Mass. Court Ruling Confirms: Foreclosure Mess Far From Over

From Yahoo Tech Ticker:

Foreclosure-gate is back.

The Massachusetts Supreme Court has ruled against U.S. Bancorp and Wells Fargo in a case that could have serious implications for the already depressed U.S. housing market.

The high court found that the banks wrongfully sold two foreclosed homes by failing to show the proper paperwork at the time of the sale indicating they actually owned those homes and had the right to a) foreclose on those properties and b) sell the homes to new owners.

If this decision is echoed in other states, the foreclosure mess is going to get a whole lot messier.

There is already a huge backlog of potential home foreclosures sitting on banks’ books as a result of last year’s “robo-signing” scandal, which forced banks to undergo a self-imposed moratorium on foreclosure proceedings. It was expected that early this year these foreclosures would eventually go through and the problem would work itself out. (See: RealtyTrac: Foreclosures Drop in November But Will Come Roaring Back in 2011)

Now, the likelihood of that happening is much less.

In the wake of the court’s ruling, there may be increased scrutiny of deals already done. In addition, people may be less inclined to purchase a foreclosure property for fear that it might end in a repossession of the home.

Another freeze on foreclosures may be good for home prices in the short-term, but the long-term outlook seems more grim as RealtyTrac’s Rick Sharga told Tech Ticker last fall. About one-third of all sales are foreclosures sales, and a freezing up of related activity can’t help but create a “chilling effect” on the market.

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Foreclosure Fraud to be Legalized by Congress?

A nice primer on the foreclosure fraud situation can be found here on CNBC.

In it, the author predicts:

The most damaging thing that could happen to banks would be the discovery that they simply cannot prove they hold a mortgage on a house. In that case, the loan would probably have to be written down to near zero. Even for current loans, the regulatory reserve requirements would double as the loan would no longer be a functional mortgage but an ordinary consumer loan. Depending on the size of the “no docs” portion of the loan portfolio, this might be a minor blip or require a bank to raise new capital to fill the hole in the balance sheet.

What does this mean for the housing market and the economy?

Get ready to hear the phrase “pig through the python” a lot. For example, “We need to get the pig through the python very quickly so that the market can be free of uncertainty.”

This is the favorite metaphor of bankers discussing the foreclosure crisis. The idea is that anything that slows down foreclosures will unsteady the housing market. There’s a lot of truth to this. Buyers will hesitate to bid on foreclosure sales if they are not confident the foreclosure is legitimate. Other buyers may worry that the lack of foreclosure sales in an area is a false indicator of the health of the local housing market.

Banks concerned about the recovery values of their mortgage portfolios and higher capital requirements, may pull back lending even further than they already have. In short, this could be the beginning of the second leg of the credit crunch.

There is probably no better example of how screwed up the banks’ records on loan ownership are than that of Florida homeowner Jason Grodensky who bought a house in cash, owed no money, and was rather unpleasantly surprosed to learn that Bank of America had foreclosed on his home.

A CNBC reporter now predicts that in the lame duck session after the elections Congress is probably going to pass a bill to help out their good friends the bankers, as they always do when things get rough for those poor fellas:

Congress will pass a bill to “forgive” banks the potentially criminal errors made in foreclosure proceedings, a senior CNBC editor predicts.

In a blog column Friday, John Carney argues that lawmakers in DC won’t allow the country’s largest issuers of mortgages to suffer financial losses following revelations of numerous mishandled foreclosure proceedings, especially when bailing them out this time “won’t cost taxpayers a dime.”

Carney predicts that the lame-duck session of Congress following this November’s elections will pass the law. “Every member of Congress … who has been voted out of office will cast a vote for the bill. And the President will sign it.”

Well, I certainly wouldn’t put it past them, we shall see … :)

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Hope You Enjoyed the Housing Recovery … Because It’s History

Some considerations from Richard Suttmeier:

Since the recovery in house prices began last summer, homeowners and real-estate agents have embraced what many believe is a return to normalcy (forever rising prices).

In Wall Street-fueled markets like New York City, properties are once again getting multiple bids, and optimists are chattering about a quick return to old highs.  If the trend continues, friends, neighbors, and real-estate agents will no doubt soon start repeating the adage that helped inflate the housing bubble in the first place: Real-estate is always a great investment.

But the trend won’t continue, says Richard Suttmeier, strategist at

The temporary increase in prices has been driven by government efforts to prop up the housing market, Suttmeier says, and those measures have come to an end. A new wave of foreclosures is hitting the market.  Fannie Mae and Freddie Mac have become black holes into which taxpayers must shovel endless billions just to keep the mortgage engine running.  Most importantly, as measured by the Case-Shiller index, housing prices are still way too high.

In most major house-price indexes, prices have already begun to roll over and head back down. Suttmeier thinks this trend will continue. In fact, he thinks prices could fall another 25% nationwide.

For a good overview of the trends that concern Suttmeier, see fund manager Whitney Tilson’s latest presentation on the housing market.

New Wave of Foreclosures

From  Zillow:

Zillow recently released its first quarter Real Estate Market Reports for the nation and 135 metropolitan areas. The reports show that home values continued to decline nationwide in the first quarter, amid encouraging signs in California. However, growing negative equity and record foreclosures will likely delay a broader recovery.
The full national report, in its new, interactive format, is available at or by emailing [email protected]. Additionally, in most areas data is available at the state, metro, county, city, ZIP and neighborhood level.
Topline National Results:

  • U.S. home values fell 3.8 percent year-over-year, and declined 1 percent quarter-over-quarter, marking the 13th consecutive quarter of year-over-year declines. Home values declined year-over-year in 106 of the 135 metropolitan statistical areas (MSAs) tracked by Zillow.
  • Home values in several large California markets have stabilized significantly, and show tentative signs of reaching a bottom.
  • Negative equity remains high with 23.3 percent of all single family homes with mortgages underwater, up from 21.4 percent in fourth quarter.
  • Foreclosures reached a new peak in March, with more than one out of every thousand homes (0.11 percent) being foreclosed.

The $8,000 first time homebuyer tax credit program has now run out, and so has the $6,500 repeat homebuyer program. Everyone knew that once those run out home prices would resume their natural and required path of price deflation, and foreclosures and underwater homeowners would be back in the news.

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Interest Only Borrowers – “Praying for Another Boom”

Looming foreclosures are hanging over the US housing market like a Damocles Sword, in particular those that arise from interest only loans:

Edward and Maria Moller are worried about losing their house – not now, but in 2013.

That is when the suburban San Diego schoolteachers will see their mortgage payments jump, most likely beyond their ability to pay.

Like millions of buyers during the boom, the Mollers leveraged their way into a house they could not otherwise afford by taking out a loan that required them to make only interest payments at first, putting off payments on the principal for several years.

It was a “buy now, pay later” strategy on a grand scale, meant for a market where home prices went only up, and now the bill is starting to come due.

With many of these homes under water — worth less than the loans against them — many interest-only mortgages will soon become unaffordable, as the homeowners have to actually start paying principal. Monthly payments can jump by as much as 75 percent.

The Mollers owe so much more than their house is worth, and have so few options, that they are already anticipating doom.

I’m praying for another boom,” said Mr. Moller, 34. “Otherwise, we’ll have to walk.

Keith Gumbinger, an analyst with HSH Associates, said: “This is going to be the source of tomorrow’s troubles. The borrowers might have thought these were safe loans, but it turns out they bet the house.”

After three brutal years, evidence is growing that the housing market has turned a corner. Sales in July were the highest in a year, and August gives signs of having been even better. In nearly all major cities, home prices are now rising.

Celebration, however, might be premature. The plight of the Mollers and many others in a similar position is likely to weigh on any possible recovery for years to come.

Experts predict a steady drumbeat of defaults over much of the next decade as these interest-only loans mature. Auctioned off at low prices, those foreclosed houses could help brake any revival in home prices.

Interest-only loans are not the only type of exotic mortgage hanging over the housing market. Another big problem is homeowners with “pay option” loans; in many of these loans, principal balances are actually increasing over time.

Still, interest-only loans represent an especially large problem. An analysis for The New York Times by the real estate information company First American CoreLogic shows there are 2.8 million active interest-only home loans worth a combined total of $908 billion.

The interest-only periods, which put off the principal payments for five, seven or 10 years, are now beginning to expire. In the next 12 months, $71 billion of interest-only loans will reset. The year after, another $100 billion will reset. After mid-2011, another $400 billion will reset.

The article goes on to say that about 18% of prime interest only loans are already 60 days or longer delinquent. It is safe to assume that those will almost all be foreclosed upon when payments reset, no matter how much people pray for another boom. But on top of that, what about other interest only loans and ARMs.

You might want to look intosomething I recently referenced regarding this:

$2.5 Trillion Alt-A Mortgage Resets Are Only Still Ahead of Us:

Click on image to enlarge.

Option ARMs by State (Good Night, California!):

Click on image to enlarge.

Also see what Mish posted recently on pent up foreclosure demand:

Delinquencies and Foreclosures by State

Calculated Risk has an excellent chart showing state by state totals in his post MBA Forecasts Foreclosures to Peak at End of 2010.

Annotations in hot pink are mine.

click on chart for sharper image

Pent-Up Foreclosure Demand

The area in pink represents potential foreclosure demand. Not all of that area will be foreclosed, but some of it sure will. The “Hidden Backlog” mentioned above (and highlighted in red) is within that pink area.

Make no mistake, there won’t be another housing boom anytime soon, most likely not even  in our lifetime. Those sky high housing prices of the 2000s are not coming back. Every decision you make based upon this false hope, will be but a false one.

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Jobless Claims, Foreclosures & Retail Sales – A Triple Whammy

As per latest AP reports, Jobless claims up, retail sales dip unexpectedly:

There were 617,000 new jobless claims in late June, before the figures were distorted last month by a shift in the timing of temporary auto plant shutdowns. That shift caused claims to drop sharply and then jump up last month.

Claims fell steeply last week, however, when the data were no longer affected by the distortions.

Still, initial claims remain far above the roughly 325,000 that economists say is consistent with a healthy economy. New claims last fell below 300,000 in early 2007.

Including federal emergency benefit programs, 9.25 million people received unemployment compensation in the week ending July 25, the latest data available. That’s down from a record of 9.35 million the previous week. Congress has added up to 53 extra weeks of benefits on top of the 26 typically provided by the states.

According to, new records are being set in foreclosure activity:

[smartads]The foreclosure plague continued to devastate last month.

There were more than 360,000 properties with foreclosure filings — including default notices, scheduled auctions and bank repossessions — an increase of 7% from June and 32% from July 2008, according to RealtyTrac, an online marketer of foreclosed homes. In fact, one in every 355 U.S. homes had at least one filing during July.

“July marks the third time in the last five months where we’ve seen a new record set for foreclosure activity,” said James J. Saccacio, chief executive officer of RealtyTrac. “Despite continued efforts by the federal government and state governments to patch together a safety net for distressed homeowners, we’re seeing significant growth in both the initial notices of default and in the bank repossessions.”

The jump occurred as several foreclosure moratoriums phased out. They were initiated by many states to give the administration’s foreclosure-prevention efforts time to work. But for many help did not come: The modification and refinancing programs have met with less success than hoped.

… and last but not least, retail sales fell unexpectedly:

Sales at U.S. retailers unexpectedly fell in July from June, a government report showed on Thursday, casting a shadow over an anticipated rebound in consumer spending in the third quarter.

The Commerce Department said total retail sales edged down 0.1 percent from increasing a revised 0.8 percent in June. Sales in June were initially reported to have risen 0.6 percent.

Analysts polled by Reuters had forecast retail sales rising 0.7 percent in July, expecting a boost from the government’s “cash for clunkers” program, which gives consumers cash to swap aging gas-guzzlers for new, more fuel efficient models.

Excluding motor vehicles and parts, sales fell 0.6 percent in July after rising 0.5 percent the prior month. Analysts had expected a 0.1 percent gain in sales excluding autos.

Gasoline station sales fell 2.1 percent in July, reflecting a retreat in gasoline prices during the month, after surging 6.3 percent in June. Excluding gasoline, retail sales nudged up 0.1 percent. Sales of building materials were down 2.1 percent in July after falling 0.6 percent in June.

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