Shadow Inventory: Banks Drag Their Heels As Local 14 Plexes Head To Foreclosure While Fully Occupied

The massive shadow of inventory of homes on which the mortgage holder has stopped paying is an often discussed topic these days. It seems the size, scope, and scale of the number of homes not being paid for, not foreclosed on, and not returned to the free market is staggering.

In fact many recent analysts believe it will take three to four years for this inventory to clear -at today's sales rate. Banks are holding on to an ever growing percentage of real estate to avoid "crashing" the market. How long can all of this last?

Morgan Stanley says the shadow inventory will take four years to clear, while Standard & Poors believes it's closer to a three year pile of sales supply. Regardless, it's obvious that banks (and accounting rules/regulations) are doing everything possible to avoid the grim reality that is real cash flow on leveraged 'assets' hiding in bank balance sheets. The truth for most large banks is insolvency when using accounting rules that were in place for generations prior to 2009.

As post-bubble history unfolds, we begin to get glimpses of how the banks are intentionally and blatantly committing fraud about the performance of loans on their books. Here's a wonderful example of how the biggest of too-big-to-fail are reporting lies, taking tax money, selling garbage MBS, and paying themselves bonuses in turn:

"Attached please find the first two pages of the credit report that I told you about. I [also have access to] mortgage statements from Bank of America, in which the borrower has not made a payment in over 18 months and is currently in the loan mod process, yet their statements reflect a current status each and every month. The borrowers had a foreclosure back in 04/2010 with no mortgage lates reported on their credit report. Please refer to the first trade line on page 2 of the credit report under Derogatory Tradelines."



Perhaps you are among those who think Portland is different, and that there are few if any local examples of bad debt blowing up? You'd be wrong. Here's an example of a local 14-plex apartment building that is fully occupied by tenants -and it's still foreclosing. Even though this asset is at its maximum cash flow generating capacity, it still fails to service the debt required to hold its title. Low rents? Irresponsible borrower added too much leverage on too few assets?

Either way -it's bad debt, and our country, currency, economy, and housing market is chock full of it. We've approached a point where interest rates are setting historical lows as home prices continue their downward trend. I believe that this mess will take many years to clear, and even that belief assumes that someday all the real estate held by banks is actually cash performing or returned promptly to the free market. It could take a decade or more to bottom if we have anything to learn from Japan. Before long, I suspect we'll see mortgage rates with a 3.X% handle. And prices will still...continue...to slowly...fall. It will take years, if not decades, to play out.

A lower interest rate to borrow money at this point is like pushing on a string. Most folks who can borrow don't want to, and are smart enough not to. There is little new credit demand from the credit worthy. Most folks who would be happy (and foolish enough) to borrow money these days cannot, because they are not credit worthy.

Meanwhile, the banks have taken over the once free real estate market. They are refusing to tell the truth about bad loans, and they're holding back housing inventory to avoid daylight on their balance sheets. This game will not end well...

FHA Loan Gravy Train Derailing?

After a week of travel to Motown on business, and seeing the housing bust at ground zero, I have to ask you all some questions regarding housing and our government's role in the quagmire.

Fannie and Freddie dominated the easy loan space to back all borrowers with a pulse from 2000-2007, and now they occupy a toxic waste dumping ground for many a bank's bad mortgages while trading as penny stocks with all but explicit taxpayer backing.

The new game in town when it comes to financing mortgages circa 2008-2010 is the truly explicit government backed FHA. That federal agency is THE mortgage market, without which no private bank/investor in their right mind would loan money to anyone to buy real estate at today's prices. Private loan origination to purchase real estate has all but disappeared.

Is the FHA spigot beginning to twist toward the "off" position?

"The Federal Housing Administration's Mortgagee Review Board (MRB) published a notice today to announce dozens of administrative actions against FHA-approved lenders who failed to meet its requirements. The total amount of originators that used to write FHA-backed mortgages, the report shows, but are restricted from doing so today, has surpassed the 900 mark."

"The rate of seriously delinquent mortgages backed by the Federal Housing Administration (FHA) declined slightly from May to June, but the gross number of mortgages that are either 90 or more days past due or in foreclosure increased 35% year-over-year."

"The total value of unpaid FHA mortgages was $865.5bn in June, up 30.3% from $663.8bn one year ago and up 3.3% from $837.8bn in May."

So we're on the hook as taxpayers for Fannie and Freddie, and now the FHA is approaching the $1Tillion mark. Delinquencies are skyrocketing, yet the federal government keeps propping up housing prices despite the reality of stagnant wages. Why? How long can this last? When does cold hard cash flow via wages show up in the equation? Perhaps sooner than we all think...

"A total of 168,915 FHA loan applications were received last month, down 6.9 percent from May and 29.4 percent lower than levels seen a year ago, according to the FHA Outlook report."

How much of an income and/or VAT-sales tax increase is Portland and Oregon willing to pay in order to prop up housing prices via government intervention and real estate bailouts? What business does the government have in financing our privately owned assets?

The sooner the government gets out of housing finance, the sooner most Americans will be able to truly afford a home based upon local wages. Why do we vote for and pay our elected officials to artificially prop up housing and real estate prices?

This post is just a few thoughts from the road, after seeing real estate up close in the Detriot and Southern Michigan area at truly rock bottom prices. Based upon what I saw during my travels, wage based reality bites...

Source #1: Housing Wire

Source #2: Housing Wire

Source #3: Truth About Mortgage

Who's Holding the Bad Debt?

Continuing our focus on the macro scale of the housing bust, let's take a quick look at what's happened to home values vs. outstanding mortgage debt. If you had any doubts about where the multi-trillion in Federal Reserve quantitative easing (money printing) went, or where the $0.8Trillion in TARP funds went -rest assured it did NOT go toward bailing out Joe Six Pack. It simply went to rescue the largest of large banks, executive bonuses, and their stock/bondholders.

"That is, what Americans' homes are worth, their equity, decreased by $7 trillion -from $20 trillion to $13 trillion-, from spring 2006 to spring 2010. In the same period, mortgage debt, what Americans owe on their homes, went down by only $270 billion. Yes, that's right: US homeowners lost more, by a factor of 26, than they "gained" through clearing mortgage debt. Thus, if we estimate that there are 75 million homeowners in America, they all, each and every one of them, lost $93,333. Good morning America!!

And your own government is still trying to encourage home ownership? Now why would they want to do that in the face of numbers such as these? How much thought have you given that question? Over the past 4 years, the "right to own a home" has become synonymous with the "right" to lose some $25,000 a year. Why does Washington, through Fannie and Freddie, Ginnie Mae and the FHLB, continue to guarantee guaranteed losses for American citizens?"



As the graph above clearly shows, the vast majority of stimulus, bailouts, and fiscal/monetary policy response to the housing crisis did not go where it would do the most good for average taxpayers, voters, and mortgage holders. The largest of large banks have been made whole and are paying record bonuses, yet mortgage holders and taxpayers have been left holding the ever growing bag to foot the bill for the bubble.

Meanwhile, the future does not look so bright for the housing market. Most anyone following housing from ignorant novice to seasoned veteran knows that when sales volume dries up, there is trouble ahead regardless of the trouble already left behind.




"To summarize, all US banks would have lost money last year if it hadn't been for your taxpayer dollars, and, indeed, all but the 6 biggest did. They received many trillions in public funds, all of which are a loss to you, who have also lost those $7 trillion on your home values. The balance sheets of the big banks, however, still wouldn't look good even with all your funds; they need stupid accounting pet tricks for that. Just like the government.

The overall picture is one of a ridiculous patchwork of lies and tricks and fraud and ultimately for you, losses bigger than you can bear."

If you step back and look at the housing/real estate bubble on a macro scale, it should be clear to all who read here that we have a long long long way to go before all of this is resolved. It will be several years before housing prices are aligned with real wages in local markets. Until mark to market / fair value accounting is restored, one cannot believe anything the banks report on balance sheets or income statements. Nor can one really be assured of what a house or property is "worth". In so may ways, the housing bust of the early 21st century has only gotten started, and will only grow much more intense, interesting, and impossibly painful going forward.

Source #1: Michael David White

Source #2: The Automatic Earth

Balance Sheet Hot Potato: FED Reserve vs. Fannie/Freddie/FHFA vs. the US Taxpayer

Stepping back from the microcosm that is Oregon and Portland's real estate market, a rather interesting and massive reclassification of toxic mortgage debt recently took place. The Federal Reserve moved $4.4 trillion in mortgage debt from "Mortgage Pools and Trusts" and placed them on the balance sheets of the GSE's (Fannie/Freddie/FHFA). The interesting part is that the GSE's balance sheets from the same period do not reflect this adjustment, which in total is roughly 40% of all outstanding mortgage debt!


To make matters worse, keep in mind that Treasury (ie: taxpayers) now own the GSEs since they were put into conservatorship, and according to the conservatorship agreement their balance sheets were to remain below $900 billion. Adding a cool $4.4 trillion instantly puts them in violation of the agreement, and if in fact Treasury now owns those mortgages it also puts the nation about $3 trillion over the congressionally approved debt ceiling.

In a rather ironic coincidence, you (via your elected officials) pledged unlimited taxpayer support for the GSEs on Christmas Eve 2009. Now just 6 months later both Fannie and Freddie stocks were recently de-listed from the NYSE, and today trade with other penny stocks on the OTC bulletin board.

At it's core, this is a mere accounting adjustment, however it's implications are massive when it comes to who foots the bill when these mortgages fail to perform, and/or the GSEs are dissolved/bankrupted. The main stream media has either missed or completely ignored this story, and most any meaningful reform of the GSEs (beyond toxic mortgage dumping ground) that is publicly reported will surely not be attempted until after the mid-term elections.

Step right up taxpayers and get your toxic mortgage potato while its hot!


Source: Bruce Kasting

Welcome to the Whipping Post: Oregon is now the #3 Foreclosure State in the Nation

The painful reality of the housing bubble is starting to find its way to Oregon and Portland, and in many ways, the housing bust is just beginning here at this juncture. We now find ourselves ahead of Michigan, California, and other smoking black holes of real estate depreciation. Regular readers here know that not only was Oregon late to the housing bubble, but we were late to the "great recession".

" "It's very discouraging," said Tim Duy, an economics professor at the University of Oregon. "For all those people who said, 'No, we don't have a housing bubble,' well, we did." "

"The rising foreclosure numbers are in part a function of timing. Oregon was late to enter the recession, and it stands to reason that its foreclosure rate will stay higher longer than other states that crashed earlier, said Josh Harwood, senior economist for the state of Oregon."

2010 - 2012 will serve as a painful and stark wake up call for many a Portland area loan owner, as even the most verdant and stubborn bubble era stakeholders face cash flow based reality, and succumb to economic pressures. It cannot and will not be different here. Wages in Oregon and Portland do not support structurally higher housing prices. It's just that simple.

"Multnomah County property records provide a somewhat more precise glimpse of the housing bust in action.

In 2006, at the height of the housing boom, about 300 county residents lost their home. In 2007, when the mortgage lending industry collapsed and foreclosures soared in much of the nation, Multnomah County was still fairly quiet. By the end of the year, 417 local residents had lost their homes.

At the time, area real estate and mortgage officials insisted Oregon was different and somehow protected from the housing crash. Builders here hadn't overbuilt (thanks more to the state's land-use laws than to any developer restraint). In-migration was still strong and the long run-up in Oregon home prices would continue, they predicted.

It was wishful thinking.

Nearly 1,100 county residents lost their homes to foreclosure in 2008, more than double the figure from a year before. It only got worse in 2009, when more than 1,900 locals gave up their homes.

Many hoped that 2009 marked the bottom of the ugly cycle. And it's true that new defaults are down slightly in 2010 from the prior year. But the number of completed foreclosures in the county is on track to top 2,000, well in excess of 2009.

Far from immune to the housing crash and resulting foreclosure wave, Oregon has proved to be exceptionally vulnerable to it. Between its large number of construction contractors, timber products workers, mortgage and real estate professionals, Oregon's economy was over-reliant on the housing industry, said Mark Vitner, senior economist at Wells Fargo.

Plus, Oregon's relatively low-wage economy paired with rapidly appreciating housing prices to create a situation in which many Oregonians borrowed heavily to get in their homes. Many worsened their situation by tapping into their home equity via second and third-mortgages.

Lenders, many of whom adopted reckless underwriting standards during the boom, showed little consideration for how much borrowers were leveraged."

Residents of other bubble plagued housing markets have seen various forms of "bailouts" from state and federal sources, but at the end of the day, bad debt is just that. Bad debt. Stimulus, bailouts, and modification programs only serve to kick the can down the road and delay the inevitable. Those who cannot pay simply won't.

Many will game the system, and live for free. Either way, the end result will be the same. Housing and real estate prices in Oregon and Portland will be dropping precipitously from here going forward. Most will only start to notice in late 2010 and into 2011. If other major markets can provide a lesson, we should clearly see that most of the carnage in Oregon and Portland will not relent until 2012-2013.

"Some help may be on the way.

The state is hurriedly crafting its Oregon Homeownership Stabilization Initiative, a program that could disburse $88 million in federal dollars to homeowners struggling to fend off foreclosure.

The details of the program, including the qualifying standards, are still being worked out. But state officials hope to have a pilot program running by late summer or early fall.

More information is available at oregonhomeownerhelp.org.

The new federal assistance is good news, said Angela Martin, of Our Oregon, an advocate for consumers in the foreclosure fight. But she said the financial industry should be required to match the $88 million. After all, the money will simply pass through homeowners to the nation's lenders and loan servicers anyway.

"The taxpayer is bearing the brunt of this," Martin said. "The banks need to step up. It was the greed and abuse of trust by the financial industry that put these homeowners into these terrible loans."

Homeowners can only hope that the new assistance program works better than the U.S. Treasury Department's initial effort -- the Making Homes Affordable program, which pays servicers to modify struggling homeowners' loan terms.

Making Homes Affordable has secured at least temporary modifications for 340,000 people. But the program has more dropouts than success stories. Many participants have been unable to make even their lowered mortgage payments."

Although the SF FED Reserve graphs in the prior post below provided all the data one needed over a week ago to make a similar assessment, many a Portland resident will find the anecdote in the Oregonian story printed on Saturday to be much more of a wake up call. When a 20 something college kid can "buy" a home in John's Landing, and then seek bailout modification mortgage assistance because they could not find a job after graduation to make payments -money was lent that could never be paid back. Bad debt. The loan should have never been made in the first place. Easy money! Easy come...easy go.

Welcome to the whipping post Portland. You've all heard about how bad the housing bubble was somewhere else, now it's time for your turn. If other major metro markets are a predictor of what's to come, we'll be here well through 2012 as wage based reality hits home.

Source: The Oregonian