This weeks industry call was somewhat eye opening for 2 reasons.
First, lenders now have all of the info on the Obama housing plan and how it will affect them.
Second, is that to date, there have been NO takers for the public (94%)/private (6%) partnership to buy $1 trillion of toxic assets to get them off the lenders books.
What this translates into is that while there will be approximately 4 million foreclosures this year, there will be very slow implementation of Obama plan guidelines for modification and refinance. This is happening at the same time many lender moratoriums on foreclosure have been lifted.
In addition the government has extended the subsidies (bonuses to lenders to modify loans) to second mortgages as well. Lenders are woefully understaffed and my optimistic side tells me the subsidies are an incentive to hire more staff.
Granted, 2nd mortgages are normally wiped after the first mortgage holder forecloses, which renders them essentially worthless. A subsidy, some argue, will artificially inflate the value of a property since nature (the market) isn’t taking it’s course.
I tend to agree, and throwing more money at the lenders to do what should be in their best interest anyway, equates to more waste and profit for lenders that made bad choices.
But I hope they use the subsidy to bring on more people to deal with this enormous problem/ choke point.
Two lenders- Chase and Ocwen have tested a phone program to attempt to automate the modification process. This may help to speed things up but many homeowners will continue to slip through the cracks.
The problem w/ the “toxic asset” plan seems to be that lenders will only guarantee investors (taxpayers/ private investors) that they will get their money back , but not necessarily a profit.
Therein lies the problem. Even w/ only 6% exposure, private money is still skittish. No one has yet to figure out how to value the assets properly, since this problem is so deep on so many different levels.
So far, approx. 100 money managers have expressed interest but no one has stepped up. Again I think they are waiting for someone to be the guinea pig. There is no market for the sheer volume of these assets and the government is trying to “make a market”.
I get the concept. We’ve done this on a much smaller scale in our real estate development business, when going into a “transitional” neighborhood with the goal of turning it around and attracting buyers where there were none present.
The hardest sale is the first one. After that, you can set your own comps, establish your “floor”, and build from there.
The two problems here are- no one seems to be able to value the assets properly, and the sheer size of the assets requires a lot of money to be thrown at the problem (again 94% taxpayer/ 6% private).
The good thing is that if it were all government/ taxpayer money the assets probably would have been overpriced when purchased, and we would be stuck w/ the bill.
Even with only 6% skin in the game, private money is forcing the market to price these assets properly. Meanwhile the lenders have been holding out to see if they could rid themselves of their problem debt.
Since they are not seeing that materialize very quickly, I believe we will see more lenders get tired of waiting for assets to be taken off their balance sheets.
How this comes full circle back to loan mods is that I believe we will see more principal balance reductions by lenders whose alternative is to foreclose on a massive amount of homes that are upside down.
I was just on the phone w/ a client in NV yesterday. He is the perfect case study for this scenario unfolding. He said, rightly so, “…why should I keep basically paying “rent” on a house that will probably never recover in value for many years (possibly a decade or more)”.
There is a subdivision nearby his home, where only 10% of houses have been built, and the project has stalled with no sign of life for several months.
He also has several vacant houses in his neighborhood, and despite raising his kids there and not wanting to pull them out of the good school district they are in, he may have no choice but to give the keys back to the bank.
Play that scenario out across the country. About 18% of homes nationwide are now “upside down,” according to a report from First American CoreLogic .
Almost two-thirds of those homes are in just seven states: Arizona, California, Florida, Georgia, Michigan, Nevada and Ohio.
In Mountain House, Calif., an unincorporated planned housing community located in the foothills of the Diablo mountain range, the housing crisis right now has nearly 90% of the homeowners owing more on their houses than they are worth – the highest percentage in the country, The New York Times reported on Nov. 10. The average homeowner is underwater by $122,000, the newspaper said.
A bright spot/ quick case study is a recent modification done by Wachovia, which in our experience has been difficult to deal with. They recently agreed to 4 principal balance reductions as part of their modification for 4 different clients.
This particular modification was a balance reduction from $540k to $370 ($170k reduction) at 6% int. only with a 40yr term.
Due to Wachovia’s previous unwillingness to agree to balance reductions, this may be an indication of things to come. Only time will tell.
Until next week…
Tags: lender subsidies, obama bailout, toxic asset
