After December, The Avalanche?

Louis XIV of France, styled the Sun King, famously opined, “Apres moi, le deluge.”  After me, the flood. He was right, of course, for his excesses so infuriated the people that his successor was guillotined and his monarchy overthrown in the French Revolution.

SoCal Plunge In Foreclosure Filings

Something similar seems to be brewing in Southern California and maybe even nationwide as lenders ratchet up their foreclosure filings after the “robo-signing” lull. Though foreclosures dropped dramatically in SoCal this fall, so, too, did all home sales. The reasons seem to be many: the end of the home buyer tax credit, stubbornly high unemployment and the generally still-moribund economy. In fact, sales are down a full 16% from November of 2009. This at the same time foreclosure filings fell 14% from the previous November after a 22% decline in October for a two-month total 36% decline. Nationwide, the filings fell 21%.

December is traditionally a slow month in real estate as consumers focus on retail buying, parties and holiday travel plans. Typically, though, also in December  smart investors are out there snapping up last-minute bargains of the now-extremely motivated sellers still on the market. Competition is almost always much less, to put it mildly, and sellers are determined to close out their books for year’s end.  This year seems to be different as even investors are holding back.

That may be because the huge drop in  foreclosure filings this fall has ominous repercussions for home prices in the new year. With the foreclosure freeze over, informed observers now expect to see the banks ratchet up their foreclosures with a vengeance, restarting filings begun in October and November and barreling ahead with new ones in January. Executives from RealtyTrac, a real estate data collection firm, speculate that the housing recovery could be set back three months, if not more, as the foreclosures pile up. In fact, we can expect ” an avalanche” of foreclosures shortly.

SoCal Home Prices

The most immediate effect of an avalanche of foreclosed properties on the market will be to further depress prices in Southern California which had started a slight upward movement. Los Angeles County home prices had dropped 1.2% over November 2009 to a median of $325,000. Riverside and San Bernardino Counties, the hardest hit by the bursting of the real estate bubble, lost 2.5% and 5.0% respectively to medians of $195,000 and $152,000. But, that is a huge improvement over the 30% and 40% drops of previous years. Other SoCal counties actually gained in value. Orange County eked out a .6% improvement for a $435,000 median home price. San Diego topped the charts with a 3.1% improvement over last year to a median of  $335,000 with Ventura County just behind at 2.7% uptick to a median of $375,000.

Future: More Underwater Homes

These hard-earned gains will soon be lost as the promised avalanche of foreclosures hits the market. Perhaps sales will pick up as buyers and investors are lured back into the game. But, bargain-hunting fun aside,  another price drop for already distressed homeowners will plunge yet more homeowners underwater.  That, in turn, spirals down into more foreclosures and more equity loss in future.

Like Louis XIV, banks see this as well as anyone, yet still refuse to modify loans in any serious way. Like Louis, they see, but, obviously, don’t give a damn as long as they get their bonuses. Short-term is the only term.

B of A’s Principal Reduction Plan: PR Phony Baloney

Maybe you’ve heard by now that B of A came out with a new plan to help distressed homeowners by reducing their mortgage principal. Wow, that’s sounds so great. Really, that’s what everybody thought the banks would do with loan mods. In fact, true to form, the big banks refused to drop the principal 98% of the time, preferring to add 10 years to the loan [40 year loans, enslaved for life] or to forebear collecting on part of the principal for 3 to 5 years, but never actually lowering the principal–no way, Jose!

So now, Big Bad B of A is going to be the first to do this? Yeah, right. Check the fine print and you will see that it’s mostly smoke and mirrors. B of A has gotten such rotten press in the past couple of years that they are apparently desperate for some positive commentary in the news media. And, this move has gotten some very good press.


What is B of A Principal Reduction Plan?

Simply put this plan would reduce the principal for homeowners who are at least 20% underwater on their loans. If you owe, say, $300K but your home is now worth $200K, the bank would reduce the principal to $240K and call it good. That’s what a cursory reading of the “pilot plan” would have us believe.
That’s fantastic, right? I have a B of A loan, you might be saying to yourself, how do I get in on this great deal? This is what I’ve been waiting for.
Hold your horses there, cowboy. Take a look at the fine print. First, this is a pilot program of 45,000 borrowers who have adjustable mortgages originally underwritten by Countrywide, purchased by B of A in 2008. Second, these few loans are being written down to 31% of household income or possibly to a very low interest rate such as 2% with a 40-year term.
And, borrowers would have 20% of the forgiven debt applied per year for 5 years when the lower amount becomes permanent unless the home value at that point is higher.
Are you with me so far? It’s a complicated plan, as is everything B of A does, and it would surprise me very much if it took less than 6 months to activate even one principal reduction.

What’s Not to Like About B of A’s Principal Reduction Plan?

As indicated, right now it’s merely a pilot program announced with a big fanfare–front page on the L.A. Times–geared to garner the most good PR for the worst of the big banks. Here are just a few of the many issues involved in the effort to lower principal.
Mainly, I would say this bank is trying to protect itself from the barrage of forensic loan audits now in the pipeline which show these types of loans—stated income, adjustable, negative amortization, etc—were actually fraudulent. To avoid lawsuits, if the bank can change the terms of the loans, it becomes lawsuit-proof.
Another major issue concerns secondary liens. What are the second lien holders going to say about principal reduction which essentially wipes out their stake in the property?During the heyday of these loans [about 2002-2007] most of the adjustable loans were 0% down, a first loan of 80% of the purchase price and then at a higher interest rate a second loan at 20%. That eliminated the dreaded PMI [private mortgage insurance] on the 20% value and also set us on our way into the present loan morass. Most of the seconds around Southern California done in this way are already essentially wiped out as home values have dropped 30% to 50% almost everywhere. But, in a short sale, for instance, the second loan holder typically gets something. Now, B of A would just tell them—“Sorry, you’re out of luck. We’re reducing the loan and wiping you out”?
To add to the mess, most of the second loans and many of the first loans were sold in pieces through the so-called mortgage-backed securities bundled up by the big Wall Street firms and flogged all over the world. It’s difficult to see how simply wiping out this debt obligation would be acceptable.
Have a B of A loan and hope is surging? Don’t hold your breath.

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Good SoCal Housing News Or Is It?

After months of plunging home prices, Southern Californians heard today that, yes, it’s true….homes have not tanked for the last three months!  It might be a trend! That’s almost all the good news. The other good news is that last month saw a veritable frenzy of home buying as prices throughout the Southland surged 52% over last year. Of course, last year was abysmal, but, oh well, you gotta get your good news where you can.

Here’s the wet blanket to douse those little flames of hope that might be springing up around us. Well, for one thing, there was a foreclosure moratorium and then lenders were holding back the flood, waiting for the new Obama housing policy to be revealed. Obama’s plan came out last month and the first refis started last week.  It will help. But, for so many there will be no help.  Expect foreclosures to surge again soon, putting more downward pressure on prices as lenders try to unload their inventories. It seems that in this first quarter [Q1] of 2009, foreclosure notices, NODs, have jumped 24%. More than 805,000 homeowners got such notices in the past three months. That means during the next three months we’ll see a tsunami of trustee sales and then a few months later a mountain of lender-owned property will hit the market.

Unless government has a few more tricks up its sleeve, prices here will continue to decline in the face of foreclosure. That will, in turn, put more homeowners “underwater” or owing more than their homes are worth. Man of these homeowners will decide it’s simply not sensible to pay the $3000 a month on the $400,000 or $500,000 mortgage when the property is now worth only $250,000. They will short sale their homes and  later buy another for $250,000, effectively cutting their  housing costs in half with today’s low rates.

As an illustration of how crazy we were:  A few days ago I did a BPO, a broker’s price opinion, of a 738 square-foot single family property with a double garage in La Puente. This tiny little house is now a repo, but it sold back in 2006 for $419,000! That’s just wrong. It has a nice lot with a wrought-iron and block fence in front and good curb appeal. But, it’s only a 2 bedroom/1 bath. The former homeowner slapped up a lean-to in the back with an exterior toilet in a little cubicle and a tiny studio wtih another bathroom as a crude rental, it seems. It’s all illegal, of course, and must be torn down. The sad remains of people desperate to save the home and perhaps their life savings. How could it ever have seemed like a good idea to buy that house?

Just as a souvenir, I guess, the L.A. Times today published a chart showing all SoCal Counties and home values during the last 8 years. Now, median SoCal home value is $250,000, less than half what it was in 2007 at the peak of the market.

It’s reached the point now that in many cases it’s cheaper to buy than to rent or at least it’s equivalent. Builders are telling us that new home values are now below replacement costs. Since these two factors are true, that also tells us that just like the last Great California Recession in the mid-90s, prices will come roaring back….sometime. Last time, it took a full 5 years. This time will possibly take as long.

socal-home-sales-and-prices

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Property Tax Reassessment Scams

Flower
Image by hoveringdog via Flickr

It seems these days almost anything can be a scam.  We’ve had mortgage loan scammers, rental scammers, foreclosure savior con artists and loan mod sharks. The latest con ? Property tax reassessment.

Let’s say you paid $750,000 for your home and now it’s worth about $550,000, but you’re still paying property tax on the purchase price. Enter the scammer who poses as a legitimate government agent or agency and offers to file a tax assessment appeal on your behalf—for a fee. Thing is–you can easily do this yourself–for free. There is nothing illegal about charging for the service of filing an assessment appeal. But it must be made clear that the company offering the service is not a Government agency and that their services are not approved by any government agency. Even if proper disclosure is made, though, it is not clear why anyone would pay for such a service.
Here’s what you do. First, don’t pay hundreds of dollars to any company no matter how “official” it may appear. The tax assessor does not send out letters and the tax assessor does not charge when you file an appeal. So, ignore the scammer’s letter and go to directly to the county tax assessors website. Each county has a tax assessor’s website. There, download the appeal form.

This form will ask the usual information and then will also request two area comparable sales that make you think your property is now worth less. How do you find the comps? Probably the best way is to call your friendly neighborhood real estate agent and ask him or her to look up some comps for you. The good part here is the agent will be able to tell you if it’s going to be worthwhile filing right now. It may be better in some areas to wait for 6 months or so. If you don’t have a real estate agent nearby, give me a call at 626-641-0346 and I will be able to provide help anywhere in Southern California.

Once you fill out your form with your information and the relevant compus, upload it to the website and then–wait. In a few weeks the answer will come. If the tax assessors says no, don’t give up. File again in six months. Property values, after all, are still falling. Sometimes the poor tax assessor takes awhile to see the big picture.

Believe it or not, sometimes the the Los Angeles County Tax Assessor  and many others  actually reviews tax assessments on its own.. Last year, the Los Angeles County Assessor’s office “initiated a review of single-family residences and condos purchased between July 1, 2004 and June 30, 2007. About 318,000 homes were reviewed, resulting in substantial savings for 128,000 homeowners.” In 2009, the review will be expanded to some 500,000 single family homes and condos purchased between July, 2003 and June,.2008. The office notes, “There is no reason to pay for a review that will be done for free.”

“All 500,000 owners whose homes are reviewed will receive a letter by the end of June notifying them of the results. Owners who disagree with the results or were not included in the review, may file an application through December 31.” There is no charge for this.

In California, it can be a little tricky to determine whether your tax assessment is too high. People tend to forget that the assessment is based on a value determined at the first of the year; and then the bill can stretch into the following year. For example, Californians have until April, 2009 to pay the second half of their current property tax bill. That’s the second half of a fiscal year that started July 1, 2008. And the bill was based on an assessment of value as of January 1, 2008. So there is, today, more than a year’s lag between the assessed value and today’s market value. Sure, market values have decreased since last January, but that’s not relevant for the current bill.

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Aid for “Responsible” Homeowners: Higher Loan Limits

Federal Home Loan Mortgage Corporation (Freddi...
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Ever feel like your good habits are cutting you out of the action? Watching your profligate neighbors who can’t afford their homes and never could get loan mods can do that to you. Watching AIG shovel money out the door while you’re watching every dime has a tendency to prickle as well.

Well, now responsible homeowners even in Southern California which normally seems left to fend for itself are getting a piece of the pie. If your loan was purchased by Fannie Mae or Freddie Mac, the cap for refis expired at the end of December, reducing eligible loans to $625,500. Yes, that’s pricey, but still shuts out far too many homeowners in SoCal. The Obama plan reinstates the higher loan limit of $729,750 for loan modifications and refis.

This amount was selected specifically to target higher-priced areas such as Los Angeles and Orange Counties. No doubt others areas of the country will benefit as well, but by far the greatest impact will be here.  Of course, just having a higher-priced loan does not automatically qualify the homeowner for the new structure under the Obama’s refinance  plan, called Home Affordable Refinance.  Homeowners will be able to refinance up to this amount providing the that loan is not more than 105% of  the current value.  That is, the current market value of the home must be at least $766,237.

If this criterion cannot be met, the homeowner may be eligible for a loan modification under another program in Obama’s plan, Home Affordable Modification. This program will help the homeowner suffering distress lower the monthly payment to 31% of income. In most cases, the lender would reduce the rates to as low as 2% for up to 5 years, or temporarily lower the loan balance or extend the loan to as long as 40 years.

Of course, either program requires the homeowner to have the capacity to pay the refinance or the modified loan. Seeking such aid, the homeowner must provide financial information as well as supporting documents. Finally, something that will help Southern California!

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Southern California Home Values: More Bad News

As noted here, L. A. County home values have now dropped 36% in one year.

But, that time period does not show the depth of the plunge. Southern California median home values have dropped 50.4% from the peak of the housing bubble. This is partly a statistical anomaly: few top-of-the-line or new homes were selling. This 50% figure is an aggregate of all SoCal counties. Some counties have it far worse and we know which they are. Riverside prices have plunged 55% from $432,000 median to $195,000. San Bernardino had it worse: median values are down from their height of $380,00 57.4% to $162,000.

Adding to the general misery is the news that about 20% of all mortgage holders in the U.S. are underwater or owe more than their homes are worth. California’s rate of negative equity is 30% of mortgage holders placing it on a par with Florida–in 5th place. It’s not quite so bad in L.A. County even with the statistical drag of  the Antelope Valley and the High Desert areas. In L.A. County about 23% of homeowners are in negative territory.

Of course, owing more than the home is worth is a difficult situation for homeowners. It hardly seems worth the struggle to make the payment. In fact, many don’t. They may have made a” business decision” [does it make sense to pay on a $400,000 mortgage when the house is worth $300,000?]  More likely,  they can no longer afford the payment due to job loss, job cutbacks or readjusting mortgages. Across the country,  4% of mortgage holders were at least 60 days late in the last quarter of 2008. A year earlier, the figure was 3%.

How’s California doing? Not so good, as we might expect, given the rising unemployment statistics. Of California home owners 6.9%  were categorized as delinquent in Q4 08. This compares to Florida, highest in the nation with 9.5% rate. We are still behind also Nevada and Arizona.

4-horsemen

But, these four populous states really are like the Four Horsemen of the Apocalypse. Their condition does presage disaster for the rest of the country. We four are huge markets for the rest of the country and the world. California alone has something like the 10th largest economy in the world. If our economic engine is stilled, what will happen to our trading partners and our fellow citizens in other states?

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Buyer Stimulus

Early reports about the massive Stimulus Bill due to be passed today indicate that home buyers will get a bit of a boost.

FIRST-TIME HOME BUYER CREDIT First-time home buyers are eligible for a refundable tax credit equal to 10 percent of the purchase price of their home, up to $8,000, if they made the purchase after Jan. 1, 2009, but before Dec. 1, 2009.  A first-time home buyer is traditionally defined as someone who has not owned a home in the past 3 years, no matter how many homes owned before that date.

first-time-home-buyer

Unlike a similar credit that Congress provided last year, buyers  don’t have to pay this one back over 15 years. The new credit, however, does phase out for individuals with incomes over $75,000. Also, you forfeit the credit if you sell the house within three years.  In other words, no home flippers, please.   Of course, this credit is for owner-occupied homes only.

Coupled with the now-permanent rise in the cap rate of FHA loans to $625,000, this does propel buyers into the market.  FHA loans offer a variety of options for the home buyer, and,  prime among them is that 3.9% down payment.  Some of the savor there is reduced by the high mortgage insurance amounts necessary for these federally-backed loans, but  FHA allows  sellers  to  contribute up to 6% of the loan amount for these and other costs.

Today, mortgage rates for 30-year fixed, are hovering around 5%, among the lowest in 50 years, and home prices are still declining, albeit more slowly.

If all this doesn’t point qualified buyers in the right direction–what will? Today’s buyer, especially in Southern California, is  unlikely to get a better deal in his or her lifetime.

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