Monday, March 15, 2010

Foreclosures, Short Sales, or REOs?

HAFA is the acronym for the new taxpayer funded housing market rescue program from the government designed to facilitate short sales at the hands of the NAR. It will be an interesting story as to whether foreclosures, short sales, or REOs will end up clearing the 7.4 million unit log jam of non-current home loans that the banks and the federal government are choosing not to deal with in a traditional free market manner. It should be obvious to all by now that the bubble will not be allowed to "pop". The correction will sound more like a long slow whisper in the mighty pines of the great Northwest.

"What the above chart should call attention to is the aging of loans in the default pipeline. Again using LPS data, for all loans more than 90 days in arrears, the average days delinquent is now at 272 days—up from 204 days in early 2008. For loans in foreclosure, the aging numbers are even more staggering: loans in this bucket average 410 days delinquent, up from 260 days delinquent in early 2008.

Ponder those numbers for just a second. On average, severely delinquent borrowers have gone more than 9 months without making a mortgage payment—and yet foreclosure has not yet started for them. For those borrowers who are in the foreclosure process, it’s been an average of 13.6 months—more than one full year—since they last made any payment on their mortgage."

Many a mortgagor utilized the housing ATM in the form of HELOCs in the last decade to fund home improvements, vehicle purchases, dream vacations, and credit card payoffs. The second liens have become more than just a small road block when it comes to sensible mortgage modifications for both the borrower (underwater) and lender (at risk of default):

"Second lien holders, when they exist, effectively determine whether a short sale can proceed—and there is zero incentive, whether through the Treasury’s HAFA program or otherwise, for a second lien holder to voluntarily vaporize their note.

Unless, apparently, money can be passed under the table. As seen in a story first broken by Diana Olick at CNBC, we’re already hearing reports of short sale fraud involving second lien holders attempting to extort dollars from seller’s agents directly, outside of the HUD settlement statement.

Government’s implicit endorsement of short sales via the HAFA program seems only more likely to increase this sort of pressure. Regulators now face a very unique conflict of interest, and it will be interesting to see how this is resolved: on one hand, violating RESPA helps grease the wheels of a short sale, something the administration wants to see happen; on the other hand, violating RESPA is a federal offense.

All of which means that second liens aren’t just a little stumbling block to short sales; they’re a boulder the size of Texas."

Before our housing market clears and we have normalcy, it is quite possible that neither foreclosures nor short sales will show us the way toward a stable housing market. REOs are going to have a strong hand in dealing with delinquent loans and long forgotten properties that are currently not marked to market on the balance sheets of the biggest of big banks.

"Thanks to effective intervention from the government, we won’t see REO volumes soar to peak levels anytime soon—but we will see elevated inflows at least through mid-2012, out of necessity. And those inflows should be seen as the road to recovery by anyone watching real estate."

Read the entire story from Housingwire