Monday, 17 January 2011 13:03

I Warned That Banks Will Soon Be Forced To Walk Away From Homes... Guess What!

About 4 months ago, I claimed that In summary:

Without an economic incentive to foreclose, it would not be in the bank shareholders best interests to pursue foreclosure even though borrowers clearly defaulted & owe money to the lender. The economics of distressed assets in mortgage and commercial banking are quickly changing. I am quite open to discussing this in the mainstream media if any are interested in hearing the “Truth go Viral!” I want all to keep this in mind when pondering the release of reserves by the banks.

This was taken by many readers as sensationalist and unlikely. As a matter of fact, much of my writing is taken in a similar way, most likely due to the fact that I have an uncommon proclivity to state things exactly as I see them, sans the sucrose patina. This is not a pessimistic (bearish) outlook, nor an optimistic (bullish) outlook. It is simply called, the TRUTH! Realism! Something that is increasingly hard to come by in these days of media for a purpose and embedded agendas.

You see, the United States, much of Europe, and China have sever balance sheet issues that are ravaging their respective economic prospects. The media, analysts, and investors are gingerly mozying along as if this is not the case. Well, no matter how hard you ignore certain problems, no matte how hard you try to kick the can down the road - the issues really do not just "disappear" on their own.

With these points in mind, let's peruse this piece I picked up from the Chicago Tribune: More banks walking away from homes, adding to housing crisis blight: the bank walkaway.

Research to be released Thursday, the first of its kind locally, identifies 1,896 "red flag" homes in Chicago — most of them are in distressed African-American neighborhoods — that appear to have been abandoned by mortgage servicers during the foreclosure process, the Woodstock Institute found.

Abandoned foreclosures are increasing as mortgage investors determine that, at sale, they can't recoup the costs of foreclosing, securing, maintaining and marketing a home, and they sometimes aren't completing foreclosure actions. The property, by then usually vacant, becomes another eyesore in limbo along blocks where faded signs still announce block clubs.

"The steward relationship between the servicer and the property is broken, particularly in these hard-hit communities," said Geoff Smith, senior vice president of Woodstock, a Chicago-based research and advocacy group. "The role of the servicer is to be the person in charge of that property's disposition. You're seeing situations where servicers are not living up to that standard." City neighborhoods where 80 percent of the population is African-American account for 71.1 percent of red-flag properties, according to Woodstock.

Don't fret, this is definitely not an "African American" thing. As a matter of fact, the reason that this is concentrated in this primarily "African American" community is that this is one of the demographic groups that have been heavily targeted by predatory lenders. You will see other demographic "concentrations" start to show similar attributes and behavior from the banks - lower income, lower educated, higher LTV, lower mean rental income, lower property value, higher mean time to disposition from commencement of marketing areas, etc.

In some cases, lenders might be skirting city rules for property upkeep even after they repossessed properties.

This is where, if the cities and municipalities are on their Ps and Qs, local governments can successfully hit the banking industry for revenues. Charge and fine the banks heavily, just keep the charges below the level of what it will take the bank to maintain the property. Then use the properties for public housing facilities and/or raze the properties.

Woodstock found that as of the end of September, 57.1 percent of the estimated 4,468 single-family, likely vacant homes that became bank-owned from Jan. 1, 2006, to June 30, 2010, were not registered with the city as vacant, as they are supposed to be. "The whole concept of charging off creates this limbo land," said Dan Lindsey, an attorney at the Legal Assistance Foundation of Metropolitan Chicago. "There's still a lien that can follow the borrower."

In November, a U.S. Government Accountability Office report on the frequency and impact of abandoned foreclosures noted that Midwestern industrial cities, including Chicago, seem to bear the brunt of bank walkaways, leaving neighborhoods in deeper distress and cities left to shoulder the associated costs of dealing with unsafe, often unsecured homes. The GAO report, derived from information provided by six loan servicers, found that servicers nationally charged off loans on 46,000 properties from January 2008 to March 2010, with 60 percent of the charge-offs occurring before an initial foreclosure filing was made. That report listed Chicago as having the second-highest number of servicer-abandoned foreclosures nationally, behind Detroit, with 499 properties charged off during the foreclosure process. An additional 361 properties were charged off without a foreclosure filing.

For its report, Woodstock culled data from the city's vacant properties registry, as well as buildings identified to the city as vacant by municipal departments, foreclosure court filings made from 2006 to the first half of 2010, foreclosure auctions and property transfers. Some of the 1,896 properties flagged by Woodstock as likely walkaways could, in fact, still work toward a resolution in the foreclosure process, but 40 percent of those homes had been in the foreclosure process for more than 18 months. Woodstock believes its projections are conservative because lenders also decide to write off their investments in properties before filing initial foreclosure actions. For only those 1,896 homes, Woodstock pegs the cost to the city, if it needed to seize, secure and demolish them, at $36 million.

And here is a list of the favored banks...

In Chicago, the mortgage servicers and trustees most often associated with the properties flagged by Woodstock are Bank of America, with 314 properties; Wells Fargo (234); U.S. Bank (185); Deutsche Bank (178); and JPMorgan Chase (165). When asked to comment generally on bank walkaways, several banks either declined to comment or did not return phone calls.

Why should they comment? The banks are reporting record [accounting] profit increases as release their bad credit reserves back into the net earnings category. Good times are hear to stay. See As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves. and After a Careful Review of JP Morgan’s Earnings Release, I Must Ask – “What the Hell Are Those Boys Over at JP Morgan Thinking????

Neighborhoods on the city's West and South sides seem to be most at risk of bank walkaways. The city's Roseland neighborhood, on the city's far South Side, is one example. In 2007, some of the pictures of the homes taken by the Cook County assessor's office showed properties that were reasonably well cared for by homeowners.

A little more than three years later, the number of eyesores has grown. Windows are broken, fences are missing and plywood covers some of the broken windows. Even if the houses look secure from the front, back doors are sometimes missing or open. Public records show that foreclosure actions initiated were never completed and titles to properties never transferred.

Now, let's run through this Chicago nightmare scenario from the BoomBustBlog analytical perspective, excerpting

About a week or so ago, I posed a controversial question, Is the US Government About to Forgive Mortgage Debt? Let’s Crowdsource Our Way Through a Scenario or Two! In that missive I warned that the recovery rate on many of the repossessed properties was not only at a historic low, but actually approaching zero, save a few blips from .gov bubble blowing and shenanigans by banks in the form of kicking cans down the road. I also said that the time may very well come when there may be no economic incentive for banks to foreclose on certain properties, and that pool of properties may grow larger than many could imagine. I know it is difficult for many to come to grips with this, but the math really ain’t that hard.

Even Tyler Durden, whose controversial ZeroHedge site I read and contribute to with a passion, is being too optimistic. Yeah, that’s right! You know things are bad when ZeroHedge is too optimistic! In his post “Quantifying The Full Impact Of Foreclosure Gate: Hundreds Of Billions To Start, he assumes there WILL be something to foreclose upon. I assert that in increasingly more common instances, there will be no economic interest to foreclose upon. It is starting at the fringes and the margin, but it is moving closer to the center faster than many think. And the longer, and deeper “Fraudclosure” investigations continue, the closer and faster to the center it will get.

Well, since I penned this piece, new developments have arisen. In particular, the likelihood that banks will be set back even further as they face additional legal pressures and foreclosures are judicially rolled back and undone. See Less Than 24 Hours After My Warning Of Extensive Legal Risk In The Banking Industry, The Massachusetts Supreme Court Drops THE BOMB!

This is, of course, not even considering the fact that all of this investigating and shining the light in dark corners will reveal the true elephant in the room (and it is not hastily signed affidavits that can be quickly fixed) which is that many, if not most, high LTV mortgage originations were fraudulent to begin with. That means that not only would it not be cost effective to foreclose, but everybody and their momma will be scrambling to put the fraudulent loans back to the originating banks – see The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008! for my realistic take on the situation and the expenses that it entails. Yes, the elusive recovery rate is going to be pushed that much lower. Long story short, bank expenses will skyrocket, along with efficiency ratios, which were already increasing to begin with at the same time housing sales economic activity and prices will drop and credit losses will spike. Oh, what fun we have in store.

Here is an excerpt from Is the US Government About to Forgive Mortgage Debt? Let’s Crowdsource Our Way Through a Scenario or Two to refresh your collective memories and then I will run through an example that clearly shows a high LTV property in Nevada that the lender literally has no economic incentive to foreclose upon if there is litigation to be had.

As you can see, the charge-offs on 1-4 family residential housing skyrocketed nearly 1,500% (yes, that is a lot) from the bursting of the bubble in ‘06.

Both recoveries have increased and the charge-offs decrease, giving us an increase in recovery rates over the last two quarters. Now, before we get all giddy about the improvement in the credit situation in residential real estate finance and blow out all of our provisions, let’s take a more careful look at the chart. For one, although the recoveries have increased very slightly, it is the drop in the charge-offs that has served to boost the recovery rate. So, that leads us to ask “What has changed so positively in the market to cause such a drop in charge-offs?” Well, for one the Case Shiller Index has shown a rise in prices. Of course, BoomBustBloggers don’t really go for that, because the Case Shiller Index rise fails to capture many of the elements that are causing aggregate housing values sold to fall on an economic basis. See Why the Case Shiller Index, Although Showing Another Downturn Coming, is Overly Optimistic and Quite Misleading! then reference this chart below.

I will make the analytical model that created this chart available to all paying subscribers in my next post on this topic, which will drill down on why a lagged, highly filtered price model (no matter how sophisticated, and they did do a good job on it) will often mislead you in regards to the true economic direction of assets as such as housing. You must measure sales activity (which has slowed to a level that nearly approximate 1963 levels) as well as sales prices – and those prices have to capture all aspects of housing. The CS index excludes the most distressed categories, which causes it to have an optimistic skew.

So, if it is not the rising prices of indicated by the Case Shiller index that caused the drop in charge-offs, then what was it? Well, I believe it was something much more old fashioned and mundane. It’s called LYING! See

Why are Banks Hiding High End Residential Real Estate? Courtesy of the Real Estate Channel:

  • Without the FTB tax credit, the housing market is receiving artificial demand and price support from the FHA loan guarantees and banks sitting on mortgages of homes once valued at $300,000
  • Banks in areas that were severely damaged by the downturn in domestic real estate (Cook County, Illinois, Miami-Dade County, Florida, Orange County, California) have significant inventories of homes worth more than $300,000 that they will not put on the market, even after foreclosures lasting more than 2 years

If that doesn’t get you going, reference “They ARE trying to kick the bad mortgages down the road, here’s proof!” and “More on kicking that housing can down the road…“.

Now, taking the above into consideration, let’s run through an example of a high LTV single mortgage home purchased in Nevada.

Sales price Loan, expenses Equity
$ 250,000 $ 312,500 $ (62,500) Starts off with negative equity
Current retail value $ 100,000 $ 300,000 $(200,000) prices drop
Distressed value $ 64,000 $ 300,000 $(236,000) distress discounts
Carrying costs/maintenance@5 m, taxes/utilities@24 m $ 12,480 $ 312,480 $(248,480) can’t hold the property for free!
foreclosure costs $ 6,000 $ 318,480 $(254,480) cost to foreclose
Broker costs@6% $ 3,840 sales costs
Recovery to bank if sold withing 4 months and not drawn into litigation $ 41,680 net recovery in a perfect world
Recovery if marketing period=12M ~35000 recovery if sales continue to slow
Recovery if litigated (win or lose?) $ - If there is a legal battle (there cropping up all over the place), the bank is better off letting it go.

This example is not far fetched, and can take place in condos in Florida, California and New York where extra costs can drive down recovery, or the humid coastal regions (ex. Florida) where humidity can drive down recovery over time, or cold weather states, or high crime areas (theft, vandalism), etc.

Methinks it is time to start rethinking the dynamics of distressed real estate, foreclosures, REOs, and recoveries for the economics are definitely starting to morph on the margin and that morphing can quickly spread to the more mainstream.

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It is imperative that my site's paying subscribers review this blog post in light of the shadow inventory study that I released late last year. This is the key to how deep this mess will get, and it will get very deep. All readers should read the following post, subscribers should download the pdf and read it, then re-read it. I will be issuing an update this weak.

The 3rd Quarter in Review, and More Importantly How the Shadow Inventory System in the US is Disguising the Equivalent of a Dozen Ambac Bankruptcies! Wednesday, November 10th, 2010 by Reggie Middleton

I feel this month has thrown enough events at the market to force it to start taking the real fundamentals into consideration. Of course, battling this ideal is the US Federal Reserve and their QE 2.1 policy. This should be a time to reflect upon exactly where we stand thus, I will review my thoughts and observations over the last 30 to 45 days and then summarize a truly unbiased and independently calculated view of the downright nasty side effects of the US shadow inventory of distressed housing. All paying subscribers can download the full shadow inventory report here: File Icon Foreclosures & Shadow Inventory. Professional and Institutional subscribers should also download the accompanying data and analysis sheet in Excel – Shadow Inventory.

Over the last few weeks, I have commented on my belief that the big banks who optimistically release reserves and provisions to pad lagging accounting earnings under the auspices of increasing credit metrics are simply setting their investors up for a major reversal which will bang those very same accounting earnings: JP Morgan’s 3rd Quarter Earnigns Analysis and a Chronological Reminder of Just How Wrong Brand Name Banks, Analysts, CEOs & Pundits Can Be When They Say XYZ Bank Can Never Go Out of Business!!!


More Reggie Middleton on residential real estate:

  1. The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!
  2. As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves
  3. The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!
  4. The Truth Goes Viral, Pt 1: Housing Prices, Economic Sales and the State of Depression
  5. Pay Attention to the National Association of Realtors and Their Chief Marketing Agent At Your Own Risk!
  6. Those Who Blindly Follow Housing Prices Without Taking Other Metrics Into Consideration Are Missing the Housing Depression of the New Millennium.
  7. Is the US Government About to Forgive Mortgage Debt? Let’s Crowdsource Our Way Through a Scenario or Two!
  8. Why the Case Shiller Index, Although Showing Another Downturn Coming, is Overly Optimistic and Quite Misleading!
  9. More Doom and Gloom: Homebuilders Making Better Money as Hedge Funds than Home Builders
  10. Yes, Housing Prices Have Much Farther to Fall. We’re Talking Years…
  11. Even at Marquis Trump Properties, Your Lyin’ Eyes are Belying the Real Estate is Bottoming Mantra
Last modified on Friday, 21 January 2011 14:25