Finally, some news that paints a true picture of how the Financial Crisis has made many decent homeowners unfairly portrayed as dead-beats.  As a San Jose Short Sale Agent, I see many many people who through circumstances outside of their control, fall into economic catastrophes from which they are unable to recover.  The  ones I see most are unemployment or reduction in income,  negative equity preventing homeowners from getting better interest rates when their ARMs reset,  and unforeseen medical bills.

People who fell so far behind and are facing foreclosure or seeking short sale to avoid foreclosure are generally not bad people (of course there are those who try to work the system), they just suffered some tragic economic hardships.   Most of  these clients struggle for a long time before coming to the conclusion they cannot pay their mortgages.   And I believe the TransUnion finding is finally vindicating many of  them from being incorrectly labled as dead-beats.

Foreclosure Victims

Here are the latest numbers from the Mortgage Bankers Association Survey about Delinquencies for Q1 10.

Sub-prime mortgages continue to dominate a lion’s share of the delinquencies nationally at a rate of 41.15% of all such loans.

An area of concern now is the FHA mortgage, which is/was the prime method of purchases in the past couple of years.  The delinquency rate is an alarming 16.02%. Given how often this product was used, this number should be growing in the coming months.

The total delinquency for all mortgages:  14.01%.

What is the cause? Under-employment nationally was at 16.7% nationally as of April 2010.

As I have said over and over again, until we can address the unemployment issue, people will continue to have difficulties paying their mortgages.  Any reasonable person will pay their grocery bills over their mortgage payments.

People often talk of the Shadow Inventory, that mysterious excess capacity of homes that will hit the foreclosure market, but is currently in limbo and have not hit the foreclosure market for whatever reason.  There is the usual speculation ranging  from it being the result of  large banks controlling the flow of foreclosure inventory to protect their assets to conspiracy theorists who think the Government is behind it.  But how do you measure it?

Well, economists at Morgan Stanley included the inventory of homes will eventually need to be processed through the REO process, including those that are going through HAMP and HAFA right now.   While others just measure those that are 90 days delinquent in their mortgage payments.  However you measure it, there is a lot of interest in trying it quantify the size of the Shadow Inventory.

Different bloggers and journalists have written about and speculated as to the size of this Shadow Inventory.   This week, Morgan Stanley took on the task and reached the conclusion that it would take up to 4 years to clear the Shadow Inventory. The number of homes were calculated at 8 Million.

Is this assessment accurate or inaccurate?  Who knows. Capital Economics did their own analysis and came to the conclusion that 5.5 Million homes (short of  3 years to deplete)  would fall into the Shadow Inventory.   Regardless  of whose numbers you choose to believe, it is very large at between 3 – 4 years.   It looks like we will have a few more years of having to deal with distressed properties.

Ask anyone who does a lot of short sales about what is becoming a troubling trend in the industry and my guess is a majority of them will bring up the fact that the junior lien holder (or the second mortgage) is refusing to cooperate and demanding unreasonable amounts of money for them to agree to a short sale; or some of them even asking for illegal kickbacks in the form of payments made without being disclosed on the HUD1.

What does all of this mean?  Well, the junior liens have been receiving pennies out of the dollar, sometimes getting paid $3,000 on a loan with a balance of $100,000.  Yes, the loss is huge, but the junior lien holder has very little alternative, as a foreclosure means their loan is wiped out.  Hence, the senior loans have been successful in pressuring the juniors to take the lesser of the two evils, pennies or nothing.

Many junior lien holders are not taking this lying down now.  They have figured out they can combat the pressure from the senior liens by refusing to agree to the short sale. They are holding out until they can negotiate better terms.  They are simply saying to the senior lien holders: “if we don’t get a better offer, we won’t let the short sale happen; you will be forced to into foreclosure and your net will be much lower in a foreclosure sale than a short sale.”  They are simply playing a game of chicken.  Remember, if there are two loans in a short sale, both of the lien holders have to agree to permit the sale to proceed.

Or the other tactic is, some junior liens are demanding that the sellers pay them a settlement fee outside of escrow so that it will not show up on the HUD1.  A HUD1 discloses to all parties who is getting paid what.  By making a payment outside of the HUD1, the junior lien holder is getting paid without the senior lien holder finding out.  This is illegal, by the way; mortgage fraud, a Federal Offense from what I am told.

We all understand what the junior lien holder is trying to accomplish, but the problem is that in their game of chicken, the majority of the parties are suffering. We have one party who wants the property; the other party who wants to sell and move on with their lives and get out from under the banks; the senior lien holder who is also taking a huge loss, but because the junior lien holder, who knows they can get nothing if they force the transaction into foreclosure is hell-bent on forcing a foreclosure because they want to get a little bit more: even by illegal means.  They pressure the sellers to such an extent, the sellers are sometimes choosing to accept foreclosure rather than to give into what is being demanded.   Remember, the collective goal right now for the country is to reduce foreclosures, not to encourage it.

Because this problem is becoming more common and have reached critical mass, Barney Frank, the Chairman of the House Financial Services Committee has sent out a petition to the largest banks to voluntarily take action to permit second lien write downs; or else.

The same banks who are junior lien holders are also senior lien holders on other loans, so in the grand scheme of things, they will benefit if they prevent foreclosures.  So what are these guys  doing?  They are hurting their own bottom line and taking everyone else down with them; it makes no sense.

I ask this question of my buyers who want to get that “deal” and I also ask that of my sellers who want to sell quickly with no hassle and get top dollars.   I use the analogy that a real estate related plan is like having a well platted map before going on a long trip (the analogy still works in this day of the GPS).  You may eventually get there, but if you have a well organized plan or a map, you can save tremendous amounts of time, money and heartache and give yourself the opportunity to enjoy the trip rather than wasting time sweating the details on the fly.  In Real Estate, you don’t get that deal or you don’t get that multiple offer scenario by accident; there is always lots of work done beforehand.

Most of us would not consider taking our family to Disneyland or Legoland or wherever our destination is, without having some sort of itinerary.   Yet, in these difficult times, when it is now so common for homeowners to be struggling to make their mortgage payments and who are facing the very real possibility of foreclosures, homeowners try to “wing it” and approach this very long and arduous trip without any sort of planning or assistance.  Almost hoping that foreclosure can be avoided by accident or hoping to talk to someone who will understand and sympathize with their plight and make things stop.  Unfortunately, that rarely happens.

Foreclosure is a process driven activity, which means activities are laid out in sequential order.  In order to successfully fight a foreclosure, you must understand the process and have a plan to fight the lender and stop the sequence so the final step – foreclosure – is not achieved.

Fighting foreclosure is not something I can write about in a few paragraphs in this blog; as you can imagine, it is much more complex and the situations and hardships differ from homeowner to homeowner.  However, I do have a report here which will explain simply and provide information so that the distressed home owner can take action to stop the foreclosure process and learn about the foreclosure prevention options that are available to them.  Some sort of action must take place; inaction will not stop, but in most cases will accelerate the foreclosure process.

We are simply living  in unprecedented times where 14% of all mortgages are delinquent and some sub-categories are approaching 50% delinquency rates.

I am including here a report called The Truth about Mortgage Modification which has information which should help dispel some misinformation and point people in the right direction if they require help.

As more and more economic data is released, more and more, we are beginning to realize how severe our current foreclosure situation truly seems to be.   The news media seems to want us to believe that the worst is behind is in the foreclosure crisis, but the reality paints a picture which is quite different.

The Mortgage Bankers Association (MBAA) recently released the Q3 2009 statistics about mortgage delinquency which revealed some truly alarming statistics which blew a lot of minds.

14.32% of all mortgages in the nation are in default (at least 30 days behind in payment)  and of those, 4.38% are actually in foreclosure process where they have been served a Notice of Default.  These numbers are the highest they have ever been since this organization kept track of these types of numbers.  I REPEAT:  14.32% OF ALL MORTGAGES IN THE NATION IS IN DEFAULT!

And we all know what is causing these historic default activities: unemployment.  Unemployment was at 10.2% while underemployment was at 17.5% for October.   Unemployment is up while housing  values are dropping, creating the perfect  storm for foreclosures.  Look at all of the categories listed above, in every single loan category MBAA tracked, 10% or more of said  loans are in default.  These are astronomical statistics, they had never seen numbers like  that before.

The numbers for states like California will be even worse that these because we were at 12.3%.  We must address the unemployment issue if we are to get out from underneath this 800 lb. gorilla sitting on our shoulders.

Here are some fantastic data from the CDPE organization which closely tracks national industry numbers.

As of Q2 2009, here are some numbers for you to digest

Type of  Mortgage            In Foreclosure                      In Default (30+ Days late) Total

All Mortgages                               4.3%                                                      8.86%                                                             13.16%

Sub Prime Mortgages               15.05%                                                25.35%                                                           40.40%

Prime                                                 3.00%                                                  6.41%                                                                 9.41%

It’s not surprising to see that sub-prime loans represents over 40% of distressed properties out there.  As of the end of Q2  2009, however, distress in prime mortgages (or the Mercedes of mortgages) represent roughly 1/4 of the volume of sub-primes mortgages. This may surprise some people, as we have been repeatedly told by the media, that sub-prime market is what brought our economy down.   However, with National Unemployment at 9.4% (as of July 09 when these stats were released) , it is no longer those who gambled on high risk mortgages, but the regular people who were doing the responsible things, who are being forced into default.

I believe the sector of mortgages to look out for in the coming months is the prime market.  I argue they will rise dramatically in numbers, relative to sub-prime mortgages.

Additional statistic I want to point out are marked in red above.  4,760,000 represents the total volume of home sales NAR predicted for 2009.  9,550,000 represents the total distressed properties in the nation as of Q2.  This means if these distressed properties have to be sold to get homeowners out of their situation (either as a short sale or foreclosure), it will take over two years to  unload the current inventory of distressed properties!

Some food for thought………

News Release

As I have been saying previously,  loan modification fraud is pervasive in these difficult times.   Everyone is trying to take advantage of distressed homeowners because they are desperate and are desperately seeking hope.  Hope sometimes in  the form of “attorney based ” operations who basically buy the names of hungry lawyers willing to gamble their licenses for a few bucks.  Well, some of those attorneys have finally been caught and are facing appropriate consequences.

This is fantastic news,  the California Bar Association is investigation its members, and the California Department of Real Estate is investigating its own members as well. It’s about time these licensing organizations finally did something  about reining in their corrupt members who were out there literally robbing these defenseless homeowners looking for hope.

Again, if we can simply warn the general public against giving up-front fees to people (whether they be lawyers, Realtors, loan brokers, etc….) who promise to do wonderful things on their behalf.  No service providing professional should receive a fee before they deliver their service. Even if these “specialists” are telling you they will give you a money back guaranty, do not fall for it.  Once they have your money, getting it back or having them refund it to  you will be an impossible task: much tougher than modifying your loan.