Bring on the short sales, foreclosures
Commentary: Tough love is what housing market needs
By Lou Barnes, Friday, May 9, 2008.Mortgage rates are sliding below 6 percent on a stock market fade, that in turn caused by credit crunch reality: Fear of big-firm dominoes is past, but credit will be scarce and expensive for another year or more. No dominoes, but many, many shoes yet to drop.
Now $125 oil and resulting inflation has everybody rattled, blowing ultimate-top forecasts to $150-$200 (which means nobody knows). Central bankers worldwide are linked by euphemism: "We are prepared to deal with inflation as necessary." However, they can't deal with it by issuing rules, enforcing regulation, passing legislation, or spraying Raid! or Agent Orange.
There are only two ways out. The first, underway: Exert monetary restraint and hope to blazes that a gentle global slowdown leads to a collapse of overshot commodity prices. Despite rate cuts and lending-of-last-resort, even our Fed is on the tight side. If that doesn't work, turn to the Grim Reaper of economics: Central banks must "destroy demand." Not since Paul Volcker stood on the brakes from '79-'82.
A third way: Politicians can undercut the central bankers. A good start: Suggest that gasoline prices are too high. Our leaders may not be willing to tell the people the truth, but markets will. American energy imports fell by about 2 percent last year, but consumption in the China/India/Russia/Middle East bloc (same-size market) rose by 4 percent. U.S. coal was $45/ton last year and is now $99; natural gas is up 45 percent, and it's spring, not winter.
Congress, federal agencies, including the Fed, and local governments agree on the need for a big, new effort to prevent foreclosures, with White House opposition more on fine points of style than purpose. I fear that these measures -- any measures -- will fail and distract from effective means to soften the housing landing.
The elephant in the room, who cannot be mentioned in polite company: We gave mortgages to a few million households with deficient long-term financial behaviors, hopelessly incompatible with home ownership.
That's a hell of a thing to say about fellow citizens, but it is the case. "Subprime" by definition meant below the minimum standards of the FHA. Roughly $1.5 trillion will default: half of subprime and a like amount of the worst of alt-A.
A year of all-out foreclosure prevention by traditional means has failed: recasting, forbearing, capitalizing interest, refinancing, canceling adjustment ... all. The new measures include writing down loans to the level of fallen market value and refinancing the remainder. Fairness aside (deeply unfair to families who tough out this cycle), two realities will defy the new efforts. First, write-down/recast will leave these households still with no equity, no upside to defend, and new monthly payments still higher than rent on equivalent housing. That ownership-rent gap has gaped throughout the cycle. The good news for a foreclosed family: Replacement housing is cheap and plentiful.
Those in authority demanding foreclosure rescue, Barney Frank and most of Congress, joined by compassionate Americans, cannot conceive the financials of a 575 FICO subprime applicant: a dozen or more late payments, several defaulted loans, and a large mass of consumer debt outstanding; poor job stability (temporary, seasonal, intermittent, commissioned sales); also no money, no savings, retirement or otherwise, often tens of thousands in consumer debt, huge negative net worth ... before purchase.
"But, you bailed out Wall Street -- why can't you do the same for these people facing foreclosure?"
Bear Stearns was not "bailed out." It was liquidated in an orderly manner.
Wise, tough-love policies would encourage rapid recycling of foreclosures, enabling quick acceptance of short-sale offers by servicers terrified of value second-guessing, and above all, making financing available for strong households to buy the foreclosures. The marketplace can absorb the volume, but it needs help. Orderly liquidation.
(Before you come after me with tar and feathers, know that my mother lost her Ada, Okla., home as a teenager in the 1930s. I know what foreclosure means.)
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
***
What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.
All rights reserved. This article may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of Inman News. Use of this article without permission is a violation of federal copyright law.
Bookmarking Sites
Add A Comment
You must login or register to post a comment.
Submitted by Glenn Race on May 9, 2008 - 3:49pm.
Right on Lou!
Submitted by Jodi Summers on May 9, 2008 - 4:02pm.
I always enjoy hearing Lou Barnes’ opinions, and I’m curiously watching as to how we’re going to get out of this situation the banks have created by giving loans to people who didn’t necessarily qualify.
Jodi Summers
Sotheby's International Realty Santa Monica
jodi@jodisummers.com
http://www.SoCalInvestmentRealEstate.com
http://www.SoCalIndustrialRealEstateBlog.com
http://www.SoCaMultiunitRealEstateBlog.com
http://www.SoCalOfficeRealEstateBlog.com
http://www.SoCalGreenRealEstateBlog.com
http://www.SantaMonicaLandmarks.com
http://www.SantaMonicaPropertyBlog.com
**
We are what we repeatedly do. Excellence, then, is not an act, but a habit. - Aristotle
Submitted by RealtyStore on May 9, 2008 - 6:04pm.
Very interesting article.
Submitted by Diane Cohn on May 9, 2008 - 7:41pm.
Lou, I agree wholeheartedly. Sometimes it's better just to puke and be done with it.
Diane Cohn, Realtor
www.renorealtyblog.com
Submitted by Sean OToole on May 9, 2008 - 11:10pm.
I'm 100% with you on orderly liquidation, the need for quick short sale approvals, and that the market can and will absorb this over time.
That said I couldn't disagree more that this crisis is due to "a few million households with deficient long-term financial behaviors, hopelessly incompatible with home ownership."
It may feel that way as we have primarily seen subprime foreclosures so far, but alt-A is now gearing up, and PRIME option ARMs held by folks with 700+ FICOs are coming too.
This has nothing to do with borrower ability or even willingness to pay. It has everything to do with prices pushed too high by Wall Street's creation of teaser rates, negative amortization, unrealistic debt-to-income ratios, and risk models that relied on forever appreciation. Bottom line - these products were DESIGNED to sell homes to those that could not afford them.
I'm not suggesting bailouts, but let's at least have the decency to recognize that this problem was created by Wall Street with the blessing of Easy Al Greenspan, NAR, and everyone else who enjoyed the ride up despite the obvious risks. Let's not be so myopic as to now blame those that did what everyone was telling them to do (just think back to Easy Al's ARMs are ok statement, or Lereah's no-bubble books).
Diane - I love the "just puke" analogy. It's actually leading to increased sales in places like Stockton that have already "puked" the hardest.
Sean O'Toole
Founder / CEO
ForeclosureRadar.com
Submitted by Jerry Hoffman on May 10, 2008 - 7:26am.
Lou, you have driven the proverbial nail home.
Sean, you may not have noticed this, but you actually do agree with Lou regarding the crisis due to "a few million households with deficient long-term financial behaviors, hopelessly incompatible with home ownership.".
In your paragraph 4 you correctly state that mortgages were ".....DESIGNED to sell homes to those that could not afford them."
This is merely symantics - but totally in agreement.
Submitted by Sean OToole on May 10, 2008 - 12:15pm.
Jerry, from his past posts I do think Lou and I agree on a lot of things - he is one of my favorite commentators.
I just think that on balance it was the banks who adopted deficient behavior, not households. And in this case the semantics could prove REALLY important.
What's at stake is the elimination of independent mortgage brokers and banks entering real estate.
NAR continues to play defense on keeping the banks out of real estate, but the other side is playing offense. And they are doing this through subtle suggestions that it was "walk away homeowners", "real estate fraud" and the like that caused this crisis. While subtle this moves the blame from the banks to homeowners, mortgage brokers and Realtors.
On the path we're on the financial institutions are going to get bailed out, consolidate all mortgage banking under their control, and gain entry into real estate services.
Time for every Realtor to stand up and say: "These problems were created on Wall St, not Main St."
Sean
Submitted by Ron Taylor on May 11, 2008 - 12:48pm.
The mortgage lenders are still not willing to face reality. As a professional real estate auctioneer and real estate broker here in the state of North Carolina, I have been contacted by many homeowners who are about to be forclosured.
The lenders are not willing to discuss a "short sale" until all financial documents they require, are in their possession.Then they send a BPO agent out to the property to tell them what the home is worth.
In most cases, the BPO agent pulls comps that are 3 or more months old, disregarding the fact that we are in a market with falling prices.
This whole process takes three or more months to go full cycle. The majority of the short sale offers are rejected because of the BPO figure given to the lender by the BPO agent.
The lenders refuse to let me hold an auction for the benefit of the homeowner prior to the foreclosure, unless they can get the payoff plus all the penalities due.
An example comes to mind on an upscale home in Wake Forest, North Carolina. A short sale offer was made on the home for $535,000. The payoff was $587,000. The BPO agent said the home was worth $640,000 to $660,000. That was back in November last year. The offer was refused.
Here it is mid May and guess what? The home is still vacant. The banks call this a non-income producing asset. I could think of a different term but they wouldn't like it.
Just think of the monthly payments they are not getting, the monthly property taxes they will pay, the cost of insurance they pay to protect a vacant property, utility payments and lawn maintenance. Not to mention all this effects their book value.
How many home must the lenders take back before reality sets in?
Ron Taylor<><
President/Broker/Auctioneer
The Restorer, Inc.
D/B/A Taylor and Sons Real Estate & Auctioneers
252-257-4822 (Office)
252-257-1302 (Fax)
www.canSellnow.com
Submitted by Brecht Palombo on May 12, 2008 - 6:02am.
This is so true, and as I read the various bleeding heart clueless commentaries out there this is a breath of fresh air. Orderly liquidation is exactly what what we need. In Massachusetts there are a handful of initiatives afoot to "save" people from foreclosure.
One initiative that actually does make some sense to me is the "just cause eviction" effort that I'm starting to hear about. This would prevent lenders from evicting renters from dwellings that have been foreclosed on, through no fault of their own, if they've paid their rent on time and have behaved as good tenants.
This makes sense because this moves us towards orderly liquidation. In MA very often the foreclosure auction is used as technical legal procedure, not a sales effort. This results in banks buying back most of the inventory and then putting it in the (very long) REO disposition queue.The new law, proposed above, would force lenders in many cases to skip the REO step and sell at the auction or else become landlords, a task for which they are not equipped.
Thanks for speaking the truth
Brecht Palombo
Auctioneer
Investment Sales
Broker MA, CT, NH
http://www.provestre.com
http://www.tranzonap.com