Thursday, April 5, 2012
The Second Foreclosure Tsunami Is Coming, And Is About To Kill Any Hopes Of A "Housing Bottom"
In what appears to be surprising news for some, Reuters has an article titled "Americans brace for next foreclosure wave" whose key premise is that "a painful part two of the [housing] slump looks set to unfold: Many more U.S. homeowners face the prospect of losing their homes this year as banks pick up the pace of foreclosures." Thank the robosettlement, where in exchange for a few wrist slaps, contract law was thoroughly trampled by America's attorneys general, but far more importantly to the country's crony capitalist system, the foreclosure pipeline was once again unclogged, and whether one does or does not have a legal title on a given house, the banks are now fully in their right to foreclose on it. What this means also is that America's record shadow housing inventory, which is far greater than any fabricated number the NAR reports on a monthly basis, is about to get unleashed on buyers, shifting the supply curve much further to the right, as up to 9 million new properties slowly but surely appear on the market. And while many will no longer be able to live mortgage free, forcing them to go out and rent (and no longer be able to afford incremental iGizmos), it also means that the prevalent price of homes is about to take another major tumble, making buffoons out of all those who, once again, called for a housing bottom in early 2012. Here's the simply math: there will be no housing bottom until the 9 million excess homes clear. Period. Until then it is a buyer's market, even if said buyer is unable to obtain bank financing, as ultimately it will be the seller who is forced to monetize (or vacate if underwater) their home in a world of ever diminishing cashflows. The fear of the supply onslaught will only make the dumpage that much faster.
As a reminder, this is what America's recover shadow inventory looked like recently:
For those curious how much more foreclosed properties are about to hit the market, we have the answer. Courtesy of RealtyTrac we know how many homes were foreclosed upon in the period until November 2010, when robosigning became a prevalent, if short-lived issue, or roughly 330,000 a month. In the aftermath, this average has dropped to 227,000 a month: a roughly 100,000 difference in less foreclosures each month! Which means that in the deferred amount of foreclosures, over and above the already endogenous deterioration in home prices and declining household income, means that there is at least 1.6 million in homes that are just waiting for a green light to be foreclosed upon, sending shadow inventory in the double digit millions, and unleashing a selling wave unlike any seen before. Behold the deffered foreclosures in all their glory:
Translation: Just like John Paulson lost billions on his massively wrong way bets that housing would soar (ironically, after getting the move lower correct), so Goldman's recent bet that properties will rebound is about to cost the firm dearly.
Because at the end of the day, it is all about supply and demand, or, said otherwise, money.
Reuters explains further:
"We are right back where we were two years ago. I would put money on 2012 being a bigger year for foreclosures than 2010," said Mark Seifert, executive director of Empowering & Strengthening Ohio's People (ESOP), a counseling group with 10 offices in Ohio.
"Last year was an anomaly, and not in a good way," he said.
In 2011, the "robo-signing" scandal, in which foreclosure documents were signed without properly reviewing individual cases, prompted banks to hold back on new foreclosures pending a settlement.
Five major banks eventually struck that settlement with 49 U.S. states in February. Signs are growing the pace of foreclosures is picking up again, something housing experts predict will again weigh on home prices before any sustained recovery can occur.
Mortgage servicing provider Lender Processing Services reported in early March that U.S. foreclosure starts jumped 28 percent in January.
Well, no. LPS which is going through legal troubles of its own, unfortunately, is very much, less than credible. For the only real source on foreclosure data, we go to RealtyTrac, where we find that February foreclosures hit 206,900, the second lowest in many years, and higher only than December 2011's period low 205,000 (see chart above). But while there is no need to fabricate data, foreclosures will eventually come, as banks, first slowly, then very, very fast, start sending out foreclosure notices. What happens next will be entire neighborhoods with "Foreclosure" signs in front of the houses, doing miracles to prevailing home prices.
A January report by the Neighborhood Economic Development Advocacy Project in New York found that in the first half of 2011 the number of 90-day pre-foreclosure notices in New York City outnumbered court foreclosure actions by a ratio of 14 to one, indicating that while proceedings were initiated against many homeowners, they were left incomplete.
"Now the banks have a settlement, foreclosure numbers for 2012 are going to be high," said NEDAP co-director Josh Zinner.
A recent survey by the California Reinvestment Coalition, an umbrella group of nearly 300 non-profit groups in the state, of member agencies found 75 percent of respondents expected increased demand for their foreclosure prevention services in 2012 but more than a third had to scale back services because of funding cuts.
"Funding is a major concern given what our members expect for this year," said associate director Kevin Stein.
Needless to say, the return of reality, i.e., when one actually has to pay for living somewhere, instead of living 5 years without making a mortgage payment like the Ritters, means a return of ever louder calls for socialist debt principal reduction. What is odd is that nobody seems to care: certainly not the millions of other hard working Americans who would end up footing the bill.
All this has non-profits intensifying calls for the Federal Housing Finance Agency to drop its opposition to allowing the government-backed mortgage giants Fannie Mae and Freddie Mac it regulates to reduce principal for underwater homeowners.
Principal reduction involves reducing the amount borrowers owe in order to make a loan modification affordable for struggling homeowners. Republicans and the FHFA oppose principal reduction because of the risk of "moral hazard"- that homeowners who do not need help will seek to abuse largesse and have their mortgages reduced too.
"Until banks engage in meaningful principal reduction as a matter of course," ESOP's Seifert said after a recent protest at a Chase branch in Cleveland, "this crisis will not end."
Well then it won't. Because since every bank asset is another bank's liability, unless the government pulls a GSE, and funds the wholesale mortgage reduction (call it the "final solution" of ubiquitous and unquestioned socialism), banks will not do this. And while this next bank bailout is only years (at most) away, in the meantime we will see banks do just what they always do: foreclose once again, and release the pent up vacant homes into the market. Which for anyone who has taken Econ 101 means prices are about to take yet another dive lower, and the entire housing recovery plan can be scrapped. As to what it means for the Fed's plans for future easing, well... we believe our readers are smart enough to figure this out on their own.