This was the Option Adjustable Rate Mortgage (ARM).

This was a pure gamble!   You were gambling that the housing prices would continue to increase and you would be able to re-finance your way out of the negative equity situation some time in the future.  Naturally, during 2006 or 2007, everyone was so drunk on the prospect of instant wealth, most of the borrowers who were presented this option took it, so they could buy a little more house than they would otherwise be able to afford. Unfortunately, the gamble did not pay off.

Throw 12% unemployment into the equation in California and see if this will not present itself as a serious crisis coming down the line.    As a San Jose Short Sale Agent and every Certified Short Sale Agent worth his/her designation knows that the re-setting of these option ARMs will be the next wave of foreclosures.