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I Warned That Banks Will Soon Be Forced To Walk Away From Homes… Guess What!
About 4 months ago, I claimed that Banks Will Be Forced to Forgo Certain Foreclosures, Even If the Borrower Has Admittedly Defaulted! In summary:
Without an economic incentive to
foreclose, it would not be in the bank shareholders best interests to
pursue foreclosure even though borrowers clearly defaulted & owe
money to the lender. The economics of distressed assets in mortgage and
commercial banking are quickly changing. I am quite open to discussing
this in the mainstream media if any are interested in hearing the “Truth go Viral!” I want all to keep this in mind when pondering the release of reserves by the banks.
This was taken by many readers as sensationalist and unlikely. As a
matter of fact, much of my writing is taken in a similar way, most
likely due to the fact that I have an uncommon proclivity to state
things exactly as I see them, sans the sucrose patina. This is not a
pessimistic (bearish) outlook, nor an optimistic (bullish) outlook. It
is simply called, the TRUTH! Realism! Something that is increasingly
hard to come by in these days of media for a purpose and embedded
agendas.
You see, the United States, much of Europe, and China
have sever balance sheet issues that are ravaging their respective
economic prospects. The media, analysts, and investors are gingerly
mozying along as if this is not the case. Well, no matter how hard you
ignore certain problems, no matte how hard you try to kick the can down
the road – the issues really do not just “disappear” on their own.
With these points in mind, let’s peruse this piece I picked up from the Chicago Tribune: More banks walking away from homes, adding to housing crisis blight: the bank walkaway.
Research to be released Thursday, the first of its kind locally, identifies 1,896 “red flag” homes in Chicago — most of them are in distressed African-American neighborhoods — that appear to have been abandoned by mortgage servicers during the foreclosure process, the Woodstock Institute found.
Abandoned foreclosures are
increasing as mortgage investors determine that, at sale, they can’t
recoup the costs of foreclosing, securing, maintaining and marketing a
home, and they sometimes aren’t completing foreclosure actions. The
property, by then usually vacant, becomes another eyesore in limbo
along blocks where faded signs still announce block clubs.
“The steward relationship between the servicer and the property is broken, particularly in these hard-hit communities,” said Geoff Smith, senior vice president of Woodstock, a Chicago-based research and advocacy group. “The
role of the servicer is to be the person in charge of that property’s
disposition. You’re seeing situations where servicers are not living
up to that standard.” City neighborhoods where 80 percent of
the population is African-American account for 71.1 percent of
red-flag properties, according to Woodstock.
Don’t fret, this is definitely not an “African American” thing. As a
matter of fact, the reason that this is concentrated in this primarily
“African American” community is that this is one of the demographic
groups that have been heavily targeted by predatory lenders. You will
see other demographic “concentrations” start to show similar attributes
and behavior from the banks – lower income, lower educated, higher LTV,
lower mean rental income, lower property value, higher mean time to
disposition from commencement of marketing areas, etc.
In some cases, lenders might be skirting city rules for property upkeep even after they repossessed properties.
This is where, if the cities and municipalities are on their Ps and
Qs, local governments can successfully hit the banking industry for
revenues. Charge and fine the banks heavily, just keep the charges below
the level of what it will take the bank to maintain the property. Then
use the properties for public housing facilities and/or raze the
properties.
Woodstock found that as of the end of
September, 57.1 percent of the estimated 4,468 single-family, likely
vacant homes that became bank-owned from Jan. 1, 2006, to June 30,
2010, were not registered with the city as vacant, as they are
supposed to be. “The whole concept of charging off creates this limbo
land,” said Dan Lindsey, an attorney at the Legal Assistance
Foundation of Metropolitan Chicago. “There’s still a lien that can
follow the borrower.”
In November, a U.S. Government
Accountability Office report on the frequency and impact of abandoned
foreclosures noted that Midwestern industrial cities, including
Chicago, seem to bear the brunt of bank walkaways, leaving
neighborhoods in deeper distress and cities left to shoulder the
associated costs of dealing with unsafe, often unsecured homes. The
GAO report, derived from information provided by six loan servicers,
found that servicers nationally charged off loans on 46,000 properties
from January 2008 to March 2010, with 60 percent of the charge-offs
occurring before an initial foreclosure filing was made. That report
listed Chicago as having the second-highest number of
servicer-abandoned foreclosures nationally, behind Detroit, with 499
properties charged off during the foreclosure process. An additional 361
properties were charged off without a foreclosure filing.
For its report, Woodstock culled data
from the city’s vacant properties registry, as well as buildings
identified to the city as vacant by municipal departments, foreclosure
court filings made from 2006 to the first half of 2010, foreclosure
auctions and property transfers. Some of the 1,896 properties flagged
by Woodstock as likely walkaways could, in fact, still work toward a
resolution in the foreclosure process, but 40 percent of those homes
had been in the foreclosure process for more than 18 months. Woodstock
believes its projections are conservative because lenders also decide
to write off their investments in properties before filing initial
foreclosure actions. For only those 1,896 homes, Woodstock pegs the
cost to the city, if it needed to seize, secure and demolish them, at
$36 million.
And here is a list of the favored banks…
In Chicago, the mortgage servicers and trustees most often associated with the properties flagged by Woodstock are Bank of America, with 314 properties; Wells Fargo (234); U.S. Bank (185); Deutsche Bank (178); and JPMorgan
Chase (165). When asked to comment generally on bank walkaways, several
banks either declined to comment or did not return phone calls.
Why should they comment? The banks are reporting record [accounting]
profit increases as release their bad credit reserves back into the net
earnings category. Good times are hear to stay. See As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves. and After
a Careful Review of JP Morgan’s Earnings Release, I Must Ask – “What
the Hell Are Those Boys Over at JP Morgan Thinking????
Neighborhoods on the city’s West and South sides seem to be most at risk of bank walkaways. The city’s Roseland neighborhood, on the city’s far South Side, is one example. In 2007, some of the pictures of the homes taken by the Cook County assessor’s office showed properties that were reasonably well cared for by homeowners.
A little more than three years later,
the number of eyesores has grown. Windows are broken, fences are
missing and plywood covers some of the broken windows. Even if the
houses look secure from the front, back doors are sometimes missing or
open. Public records show that foreclosure actions initiated were
never completed and titles to properties never transferred.
Now, let’s run through this Chicago nightmare scenario from the BoomBustBlog analytical perspective, excerpting Banks Will Be Forced to Forgo Certain Foreclosures, Even If the Borrower Has Admittedly Defaulted!
About a week or so ago, I posed a controversial question, Is the US Government About to Forgive Mortgage Debt? Let’s Crowdsource Our Way Through a Scenario or Two!
In that missive I warned that the recovery rate on many of the
repossessed properties was not only at a historic low, but actually
approaching zero, save a few blips from .gov bubble blowing and
shenanigans by banks in the form of kicking cans down the road. I also
said that the time may very well come when there may be no economic
incentive for banks to foreclose on certain properties, and that pool of
properties may grow larger than many could imagine. I know it is
difficult for many to come to grips with this, but the math really ain’t
that hard.
Even Tyler Durden, whose controversial
ZeroHedge site I read and contribute to with a passion, is being too
optimistic. Yeah, that’s right! You know things are bad when ZeroHedge
is too optimistic! In his post “Quantifying The Full Impact Of Foreclosure Gate: Hundreds Of Billions To Start“, he
assumes there WILL be something to foreclose upon. I assert that in
increasingly more common instances, there will be no economic interest
to foreclose upon. It is starting at the fringes and the margin, but
it is moving closer to the center faster than many think. And the longer, and deeper “Fraudclosure” investigations continue, the closer and faster to the center it will get.
Well, since I penned this piece, new developments have arisen. In
particular, the likelihood that banks will be set back even further as
they face additional legal pressures and foreclosures are judicially
rolled back and undone. See Less
Than 24 Hours After My Warning Of Extensive Legal Risk In The Banking
Industry, The Massachusetts Supreme Court Drops THE BOMB!
This is, of course, not even considering
the fact that all of this investigating and shining the light in dark
corners will reveal the true elephant in the room (and it is not
hastily signed affidavits that can be quickly fixed) which is that
many, if not most, high LTV mortgage originations were fraudulent to
begin with. That means that not only would it not be cost effective to
foreclose, but everybody and their momma will be scrambling to put
the fraudulent loans back to the originating banks – see The
Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks
Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf
2008! for my realistic take on the situation and the expenses that
it entails. Yes, the elusive recovery rate is going to be pushed that
much lower. Long story short, bank expenses will skyrocket, along with
efficiency ratios, which were already increasing to begin with at the
same time housing sales economic activity and prices will drop and
credit losses will spike. Oh, what fun we have in store.
Here is an excerpt from Is the US Government About to Forgive Mortgage Debt? Let’s Crowdsource Our Way Through a Scenario or Two
to refresh your collective memories and then I will run through an
example that clearly shows a high LTV property in Nevada that the lender
literally has no economic incentive to foreclose upon if there is
litigation to be had.
As you can see, the charge-offs on
1-4 family residential housing skyrocketed nearly 1,500% (yes, that
is a lot) from the bursting of the bubble in ‘06.
Both recoveries have increased and
the charge-offs decrease, giving us an increase in recovery rates
over the last two quarters. Now, before we get all giddy about the
improvement in the credit situation in residential real estate
finance and blow out all of our provisions, let’s take a more
careful look at the chart. For one, although the recoveries have
increased very slightly, it is the drop in the charge-offs that has
served to boost the recovery rate. So, that leads us to ask “What
has changed so positively in the market to cause such a drop in
charge-offs?” Well, for one the Case Shiller Index has shown a rise
in prices. Of course, BoomBustBloggers don’t really go for that,
because the Case Shiller Index rise fails to capture many of the
elements that are causing aggregate housing values sold to fall on an
economic basis. See Why the Case Shiller Index, Although Showing Another Downturn Coming, is Overly Optimistic and Quite Misleading! then reference this chart below.
I will make the analytical model that created this chart available to all paying subscribers
in my next post on this topic, which will drill down on why a lagged,
highly filtered price model (no matter how sophisticated, and they
did do a good job on it) will often mislead you in regards to the
true economic direction of assets as such as housing. You must
measure sales activity (which has slowed to a level that nearly
approximate 1963 levels) as well as sales prices – and those prices
have to capture all aspects of housing. The CS index excludes the
most distressed categories, which causes it to have an optimistic
skew.
So, if it is not the rising prices of
indicated by the Case Shiller index that caused the drop in
charge-offs, then what was it? Well, I believe it was something much
more old fashioned and mundane. It’s called LYING! See Anecdotal Evidence That Banks Are Hiding Depressed High End Real Estate, as excerpted…
Why are Banks Hiding High End Residential Real Estate? Courtesy of the Real Estate Channel:
- Without the FTB tax credit, the housing market is receiving
artificial demand and price support from the FHA loan guarantees and
banks sitting on mortgages of homes once valued at $300,000 - Banks in areas that were severely damaged by the downturn in
domestic real estate (Cook County, Illinois, Miami-Dade County,
Florida, Orange County, California) have significant inventories
of homes worth more than $300,000 that they will not put on the
market, even after foreclosures lasting more than 2 years
If that doesn’t get you going, reference “They ARE trying to kick the bad mortgages down the road, here’s proof!” and “More on kicking that housing can down the road…“.
Now, taking the above into consideration, let’s run through an example of a high LTV single mortgage home purchased in Nevada.
| Sales price | Loan, expenses | Equity | ||
| $ 250,000 | $ 312,500 | $ (62,500) | Starts off with negative equity | |
| Current retail value | $ 100,000 | $ 300,000 | $(200,000) | prices drop |
| Distressed value | $ 64,000 | $ 300,000 | $(236,000) | distress discounts |
| Carrying costs/maintenance@5 m, taxes/utilities@24 m | $ 12,480 | $ 312,480 | $(248,480) | can’t hold the property for free! |
| foreclosure costs | $ 6,000 | $ 318,480 | $(254,480) | cost to foreclose |
| Broker costs@6% | $ 3,840 | sales costs | ||
| Recovery to bank if sold withing 4 months and not drawn into litigation | $ 41,680 | net recovery in a perfect world | ||
| Recovery if marketing period=12M | ~35000 | recovery if sales continue to slow | ||
| Recovery if litigated (win or lose?) | $ - | If there is a legal battle (there cropping up all over the place), the bank is better off letting it go. |
This example is not far fetched, and can
take place in condos in Florida, California and New York where extra
costs can drive down recovery, or the humid coastal regions (ex.
Florida) where humidity can drive down recovery over time, or cold
weather states, or high crime areas (theft, vandalism), etc.
Methinks it is time to start rethinking
the dynamics of distressed real estate, foreclosures, REOs, and
recoveries for the economics are definitely starting to morph on the
margin and that morphing can quickly spread to the more mainstream.
It is imperative that my site’s paying subscribers review this blog
post in light of the shadow inventory study that I released late last
year. This is the key to how deep this mess will get, and it will get
very deep. All readers should read the following post, subscribers should download the pdf and read it, then re-read it. I will be issuing an update this weak.
The
3rd Quarter in Review, and More Importantly How the Shadow Inventory
System in the US is Disguising the Equivalent of a Dozen Ambac
Bankruptcies! Wednesday, November 10th, 2010 by Reggie Middleton
I feel this month has thrown enough
events at the market to force it to start taking the real fundamentals
into consideration. Of course, battling this ideal is the US Federal
Reserve and their QE 2.1 policy. This should be a time to reflect upon
exactly where we stand thus, I will review my thoughts and observations
over the last 30 to 45 days and then summarize a truly unbiased and
independently calculated view of the downright nasty side effects of
the US shadow inventory of distressed housing. All paying subscribers
can download the full shadow inventory report here: 
Foreclosures & Shadow Inventory. Professional and Institutional subscribers should also download the accompanying data and analysis sheet in Excel – Shadow Inventory.
Over the last few weeks, I have commented on my belief that the big banks who optimistically release reserves
and provisions to pad lagging accounting earnings under the auspices of
increasing credit metrics are simply setting their investors up for a
major reversal which will bang those very same accounting earnings: JP
Morgan’s 3rd Quarter Earnigns Analysis and a Chronological Reminder
of Just How Wrong Brand Name Banks, Analysts, CEOs & Pundits Can
Be When They Say XYZ Bank Can Never Go Out of Business!!!
_________________________
More Reggie Middleton on residential real estate:
- Less
Than 24 Hours After My Warning Of Extensive Legal Risk In The Banking
Industry, The Massachusetts Supreme Court Drops THE BOMB! - As
JP Morgan & Other Banks Legal Costs Spike, Many Should Ask If It
Was Not Obvious Years Ago That This Industry May Become The “New”
Tobacco Companies - The
Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks
Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf
2008! - As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves
- The
Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks
Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf
2008! - The Truth Goes Viral, Pt 1: Housing Prices, Economic Sales and the State of Depression
- Pay Attention to the National Association of Realtors and Their Chief Marketing Agent At Your Own Risk!
- Those
Who Blindly Follow Housing Prices Without Taking Other Metrics Into
Consideration Are Missing the Housing Depression of the New
Millennium. - Is the US Government About to Forgive Mortgage Debt? Let’s Crowdsource Our Way Through a Scenario or Two!
- Why the Case Shiller Index, Although Showing Another Downturn Coming, is Overly Optimistic and Quite Misleading!
- More Doom and Gloom: Homebuilders Making Better Money as Hedge Funds than Home Builders
- Yes, Housing Prices Have Much Farther to Fall. We’re Talking Years…
- Even at Marquis Trump Properties, Your Lyin’ Eyes are Belying the Real Estate is Bottoming Mantra
»
- advertisements -
Your question to Reggie is a good one and I headscratch over the answer too. As I see it, there are 4 primary villians enabling and encouraging the fraud: UST, FASB ( which is overseen by SEC, which itself is overseen by UST ), the ratings agencies and, of course, the banks themselves. Altogether these 4 have converted financial sense into financial nonsense. In the end, King KashFlow will eventually force out all the bluffs.
Yes, GW posted a great piece last week: http://www.washingtonsblog.com/2011/01/failing-to-prosecute-financial-fraud-on.html
I repeat myself from a comment above, What if the Big Secret Plan was to gather up all the ruined financial companies (15 or so) and merge them together into 4 or 5 TBTF banks, THEN take them over once things have settled down. Its the only way I will let Ben off the hook for squandering $trillions and Tim for not prosecuting anyone. This Big Bank Theory posits eventual merger w/GSEs so putbacks aren't even a issue. I'm telling you, if there ISN'T a bigger plan out there, then what is happenning to The Working Taxpayer is atrocious.
Bear Stearns+WashMutual=JPMChase (+Suntrust mebbe?)
Countrywide+Merrill Lynch+MBNA= Bank of America
Citibank was going to buy Wachovia
Wells Fargo+Wachovia
PNC+National City (+Regions mebbe?)
And we can't leave out MS or GS from this list.
Free houses!!??!! God Bless America! Truly the richest nation on earth!!!
Bernanke's biggest coup was getting The Gov't to guaranty the GSE's MBS securities he bought in QE1: That opened the door for The Banks to offload as many defective loans the Fanny/Freddie as they could, and The Fed certainly didn't stop them. Maxine Waters has the right focus, she understands that The Taxpayers own the GSE's. (My 2006 refi was a "no docs" NINJA from Suntrust, now FNMA owns it. How is that possible?).
Reggie's 1970's Porn Statche' is his secret source of knowledge!
Great, Fantastic and / or other adjective!
Love the stuff Reggie, Please keep it up forever and God Bless YOU and YOURS!
I predicted we would soon see bulldozers at work to "solve" the crisis of foreclosed homes, and Reggie's latest post confirms it. The next step is a federal program to reimburse states for the demolition and disposal costs associated with clearing these lots.
'soon see bulldozers at work to "solve" the crisis of foreclosed homes'
"The city of Youngstown, Ohio has been bulldozing a few hundred houses a year since 2005.""
Read more: http://www.businessinsider.com/the-mayor-of-detroits-radical-plan-to-bulldoze-one-quarter-of-the-city-2010-3#ixzz1BJ1SboQfThe property tax issues will be tied up in court for years. Since no one know who owns what anymore, the next step down this path is for the current occupant to pay the property tax (e.g. rent), payable to the sherriff or policeman going doot-to-door. How medieival.
Move into vacant, foreclosed home, then walk on down to county offices. Let them know you are living there, pay first year's property taxes. Shake hands with Sheriff, donate a couple of bucks to the Fraternal order of Police, settle into your new home.
everyone rents....from the government! At least this way we don't have to pretend we are "buying" our houses, since we will never really own them.
But what about Jingle Mail. Won't these properties have taxes owed by the banks holding the notes ???
What a mess. Will there be tax sales ??? So many possibilities. And the banks are going up, yeh.
This is great! It adds to the question: WHEN do The Banks take the hit on foreclosed properties? That is the question that Robert Lenzner of Forbes asked last week.
I'll take a stab at that one: Probably never. Rules will change, bailouts will emerge, politicians will be bought and sold, but the banks will be held inviolate.
What if the Big Secret Plan was to gather up all the ruined financial companies (15 or so) and merge them together into 4 or 5 TBTF banks, THEN take them over once things have settled down. Its the only way I will let Ben off the hook for squandering $trillions and Tim for not prosecuting anyone. The Big Bank Theory posits eventual merger w/GSEs so putbacks aren't even a issue. I'm telling you, if there ISN'T a bigger plan out there, then what is happenning to The Working Taxpayer is atrocious.
What if the big secret plan was too kill the Fed by bankrupting it?
And they still try to put lipstick on that pig to appease the sheep...
I like your documentation.
The best new business to start in the sand states is DEMOLITION
Related businesses: roll-off dumpsters and on-site demo waste shredding.
Used equipment should be readily available.
"The best new business to start in the sand states is DEMOLITION"
demolition is one of the ultimate resolutions to the current housing mess
I think Flint, Michigan was the first American city to start bulldozing houses - they have determined that they need to shrink the city by 40% in order to continue providing municipal services (you know, little things like potable water, sewage treatment, police & fire coverage, etc)
it's easy to scrape an abondoned house (of which there are many in Flint) but how do you handle the houses where people are still living? whole neighborhoods are being scraped so I guess eminent domain comes into play - Flint will be showing us the way ...
Detroit, Philadelphia, Pittsburgh, Baltimore and Memphis
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5516536...
Detroit plans to bulldoze 25% of city
http://www.businessinsider.com/the-mayor-of-detroits-radical-plan-to-bul...
You gotta love your US empire. People in the future will not believe their eyes when learning about this era.
Starting point:
US dream, work hard, you will own your house.
Trouble:
US is growing more and more expensive, work output not enough to enable US dream to be true.
Solution:
Inflate house market, create big bubble so that world capital is attracted to US.
Houses got built in the US, not elsewhere.
Troubles:
Oil is not plentiful enough to support the scheme.
Bubble exploses.
Solution:
Destroy houses to reflate the house market.
In other words, that is scorched tactics, steal resources and destroy them so that other competitors can not use the resources.
Incredible.
And that is the US world order.
"The best new business to start in the sand states is DEMOLITION"
...Which explains why Asians and the World's "Smart money" have been relocating to Canada's Four Western Provinces, led by Gateway Capital Vancouver BC
...The Next Financial Safe Haven is...
Vancouver B.C...The new Geneva of Switzerland
...and it is completely legal and safe
http://seenoevilspeaknoevilhearnoevil.blogspot.com/2011/01/vancouverthe-geneva-of-switzerland.html
Why?
...Because it is the Gateway City of Canada's Four Western Provinces...a plethora of natural resources w/ on 12.5 million citizens
http://seenoevilspeaknoevilhearnoevil.blogspot.com/2011/01/what-will-happen-to-canadas-western.html
And VBCE has monster boxes available!
We have a winner.
Da housin' goin' down, again. No doubt Reggie. If current mortgage activity reflects the stimulus addicted marketplace, that pukes on a whif of a "normalization" of rates then look out when the fed signals it is time to sell.
good day for this report.the whole damn thing is sick.
Don't forget commercial loan fraud Reggie. I'd like your take. Here's an example
where the local paper(conflicted by ad revs and cronyism) covers up the
local bank's shareholder rape precipitated by a borrower who defrauded IndyMac,
who also didn't care, just write those loans and package that paper. It's
everywhere.
http://www.youtube.com/watch?v=exy70HEnkPQ
how it all began.
http://www.youtube.com/watch?v=QeiWUCSry8o&feature=mfu_in_order&list=UL
good stuff reggie.
did you see this:
http://news.firedoglake.com/
Most of this will just be rejigged with extending the mark to market rules to extend into the derivatives market that contain all of the poison surrounding the mortgages. Not sure if anyone noticed when it (Mark to market) was removed last time but Congress was damn sure to put the banks a couple more escape hatches.
All this means is we will see QE3 whenever the banks need that trigger pulled. This is all part of the master plan of swindel and burn tactics. It will however come back to bite them in the ass come QE4 and QE5.
Eventually the US government will have to invent another currency to replace the burned out husk called the USD.
Thanks Reggie for the insight. Between you, Dr Housing Bubble, and the times Denninger doesn't drive me crazy, I've had the real estate sector on lock. Much appreciated.