Are The 250,000 Foreclosure Sales From Q2 About To Be Reversed, As Fitch Prepares To Downgrade Foreclosure Fraud Companies
Minutes ago RealtyTrac has released its Q2 summary snapshot. In summary, Q2 saw 248,534 properties in some stage of foreclosure (default, scheduled for auction or bank-owned) sold to third parties. This represented a 5% increased from Q1, and a 20% decline from Q2 of 2009. The average sales price of a foreclosure property was 26% below the average sales prices of regularly sold homes. “While foreclosure sales increased in the second quarter, non-foreclosure sales increased even more, spurred on by the homebuyer tax credit that expired during the quarter,” said James J. Saccacio, chief executive officer of RealtyTrac. “That had the net effect of lowering foreclosure sales as a percentage of total sales during the quarter, but that may be a temporary dip as the removal of the tax credit could drive more buyers back to discounted short sales and REOs.” Ah, but herein lies the rub: with pretty much everyone now halting evictions, and foreclosure themselves, all those who are looking for foreclosure bargains will be very, very disappointed. Because while the actual market is digesting the implications of what the recently announced JPMorgan moratorium on foreclosures means (very bad things), Fitch has already fired the first shot and announced it would downgrade mortgage companies engaging in foreclosure fraud. Well, that means preeeetttty much all of them. And the most troubling implication: all those who bought foreclosed properties may soon be facing a transaction unwind, once it becomes clear that there isn't a clear title owner.
From the NYT:
Fitch Ratings said that Wednesday it was asking mortgage companies about their internal processes for executing foreclosure affidavits. If it finds the processes lacking, Fitch will consider downgrading the company’s rating.
The agency also said if the issue is widespread, the resulting delays and extra costs to foreclose could increase losses related to residential mortgage-backed securities.
Bottom line is look for RealtyTrac's foreclosure numbers to take a sharp turn lower in coming months as the foreclosure fiasco hits near and far, and all those banks holdings trillions in RMBS to renew their push against the FASB's recent MTM initiatives. Because as Bruce Krasting pointed out earlier, the 1,500 or so people that are sweating like a Wall Street whore in church and have chopped their left testicle off to never, ever allow the general public to catch a glimpse of the radioactive effluvium gracing the "asset" side of their balance sheets, have just upped the ante and are now throwing the right testicle in the pot as well. The reason is simple: suddenly banks will be stuck with properties which are technically on their books, but to whose cash flows they have no recourse, and no recourse to kick out their vagrant squatters! This means that until the foreclosure crisis is resolved, and that could take years, suddenly hundreds of billions in RMBS paper will have to be marked not at par, but at zero.
Furthermore, the 250,000 or so people who bought their foreclosed home in Q2 (not to mention the millions over the past two years) will be sweating bullets that the previous owner doesn't come back and demand a cease and decist on the transactions, as well as a full unwind and give up of all equity rights until the rightful owner of the underlying debt is identified. And since one doesn't exist, hundreds of thousands, if not millions of foreclosure transactions will suddenly become null and void, and nobody will be paying any mortgage on them, resulting in billions of incremental writedowns.
P.S. Homebuilders may well be the biggest losers in all this, as the end of foreclosures means someone will need to step in with a price point that is 26% below the prevailing one.