Read Article here.

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.

Other significant laws also are in place. For detailed information, please visit www.leginfo.ca.gov on car.org.

This is from the CAR legal update informing Realtors  of changes in the law that may affect us.

I did not realize that Mortgage Brokers did not have a fiduciary duty to their clients!  The first document a Realtor signs with his/her client is an Agency Relationship Disclosure which puts into writing the fiduciary obligation to put the client’s interest ahead of our own economic interests.   No wonder some of these unscrupulous brokers were pushing option ARM loans on their clients………..

I first pulled all of the particular types of property (either Single Family Residences or Condo/Townhomes) which were in active status  today in Santa Clara County.  Then I pulled from all of the same properties the ones that were identified by the listing agents as Short Sale and as REO (bank owned properties) to get the results.

The numbers were significant, but a bit less than I had anticipated.

Single Family Residences – Total Distressed Properties represented 26% of the properties for sale.

Condo/Townhomes - total distressed  properties represented 33% of the properties for sale.

Given the high rate of unemployment in California and the current status of the Alt-A and Option ARM loans resetting in the coming months, I believe, unfortunately,  this number will steadily increase.

Article
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.

Article

The above article boldly declares that foreclosure activities have dropped 18% reduction in Notices of Default being issued and 11.5 % reduction in Notices of Trustee Sales last month in Silicon Valley.  On its face, that seems like fantastic news, but we have to now consider something which happened today. How will the law which enacted a moratorium to stop foreclosures ending impact the activities in the coming months?  Of course only time and data will tell…….

However, the above question may be a moot point unless the two root  causes of foreclosure are addressed in California: unemployment and  the looming option ARMs problem.   Unless these powerful forces are somehow resolved or mitigated, we may be looking at years of foreclosures to come.

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.