Peter Pays Paul

BusinessWeek is reporting that California’s Foreclosure Notices Soar.

Lenders filed a record number of mortgage default notices against California homeowners during the first three months of this year, according to the research firm MDA DataQuick.

The company blamed the recession and of lenders playing catch-up after a temporary lull in foreclosure activity. A total of 135,431 default notices were sent out during the January-to-March period, an all time high in the  company’s database which goes back to 1992. That was up 80.0 percent from 75,230 for the prior quarter and up 19.0 percent from 113,809 in first quarter 2008, according.

According to the DQNews.com article Golden State Mortgage Defaults Jump to Record High:

The median origination month for last quarter’s defaulted loans was July 2006. That’s only four months later than the median origination month for defaulted loans a year ago, in first quarter 2008. That suggests a period where underwriting criteria were particularly lax.

Of the 3.7 million home loans made in 2004, less than 1 percent have since resulted in a lender filing a default notice. Of the 3.7 million loans originated in 2005, 4.9 percent have triggered a default notice so far. Of the 3 million in 2006, 8.5 percent have so far resulted in default. A particularly toxic period appears to have been August through November 2006 which had more than a 9 percent default rate. Of the 2.1 million loans made in 2007, it’s 4.6 percent – a percentage that’s likely to rise significantly during the rest of this year.

The lending institutions with the highest default rates for loans originated in August to November 2006 include ResMAE Mortgage (69.9 percent of loans resulting in a default notice), Master Financial (64.6 percent) and Ownit Mortgage Solutions (63.6 percent). Of the major lenders, IndyMac has a default rate on those loans of 18.9 percent, World Savings 8.0 percent, Countrywide 7.7 percent, Washington Mutual 6.3 percent and Wells Fargo 3.4 percent. Less than 1 percent of the home loans originated in late 2006 by Citibank and Bank of America have since gone into default.

The DQNews.com article also reported:

Foreclosure resales have emerged as a significant market factor, accounting for 58.1 percent of all California resale activity last quarter. A year ago it was 33.1 percent. Foreclosure resales varied significantly by area, from 13.0 percent in San Francisco County to 80.8 percent in Merced County.

Real estate values have not settled in California. This new “wave” of foreclosure notices is going to cause uncertainty in the markets for a while. This combined with the “shadow inventory” of as many as 80,000 homes reported by SFGate.com will keep prices depressed and may drive them lower.

CoStar.com is reporting that Opportunities Mount for Distressed Office Buildings, But Few Are Trading.

According to the report there are currently 19,600 office buildings with vacancy ranging from 60-100% of the office space. According to the chart compiled by CoStar San Francisco has 125 buildings in this category and the Oakland/East Bay has 208 buildings.

The article also reports few if any sales of these distressed assets.

The reasons for the dearth of deals appear to come down to three primary factors: the pricing disconnect that exists due to rapidly declining market fundamentals, tightened credit conditions, and a lack of appetite for risk on the part of [both] lenders and investors.

A Matter of Perspective

The answer CoStar provides is exactly correct and comes down to a matter of perspective.

Sellers tend to be optimistic about the future value of assets and buyers tend to be pessimistic or at least realistic. Sellers foresee rental rates rising and demand picking up for commercial office properties. This perspective motivates sellers to hang on to the property until a buyer who recognizes the “true value” of their property or they are forced to sell through foreclosure.

Buyers realize that though the seller may expect rents to increase, there is no guarantee that this will actually happen. Buyers want to pay a price based on actual rents, if not decreased rental rates due to the over abundance of office space. Buyers with this perspective will hold out until they can buy a property that meets their criteria.

Leverage Has Left the Building

A lot of the value attributed to office buildings in the past five years was a product of the ability of buyers to leverage the properties to such a degree that even a slight increase in rents or occupancy gave a nice bump to their rates of return.

With 80-90% loan to value leverage, unavailable buyers need to have a greater upside in relation to the purchase price to get a compensating return commensurate to the risk they are taking on.

A Staring Match

It has become a staring match of sorts. Neither side wants to show weakness and neither side is ready to admit defeat.

Until one side concedes defeat, the staring will continue and properties will remain unsold.

Who will blink first? Will it be they buyers or the sellers?

When governments intervene into private contracts it has long-term unintended consequences, and usually they are negative.

Read a blurb regarding the research from the St. Louis Fed on the downside of a moratorium on foreclosures.

Governments cause both immediate and long-term effects when they rewrite the terms of contracts between private parties, Wheelock argueded. “Although the economic and societal benefits of lower foreclosure rates are difficult to measure,” he said, “research shows that the foreclosure moratoria of the Great Depression imposed costs on future borrowers.”

Future borrowers were faced, according to the analysis and cited studies, with a restricted supply of loans and sky-high interest rates, because lenders needed to compensate for the possibility that their right to foreclose on delinquent loans would be constrained. Under the nation’s current turmoil, policymakers are scrambling to enact similar regulations as were made during the great depression, in order to limit the highest foreclosure rates since (what else?) the Great Depression.

Here is the link to the HousingWire.com article.
History Warns Against Foreclosure Moratoria: Study : HousingWire.

Here is a link to the St. Louis Fed report.

Update (HT: Tom Vanderwell)

The Wall Street Journal has another article on an East Bay town this week.

Antioch, California is the focus of an article by the Journal regarding IndyMac Federal Bank’s (formerly IndyMac Bancorp) efforts to stem the tide of foreclosures.

FDIC Plan Tests Limits of Leniency – WSJ.com.

The FDIC is taking steps to modify as many delinquent loans as possible. There are some complications with the process, including loans that IndyMac Federal Bank only provides the servicing for.

IndyMac sold many of the loans it made to various investors. IndyMac still services the loan by collecting payments, keeping track of interest owed, and filing the necessary tax forms. IndyMac is limited in its ability to negotiate with the borrower because it is no longer the lender, the investor that bought the loan is now owed.

I also liked the WSJ’s efforts to give an accurate description of those that had borrowed money from IndyMac. Some used loan proceeds to buy other houses. Others have stopped paying and have “socked away money he saved by not paying IndyMac” and stored it in a safe.

Not all delinquent borrowers are “down on their luck”.

The LA Times is reporting that a Record number of California homeowners default on mortgages in 2nd quarter.

Year over year the actual number of homes being foreclosed on has increased 261%. The percent increase is dramatic. However the total number is only 63,061.

Based upon the U.S. Census Bureau Data California had 13,174,378 household units and 56.9% of those are owner-occupied. If these statistics are correct, there are 7,496,221 owner-occupied homes.

Though the increase is dramatic, the total number is still a small percentage of the total owner-occupied homes. This means that at most 0.84% of the owner-occupied homes are being foreclosed upon, or 8.4 out of 1,000.

However, my statistics do not breakout condos or home that were owned by speculators or investors. Many investors will stop making payments on their investment before they will stop making payments on their own home.

Likely, a lower percentage of owner-occupied homes are being foreclosed upon. A larger number are likely investor and speculator homes that were bought during the run-up in the real estate market.

Does the small increase from last quarter to this quarter signal that the damage is coming to an end? My crystal ball is broken. We will just have to batten down the hatches and ride out the storm.