Oregon Catching Up With The Rest of The Nation

The May 2010 "Trends in Delinquencies and Foreclosures in Oregon" report from the Federal Reserve Bank of San Francisco was recently released to the public. Of particular interest, is a graph depicting four of Oregon's major housing markets price indexed for the last decade. As you can see below, after 10 years of varying growth rates, Oregon's home prices are once again converging back toward a common historical point of reference -regardless of where you live in the state. Bend and Salem are leading the way in price declines as we race toward the new lows.


As the graph below demonstrates, Oregon's housing prices lagged much of the country after the dot com bubble burst. However beginning in 2005 the late to the party housing bubble in Oregon heated up and the rest of the country saw prices begin to level out. Oregon prices charged upward through the summer of 2007. Oregon prices are now following the same wage/reality bound journey downward, and swiftly catching up with the rest of the country.


Speaking of wages and reality, the Oregon unemployment rate still remains stubbornly higher than the rest of the nation, as most every employer with a viable balance sheet and an income statement that still turns positive cash flow is avoiding the hiring of new employees like the plague.


When it comes to YOY four quarter price change, Oregon finds itself in dangerous company. Foreclosures during Q1 2010 in Oregon increased roughly 20% compared to the prior two quarters, while the rest of the country saw foreclosures decline in Q1 2010. Are you starting to notice a "late bloomer" theme at work here Oregon? If not convinced, ask someone you know in Bend what to expect for Portland real estate prices circa 2012.



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Caveat Emptor!!!


Source: The Federal Reserve Bank of San Francisco. The full report can be found here in .pdf format. The first half of the report is national in scope, while the second half (starting on page 13) focuses exclusively on Oregon, complete with foreclosure trends and foreclosure heat maps for the entire state. Bend is clearly ground zero, but there are plenty of new darker orange colors starting to pop up in the Portland area (VC and Clackamas) as recently as this quarter. The commentary is exactly what you'd expect from a Federal Reserve Bank, however the data and the graphs alone are well worth the 30 page read.

HAMP Fails: Your Tax Money At Work

The Obama administration's HAMP program has proven to be an exercise in futility, and largely a waste of taxpayer dollars as only about 30% of the 5.7 million borrowers who are 60 days delinquent are eligible for the program. Of those who are eligible for the program, less than 350,000 have recieved a permanent modification to their home loan after successfully completing the trial period.

"As more people leave the program, a new wave of foreclosures could occur. If that happens, it could weaken the housing market and hold back the broader economic recovery. Even after their loans are modified, many borrowers are simply stuck with too much debt -- from car loans to home equity loans to credit cards. "The majority of these modifications aren't going to be successful," said Wayne Yamano, vice president of John Burns Real Estate Consulting, a research firm in Irvine, Calif. "Even after the permanent modification, you're still looking at a very high debt burden." "



"The mortgage modification plan was announced with great fanfare a month after Obama took office. It is designed to lower borrowers' monthly payments -- reducing their mortgage rates to as low as 2 percent for five years and extending loan terms to as long as 40 years. Borrowers who complete the program are saving a median of $514 a month. Mortgage companies get taxpayer incentives to reduce borrowers' monthly payments.

Consumer advocates had high hopes for Obama's program when it began. But they have since grown disenchanted. "The foreclosure-prevention program has had minimal impact," said John Taylor, chief executive of the National Community Reinvestment Coalition, a consumer group. "It's sad that they didn't put the same amount of resources into helping families avoid foreclosure as they did helping banks." "

"But analysts expect the majority will still wind up in foreclosure and that could slow the broader economic recovery. A major reason so many have fallen out of the program is the Obama administration initially pressured banks to sign up borrowers without insisting first on proof of their income. When banks later moved to collect the information, many troubled homeowners were disqualified or dropped out."




Foreclosures in Oregon are on the rise, and the only help on the way from Uncle Sugar will largely benefit banks and large financial institutions. Taxpayers and the middle class will end up footing the bill for the housing bubble. It doesn't matter whether you rent, mortgage, or own your home outright. The suspension of mark to market accounting is a clear sign that protecting the too big to fail banks is the #1 goal of the Obama administration and the Federal Reserve.

"If we look at the HAMP program stats (see page 5), the median front end DTI (debt to income) before modification was 44.8% - about the same as last month. And the back end DTI was an astounding 79.8 (down slightly from 80.2% last month). Think about that for a second: for the median borrower, about 80% of the borrower's income went to servicing debt. And it is almost 64% after the modification. And that is the median - and just imagine the characteristics of the borrowers who can't be converted!"

It's no wonder that cold hard income verification is killing HAMP mods. It didn't exist when the loans were made to mortgage the home in the first place! Sustainable housing prices are still well out of line with median incomes -especially in the Pacific Northwest. No amount of government stimulus or taxpayer funded bailouts can escape the reality of actual wages and their relationship to the true nature of the market for 'owning' a home vs the debt to do so. The bottom is likely to be a long way down from here. Even the .gov source hints at 2012. Until the BAD DEBT is cleared from the financial system there can be no meaningful recovery in housing and real estate prices.

Caveat Emptor!!!

Sources:

http://www.financialstability.gov/docs/May%20MHA%20Public%20062110.pdf

http://finance.yahoo.com/news/Borrowers-exit-troubled-Obama-apf-887634101.html?x=0

http://www.bloomberg.com/news/2010-06-21/meredith-whitney-says-she-expects-double-dip-recession-in-u-s-housing.html

http://www.housingwire.com/2010/06/21/total-number-of-hamp-permanent-modifications-passes-340000-2

http://www.calculatedriskblog.com/2010/06/hamp-data-shows-over-150-thousand.html

Your Next Trillion $ Bailout: Half of All Outstanding Mortgage Debt Via Fannie Mae and Freddie Mac

The mother of all bailouts is appearing before our eyes in the form of Fannie and Freddie. They have become a toxic dumping ground for mortgages that cannot be modified, rejiggered, or otherwise ignored portending mark to model cash flows. Regardless of whether you are a renter, home owner, or loan owner, Fannie Mae and Freddie Mac will end up costing you and your children hundreds upon hundreds of billions of dollars over the coming decades. All of this of course in the name of "affordable" housing!

"Fannie and Freddie, now 80 percent owned by U.S. taxpayers, already have drawn $145 billion from an unlimited line of government credit granted to ensure that home buyers can get loans while the private housing-finance industry is moribund. That surpasses the amount spent on rescues of American International Group Inc., General Motors Co. or Citigroup Inc., which have begun repaying their debts.

“It is the mother of all bailouts,” said Edward Pinto, a former chief credit officer at Fannie Mae, who is now a consultant to the mortgage-finance industry.

Fannie, based in Washington, and Freddie in McLean, Virginia, own or guarantee 53 percent of the nation’s $10.7 trillion in residential mortgages, according to a June 10 Federal Reserve report. Millions of bad loans issued during the housing bubble remain on their books, and delinquencies continue to rise. How deep in the hole Fannie and Freddie go depends on unemployment, interest rates and other drivers of home prices, according to the companies and economists who study them."

And now for an excellent potpourri of quotes from various sources / individuals:

• "Neither political party wants to risk damaging the mortgage market, said Douglas Holtz-Eakin, a former director of the Congressional Budget Office and White House economic adviser under President George W. Bush. “Republicans and Democrats love putting Americans in houses, and there’s no getting around that,” Holtz-Eakin said."
  
  
• "With no solution in sight, the companies may need billions of dollars from the Treasury Department each quarter. The alternative -- cutting the federal lifeline and letting the companies default on their debts -- would produce global economic tremors akin to the U.S. decision to go off the gold standard in the 1930s, said Robert J. Shiller, a professor of economics at Yale University in New Haven, Connecticut, who helped create the S&P/Case-Shiller indexes of property values. “People all over the world think, ‘Where is the safest place I could possibly put my money?’ and that’s the U.S.,” Shiller said in an interview. “We can’t let Fannie and Freddie go. We have to stand up for them.”"
  
  
• "“Do we really want to go to the central bank of China and say, ‘Tough luck, boys’? That’s part of the problem,” said Karen Petrou, managing partner of Federal Financial Analytics Inc., a Washington-based research firm. The terms of the 2008 Treasury bailout create further complications. Fannie and Freddie are required to pay a 10 percent annual dividend on the shares owned by taxpayers. So far, they owe $14.5 billion, more than the companies reported in income in their most profitable years. “It’s like a debt trap,” said Qumber Hassan, a mortgage strategist at Credit Suisse Group AG in New York. “The more they draw, the more they have to pay.” Fannie and Freddie also benefited by selling $1.4 trillion in mortgage-backed securities to the Fed and the Treasury since September 2008, bonds that otherwise would have weighed on their balance sheets."
  
  
• "Treasury Secretary Timothy F. Geithner has vowed to keep Fannie and Freddie operating. “It’s very hard to judge what the scale of losses is,” Geithner told Congress in March."
  
  
• "The number of loans more than three months past due has risen every quarter for more than a year, hitting 5.5 percent at Fannie as of the end of March and 4.1 percent at Freddie, according to the filings"
  
  
• "“We need to have a housing-financing system in place,” Senate Banking Committee Chairman Christopher Dodd said last month. “If you pull that rug out at this particular juncture, I don’t know what the particular result would be. We’re caught in this quandary.”"
  
  
• "Yes, "extend and pretend" worked so well for Iceland and Greece. Allowing the companies to go under and hoping that private financing will fill the gap isn’t realistic, analysts say. "It would require at least two years of rising property values for private companies to return to the mortgage-securitization market", said Robert Van Order, Freddie’s former chief international economist and a professor of finance at George Washington University in Washington. Absolute nonsense. There is a price at which private financing will loan money for houses. The standards will return to reasonable risk management, meaning 20% down and a 36% "back end" ratio, and money from private sources under such lending standards would fund the market now."
  
  
• "Whatever the fix, the money spent will not be recovered, said Alex Pollock, a former president of the Federal Home Loan Bank of Chicago who is now a fellow at the Washington-based American Enterprise Institute. “It doesn’t matter what you do or don’t do, Fannie and Freddie will cost a lot of money,” Pollock said. “The money is already lost. There’s an attempt to try to avert your eyes."

As you can see in the example provided below, paper issued by the GSE's is not backed by the full faith and credit of the United States Government. So why do we continue to lie about "affordability" and prop up housing prices as a matter of national policy? The biggest of too big to fail are truly Fannie and Freddie. Note the bold print in the document below.

Enjoy paying your income taxes going forward as well as that near zero percent interest paid on your savings accounts, you'll be cleaning up the giant mess that has become the GSEs, soon to be joined by the FHA. Whether it's accomplished via increased taxes or currency devaluation (QE/printing), the middle class will foot this bill over the long haul. The too big to fail banks will not get the short end of this stick.

The bottom line is that private financing for mortgages at current housing prices is truly non-existent. So why would anyone in their right mind plunk down their hard earned wages for a 30 year lease on money from a bank to "buy" a home right now? When the only entities willing to back mortgage debt are government backed GSEs with unlimited bailout support, that should send a very clear signal that home prices are well out of alignment with wages, and that those prices are still truly overvalued. This situation cannot continue indefinitely, and sooner or later those who play the game will pay the fiddler when the bill comes due.

Related links and sources noted below:

http://www.bloomberg.com/apps/news?pid=20601109&sid=an_hcY9YaJas&

http://www.ritholtz.com/blog/2010/06/gses-1-trillion-dumping-ground-for-bad-bank-loans/

http://globaleconomicanalysis.blogspot.com/2010/06/fannie-freddie-mother-of-all-bailouts.html

http://market-ticker.denninger.net/archives/2402-Fannie-And-Freddie-Weve-Fixed-Nothing.html

RealtyTrac: Less Than Half of All Foreclosures Have Negative Equity So Why Are Defaults Soaring?

Whether it's due to loan owners doing the math and realizing that they can rent or buy a similar residence nearby for a fraction of what they are paying monthly; or because of wage deterioration, job loss, and the inability to make the monthly nut -both situations come down to this one very simple and sometimes painful economic reality:

Monthly Cash Flow!

Rick Sharga, senior vice president at RealtyTrac reported today at the REO Expo in Dallas, TX that less than 50% of all foreclosures are actually underwater. The reality of the situation is that loan owners either can't pay due to wage losses, or have done the math and are unwilling to pay in order to protect their monthly earnings.

"The RealtyTrac database covers foreclosure filings from notice of default to REO properties across more than 2,200 counties in the US. Sharga said while underwater borrowers are beginning to explore the possibilities of strategically defaulting, unemployment, not negative equity, is driving the current wave of foreclosures.

"We estimate there is one foreclosure to every six to 10 jobs lost," Sharga said.

The overall unemployment rate dropped slightly to 9.7% in May, from 9.9% in April, mainly due to the labor force shrinking by 322,000, according to the US Department of Labor Bureau of Labor Statistics. This has caused foreclosures to increase in places previously thought safe from the crisis, including Provo, Utah and Portland, Ore."

"With so many reasons for default, Sharga said the month-to-month levels of foreclosures should not return to more normal levels until after 2012." We are in the midst of an unprecedented cycle," Sharga said."

For loyal and devoted 04-08 loan owners, making bubble era mortgage payments can be a stressful, punishing, and increasingly impossible task in the wrong set of wage loss circumstances. For those who can afford such payments, but are aware of what's happening around them, strategic default can be a very lucrative option, especially in a non-recourse state like Oregon.

The NY Times recently reported that the average number of days in mortgage default and foreclosure in Oregon is 341 days. Folks that decide to stop paying on bubble era mortgages in Oregon are living payment/rent free for nearly one full year before moving on to a lower cost option:




Regardless of whether foreclosures occur because loan owners cannot pay, or choose not to pay, the outcome will be the same. Home price appreciation will be non-existent for the next several years in the PacNW, and private sector job creation looks to be stagnant at best going forward. Real incomes are declining, and the invisible hand of the market will do what it does best. Consumers of housing (rented, mortgaged, or purchased outright) will migrate to the option that best protects their hard earned monthly cash flow.

Darwinism will rule the housing market, and consumers will seek out lower costs either by choice or by force. Regardless, incomes are still out of alignment with home prices and Portland's housing market price correction is inevitable. 2010 will probably see single digit YOY price declines, but in 2011 and 2012 home prices here will bear the brunt of monthly cash flow reality.

Goldman Sachs: Portland Real Estate Market Ranked 3rd Highest in Nation for Downside Risk

Rather ironically, in April it was Forbes reporting that Portland and Seattle housing markets were among those poised to experience the most precipitous declines in home prices over the next couple of years vs the rest of the nation. Now we have a report from none other than Goldman Sachs showing similar outcomes (Portland ranking the 3rd most risk prone housing market in the nation) via their own research:

From Goldman US Economics Analyst: 10/22 - House Prices Have Not Bottomed Yet June 4, 2010

"We predict the largest house price declines for Las Vegas, Seattle and Portland (Exhibit 6). While high home vacancy rates and steeply rising delinquencies are expected to push down prices in all three areas, some interesting differences emerge. Price declines in Las Vegas are projected to be front loaded, as negative price momentum and excess supply lead to near-term price declines, before valuation undershoots sufficiently to push up prices. For Seattle and Portland, the model projects back-loaded price declines as house prices currently look overvalued."


"First, much of the stabilization of house prices since early 2009 appears due to government housing policies, including (1) the homebuyer tax credit, (2) the Fed’s purchase of mortgage-backed securities and (3) temporary mortgage modifications through the Obama administration’s Home Affordable Mortgage Program. We have estimated that these housing policies have temporarily boosted house prices by around 5%. Second, the housing market remains plagued by enormous excess supply (Exhibit 3). Despite recent improvements, both the homeowner vacancy rate and the months’ supply of single-family homes for sale remain well above historical levels. Third, the mortgage market remains troubled. Mortgage delinquencies have continued to rise from their already elevated level."


Portland and Seattle are "back-loaded" because the peak of the bubble occurred in the Pacific NW 2-years later than the rest of the country. Incomes in the NW are not capable of sustaining structurally higher housing prices nor bubble era mortgage debt. Unemployment is as big a problem in Oregon as most anywhere in the nation. Regardless of our groovy retail, the creative class, urban planning, or the shitty weather -it will not be "different here".

Portland real estate: long-term view

I thought you might like to see the long run trend taking shape in the Portland housing market. The market might fall some more but I think the price bottom is near. Home values have fallen 20% and the probability of them falling another 20% is remote.

Post Tax Credit Subterranean Homesick Blues: Purchase Demand in Freefall, Industry Unravelling

The expiring home buyer's credit appears to have done well to create a surge of taxpayer funded house buying activity, which was highly touted by the media as 'good news for housing' in April. The MBA (Mortgage Bankers Assoc) released the weekly applications survey which shows that the month of May will be quite a different story with respect to any new green shoots for the housing market.

Purchase applications have absolutely plummeted off a cliff from activity levels in April, and are now groping at levels not seen since the mid 1990s.



Even the usually spin happy RE-pro bubble crowd at Mortgage News Daily cannot deny the grim reality that greets the summer selling season:

"The true barometer of the health of housing rests in May housing data..not April. If the recent downtrend in purchase apps holds any clue as to what sort of results we'll see in May, it won't be pretty. Anecdotal evidence is highly supportive of this theory. Heck, besides the drastic decline in purchase demand we've seen, pull-through on refi apps is poor thanks to the vast variety of hoops that must be jumped through before a loan can be cleared to close.

Working in this industry is no fun right now. Borrowers don't trust loan officers. Originators are losing deals for a measly $250 processing fee. Underwriters and appraisers are annoying each other to protect their own behinds. Meanwhile, secondary is fronting the bill and processors (a generally "testy" group to begin with) are stuck in the middle of it all. To make matters worse...Realtors are pointing the finger at mortgage professionals for the slowdown. I feel like my world is unraveling in front of me. Can't we all just get along?"

Note the jaded RE pros in the comments section of the MND article for some much needed comedy relief. One RE-pro commenter even suggests that short sales and foreclosures shouldn't be included in any appraisal comps "so as not to further pollute the non-distressed seller/builder market"! After our now 20th straight day of grey skies and rain in Portland -anything resembling humor (however misguided) can only help at this point.