Foreclosures Still Climbing in California

Despite the fact that lenders in California are voluntarily postponing the majority of foreclosure sales – 73 percent, to be exact – ForeclosureRadar says its market data reveals a steady increase in the number of foreclosed homes in the state sold at auction.

The company issued its monthly California Foreclosure Report this week, which shows that sales jumped 31.9 percent in May, following a 35 percent increase the prior month. Notices of trustee sale, which set the auction date and time, also rose a significant 42 percent from April, indicating that foreclosure sales are likely to continue to rise in the weeks and months ahead. However, notices of default, which are the first step in the foreclosure process, fell 4.2 percent from April.

In total, Foreclosure Radar reported, there were 17,871 foreclosed homes taken to auction in California last month. Though loan values represented a total of $8.01 billion, the company said 83 percent of the sales opened with a discounted bid that averaged just 58.6 percent of the loan value.

The majority of foreclosures put up for sale continue to be taken back by the lender. According to Foreclosure Radar, 87.9 percent, or 15,599 sales, with a total loan value of $6.98 billion, went back to the lender in May.

Third-party foreclosure auction sales continued to rise, as well, reaching 2,272 last month – that represents a 39 percent jump from the prior month, and a significant 228.3 percent increase from May 2008. Based on Foreclosure Radar's market data, more than half of third-party sales occurred in just five counties: Los Angeles, San Diego, Orange, Riverside, and Sacramento.

Foreclosure Radar tracks every foreclosure auction throughout the Golden State, making it uniquely positioned to see not only how many foreclosures were initiated, but also the current status of those foreclosures and their ultimate outcomes, whether postponed, canceled, or sold. By the end of May, the company said, there were record 111,824 foreclosures scheduled for sale in California, yet just 15.9 percent were actually sold, versus actual sales of 49.2 percent a year earlier.

Of those foreclosures currently scheduled, Foreclosure Radar says 40 percent are being postponed to a future date at the lender's request, and another 33 percent are being postponed based on the mutual agreement of lender and borrower. The company says this clearly demonstrates that lenders are indeed delaying foreclosure in the majority of cases on their own accord. It should also be noted that lenders were under no obligation in May to offer a loan modification program, short sale, or other resolution, as they are now that the statewide foreclosure moratorium went into effect this week.

Sean O’Toole, founder and CEO of Foreclosure Radar, commented, “While many complain that lenders are foreclosing too aggressively, and others claim a wave of foreclosures sales are imminent, the data actually shows that lenders are doing everything possible to delay foreclosure. The reality is that we have very few homeowners being foreclosed on when viewed as a percentage of those scheduled to be foreclosed on, in default, delinquent, or upside down in their mortgage.”

Lending Down at Bailed-Out Banks

Federal regulators completed unprecedented stress tests of the largest banks' balance sheets last month, and found that 10 of the 19 institutions screened had enough capital on hand to not only sustain lending in the current environment, but could continue lending even if economic conditions worsen. Based largely on these conclusions and investors' seemingly renewed confidence in the nation's banking system, regulatory supervisors have given 10 major lenders the go-ahead to repay the capital injections they received from the government, which were intended to improve market liquidity and loosen the banks' tight grip on credit.

However, according to a report released last week by the Treasury Department, lending has actually declined at 500 of the 600-plus banks that have received federal bailout money. The report shows that outstanding loans for these banks totaled $5.23 trillion in March, down 0.8 percent from $5.28 trillion in at the end of February.

The drop in loans outstanding was a bit more pronounced at the 21 largest banks to receive taxpayer dollars. The Treasury said the aggregate loan balances at these leading institutions slipped one percent to an average of $4.38 trillion for March, down from $4.42 trillion in February. The Treasury said, though, that this decline was largely due to borrowers paying down outstanding debt.

In spite of the declines in loans held on these banks’ balance sheets, originations of new loans accelerated, the report said. The nation's top 21 banks reported an increase in total new lending of 27 percent from February to March (about $63 billion). However, the Treasury Department noted that increases in first lien mortgages and other consumer loans was smaller than in February.

Gary Koster, head of the Real Estate Fund Services Practice at Ernst & Young LLP, said, "It seems that, despite the widespread infusions of capital into various lending institutions through economic stimulus programs, it appears there is still very little, if any, lending taking place in the real estate industry right now."

Survey: Refinances Continue to Decline

The Mortgage Bankers Association (MBA) released its Mortgage Applications Survey on Wednesday, for the week ending June 5, 2009. The association's study shows that refinances, typically an effective tool for lowering distressed homeowners' monthly payments, continued to fall last week – a trend that has prevailed for several weeks now. Applications for new purchases, however, held steady.

Based on MBA's market data, the total volume of mortgage loan applications has dropped by 7.2 percent on a weekly basis. But compared to the same time last year, the number of home loan requests is up 7.6 percent.

MBA's Refinance Index decreased 11.8 percent from the previous week. The refinance share of mortgage activity plummeted to 59.4 percent of total applications, down from 62.4 percent the previous week. This is the lowest the refinance share has been since November 2008.

The association said its Purchase Index, on the other hand, increased 1.1 percent from one week earlier. The four week average is up 0.5 percent for this measurement of home buys.

MBA also reported on average mortgage interest rates for the home loan petitions submitted last week. Rates for all types of mortgage products in the survey proceeded to follow the ascensions we saw the week prior.

According to MBA's study, the average interest rate for 30-year fixed-rate mortgages (FRM) increased to 5.57 percent, up more than a quarter of a percentage point from 5.25 percent the week before.

The average rate for 15-year FRMs rose to 5.10 percent last week, also an increase of more than a quarter point, from 4.80 percent the week prior.

MBA said the average contract interest rate for one-year adjustable-rate mortgages (ARMs), also increased. Last week, the 1-year ARM rate was 6.75 percent, compared to 6.61 percent one week earlier. The ARM share of activity increased to 3.4 percent of total applications.

MBA's survey covers more than 50 percent of all U.S. retail residential mortgage applications. Respondents include mortgage bankers, commercial banks, and thrifts

One fourth of sellers reduce asking price

Sellers dropped their asking price on nearly one in four homes listed for sale on Trulia.com during the last year by an average of 10.6 percent, the company said today in a report identifying the markets experiencing the most and biggest price reductions.

Although Trulia's analysis did not include foreclosure properties, it showed that asking prices are being slashed more severely in areas hardest hit by foreclosures.

Price reductions averaged 23 percent in Detroit, 16 percent in Las Vegas, 15 percent in Miami, and 13 percent in Phoenix and Mesa, Ariz., Trulia said.

But luxury markets like New York City also saw price reductions exceeding the national average. Homes with a selling price above $2 million were reduced by 14.3 percent on average, compared with 9.7 percent for homes under $2 million.

While 23.6 percent of homes listed for sale nationwide on Trulia between June 1, 2008 and June 1, 2009, saw at least one price reduction, the percentage was considerably higher in some markets. Among the 50 largest U.S. cities by population, the 12 with the greatest percentage of listings with price reductions were scattered around the nation, Trulia said. They were:

· Jacksonville, Fla. – 36 percent
· Tucson, Ariz. – 32 percent
· Boston, Mass. – 32 percent
· Los Angeles, Calif. – 32 percent
· Columbus, Ohio – 31 percent
· Dallas, Texas – 31 percent
· Honolulu, Hawaii – 31 percent
· Minneapolis, Minn. – 31 percent
· Austin, Texas – 30 percent
· Washington, D.C. – 30 percent
· Baltimore, Md. – 30 percent
· Las Vegas, Nev. – 30 percent

Anti-Predatory Lending Bill Passes California Assembly

As federal lawmakers continue to pour over proposals that would tighten anti-predatory lending statutes throughout the nation, California may become one of the first states to enact its own mortgage reform legislation.

Earlier this week, the California Assembly passed AB 260, and it has headed to the state Senate for review. The bill was sponsored by Assembly member Ted Lieu (D-Torrance), who says the measure will “ban the worst predatory lending practices.”

The bill would create a stronger fiduciary standard for mortgage brokers in the state, across all loan products. It eliminates compensation incentives, namely yield-spread premiums, that lenders pay to brokers for contracting higher- or adjustable-rate loans, such as those which prevailed in the subprime era.

AB 260 directly prohibits steering borrowers toward inferior mortgages and explicitly bars brokers and lenders from making false or deceptive statements regarding subprime loans. The bill also limits prepayment penalties, bans negative amortization loans, and establishes strong enforcement and punishment for abusive subprime lending. The measure would give the state Attorney General the power to revoke state licenses and impose a $10,000 fine per violation.

“Enough is enough,” said Lieu, who is presently in the running for the California Attorney General seat. “We must act to preserve homeownership opportunities and prevent the next crisis in the subprime lending market.”

Lieu points out that homeowners in California continue to experience record foreclosures as a direct result of irresponsible lending. According to RealtyTrac, one in every 138 homes in the state received a foreclosure filing in April – the highest state foreclosure rate in the nation. Total foreclosure activity in California is up 42 percent from April of last year.

Assembly Speaker Karen Bass (D-Los Angeles) commented,“So many Californians bought homes to provide a foundation for their families only to have it undermined by irresponsible lenders and faulty lending practices. Assemblymember Lieu’s AB 260 is real reform of the mortgage industry that will give homebuyers the piece of mind they need to invest in and stabilize our economy.”

A similar mortgage reform bill authored by Lieu, AB 1890, was vetoed by Gov. Arnold Schwarzenegger as soon as it hit his desk last year. The governor said that while the legislation was “well intentioned,” it was unbalanced and would stifle competition within the marketplace because the new statutes did not apply to federally regulated entities.

But since that time, Gov. Schwarzenegger has issued a pointed call to lawmakers to do something about the spiraling housing crisis in California and publicly commented that mortgage reform is now a top priority. Lawmakers hope AB 260 will see Gov. Schwarzenegger's signature.

A spokesperson from Assemblymember Lieu's office told DS News they feel the new legislation has been altered enough from last year's AB 1890 version to address the governor's previous concerns and will be better received.

Lieu was also the author of the California Foreclosure Prevention Act, which did find favor with the governor. He signed it into law in February to help stem the state's foreclosures. Effective June 15, the act will impose a 90-day foreclosure moratorium unless a lender offers a comprehensive loan modification program designed to keep people in their homes.

Home Prices Continue to Decline

Data through March 2009, released Tuesday by Standard & Poor's, show the U.S. National Home Price Index continues to set record declines, a trend that began in late 2007 and prevailed throughout 2008. The company said residential real estate depreciation continued at a steady pace into March, with the overall index dropping 7.5 percent between the fourth quarter of 2008 and the first quarter of 2009. Nationally, home prices are down 19.1 percent compared to a year ago.

The S&P/Case Shiller 10-city composite dropped 2.1 percent from February to March, a pace equal to the decline between January and February. On an annual basis, the 10-city index is down 18.6 percent. The 20-city composite also fell at the same rate it did the month prior. In March, the 20-city figure recorded a decline of 2.2 percent, and a year-over-year depreciation of 18.7 percent.

David M. Blitzer, chairman of the index committee at Standard & Poor's, elaborated on the results, saying, "All 20 metro areas are still showing negative annual rates of change in average home prices, with nine of the metro areas having record annual declines. Seventeen metro areas recorded a monthly decline in March.”

But Blitzer added, “On a positive note, nine of MSAs are reporting a relative improvement in year-over-year returns and nine of the 20 metro areas saw an improvement in their monthly returns compared to February. Furthermore, this is the second month since October 2007 where the 10- and 20-city composites did not post a record annual decline.”

Still, Blitzer said, the March data shows no evidence that a recovery in home prices has begun.
According to S&P's study, Minneapolis, Detroit, and New York had the worst showing in March. Minneapolis' home values saw a record decline of 6.1 percent – representing the largest monthly decline of any metro area in the history of S&P's indices. For March, Detroit and New York also reported their largest monthly declines, returning -4.9 percent and -2.5 percent, respectively.
The cities that fared the best, based on S&P's market data, were Charlotte, where prices actually increased by 0.3 percent; Denver, which had a gain of 0.1 percent; and Dallas, where property values remained flat from February to March.

In terms of annual declines, the three worst performing metros in S&P's analysis continue to be the same three from the Sunbelt, each reporting negative returns in excess of 30 percent. Phoenix was down 36 percent, Las Vegas declined 31.2 percent, and San Francisco fell 30.1 percent. S&P reports that Denver, Dallas, and Boston continue to fare the best in terms of annual declines, down only 5.5 percent, 5.6 percent, and 8 percent, respectively.

The Federal Housing Finance Agency (FHFA) released a similar home price study on Wednesday, which confirmed continued declines in property values, but at a more modest pace.
FHFA's purchase-only Home Price Index (HPI) showed that in the first quarter of 2009, U.S. home prices fell 0.5 percent compared to the fourth quarter of last year. The agency reported that nationally, property values actually increased in January and February, but were offset by a decline in March. The first quarter depreciation of only half a percentage point is a much slower pace than the 3.3 percent decline reported for the prior quarterly period, FHFA said. Over the past year, the agency says prices have fallen 7.1 percent.

FHFA’s all-transactions HPI, which includes data from both home purchases and refinancings, showed more strength over the latest quarter than the purchase-only index. The all-transactions figure rose 0.4 percent from the fourth quarter of last year and is down only 3.3 percent for the year.

FHFA Director James B. Lockhart, commented, “Our latest data are consistent with growing evidence that housing market conditions may be stabilizing in some parts of the country, especially areas not covered by the other major repeat sales price index. I am hopeful that this first quarter data combined with recent market stimulus programs, such as the first-time homebuyer tax credit and President Obama’s Making Home Affordable program may mean that home price depreciation may be easing.”

The industry is certainly not short on home price reports and analysis, and sometimes the differing numbers that are tossed around can lead to confusion, particularly when it comes to housing data that varies significantly from market to market. Both the S&P and FHFA indexes employ the same fundamental repeat-valuations approach, but there are a number of data and methodology differences. FHFA explained the dissimilarities in the two property value reports:
a. The S&P/Case-Shiller indexes only use purchase prices in index calibration, while the all-transactions HPI also includes refinance appraisals. FHFA’s purchase only series is restricted to purchase prices, as are the S&P/Case-Shiller indexes.

b. FHFA’s valuation data are derived from conforming, conventional mortgages provided by Fannie Mae and Freddie Mac. The S&P/Case-Shiller indexes use information obtained from county assessor and recorder offices.

c. The S&P/Case-Shiller indexes are value-weighted, meaning that price trends for more expensive homes have greater influence on estimated price changes than other homes. FHFA’s index weights price trends equally for all properties.

d. The geographic coverage of the indexes differs. The S&P/Case-Shiller National Home Price Index, for example, does not have valuation data from 13 states. FHFA’s U.S. index is calculated using data from all states.

Converting Primary Residences to Rental Properties More Difficult

The housing market has been as uncertain as the next monthly unemployment figures. Families have put home purchases and remodeling projects on hold, waiting for a positive sign in consumer confidence -- or an upward, consistent move in the stock market -- to make a big-ticket decision.

A friend of mine, whose two daughters are grown and gone, would like to remodel a home in the neighborhood, sell his present residence, and then move in to the remodel. Given the present conditions, he doesn't feel he can do either. He's uncomfortable with investing a ton of dollars on the remodel that he may otherwise need for day-to-day expenses, and he's afraid there's already too much inventory now on the market to list his home for sale.

"The remodel may be closer," he said. "There are a lot of people out there now willing to work for a lot less than they were two years ago. If the drop in labor costs reaches a point that it equals what some of my investments have lost, it's close to a wash. I might as well do it."
Borrowers who currently own their home typically have three options when they decide to purchase a new principal residence. They can sell the current residence and pay off the outstanding mortgage, make the property into a second home, or convert the property to an investment property. In the past two years, more and more people have been unable to sell and have been forced to consider the two other options.

However, unless you have a lot of cash, those two options are not as easy to execute as they were two years ago. In order to ensure that borrowers have sufficient equity and/or reserves to support both the existing financing and the new mortgage being originated, Fannie Mae is updating the policies for qualifying borrowers who are purchasing a new principal residence and converting their existing principal residence to a second home or investment property.

Perhaps the most stringent new rule requires borrowers to have a reserve amount set aside equal to six months of principal, interest, taxes and insurance (PITI) payments on both homes when converting the primary residence to a rental or a second home. Previous guidelines did not include reserves on both homes.

Lenders do have some leeway in the case of a second-home conversion. Lenders may consider reducing reserves of no fewer than two months for both properties if there is documented equity of at least 30 percent in the existing property. The value can be derived from an appraisal, automated valuation model (AVM), or broker price opinion (BPO), minus outstanding liens. The previous guidelines did not include a required equity percentage.

If the owner wishes to convert the primary residence to a second home, the current and the proposed mortgage payments must be used to qualify the borrower for the new transaction.
If the current residence is converted to an investment property, Fannie Mae will continue to permit up to 75 percent of the rental income to be used to offset the mortgage payment. Again, the new twist is the needed documented equity of at least 30 percent in the existing property. The rental income must be documented with a copy of the fully executed lease agreement, and the receipt of a security deposit from the tenant and deposit into the borrower's account. If the 30 percent equity in the property cannot be documented, rental income may not be used to offset the mortgage payment.

If the current principal residence is a pending sale, but the transaction will not be closed (with title transfer to a new owner) prior to the new transaction, both the current and the proposed mortgage payments must be used to qualify the borrower for the new transaction. This sometimes occurs unexpectedly when an escrow is delayed or when an employee is transferred to a new location and buys a new home before the previous home sells.

Who can afford to pay cash for an additional home without first selling their primary residence? Surprisingly, more than four out of 10 investment buyers and more than three in 10 vacation-home buyers paid cash for their properties, with large percentages indicating that portfolio diversification was a factor in their purchase decision, according to recent study by the National Association of Realtors.

All cash for real estate -- proof that somebody thinks it's a good idea.