A great analysis article today courtesy of Housing Wire discusses how the solution to the housing crisis will ultimately be REO (real-estate owned). The REO trend is based on their analysis that the size of the foreclosure market is so overwhelming that even short sales won’t be able to keep up with the demand:
But in the end, the real key to resolving the problems that yet remain in housing is likely to come back to an old standby: REO property sales.
Yes, really. But to understand why, you’ve got to first really understand the scope of the mortgage default problem we’ve now got.
According to data from Lender Processing Services (LPS: 40.74 +1.29%), a whopping 7.4m loans are now non-current, compared to just 4.1m on average between January and June of 2008. A recent JP Morgan Chase (JPM: 43.00 -0.16%) investor presentation presents the problem more visually, per the data below:
JPM Prime Mortgage Defaults
The analysis here is that the loans in default are becoming more in default. While short sales will play a critical role in assisting in the correction process, the limitations within HAMP and the problem of 2nd lienholders make short sales too cumbersome to resolve all the issues in the housing market, and thus REO will play an increasingly important role.
The article states that for loans over 90 days past due, the average days delinquent stands at 272 days, which us up from around 200 days in 2008. For foreclosure loans; the delinquency average 410 days!
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.
So, that sets the stage to show the volume that we are facing. The article states that while short sales will be important; REO will also be important; for two reasons.
First, the infamous second lien: over half of all first mortgages have second liens as well, and these second lienholders have very little incentive (typically $1000) to agree to a short sale. (Unless, of course, there is fraud involved and money passes hands off-HUD!). In fact, the article continues on to suggest that the HAFA program may well encourage the pressure to commit fraud.
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.
Our thoughts on this? Somewhat split! Savvy investors and agents have been able to negotiate successfully with second lienholders and will continue to do so. Yes, they are a huge area of difficulty; but in many cases a second lienholder will get some settlement (hey, even $1000 is better than $0), and if the case is made that the house will go into foreclosure and the 2nd lender is confident that will be the outcome, why wouldn’t they accept the $1000? That said; properties that are “on the fence” are of course more in jeapordy. That incentive isn’t any different today than it was six months ago, and short sales have continued to dramatically climb in popularity and use despite the 2nd lienholders unfortunate position.
Secondly, HAFA itself: the article then continues to discuss HAFA in some more detail:
Meet HAFA, child of HAMP. The HAFA program, going into effect on April 5, is getting plenty of attention—and the program’s heart is in the right place. But most are forgetting that it’s an extension of HAMP, the government’s loan modification program that has seen tepid success at best thus far. A loan must first be HAMP-eligible in order for anyone (borrower, servicer, or investor) to qualify for the program’s various incentive payments for short sale or deed-in-lieu.
Which means any of the guidelines applicable to the HAMP program—loan in default or default imminent, within UPB guidelines, owner-occupied, and originated prior to 2009—still apply.
The gist of the statement is that HAMP has been relatively unsuccessful, and trying to get HAFA to work in that situation will be minimal at best:
As for the 7.4m already troubled borrowers? 1.3m troubled homeowners have received offers for modifications under HAMP to date, according to the latest report card, with 1.1m agreeing to a trial – and of that, 168,000 have moved to permanent status since the program’s start in the middle of last year. (We don’t know how many have since re-defaulted, however.)
That’s certainly a small number, particularly over the course of six full months, when one considers the size of the housing crisis on hand. Similar to analysis we did on the Treasury’s report, the concern is that HAMP utilization is both low and that re-defaulting is a continuing problem on modified loans.
JPM, for example, recently reported that out of every 100 HAMP trials offered, 25 borrowers do not pay as agreed and another 29 do not submit required documents, omitting Social Security Numbers, signatures and the like on documents that are submitted.
(Makes you wonder, though, 29% of borrowers do not submit the required documents….. we are willing to bet this happens all the time and then we wonder why short sale applications sit on loss mitigators desks without movement!). And this happens at a bank that, according to the article, has 15,000 dedicated staff just for loss mitigation and each borrower receives an average of 36 calls, 15 letters, and 2 personal visits!
Additionally, HAMP’s inherent limitations limit HAFA. Of 6 million borrowers late on their loans, HAMP only applies to 1.8 million.
The article goes on to say (and this we certainly agree with) – that HAFA will not all of a sudden shift all the delinquent properties via short sale. It’s being overblown:
Instead, the short sale process in general is likely to become more streamlined as a result of the HAFA program, and that will help servicers process more short sales than they may have in the past.
Well, investors and agents would gladly take some streamlining!
So, while HAFA and government programs to aid short sales are expected to assist in a housing recovery, ultimately the author believes REO is the true end-game of recovery. While this is probably true, it certainly doesn’t diminish the opportunity short sales present, in the correct circumstance.
What are your thoughts on REO vs. Short Sales for recovery?
