Lenders have been concentrating shadow inventory in communities like Irvine with larger loan balances and numerous second mortgages. They foreclose only on rare occassions, and they do so in a capricious manner to combat strategic default and avoid large losses.
Keeping my eyes open I cannot afford to sleep Giving away promises I know that I can't keep
I would stand inside my hell And hold the hand of death You don't know how far I'd go To ease this precious ache You don't know how much I'd give Or how much I can take
Melissa Etheridge -- Come To My Window
As a renter it's hard not to feel a twinge of jealousy for delinquent mortgage squatters. While many of us pay outrageously high rents to live in Irvine, squatters get to occupy their houses for nothing. With a typical single family home renting for $2,500 here, delinquent mortgage squatters are saving $30,000 per year compared to their renting counterparts. Plus, the government is doing everything possible to give them more free money so they can continue to occupy houses they have no business being in.
It must be difficult for many of them to sleep at night. They have made promises they can't keep, and unless their lender forgives their debts, most are going to be forcibly removed from what they consider to be their family homes. How much would they give to relieve that ache? How much more can they take?
To make matters worse for stressed out borrowers, lenders use terrorist tactics to keep more struggling borrowers from defaulting. Each month lenders randomly single out a few squatters to push through the foreclosure process. If they didn't do this, borrowers would know they had several years of free lodging waiting for them if they default. If borrowers knew they could save $50,000 to $100,000 in housing costs through several years of squatting, most struggling borrowers would default. Lenders know this, so they must randomly execute a few to keep the herd fearful and guessing.
This practice is not as random as it would seem. The selection process is first divided up into buckets. One bucket contains small loans with no second mortgages. This bucket is the one getting the most activity as lenders and the GSEs are competing to empty this bucket as quickly as possible.
The second bucket contains large loans on the balance sheets of large lenders and in private securitizations. Lenders randomly select a moderate number from this bucket each month. Since the big lenders (which are also the big servicers) do not have second mortgages on these homes, they are somewhat more eager to process them, although since the loan losses are still quite large, they aren't in any particular hurry.
The third bucket contains large loans with second mortgages on them. These are the most irresponsible borrowers, and the most likely to be distressed. Lenders only select a very small number of these each month to process because they will lose much more money. If the lender is losing on the first mortgage, the second mortgage is a complete loss.
In fact, bucket number three can be subcategorized by whether or not the lender-servicer holds both the first and the second or if the second is with another lender. If the lender-servicer holds the first and the second, this is the group least likely to be foreclosed on. If the lender-servicer only has the first mortgage, they will ruthlessly blow out the second mortgage of their competitors. This partitioning of the third bucket is so brazen that many servicers are risking lawsuits from the asset-backed securities pools waiting for the foreclosure to take place.
In short, lenders are giving the most irresponsible borrowers the greatest squatting benefits because these are the borrowers on which lenders stand to lose the most.
Nearly a year ago I opined that banks were engaged in a game of Foreclosure Roulette — a game by which they randomly foreclosed on a few homeowners, while delaying most foreclosures for longer and longer periods of time. The primary aim of the bank’s random foreclosures being that they can’t let word get out that you can stop making mortgage payments and live in your home for free for years on end, as is increasingly the case. Otherwise, millions of underwater, but paying, homeowners might also stop making payments, spelling disaster for the banks.
At first glance current foreclosure sales do seem completely random. Vacant homes sit for months or even years waiting to be foreclosed on, while a family working hard to short sale their home has the rug pulled out from under them. But looking for patterns by focusing on the borrower or even the property assumes lenders care about people, and neighborhoods. That’s not the role of financial institutions. These are corporations, and their focus is on profit and loss. By focusing on where the losses really are, clearer patterns begin to emerge and we now see that this game of chance isn’t completely random. Like in Vegas, the odds are stacked in favor of the house — not your house, the banks.
This behavior may be completely logical, but it is still reprehensible. They are resorting to terrorist tactics, and they are rewarding the most irresponsible. No matter how they go about resolving these bad loans, moral hazard will inevitably result.
First lets look at time to foreclose based on the size of the potential loss. We did this by analyzing 153,956 foreclosure sales on first mortgages from January 2008 through July 2011 for which we had all the necessary data. This includes properties that were sold back to the bank and became REO, as well as properties purchased by investors on the courthouse steps at foreclosure auction. We divided all the loans into two groups: those with balances over $417,000 (the conforming loan limit) and those below. Specifically we were wondering if banks took longer to foreclose on larger loans, where there tend to be larger losses, than on smaller loans. The answer is clear: yes, the size of the potential loss absolutely matters. Not only that, but time to foreclose doesn’t diverge until the government intervened in the foreclosure market in early 2009, with, for example, changes to the Federal Accounting Standards Board rules on mark-to-market.
Amend-extend-pretend began in earnest in mid 2008, and the results became apparent in early 2009 as Mr. O'Toole's data shows. This also corresponds to the buildup of shadow inventory.
In July 2011, the average loan balance on foreclosures with a loan balance greater than $417,000 (the red line) was $616,000, and the average current market value was $404,000, resulting in an average loss of more than $250,000 per loan after sales costs.
Compare that to loans with a balance less than or equal to $417,000 (the blue line). On those loans the average loss was closer to $115,000 on an average loan balance of $274,000 and with an average current market value of $176,000.
The truth is that the larger the loan balance you have, the more upside down you are in the home, and the bigger the loss for the lender, the better your chances are of not being foreclosed on for a very long time.
This nuance is important for anyone considering strategic default. If someone is considering defaulting on a $100,000 loan, I wouldn't count on much squatting time. Perhaps they will get a year or two, but the GSEs are processing their bad loans at a relatively rapid pace. However, if someone is considering defaulting on a $1,000,000 loan -- and we have a lot of those in Orange County -- chances are those borrowers will get to squat in their McMansions for the foreseeable future.
In other words, for all of you renting and waiting for prices to drop, lenders are allowing the deadbeat borrowers to stay in the house you want to buy without making any payments. You are stuck renting while they are getting to live in what should be your house for nothing.
Next lets look at the time to foreclose based on the number of outstanding loans. Some have suggested that many servicers have a conflict of interest in that they service first mortgages on properties on which they directly hold the second mortgage in their own portfolio. In fact, Representative Bradley Miller D-NC, introduced a bill, H.R. 4953, to specifically eliminate this conflict of interest; saying at the time “Their stance does seem largely driven by accounting concerns — they are trying to maintain the fiction that the mortgages are worth the value they are carrying them at on their books.” It turns out that there is a dramatic difference in the amount of time it takes servicers to foreclose on first mortgages when there is also a second mortgage on the property, as shown below.
The blue line indicates the average time to foreclose for properties that only had one loan; and the red line indicates the average time to foreclose for properties that had two loans. While there is a notification requirement when foreclosing on a property with a junior lien (a second mortgage for example), this is easily accomplished within the standard foreclosure timeframe, and first mortgage holders have no other duties to protect second mortgage holders, so there is really no other reasonable explanation that we can think of for this significant difference in timing outside of the conflict of interest issue that some have suggested. Note that like time to foreclose by loan balance above, the lines don’t start to diverge until early 2009, when mark-to-market rules were loosened.
The evidence is clear. Lender-servicers are not foreclosing on loans where they would be wiping out their second mortgage. This is also an important nuance for those considering strategic default. If someone has a first mortgage and a second from the same lender, they are much more likely to be allowed to squat indefinitely than if their second is through a different lender.
The basic idea behind mark-to-market accounting rules is that if an asset that you have on your books drops in value, you should recognize that loss on your books and write down the value of the asset on your books. When Treasury Secretary Paulson announced TARP in September 2008, he made it clear that he didn’t think banks should have to write down these assets to or be forced to sell them at what he believed were distressed prices.
This merely underscores the complete lack of understanding of the problem in our government. Prices were not distressed in 2008, and they are only distressed now in a few markets. Prices were in fact quite elevated and needed to come down. Allowing banks to pretend merely delayed the inevitable. It did not fend off a write down that did not need to occur.
After that announcement, considerable pressure was put on the supposedly independent Federal Accounting Standards Board (which writes the accounting rules these companies must follow) to ease the rules that require companies to mark assets to current market values. It occurred to me at the time that it was a ridiculous notion as properties weren’t selling at distressed prices, they had instead returned to normal prices after being artificially inflated in a major credit bubble. Regardless, I think there is little doubt that the changes to these rules were necessary in order for the banks to pass the stress tests that were undertaken shortly after this accounting change was pushed through.
So while we still think foreclosure roulette is the bank’s game of choice, we now also believe that the number of chambers in their gun, and your likelihood of being quickly foreclosed on, is directly tied to the size of the potential loss that the bank might face. Perversely, this means those who took the biggest loans, on the nicest houses, with the largest lines of credit to buy lots of shiny new toys will also get the most free rent when they strategically default.
And we will also probably allow many of those people to get loans again without much waiting because lenders need warm bodies to buy their REO.
It's a great system we have, isn't it?
A squatter's paradise
The bank currently owns this empty property, but the former owners tried to sell it for almost four years prior to their foreclosure. Do you think they were making any payment during that time?
Property History for 57 SNOWDROP TREE
Date
Event
Price
Source
Jul 05, 2011
Listed (Active)
$845,000
SoCalMLS #S665221
Jun 29, 2011
Sold (Public Records) REO
$668,126
Public Records
Jan 02, 2009
- Delisted
--
Inactive SoCalMLS #3
Sep 26, 2008
- Relisted
--
Inactive SoCalMLS #3
Sep 25, 2008
- Delisted
--
Inactive SoCalMLS #3
Aug 27, 2008
- Relisted
--
Inactive SoCalMLS #3
Aug 26, 2008
- Delisted
--
Inactive SoCalMLS #3
Jun 13, 2008
- Price Changed
*
Inactive SoCalMLS #3
May 14, 2008
- Listed
*
Inactive SoCalMLS #3
May 05, 2008
- Delisted
--
Inactive SoCalMLS #2
Jan 05, 2008
- Listed
*
Inactive SoCalMLS #2
Nov 16, 2007
- Delisted
--
Inactive SoCalMLS #1
Oct 10, 2007
- Price Changed
*
Inactive SoCalMLS #1
Aug 30, 2007
- Price Changed
*
Inactive SoCalMLS #1
Aug 12, 2007
- Listed
*
Inactive SoCalMLS #1
Sep 20, 2006
Sold (Public Records)
$1,024,500
Public Records
My records show the first notice of sale in April of 2009. If a lender is prompt in their filing -- and in the deflation of the housing bubble, they haven't been -- the borrower stopped making payments at least 6 months earlier. That puts his last payment back in November of 2008 at the latest.
Foreclosure Record Recording Date: 08/25/2010 Document Type: Notice of Sale
Foreclosure Record Recording Date: 04/21/2009 Document Type: Notice of Default
The foreclosure auction took place on June 29, 2011, nearly three years after he quit paying. When this property was purchased for $1,024,500, the borrower used a $716,850 first mortgage and put $307,650 down. In this instance the lender gave the borrower ample time to sell the house to recover some of his down payment. It didn't happen, so now the lender has the property and is trying to sell it for an amount that will make them a profit. They need to make it when they can.
If the lender gets this price, the former owner would feel like a fool leaving any equity in the property. Of course with a $4,000+ per month cost of ownership, this owner recovered $120,000 in savings during his 30 months of squatting. I guess that makes it a win-win.
------------------------------------------------------------------------------------------------------------------------------------------- This property is available for sale via the MLS. Please contact Shevy Akason, #01836707 949.769.1599 sales@idealhomebrokers.com
Beds: 4 Baths: 2 Sq. Ft.: 2803 $301/SF Property Type: Residential, Single Family Style: Two Level, Traditional View: Reservoir Year Built: 2006 Community: Columbus Grove County: Orange MLS#: S665221 Source: SoCalMLS On Redfin: 17 days ------------------------------------------------------------------------------ Welcome to Lantana at Columbus Grove in Irvine!!! Enjoy the several amenities including association barbeque, club house, recreational facility, parks, association pool, greenbelts and more. Walk, drive or bike over to the District at Tustin Legacy which is Orange County's newest shopping, dining and entertainment destination. After a long day, return to your own sanctuary; park inside your 3 car attached tandem garage, relax in your spacious 4 bedroom, 3 bath home. Start up the fireplace, enjoy a cup of coffee or soak in your master bedroom tub. The gourmet kitchen includes stainless steel appliances, granite counters, breakfast bar and a walk-in-pantry; this kitchen will keep all chefs wanting to try new recipes! Valuted ceilings, recessed lights, mirrored closets, upstairs laundry, and plenty of linen space. Carpet, hardwood floors and a big back yard makes this house truly a BEAUTIFUL HOME, ALL THAT IS MISSING IS YOU!!! ------------------------------------------------------------------------------------------------------------------------------------------- Proprietary IHB commentary and analysis
Valuted? I have concluded that three exclamation points are the surest sign of a realtor's writing. Nobody else feels the need to express that much excitement in their sales spiel.
Resale Home Price ...... $845,000 House Purchase Price … $668,126 House Purchase Date .... 6/29/2011
Net Gain (Loss) .......... $126,174 Percent Change .......... 18.9% Annual Appreciation … 317.7%
Cost of Home Ownership ------------------------------------------------- $845,000 .......... Asking Price $169,000 .......... 20% Down Conventional 4.48% ............... Mortgage Interest Rate $676,000 .......... 30-Year Mortgage $146,450 .......... Income Requirement
-$814 .......... Tax Savings (% of Interest and Property Tax) -$893 .......... Equity Hidden in Payment (Amortization) $280 .......... Lost Income to Down Payment (net of taxes) $126 .......... Maintenance and Replacement Reserves ============================================ $3,715 .......... Monthly Cost of Ownership
Cash Acquisition Demands ------------------------------------------------------------------------------ $8,450 .......... Furnishing and Move In @1% $8,450 .......... Closing Costs @1% $6,760 ............ Interest Points @1% of Loan $169,000 .......... Down Payment ============================================ $192,660 .......... Total Cash Costs $56,900 ............ Emergency Cash Reserves ============================================ $249,560 .......... Total Savings Needed -------------------------------------------------------------------------------------------------------------------------------------------------------
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