Prime Foreclosure Sales Outpace Subprime

Two-thirds of the 93,924 foreclosure sales in June were originally financed with prime mortgage loans, according to figures released this week by the HOPE NOW Alliance. It was the first time since HOPE NOW began collecting data that prime foreclosure sales outpaced subprime sales by two-to-one.

Foreclosures involving subprime mortgages have subsided over the past year. HOPE NOW’s survey data suggests the peak in subprime foreclosure sales occurred during the second quarter of 2008. The largest gain in foreclosure sales backed by prime loans occurred in the recently ended second quarter of 2009.

HOPE NOW’s report also showed a 25 percent surge in loan workouts during the month of June. The Alliance said mortgage lenders helped 310,000 homeowners avoid foreclosure – 96,000 loans were modified and 214,000 repayment plans were initiated.

June marked the second straight month that HOPE NOW’s participating servicers reported a drop in modifications (down 5.1 percent) and a significant increase in repayment plans (up 44.9 percent). The imbalance is primarily attributed to servicer participation in the Obama administration’s Home Affordable Modification Program (HAMP). Under the government’s guidelines, loans are subject to a three-month trial period and are reported as repayment plans until the modification becomes permanent after 90 days.

Faith Schwartz, executive director of the HOPE NOW Alliance, commented, “I am proud of the continued progress made by HOPE NOW servicers and am confident that they are aggressively and proactively using HAMP, as well as other successful foreclosure prevention programs, to help as many homeowners as possible. These efforts are in the best interest of consumers as well as the U.S. economy overall.”

Since January, 2009, HOPE NOW says more than 1.5 million homeowners have been helped through mortgage workout plans. However, the Alliance’s study shows that the number of distressed borrowers continues to grow. Those 60 or more days behind on their mortgage payments increased from 3 million to almost 3.1 million in June, HOPE NOW reported.

Last week, HOPE NOW and its partners hosted an outreach event with administration and local officials in foreclosure-ravaged Las Vegas, providing more than 1,500 at-risk homeowners in the area with the opportunity to meet directly with lenders and non-profit counselors. And today marks the start of a two-day event in Phoenix, another market struggling with high foreclosure rates and plummeting property values. Since the beginning of this year, HOPE NOW’s consumer outreach efforts have helped over 15,000 homeowners.

Foreclosures Continue to Burn Sun Belt's Biggest Metro Areas

Cities in the Sun Belt states, including California, Florida, Nevada, and Arizona, continued to dominate foreclosure rankings throughout the first half of 2009, accounting for 35 of the 50 highest foreclosure rates among metro areas with a population of 200,000 or more, RealtyTrac reported Thursday.

However, RealtyTrac says the foreclosure epidemic appears to be spreading to other areas of the country not previously considered foreclosure hot spots, such as Oregon, Idaho, Utah, Arkansas, Illinois and South Carolina. Increased activity in these states suggests much of the new foreclosure activity may be more directly related to growing unemployment than continuing fallout from subprime and adjustable rate loans.

James J. Saccacio, CEO of RealtyTrac, explained, “Foreclosure activity continued its upward trajectory nationwide and in the majority of metro areas in the first half of the year, but there are some significant differences beginning to show up in the data. While some of the markets that had the highest saturation of foreclosures over the past few years have seen declining rates, new markets like Provo, Utah, and Boise, Idaho, have seen large increases. As unemployment rates increase in different parts of the country, it’s very likely that we’ll see similar patterns develop elsewhere.”

Looking at RealtyTrac’s Midyear 2009 Metropolitan Foreclosure Market Report, Las Vegas posted the nation’s highest foreclosure rate, with 7.45 percent of its housing units receiving at least one filing in the first half of 2009 – that’s more than six times the national average and equates to one in every 13 homes. A total of 58,691 Las Vegas properties received a foreclosure filing during the first six months of the year.

The Cape Coral-Fort Myers metro area in Florida documented the second highest foreclosure rate. One in every 14 residential properties, or 7.20 percent of its housing units, have received at least one foreclosure filing this year.

Merced, California, claimed the No. 3 spot, with 6.89 percent – one in 15 – of its housing units receiving a foreclosure filing from January to June.

Both Cape Coral-Fort Myers and Merced reported a slight decrease in foreclosure activity from the previous six months but still experienced increasing foreclosure activity compared to the first half of 2008.

Five other metro areas in California made RealtyTrac’s top 10 list: Riverside-San Bernardino-Ontario (5.73 percent), Stockton (5.64 percent), Modesto (5.38 percent), Bakersfield (4.53 percent), and Vallejo-Fairfield (4.48 percent).

The Phoenix metro area (4.44 percent) and Orlando, Florida (4.28 percent) were also among the top 10.

All seven of these metro areas except for Stockton and Modesto reported increasing foreclosure activity from the previous six months and from the first six months of 2008.

Although Stockton, California, had the fifth highest metro foreclosure rate, activity actually decreased – down nearly 4 percent from the previous six months and nearly 13 percent compared to the first half of 2008.

Likewise, foreclosure activity in Modesto, which had the sixth highest foreclosure rate, decreased nearly 3 percent from the six months prior and is down more than 9 percent from the first half of last year.

Detroit continued to rank among the top 50 metro foreclosure rates, but activity there decreased 8 percent from the previous six months and 16 percent compared to the first half of 2008. Detroit’s foreclosure rate ranked highest in the nation in RealtyTrac’s 2006 and 2007 reports. During the first half of 2009, 1.86 percent of Detroit’s housing units received a foreclosure filing.

Foreclosure activity in Cleveland, which posted the nation’s sixth highest foreclosure rate in 2007, decreased 11 percent from the previous six months and 30 percent from the first half of 2008. With 1.36 percent of its housing units receiving at least one foreclosure filing, Cleveland’s foreclosure rate was still above the national average but was not among the top 50 metro foreclosure rates in the first half of 2009.

Other hard-hit Rust Belt cities posting year-over-year declines were Indianapolis and the Ohio cities of Toledo and Columbus.

Allison Testifies for More Foreclosure Aid

Herb Allison, the Treasury’s new assistant secretary for financial stability and former CEO of Fannie Mae, told lawmakers at a Senate Banking Committee hearing last week that the administration is considering another housing proposal that would require lenders to allow previous homeowners to stay in their foreclosed homes as renters.

Officials say that besides providing a residence option for former homeowners, the plan would also address the glut of vacant properties plaguing neighborhoods across the country and pulling down home values.

Sen. Charles Schumer (D-New York), said, "This could make sense as a last resort for troubled homeowners who would otherwise lose their homes and find themselves with nowhere to live."
William Apgar, HUD’s senior mortgage finance adviser, also testified that the administration is exploring foreclosure rentals as another mortgage relief option. However, he noted that in many instances, borrowers who have gone through the distress of the foreclosure process do not want to stay on as renters in the same property.

The idea is similar to a program launched by Freddie Mac in March, which gives homeowners the choice to rent their homes after foreclosure. Brad German, a spokesperson for the GSE, told the Washington Post, though, that the company’s rental program has not attracted many participants because most former owners instead choose to accept money to voluntarily vacate under its cash-for-keys program.

The administration is also considering an initiative that would provide mortgage assistance to the growing population of unemployed homeowners.

Apgar told lawmakers at the hearing, "The current very high level of unemployment is making the already difficult task of helping families struggling to meet their mortgage payments even harder."

New York Fed: Lax Lending Not to Blame

A recent study published by the New York Federal Reserve says that lax lending standards were not the air that inflated the market’s latest housing bubble and propelled the nation into an economic tailspin. Instead, the government bank argues that consumers’ misjudgments and swings in labor productivity played a significant role in the boom and bust of residential real estate.

James Kahn, author of the study and a professor of economics at Yeshiva University, explained, “What appears in retrospect to be relatively lax credit conditions in the early part of this decade may have emerged in part because of then-justifiable, although ultimately misplaced, optimism about income growth."

In the report, Kahn says a widely held view among market observers is that the rapid growth in home prices from the mid-1990s until the recent crash reflected a “bubble,” brought on by excessively lax lending standards and a belief that house prices would increase indefinitely. In this view, the bubble was destined to burst, triggering a dramatic decline in the housing sector.

Kahn contends it was consumer confidence that persuaded people they could afford more expensive homes. He says consumers believed they were working harder than the previous decade and expected their paychecks to likewise increase. Their optimism continued until 2007, Kahn says, when it became clear this was not the prevailing trend – a slowdown in productivity helped dash expectations of further income growth and stifle the boom in residential real estate.
These productivity swings helped determine the price of housing through their effects on income growth and long-term income expectations, Kahn says – both factors that directly influence what consumers are ready to pay for housing and what mortgage providers are willing to lend.

Using a recently developed model of housing prices, Kahn shows how a large share of price fluctuations over the last 45 years can be attributed to changes in productivity growth. Applied to the most recent housing cycle, the model suggests that the surge in home prices from the mid-1990s to 2007 was fueled at least in part by the belief that ongoing productivity advances would lead to continued strong growth in income.

Kahn explains that the relationship worked in reverse as evidence mounted in 2007 that productivity growth had slowed – at that time, expectations of further income growth declined, helping to quash the housing boom and jeopardizing mortgages and other investments.

Kahn’s argument attaches considerable importance to the perception of productivity shifts. He says housing market participants were slow to perceive the productivity decline because the data released through mid-2007 gave little indication of it. Subsequent data revisions, though, made it clear that productivity had in fact begun to decelerate in 2004.

According to Kahn, if productivity growth returns, then housing prices could bottom out and begin to move upward. But if productivity slows further or grows only modestly, he says property values will remain low or fall even further.

Report Says Investors Should Act Quickly

Despite recent negative information about the job market in the United States, a report issued last week shows the housing market is beginning to exhibit some signs of improvement. Because real estate investors can acquire distressed properties well below their actual market value – with savings ranging from 10 to 50 percent – the New York-based company says investors looking for large profit margins, particularly in some of the best investment markets, should act quickly.

Based on nationwide data, foreclosures in many of the top states for investors have dropped. For example, foreclosure rate in California is down by more than 3.5 percent and in Florida it’s fallen by nearly 2 percent. Arizona’s foreclosure rate slipped by almost 1.5 percent, while in Texas the rate dropped by just over 1 percent. In Georgia and Michigan, The largest drop recorded was in Nevada, which saw its foreclosure rate plummet by nearly 7.5 percent.

Many individual cities also saw notable decreases in their levels of foreclosures, including Salinas (-18 percent), Las Vegas (-9.5 percent), Chicago (-6 percent), Detroit (-4.3 percent), Atlanta (-3.2 percent), Phoenix (-1.6 percent), and Memphis (-1 percent).

Home prices in many states and some big cities have also started to creep upward, squeezing investors’ potential profit margins. There was an increase of less than a percentage point in the states of California, Georgia, and Texas, while prices rose by just over 1 percent in Florida and Michigan. Report found that housing prices are now averaging $64,000 in Ohio (the lowest in the country) and $343,000 in California (the nation’s highest average).

Price increases have been seen in several hot investment cities as well. The report shows in Miami and Orlando, property values are up 1.3 percent, and in Las Vegas they’ve risen 1 percent. In Phoenix, Atlanta, and San Diego, the company says prices have increased less than 1 percent, while in Denver they’ve jumped 2.3 percent. Foreclosurelistings.com reports the biggest leap in Ridgefield, Connecticut, where prices rose by more than 45 percent.

California Law Impacting Foreclosures

ForeclosureRadar, a company based in Discovery Bay, California that tracks every foreclosure in the Golden State, says it expected the new California Foreclosure Prevention Act to have little impact. But the company reported Tuesday that in fact, the day the law went into effect, it saw a significant decline in filings of Notice of Trustee Sale, which set the date and time of a foreclosure auction sale.

The law adds an additional 90 days to the waiting period between default notice and the filing of a Notice of Trustee Sale. However, lenders can avoid this requirement by putting in place a comprehensive loan modification program, and nearly all major lenders operating in the state had done so and were exempt as of June 16. But ForeclosureRadar reported that it actually documented a drop of nearly 50 percent in Notice of Trustee Sale filings among lenders who were exempt – an outcome for which the company says it is struggling to find an explanation.

Sean O’Toole, founder and CEO of ForeclosureRadar, said, “A number of lenders appear to have self-imposed California’s latest foreclosure moratorium on themselves, despite having received an exemption from it. Given the number of exempt lenders it was quite surprising to see Notice of Trustee Sale filings drop by nearly 50 percent the day the new law went into effect.”

Among the larger lenders who were exempt, ForeclosureRadar reported that Bank of America’s notice of sale filings declined by 48 percent from May to June, and Litton Loan Servicing’s dropped by 41 percent. At the same time, the company says a handful of lenders dramatically increased their filings in June, including CitiMortgage by 69 percent and Downey Savings by 45 percent.

ForeclosureRadar said California’s Notice of Trustee Sale filings began climbing during the later part of the month, so the company still contends it is unlikely the law will have a long-term impact on the state’s foreclosure activity.

Overall, ForeclosureRadar reported that Notices of Trustee Sale dropped by 28.7 percent in June and are down 14.8 percent compared to a year ago. However, the company’s California Foreclosure Report released Tuesday, showed all other foreclosure trends were up significantly in the state, with sales at auction rising for the third month in a row and default notices at near-peak levels.

Foreclosure sales jumped 24.7 percent in June –after a 31.9 percent rise in May, and a 35 percent April increase. However, the June figure is 8.2 percent lower than the prior year. A total of 22,291 California foreclosures were taken to sale at auction last month, according to ForeclosureRadar, representing loan value of $9.57 billion dollars.

The company said opening bids set by lenders were, on average, 39.3 percent lower than the loan balance. Forty-six percent of sales were discounted by 50 percent or more.

Sales to third-party bidders in June increased by 18.3 percent from May, to 2,687 foreclosures. ForeclosureRadar said the majority of foreclosures still continue to be taken back by the lender – 87.9 percent, or 19,604 sales, with a total loan value of $8.44 billion, were returned to the lender in June.

Notices of Default, the initial step in the foreclosure process, rose by 11.8 percent to the second highest level on record at 45,691 filings, after a 4.2 percent drop the prior month. Default notices were up 10 percent compared to June 2008.

A new statistic ForeclosureRadar says it is watching closely is the number of properties actively scheduled for sale – meaning that a Notice of Trustee Sale has been filed to set the auction date and time, but the foreclosure has not yet been sold or cancelled. Under California’s foreclosure code, a foreclosure sale can be postponed repeatedly for one year before a new Notice of Trustee Sale has to be filed. While postponements are quite common, they have reached record levels in recent months, ForeclosureRadar reported.

Congressman Proposes Home Loan Plan for Unemployed

Rep. Barney Frank (D-Massachusetts) wants to ensure the growing population of jobless Americans don’t fall victim to foreclosure. At a House Financial Services Committee hearing on Thursday – a committee which Frank chairs – he pushed for another $6.5 billion stimulus program he’s calling “TARP for Main Street.”

The proposal includes a $2 billion loan program for unemployed homeowners who do not qualify for other mortgage aid since they no longer have a steady income stream to claim. The initiative would essentially bring back a 1975 program that provides credit to Americans who’ve lost their jobs so they don’t also lose their home – however borrowers would have to secure the loan with their property.

One billion dollars would also be earmarked to build and maintain affordable housing, $1.5 billion to revitalize foreclosed and vacant homes, and $2 billion to help apartment tenants keep their residence if the management company defaults on the mortgage.

The program would reportedly be funded with the dividends banks are paying the Treasury for the taxpayer dollars they received as part of Congress’ $700 billion bailout.

Frank is also fast-tracking the White House’s proposed bill that would create a new federal regulatory office, the Consumer Financial Protection Agency. The agency would be the primary protector of consumers’ rights related to the purchase of financial products such as mortgages, credit cards, and other loans.

In a statement, Frank said, “Recent reports about the lack of mortgage modifications and increases in various fees only reinforce the need for this bill. I am confident that we will produce a bill that will provide greater consumer protections while in no way burdening the legitimate activities of responsible banking.”

Foreclosure Starts on the Rise!

Jacksonville, Florida-based Lender Processing Services (LPS) says foreclosure starts have increased to their second highest level since the company began keeping records in 1992. LPS released its June Mortgage Monitor Report last week, which provides mortgage industry performance indicators based on data collected as of May 31.

LPS' analysis shows that foreclosure starts in May increased 4.3 percent. Based on LPS' market data, rising foreclosures can be attributed to a larger number of states than the typical Sun Belt culprits. The company said Nevada, Florida, Arizona, California, Maryland, Michigan, Hawaii, Georgia, Rhode Island, and New Jersey all posted foreclosure starts above the national average, with the states of Washington, Illinois, and Maryland experiencing the largest percentage increases.

Total mortgage delinquencies also rose in May, to 8.49 percent, according to LPS' study. That figure represents a 5 percent increase over April and a 50 percent year-over-year climb. The LPS Mortgage Monitor also shows that the quality of loan originations has been improving, with 2009 delinquency curves well below prior years. With more attention focused on improved credit scores, lower LTV ratios, income, and documentation, LPS says overall loan vintage quality has escalated.

Based on LPS' research, the number of newly delinquent loans reached 637,822 last month. Roll volumes, which reflect loans moving to a more delinquent status (for example, moving from 30 days to 60 days delinquent), increased month-over-month, with the exception of loans moving from 60 to 90 days delinquent, perhaps signaling that more workouts are being completed for homeowners that are at the brink of foreclosure. But the April-to-May 2009 time period marks the first significant increase in loans rolling from current to 30-days delinquent in five years.

New Research Reveals One-Quarter of Mortgage Defaults Are Strategic

New research released last week by the University of Chicago Booth School of Business and the Kellogg School of Management at Northwestern University in Evanston, Illinois, suggests that a novel phenomenon is at hand in the fallout of today's housing crisis - strategic default on mortgage loans.

According to the researchers, given that homes in many markets have lost more than 30 to 40 percent of their value, a growing number of homeowners say they would simply walk away from their loans, without fear of repercussion. Based on data collected from surveys conducted within the last six months as part of the universities' Financial Trust Index, the researchers estimate that more than a quarter of defaults on mortgage loans are strategic, especially when home values have fallen by more than 15 percent.

The research project was led by Paola Sapienza, Kellogg School of Management at Northwestern University, and Luigi Zingales, University of Chicago Booth School of Business – both co-authors of the quarterly Chicago Booth/Kellogg School Financial Trust Index – as well as Luigi Guiso with the European University Institute. Their paper, entitled "Moral and Social Restraints to Strategic Default on Mortgages," finds that a disturbing number of American homeowners are inclined to purposely default when the value of their mortgage exceeds the value of their house, even if they can afford to make the mortgage payments.

The researchers say that the Obama administration's housing policy has been largely influenced by a study of the Boston housing market during the 1990-91 recession, in which homes devalued by approximately 10 percent. This study found that very few people who could afford their mortgage chose to walk away from their homes. The new research issued last week confirms this claim that homeowners refrain from defaulting as long as negative equity does not exceed the 10 percent mark.

After that level, however, it shows that homeowners start to default at an increasing pace, and walk away massively after decreases of 15 percent or more. In fact, the researcher say 17 percent of households would default, even if they can afford to pay their mortgage, when the equity shortfall reaches 50 percent.

Sapienza commented, "Housing policy under the current administration has focused on reducing households' cash flow problems in response to the housing crisis, but no one has addressed the negative equity issue as part of public policy regarding housing. We're in a completely different economic environment today, where for the first time since the Great Depression millions of Americans have mortgage loans that exceed the value of their home."

Sapienze and his colleagues say moral and social variables play a significant role in predicting strategic default. People surveyed who said it was immoral to default were 77 percent less likely to declare their intention to do so, while people who know someone who defaulted were 82 percent more likely to say they would default themselves.

According to Zingales, the social pressure not to default is weakened when homeowners live in areas of high foreclosures or know others who defaulted strategically. He said, “The predisposition to default increases with the number of foreclosures in the same ZIP code."

The researchers also noted that mortgage default is considered less morally wrong in the Northeast and Western regions of the country. They said that homeowners under the age of 35 and over the age of 65 were less likely to say it was morally wrong to default compared to middle-aged respondents, and respondents who supported government intervention to help homeowners were also less likely to say strategic default is immoral.

Sapienza added, "As defaults become more common, the social stigma attached with defaulting will likely be reduced, especially if there continues to be few repercussions for people who walk away from their loans. This has an adverse effect on homeowners who do pay their mortgages, and the after-effects of more defaults and more price collapse could be economic catastrophe."