Market Update
Current News Items about the local San Diego Real Estate Market
Check out this article - it's time to think about buying! - vikki k.
Regional home prices end 2-year skid, report showsThe San Diego Union - Tribune - San Diego, Calif.
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Author: |
Roger Showley |
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Date: |
Jun 18, 2009 |
In the latest indication that the gloom in the housing market might be lifting, MDA DataQuick reported yesterday that May prices in Southern California rose for the first time in nearly two years, up $2,000 from April to reach an overall median of $249,000.
On Tuesday, DataQuick reported that San Diego County's median price rose even more, up $5,000 from April, to stand at $295,000, or $15,000 above the recent low point in January.
"We appear to be in the early stages of the market gradually tilting back toward a normal balance of sales across the home-price spectrum," DataQuick President John Walsh said.
Jerry Nickelsburg, senior economist at the UCLA Anderson Forecast, said the prices are "about right" in historical terms and are attracting would-be buyers, but not yet enough of them to completely turn the market upward.
"A lot of people are on the sidelines who are saying it may be beneficial to wait another month or so," he said.
But for now, the "sideways" direction of the market signals one possible conclusion -- "The big implosion in housing is running out of steam," Nickelsburg said.
As always, the big picture doesn't tell all.
The six-county region showed a wide variety in sales and price changes from April to May and from May 2008 to now.
Orange County's median was up $30,000, or 7.9 percent, in one month's time to reach $410,000. Los Angeles and Riverside were unchanged at $300,000 and $180,000, respectively. But San Bernardino County, ground zero of the housing meltdown in Southern California, absorbed a $1,500 loss to sink to $137,000, which is down 45.3 percent from May 2008, the worst showing in the region.
The month-to-month rise in prices -- the first since July 2007 -- did not necessarily reflect an improvement in value. DataQuick said it was a question of fewer low-cost foreclosure homes selling and slightly more higher-priced, move-up homes closing escrow.
Sales below the $500,000 mark represented 83 percent of all sales, down from 84.8 percent in April.
Total sales regionwide stood at 20,775, up slightly from April's 20,514 and 22.8 percent higher than year-ago levels. San Diego County rose the least year-over-year, as reported earlier, up 8.8 percent to 3,242. San Bernardino, reflecting a continued hunger for low-cost foreclosure properties, was up 51 percent to 3,134 over last year's May count.
Foreclosures, which have dominated the Southern California market for months, slipped percentage-wise in May to represent 50.2 percent of all resales, down from a peak of 56.7 percent in February. San Diego's percentage was 43.1 percent, down from a high of 55 percent in January.
Analysts said foreclosure activity is down because lenders have foreclosed on fewer properties in recent months -- either because they could not cope with the volume of distressed homes or because they were working with owners to modify the mortgages. Government-sponsored moratoriums and extended notification schedules also played a part.
Leslie Appleton-Young, chief economist of the California Association of Realtors, said the slowdown has led to multiple and overbid offers by investors and first-time buyers, eager for deals.
"It looks like to me the low- and moderate-end of the distressed market is starting to show signs of bottoming," Appleton-Young said. "There's just no inventory."
Her latest count showed only a 2.5-month supply statewide of single-family resale homes priced below $300,000. By contrast, there was a 17.2-month supply of homes above the million-dollar mark.
"We have a bifurcated market," Appleton-Young said, "distressed on the one hand and a higher-end, coastal, jumbo-financed market on the other hand" -- a reference to costly and less-available mortgage loans above $417,000.
In recent weeks, interest rates have risen above the 5 percent level from their lows of about 4.5 percent on 30-year, fixed-rate loans.
If rates continue to rise, UCLA's Nickelsburg said, "You can expect the housing market to take longer to recover, because home prices will have to fall to compensate for the additional cost."
Online:
For a breakdown of Southern California home prices and sales,
go to uniontrib.com/more/socalprices
Credit: STAFF WRITER
Low prices and low interest rates - WOW- what a great time to buy! - Vikki Kuick
Loan giants' bailout fosters hefty decline
By Martin Crutsinger
ASSOCIATED PRESS
September 12, 2008
WASHINGTON – Rates on 30-year mortgages dropped sharply this week, falling to the lowest level in five months, as the government's dramatic takeover of mortgage giants Fannie Mae and Freddie Mac had the hoped-for effect of lowering mortgage rates.
Freddie Mac reported yesterday that its nationwide survey found that 30-year, fixed-rate mortgages dipped to 5.93 percent this week, down from 6.35 percent last week.
The sharp decline pushed the 30-year rate below 6 percent for the first time since late May and marked the lowest level for this rate since it averaged 5.88 percent the week of April 17.
Private economists had predicted that the government's move on Sunday to take control of Fannie Mae and Freddie Mac would result in lower mortgage rates for consumers because it removed a huge uncertainty about the future of the two firms, which own or guarantee half of the nation's mortgages.
Mark Zandi, chief economist at Moody's Economy.com, said yesterday that he believed rates could keep falling and perhaps drop to around 5.5 percent on the 30-year mortgage, which would give a further boost to the battered housing market.
“This is the most significant positive benefit of the government takeover of Fannie and Freddie,” Zandi said. “I think it is important that rates have fallen below the key 6 percent benchmark, and hopefully, rates will move lower in coming weeks.”
The 30-year mortgage hit a high for this year at 6.63 percent on July 24 and had been above 6 percent since late May.
The Freddie Mac survey showed that other mortgage rates declined this week, though one-year rates bucked the downward trend.
Rates on 15-year, fixed-rate mortgages, a popular choice for refinancing, fell to 5.54 percent, down from 5.90 percent last week.
Rates on five-year, adjustable-rate mortgages averaged 5.87 percent this week, down from 5.97 percent last week.
One-year, adjustable-rate mortgages edged up to 5.21 percent, compared with 5.15 percent last week.
The mortgage rates do not include add-on fees known as points. The nationwide fee for 30-year, 15-year and five-year mortgages averaged 0.7 point last week. The nationwide fee for one-year mortgages averaged 0.6 point this week.
Steve Hops, senior vice president of production for Guild Mortgage in San Diego, said the drop in interest rates prompted an immediate increase in mortgage applications this week.
“We're doing a lot of FHA, first-time homebuyer loans for people who haven't previously been able to afford home,” he said. “It's a good part of a bad story.”
Hops, who is also president of the residential section of the California Mortgage Bankers Association, said the effect is significant. For a borrower taking out a $265,000 loan, going from 6.38 percent to a 5.75 percent interest rate results in savings of $106 a month.
Prices are at almost a 20% discount! See below! - vikki k.
A housing flip-flop
Local market now most 'undervalued' in state, study finds
By Roger Showley
STAFF WRITER
September 5, 2008
San Diego, which three years ago had one of the most overvalued housing markets in the country, is now the most undervalued in California, the economic and financial analysis company Global Insight reported yesterday.
The market has improved because housing prices have fallen about 32 percent from their peak, while incomes have continued to increase.
“A metro area like San Diego has, in a sense, fallen too much,” said James Diffley, who directs Global Insight's regional services group.
But he cautioned that prices could drop an additional 10 percent over the next year before they level out and start climbing again by 2010. Diffley cited the continued influx of foreclosures on the market, the weak economy, and tougher lending standards that will make it difficult for buyers to get mortgages.
On the other hand, Southern California benefits from a strong export market and is not as depressed economically as some other regions of the country.
“You still have a huge amount of properties for sale,” Diffley said. “That's going to depress prices further, regardless of what you think about the (area's economic) fundamentals.”
Global Insight, a Massachusetts company that conducts economic and financial analysis and forecasting, has more than 3,800 clients in 14 countries.
Drawing on data from National City Corp. in Cleveland, Global Insight said San Diego single-family resale housing, which had a median price of $349,300 in the second quarter, was 17.2 percent undervalued, based on household income and prices. In the second quarter of 2005, single-family housing, then with a median price of $505,900, was 39.1 percent overvalued.
In national terms, San Diego ranked as the 29th most-overvalued market in 2005 and, most recently, the 33rd most-undervalued in the ranking of 330 metro areas.
The rankings are based on price-to-income ratios, mortgage rates and historical trends in each metro area. An area is deemed undervalued when the value is at least 15 percent under the fair value and deemed extremely overvalued when it is at least 35 percent over the fair value.
Esmael Adibi, director of the A. Gary Anderson Center for Economic Research at Chapman University in Orange, said he agreed with some of Global Insight's findings. But, he said, the outlook is clouded by the prospect of more troubled home loans and tighter underwriting standards by lenders.
“There's still downward pressure on prices, in spite of improvements in affordability,” Adibi said.
He predicted Southern California's economic outlook remains cloudy because of the housing downturn.
“We benefited disproportionately from construction spending and the mortgage industry,” Adibi said. “Now, they are the two industries that are the weakest and, consequently, we are disproportionately hit harder.”
The Global Insight analysis noted that San Diego's last housing downturn lasted 27 quarters, from 1990 to 1997. Prices, which were overvalued by 19 percent in the fourth quarter of 1989, dropped a total of 14 percent.
This time, prices have dropped much faster in a much shorter period, but the timing of the upturn isn't clear.
“So many things have to fall in place,” Adibi said, “and I don't think they will all fall in place in the very near future, in 2009.”
W. Erik Bruvold, president and chief executive of the San Diego Institute for Policy Research, said the current economic downturn is so different from the past that it is difficult to predict the outcome.
But the strength of San Diego's non-real-estate economy should bode well for a quick housing upturn once it happens, he said.
“Our future, in a lot of ways, looks like the Bay Area's within the coastal hills,” Bruvold said. “We have no vacant land; it's all infill (for future housing development), and people still want a detached home with a yard and kids.”
Norm Miller, academic programs director at the University of San Diego's Burnham-Moores Center for Real Estate, discounted Global Insight's undervaluation findings as virtually meaningless for San Diego. Miller said the prices are based on low-priced foreclosed homes, which are dominating the market.
And in high-priced areas such as San Diego, buyers typically pay more of their income or draw more from their assets to buy than in other areas.
MDA DataQuick previously reported that nearly 41 percent of all resales in July involved foreclosures, while the number of foreclosures topped 2,000 for the first time, three times the figure of July 2007.
Miller agreed that prices will drop further, probably an additional 5 percent, and that a recovery is six to 18 months away.
“We're still softening and going to soften until more of the inventory and shadow inventory – which is expired listings that didn't sell – come back on the market (and sell), and that takes a while,” he said.
Senate, Bush need to act on bill to help homeowners
May 18, 2008
After more than two years of declining home prices and rising foreclosures, Congress has finally come up with a proposal that could keep hundreds of thousands of borrowers from losing their homes.
True, the bill is currently stymied in the Senate and faces a veto threat from President Bush.
But it could be the closest thing we'll see to a significant remedy coming out of Capitol Hill. Judging from the wave of foreclosures that is about to hit us, we'll need it.
Here's the situation. Nationwide, more than 1.2 million homes are in foreclosure – and we're not even halfway through the foreclosure wave. By the time the smoke clears in 2010, as many as 3 million more homes will be foreclosed upon nationwide, some analysts predict.
Last month alone, there were 5,297 defaults and foreclosures in San Diego County, twice as many as the year before, according to RealtyTrac, a firm in Irvine that tracks the real estate market.
Hardest hit was the city of San Diego, with 1,880 defaults or foreclosures, followed by 730 in Oceanside, 431 in Escondido and 227 in El Cajon, according to Default Research Inc. in Pennsylvania. Not all of the defaults will end up as foreclosures. But then again, those numbers don't count short sales – people who sell their home at a loss to avoid foreclosure. If you factor the short sales in, the number of troubled properties rises dramatically.
To clean up this mess, Democrats on Capitol Hill have been pushing for a bill to help the Federal Housing Administration extend up to $300 billion in low-interest loans to borrowers who have been unable to keep up with the adjustable rates on their current mortgages.
The proposal – which passed in the House 10 days ago but and is now stymied in the Senate – echoes a program that President Franklin Roosevelt introduced in 1933 to aid homeowners in the Great Depression. It was one of the few Depression-era programs to turn a profit, because the vast majority of borrowers repaid their government-backed mortgages in full.
The Congressional Budget Office, which apparently believes today's borrowers are not as trustworthy as they were in the 1930s, estimates that the program could cost $1.7 billion. But considering the downside if a fix doesn't come soon – massive foreclosures, deteriorating neighborhoods, growing numbers of homeless people, depressed property values, a deeper recession, etc. – that seems like a small price to pay, right?
Wrong. Or at least not to everybody.
“What we're talking about here is a $300 billion bailout for those who were scamming the market,” said House Minority Leader John Boehner, R-Ohio. “Democrats are forcing responsible homeowners and taxpayers to pick up a $300 billion tab to bail out scam artists, speculators and reckless borrowers.”
Boehner and the vast majority of House Republicans voted against the bill, including our own Reps. Duncan Hunter, Brian Bilbray and Darrell Issa. Democratic Reps. Susan Davis and Bob Filner voted for the proposal.
Although the bill passed in the House, it has been stuck in the Senate, which has a smaller Democratic majority. Even if it makes it out of the Senate, President Bush is threatening to use his veto pen if the final version of the bill smacks too much of being a taxpayer-funded bailout.
All of this squabbling seems more like political posturing than anything else.
For one thing, Boehner's wrong. The bill is specifically designed to weed out speculators and scam artists. If history is any guide, taxpayers may make a slight profit on the proposal. And even if they don't, the so-called bailout would be less than $2 billion, not the $300 billion that he and other opponents are railing about.
For another thing, there seems to be a great deal of hypocrisy regarding what constitutes a bailout. Throughout the past year, we have seen the administration and the Federal Reserve work to bail out banking institutions such as the now-defunct Bear Stearns.
We have also seen Boehner and other Republicans in Congress refuse to back a previous weak package for homeowners unless it included multibillion-dollar tax breaks for corporations that lost money during the mortgage debacle – regardless of the fact that some of those corporations helped cause the problems by extending risky loans to unworthy borrowers.
The fact is that the vast majority of homeowners who are in trouble now were not “scamming the market.” Speculators constituted a relatively small minority of the buyers who got burned over the past few years – fewer than one in five defaulting borrowers, according to a Federal Reserve study.
“By far the largest category is the people who had mortgages they shouldn't have gotten in the first place, including some who were duped into taking out the loans,” said Jerry Kalman, a real estate agent at the Bonsall office of RE/MAX United. “I've heard stories of how a lot of chicanery went on. It's probably 50-50 as to how many people got their loans through greed compared to faulty guidance or questionable practices.”
Still, there is a valid question here: Should we help out homeowners who made bad choices, whether through greed or naiveté?
In former times, you could make the argument that we should show some compassion to our fellow citizens. But since that argument doesn't seem to go far these days, let's just say that by helping them, we may end up helping ourselves, because the ramifications of the mortgage crisis seem increasingly dire for our economic health.
Federal Reserve Chairman Ben Bernanke – who originally took a laissez-faire approach to the mortgage crisis – is sounding more and more like the poet John Donne. “No homeowner is an island,” Bernanke warns these days. “The bell that tolls in the real estate market tolls for thee.”
With an increasingly urgent tone, Bernanke has been warning lately that if the foreclosure problem isn't fixed soon, the effect on the economy could be much more severe than we're experiencing right now.
“High rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets and the broader economy,” he said last week. “Therefore, doing what we can to avoid preventable foreclosures is not just in the interest of the lenders and borrowers. It's in everybody's interest.”
Dean Calbreath: (619) 293-1891; dean.calbreath@uniontrib.com
An educational article about short sales compared to foreclosures -
Short sale still stings, but it's better than foreclosure
By Bob Tedeschi
NEW YORK TIMES NEWS SERVICE
September 9, 2007
Homeowners who have seen the value of their houses drop below the amount left on their mortgages and who are struggling to make their monthly payments often believe their only option is to walk away from the loans and accept a foreclosure.
Not so, lenders say. Borrowers can both avoid foreclosure and escape their mortgage debt, provided they are willing to give up their homes and accept at least some collateral damage to their credit ratings.
This financial work-around is called a “short sale,” and it involves working with the lender and a real estate agent to sell the house at a loss.
For example, consider a borrower who owns a home that has fallen in value from $400,000 to $375,000, but who still owes about $400,000 on the mortgage because the loan required no down payment – a common enough feature before the current mortgage crisis.
If the borrower is struggling with the monthly payments and has no means to pay off the mortgage, a bank will often consider a short sale.
“As long as the customer is being reasonable, we'll entertain this as a possibility, because we don't want the home,” said Robert Caruso, a senior vice president of Bank of America. “We'd rather sell it and take a little more of a haircut on it now than later.”
Banks generally avoid foreclosures because the legal process can be costly and long, and because banks do not want the additional burden of trying to sell distressed properties.
So in the example of the $400,000 mortgage, after the borrower and the bank agree to a short sale, the bank will suggest a real estate agent or ask the borrower to find one, then the house will be listed at its appraised value. When the house sells, the bank takes the money, pays the agent's commission and voids the mortgage.
So assuming the final sale price is $375,000, the bank might end up with $345,000. (By the time a borrower considers a short sale, he or she is often several months behind on mortgage payments and property taxes, which the bank also covers.)
And what about the borrower with the $400,000 mortgage? “We'll typically forgive the debt,” Caruso said. “There may be some impairment to your credit history, showing you have missed payments and the short sale. But it's a lot better than having a foreclosure.”
Caruso and other lenders say they expect to see more short sales in coming months because default rates are increasing, especially among those with poor credit who have taken out adjustable loans that may rise sharply in coming months.
Vikki gets quoted in Business Week -
MAY 7, 2007
NEWS & INSIGHTS
By Christopher Palmeri and Dawn Kopecki
Why This Slump Is Different
Foreclosures are rising fast, investors are sweating, and lenders are now bending over backwards to keep bad loans alive
First comes the reminder notice that a borrower is late on the mortgage payment. Then the phone calls start. Later a brochure arrives, maybe even a DVD, explaining the homeowner's options. Around month four, there will be a knock on the door.
Don't call them bill collectors. Today, the industry has a softer term, "debt counselors," for the swelling ranks of people who are pounding the pavement trying to stem the tide of mortgage foreclosures. Says Steve Bailey, senior managing director at mortgage giant Countrywide Financial Corp., who oversees the company's $1.4 trillion portfolio: "You need to keep the revenue stream flowing and keep hope alive."
As the housing downturn grinds on, that has become the mantra for everyone from homeowners and lenders to agents and investors. There have been previous busts, but this one is markedly different. Never before have home prices fallen so broadly: Median national home prices slipped 0.3% in March from a year earlier, and the National Association of Realtors predicts a fall of 0.7% for 2007, which would mark the first annual drop since the Great Depression era. And foreclosure filings are increasingly common, jumping 42% in 2006 to 1.2 million, calculates RealtyTrac. There's little relief in sight; in the first quarter, 2 million homeowners were at least 30 days late on their payments, an increase of 26% from last year, according to Moody's Economy.com Inc.
Foreclosure is never an attractive option, but now it's even less appealing. With prices falling nationwide, lenders are wary of holding on to properties whose values could sink further. And unlike in previous cycles, a big chunk of the loans made recently are held not by federally insured thrifts or banks but by hard-charging hedge funds and other big investors that are aggressively pushing lenders to stop the bleeding. What's more, the steep rise in second mortgages that accompanied the boom means lenders in foreclosure proceedings are increasingly fighting one another for the scraps. Such pressures are inspiring some to dream up creative alternatives to foreclosure, from tinkering with loan terms to subsidizing sellers.
UNDERWATER EPIDEMIC
Many of the homeowners in trouble are first-timers who bought recently or investors who got in over their heads. Vikki Kuick, a real estate agent in San Diego, has a listing on a three-bedroom condo that the owners bought as an investment property three years ago for $447,000. Payments on their adjustable-rate loans have since gone from about $2,000 a month to $3,800, while their tenant pays just $1,800. Kuick says she has an offer for $370,000, which she has taken to the couple's lenders. If the lenders agree, the holder of the second mortgage would receive a token amount—as little as $1,000. "If it goes to foreclosure, [the second lender] may get zero," she says.
For the first time in years, houses are hitting the market with asking prices below the value of their mortgages. Stretched owners are hoping for a so-called short sale, in which the lenders forgive the difference. National statistics are scarce, but according to a study performed for BusinessWeek by the online agency ZipRealty, there are 1,100 such listings in Miami, nearly 1,000 in Atlanta, and 700 in the Washington area. In Sacramento, real estate agent Patrick Hake counts 1,079, more than 10% of the total homes on the market. "If home values are falling, short sales are better because they can be done cheaper and quicker [than foreclosures]," says Kevin J. Kanouff, head of the bond group at mortgage consulting firm Clayton Holdings Inc.
Quick is good, given the unprecedented pressures lenders are facing. In previous downturns, most loans were owned by federally insured lenders. Now roughly 56% of all loans outstanding, $5.7 trillion worth, have been pooled into mortgage-backed securities, vs. just 12% in 1980. "Wall Street has been very tough, and it's encouraging lenders to act rapidly," says Douglas G. Duncan, chief economist for the Mortgage Bankers Assn. "The faster you act, the lower your losses."
With so much at stake, lenders are scrambling to cut delinquencies and avoid foreclosures. In Dallas, EMC Mortgage Corp., a unit of Wall Street investment bank Bear, Stearns & Co., recently set up a "Mod Squad" team—short for loan modification—of 50 workout specialists who travel the country helping homeowners renegotiate. Citigroup Inc. and Bank of America Corp. have pledged to make a total of $1 billion in new, below-market loans to homeowners in trouble through the nonprofit Neighborhood Assistance Corp. of America. Ocwen Financial Corp., which collects payments on $50 billion in mortgages for other lenders, has recently doubled the size of its loan-mitigation department and has put people on the ground for face-to-face meetings with borrowers before there is a problem. It even pays its staff bonuses if they can avoid foreclosure. Says John Vella, president of EMC: "We want to protect the loan from going all the way south."
EVERYONE TAKES A HIT
That's good for everybody. Each foreclosure costs lenders, the government, and homeowners an estimated $80,000. Even neighbors take a hit, since foreclosure can have a ripple effect on property values. One foreclosure can cut the price on nearby homes by 1.4%.
Still, with so many loans packaged and sold as pools, the industry has tied its hands to some extent. To take advantage of the accounting and tax benefits, many lenders wrote restrictions on the mortgage-backed securities; generally just 5% of loans in such investments can be renegotiated. Some pools containing subprime loans already have delinquency rates of 8% or more. It's possible to change the deal, but it's time-consuming and costly. "What was once a simple, often personal relationship between a borrower and lenders is now a complex structure involving many parties, including services, investors, trustees, and rating agencies," said Federal Deposit Insurance Corp. Chair Sheila C. Bair in testimony to Congress.
By keeping borrowers in houses they never should have bought, lenders could simply be setting everyone up for a steeper fall down the road. But for now the focus is on working out some alternative to foreclosure. With the housing market being buffeted by the harshest storm it has seen in memory, everybody's just trying to hold on.
With Mara Der Hovanesian
NEWS & INSIGHTS
By Christopher Palmeri and Dawn Kopecki
Why This Slump Is Different
Foreclosures are rising fast, investors are sweating, and lenders are now bending over backwards to keep bad loans alive
Don't call them bill collectors. Today, the industry has a softer term, "debt counselors," for the swelling ranks of people who are pounding the pavement trying to stem the tide of mortgage foreclosures. Says Steve Bailey, senior managing director at mortgage giant Countrywide Financial Corp., who oversees the company's $1.4 trillion portfolio: "You need to keep the revenue stream flowing and keep hope alive."
As the housing downturn grinds on, that has become the mantra for everyone from homeowners and lenders to agents and investors. There have been previous busts, but this one is markedly different. Never before have home prices fallen so broadly: Median national home prices slipped 0.3% in March from a year earlier, and the National Association of Realtors predicts a fall of 0.7% for 2007, which would mark the first annual drop since the Great Depression era. And foreclosure filings are increasingly common, jumping 42% in 2006 to 1.2 million, calculates RealtyTrac. There's little relief in sight; in the first quarter, 2 million homeowners were at least 30 days late on their payments, an increase of 26% from last year, according to Moody's Economy.com Inc.
Foreclosure is never an attractive option, but now it's even less appealing. With prices falling nationwide, lenders are wary of holding on to properties whose values could sink further. And unlike in previous cycles, a big chunk of the loans made recently are held not by federally insured thrifts or banks but by hard-charging hedge funds and other big investors that are aggressively pushing lenders to stop the bleeding. What's more, the steep rise in second mortgages that accompanied the boom means lenders in foreclosure proceedings are increasingly fighting one another for the scraps. Such pressures are inspiring some to dream up creative alternatives to foreclosure, from tinkering with loan terms to subsidizing sellers.
UNDERWATER EPIDEMIC
Many of the homeowners in trouble are first-timers who bought recently or investors who got in over their heads. Vikki Kuick, a real estate agent in San Diego, has a listing on a three-bedroom condo that the owners bought as an investment property three years ago for $447,000. Payments on their adjustable-rate loans have since gone from about $2,000 a month to $3,800, while their tenant pays just $1,800. Kuick says she has an offer for $370,000, which she has taken to the couple's lenders. If the lenders agree, the holder of the second mortgage would receive a token amount—as little as $1,000. "If it goes to foreclosure, [the second lender] may get zero," she says.
For the first time in years, houses are hitting the market with asking prices below the value of their mortgages. Stretched owners are hoping for a so-called short sale, in which the lenders forgive the difference. National statistics are scarce, but according to a study performed for BusinessWeek by the online agency ZipRealty, there are 1,100 such listings in Miami, nearly 1,000 in Atlanta, and 700 in the Washington area. In Sacramento, real estate agent Patrick Hake counts 1,079, more than 10% of the total homes on the market. "If home values are falling, short sales are better because they can be done cheaper and quicker [than foreclosures]," says Kevin J. Kanouff, head of the bond group at mortgage consulting firm Clayton Holdings Inc.
Quick is good, given the unprecedented pressures lenders are facing. In previous downturns, most loans were owned by federally insured lenders. Now roughly 56% of all loans outstanding, $5.7 trillion worth, have been pooled into mortgage-backed securities, vs. just 12% in 1980. "Wall Street has been very tough, and it's encouraging lenders to act rapidly," says Douglas G. Duncan, chief economist for the Mortgage Bankers Assn. "The faster you act, the lower your losses."
With so much at stake, lenders are scrambling to cut delinquencies and avoid foreclosures. In Dallas, EMC Mortgage Corp., a unit of Wall Street investment bank Bear, Stearns & Co., recently set up a "Mod Squad" team—short for loan modification—of 50 workout specialists who travel the country helping homeowners renegotiate. Citigroup Inc. and Bank of America Corp. have pledged to make a total of $1 billion in new, below-market loans to homeowners in trouble through the nonprofit Neighborhood Assistance Corp. of America. Ocwen Financial Corp., which collects payments on $50 billion in mortgages for other lenders, has recently doubled the size of its loan-mitigation department and has put people on the ground for face-to-face meetings with borrowers before there is a problem. It even pays its staff bonuses if they can avoid foreclosure. Says John Vella, president of EMC: "We want to protect the loan from going all the way south."
EVERYONE TAKES A HIT
That's good for everybody. Each foreclosure costs lenders, the government, and homeowners an estimated $80,000. Even neighbors take a hit, since foreclosure can have a ripple effect on property values. One foreclosure can cut the price on nearby homes by 1.4%.
Still, with so many loans packaged and sold as pools, the industry has tied its hands to some extent. To take advantage of the accounting and tax benefits, many lenders wrote restrictions on the mortgage-backed securities; generally just 5% of loans in such investments can be renegotiated. Some pools containing subprime loans already have delinquency rates of 8% or more. It's possible to change the deal, but it's time-consuming and costly. "What was once a simple, often personal relationship between a borrower and lenders is now a complex structure involving many parties, including services, investors, trustees, and rating agencies," said Federal Deposit Insurance Corp. Chair Sheila C. Bair in testimony to Congress.
By keeping borrowers in houses they never should have bought, lenders could simply be setting everyone up for a steeper fall down the road. But for now the focus is on working out some alternative to foreclosure. With the housing market being buffeted by the harshest storm it has seen in memory, everybody's just trying to hold on.
With Mara Der Hovanesian
