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One Solution to Rundown Foreclosed Houses? Bulldoze Them

Wednesday, August 17th, 2011

Several banks have found a new solution to the glut of foreclosed houses – many of them in poor condition.  It’s the bulldozer. Bank of America (BoA) owns a glut of abandoned houses that no one wants to purchase.  As a result, the nation’s largest mortgage servicer is bulldozing some of its most uninhabitable inventory.  Additionally, Wells Fargo, CitiCorp, JP Morgan Chase and Fannie Mae have been demolishing a few of their repossessed houses.  BoA is donating 100 foreclosed houses in the Cleveland area and in some cases will contribute to the cost of their demolition in partnership with a local agency that manages blighted property.  The bank has similar plans impacting houses in Detroit and Chicago, and more cities tare expected to be added.

“There is way too much supply,” said Gus Frangos, president of the Cleveland-based Cuyahoga County Land Reutilization Corporation, which works with lenders, government officials and homeowners to salvage abandoned homes.  “The best thing we can do to stabilize the market is to get the garbage off.”  Detroit mayor Dave Bing is in the process of ” right-sizing” the motor city by razing entire neighborhoods.

BoA plans to donate and bulldoze 100 houses in Cleveland, 100 in Detroit, and 150 in Chicago.  The lender will pay up to $7,500 for demolition or $3,500 in areas eligible to receive funds through the federal Neighborhood Stabilization Program.  Uses for the land include development, open space and urban farming.  “No one needs these homes, no one is going to buy them,” said Christopher Thornberg, founding partner at the Los Angeles office of Beacon Economics LLC.  “Bank of America is not going to be able to cover its losses, so it might as well give them away and get a little write-off and some nice public relations.”

Some foreclosed properties are so uninhabitable that the bank is willing pay to have them destroyed.  A bank spokesman said some in this category are worth less than $10,000.

Writing in The Atlantic, Daniel Indiviglio says that “The motivation here is pretty straightforward.  They get out of ongoing maintenance costs and taxes that they would have to pay as long as the property remains on the market.  But the even better news is that the banks can often write-off these properties as a result.  In some cases, banks can deduct as much as the homes’ fair market value from their income taxes.  From the real estate market’s standpoint this strategy is also positive.  With less supply, prices will stabilize more quickly.  Disposing of these foreclosures will make the market clear sooner.  And yet, the idea of bulldozing homes does seem rather unsavory, does it not?  Perhaps some of these homes are condemned and/or beyond repair.  In those cases, it might turn out to be more expensive to try to get them back up to code than it would be to knock them down and start over.  But does this really describe all of the cases?  This is reportedly happening to thousands of homes across the U.S.  My concern is that banks are using this as an easy out to minimize their loss with little concern about what’s best for the U.S. economy.  If some of these homes could be converted to perfectly adequate rental properties at minimal additional cost at some point in the future, for example, then this would make a lot more sense than knocking them down and building new homes from scratch.”

According to a Time magazine article,  “After multi-billion dollar legislative efforts in the form of the Stimulus, Dodd-Frank and stand-alone legislation, President Obama declared failure earlier this month and said he’s going back to the drawing board on a housing fix.  Negotiations between the 50 state attorneys general and the big mortgage lenders, rather than clearing the air for banks and borrowers, has become an enormous wet blanket as negotiations drag out and banks refuse to make any move without knowing how much of the reported $20 billion settlement will fall on them.  Economists argue that the failure to clear the housing market is a primary cause of the stunted recovery: continued household debt weighs on consumer spending, home ownership and excessive debt puts a drag on labor mobility, and banks fear the consequences of increased lending.”

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Fannie and Freddie to Marry?

Tuesday, August 2nd, 2011

Mortgage finance giants Fannie Mae and Freddie Mac might find themselves merged into a single government-run entity.  Representative Gary Miller (R-CA) is set to unveil a bill that would create a utility-like entity and phase out government-controlled Fannie Mae and Freddie Mac.  The new company would buy mortgages and repackage them as government-backed securities.  The major difference from Fannie and Freddie lies in the fact that it would not have shareholder investors.  The National Association of Homebuilders and the National Association of Realtors are expected to support the proposal, which reflects concerns by the industry, consumer groups and some policymakers that a complete withdrawal of government support for home lending could make the housing recession go further downhill.

A competing proposal by Representatives Gary Peters (D-MI) and John Campbell (R-CA) would create a minimum of five private companies to replace the two co-called government-sponsored enterprises, or GSEs.  The point of contention for many lawmakers is whether to provide a government backstop for mortgages and on what terms to provide the guarantee.  House Financial Services Committee Chairman Spencer Bachus (R-AL) is trying to forge a consensus among Republican members.  Any bill that is generated by Bachus’ committee and is passed by the Republican-led House would likely still be in jeopardy once it reaches the Democratic-controlled Senate.

“There was the idea that people were so tired of taxpayer losses related to housing that the traditional housing lobby would not be able to retaliate effectively,” said Jim Vogel, chief of agency debt research at Memphis-based FTN Financial. “It’s time to start waving the housing flag again.”

That would represent a sea change from February, when the Treasury Department recommended selling off Fannie Mae and Freddie Mac holdings within 10 years; Jeb Hensarling (R-TX) wanted to do it in half that time.  Since then, homebuilders, real estate agents, investment banks, civil rights leaders and consumer advocates have lobbied to retain a government role — including the unspoken federal guarantee behind Fannie Mae and Freddie Mac.  Congress created the programs as private companies to expand home ownership.

Already, the government is slowing its efforts to prop up the housing market.  Beginning this fall, the cap on Fannie and Freddie-backed mortgages — loans where taxpayers are on the hook if borrowers don’t pay — will decline in some regions.  At the height of the housing crisis, Congress raised the cap to $729,750 in areas where homes are most expensive.  After October, that will fall to $625,500.  The limit varies by county.  Mortgages that are too expensive to get backing from Fannie and Freddie are called jumbo loans and usually have higher interest rates and require larger downpayments.  That maximum was set by Congress in 2008 in an attempt to ensure that borrowers could continue to obtain loans in particularly expensive housing markets during the credit crunch, especially in prime real estate locations, such as New York, Los Angeles and Washington, D.C.

The Deal Book column in the New York Times thinks that the idea of merging Fannie and Freddie is not as outrageous as it may at first seem.  “Consider the math: For the first six months of this year, both companies spent $1.825 billion in overhead costs combined; on an annualized basis, that means the companies are spending about $3.65 billion.  Given that the companies do pretty much the same thing – buying mortgages from banks, insuring them and creating mortgage-backed securities – there might be opportunities for savings if many of their managers and staff are, to put it politely, redundant.  Conservatively, a combined Fannie and Freddie could probably cut a third of its overhead and staff, saving some $1.2 billion annually.  The way Wall Street values companies, that means – presto – billions more in value, perhaps as much as $18 billion or $19 billion, could be created overnight.”

“It would instill a huge amount of confidence. The market will know that both entities combined will have much more consistent, stable margins,” John Lekas, chief executive of Leader Capital, an investment firm, said on CNBC last week. He added that it “doesn’t cost taxpayers one nickel.”

Additionally, Fannie and Freddie are on track in 2011 to spend about $1.8 billion on what is known as “foreclosure costs,” which means maintaining and selling thousands of homes that became part of their ownership portfolios after the owners were unable to pay the mortgage.  The costs are staggering, given that Fannie and Freddie together own approximately 153,000 foreclosed homes. “This is just one of the costs that Fannie and the rest of us will pay to dig out of a very big hole,” says Karen Petrou, of Federal Financial Analytics.  When she says “the rest of us,” she is telling the truth.  Fannie Mae’s tab to American taxpayers is up to $86 billion since September 2008 when it was taken into government conservatorship.  During the 1st quarter of 2011, Fannie racked up $488 million in foreclosure-related expenses, including holding costs (insurance, taxes and maintenance); valuation adjustments for changes in market value; gains/loss when the property is sold; legal fees; eviction costs; weatherization costs to prevent pipes from bursting; costs to secure the property; and repair costs.

“We want to make sure that we’re comparable with the market or with the neighborhood,” said Elonda Crocket, a Fannie Mae executives who is part of the management team of its massive portfolio of foreclosed properties.  The goal is to stabilize the neighborhoods where there are foreclosed homes and get the properties to a condition where first-time homebuyers want to purchase them.  “We want to make sure that we can maximize our return on the investment,” she said.  In 2010, Fannie Mae repaired 87,000 foreclosed homes.

“It makes them — I think — indisputably the largest purchaser of paint and general appliances for these homes they’re fixing up,” said Guy Cecala, publisher of Inside Mortgage Finance.  “If they don’t maintain the houses, then the neighborhoods go downhill, other people are put at risk and the housing crisis gets worse because you have still more downward pressure on overall house prices,” Petrou said.

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Walkability Factor Increases Property Investment Values

Wednesday, July 27th, 2011

According to a recent study, a 100-point scale, a 10-point increase in walkability increases property values by one to nine percent, depending on the property.  Chicago – with a Walk Score of 74 — was one of the nation’s most walkable cities.  The others are New York, Boston, San Francisco, Washington D.C., and Philadelphia.  The least walkable cities are Jacksonville, Nashville, Charlotte, Indianapolis, Oklahoma City, Memphis, Fort Worth, Kansas City, San Antonio, El Paso, Austin and Phoenix.

The report examined the impact on walkability and investment returns on more than 4,200 apartment, office, retail and industrial properties over the past decade.  Gary Pivo and Jeffrey D. Fisher compiled the data using performance information from the National Council of Real Estate Investment Fiduciaries and walkability data from Front Seat.  The study defines walkability as “the degree to which an area with walking distance of a property encourages walking trips from the property to other destinations.”

The Loop and the Near North Side were rated as Chicago’s most walkable neighborhoods with Walk Scores of 96 each.  Just five percent of Chicagoans live in car-dependent neighborhoods.  Illinois’ most walkable city is Forest Park – in the near western suburbs — with a Walk Score of 82; the least walkable is Godfrey – near downstate Alton — with a score of just 20.

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HUD Head Says Housing Bottoms Off

Wednesday, July 20th, 2011

American home prices may start rising as soon as the 3rd quarter as a foreclosure decline makes more homes available for sale, according to Housing and Urban Development Secretary Shaun Donovan.  “It’s very unlikely that we will see a significant further decline,” Donovan said.  “The real question is when will we start to see sustainable increases.  Some think it will be as early as the end of this summer or this fall.”  Home sales have increased in six of the past nine months; the number of homeowners in default is declining, Donovan said on CNN’s “State of the Union” program.

“In the long run, it’s a good time to buy,” Donovan said.  “It’s so affordable today compared to where it’s been for generations.”  Contracts to purchase previously owned homes rose 8.2 percent in May, following a revised 11 percent drop in April, according to the National Association of Realtors (NAR).  Another NAR report showed sales of existing houses, which make up about 96 percent of the market, fell in May to a six-month low.  Home prices fell four percent in April over 2010, the biggest decline in 17 months according to the S&P/Case-Shiller index of values in 20 cities.  An estimated 1.7 million U.S. homes were in the foreclosure process and expected to be put on the market in April, representing an 18 percent decline from the peak, as fewer loans entered delinquency and more distressed homes were sold, CoreLogic Inc. said.

Additionally, Donovan said that foreclosures are down approximately 40 percent when compared with last year.  Although 1.3 million homes are still in the foreclosure process, Donovan said that housing prices are stabilizing in the aftermath of the worst financial crisis since the Great Depression.  According to Donovan, “So, we are making progress, but rightly, the American people recognize we’re not where we need to be.  We still have a ways to go.”

On the subject of requiring 20 percent downpayments to buy homes, Donovan said there should be a way for qualified people to buy a home with less money upfront.  “We can’t go so far in the other direction that we cut off home ownership for people who really can be successful homeowners.  We can get back to the place where it’s a good investment and we will be able to make money over time,” Donovan said, noting that Americans should no longer view their homes as ATMs.

Financial analyst A. Gary Shilling, writing in The Christian Science Monitor, isn’t as optimistic.  In fact, he thinks that housing prices are likely to fall another 20 percent before bottoming out.  According to Shilling, “Many housing optimists a year ago believed not only that the housing collapse was over, but also that a robust rebound was under way.  Low mortgage rates and collapsed housing prices, not to mention the $8,000 federal tax credit for new home buyers and other initiatives, seemingly were going to kick-start housing activity nationwide.  Then a funny thing happened on the way to the housing recovery.  The tax credits expired, home sales dried up, and prices resumed their declines from their 2006 peak.  Excess inventories piled up due to overbuilding and mounting foreclosures.  In the meantime, buying those lower-priced houses became more difficult as lenders, burned by the housing crash, tightened lending standards and increased downpayment requirements.  As a result, the housing sector not only has failed to bolster the weak economic recovery but is also likely to continue to struggle for years.  And that’s bad news for the economy, which has softened in recent months.  Excess inventories are the mortal enemy of housing prices.  Lower prices are needed to unload surplus inventory, but in turn, lower prices bring forth more inventory from anxious sellers.  The anxiety of house sellers and the reluctance of buyers are enhanced by the realization that house prices can fall – and are falling for the first time in 70 years.”

The idea of owning a home is becoming less attractive as many people realize that it may be many years before prices stop falling and stabilize, let alone revive.  As proof, the national homeownership rate has fallen from its late 2009 peak of 69.2 percent to 66.4 percent in the 1st quarter of 2011 – the exact same level as in late 1998.  As homeownership loses its luster, rental apartments are gaining.  The homeownership rate is likely to continue to decline to its earlier long-term trend of around 64 percent as people continue to separate their abodes from their investments and as the baby boomers age, retire, and downsize.  That means approximately 4.5 million new renters in coming years.  Apartment construction, which normally totals 300,000 units annually, will be vigorous once surplus vacancies disappear.

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Google Goes Green

Wednesday, July 6th, 2011

Google and SolarCity,  a rooftop solar-panel company announced a $280 million investment deal,  the largest such deal for home-based solar power systems in the United States.  The investment gives San Mateo, CA-based SolarCity the funding to build and lease solar power systems to as many as 7,000 to 9,000 homeowners in the 10 states in which it operates.

Established in 2006, SolarCity currently has 15,000 solar projects around the nation completed or under way.  Customers who want to have the firm’s solar system installed at their homes can pay for it up front; however, the majority let SolarCity retain ownership of the equipment and rent back the use of it through monthly solar lease payments.  By financing SolarCity, Google will recoup its investment through those lease payments.  “We hope to be seen as a model,”said Rick Needham, Google’s director of green business operations.  Needham didn’t discuss the deal’s terms, but said “these investments are designed to earn us a good return on our capital.”

“It allows us to put our capital to work in a way that is very important to the founders and to Google, and we found a good business model to support,” said Google’s Joel Conkling.  Google CEO Larry Page wants the firm’s operations to eventually produce no-net greenhouse gas emissions.  To achieve this, Google has invested in wind farms in North Dakota, California and Oregon, solar projects in California and Germany, and the beginning stages of a transmission system off the East coast to encourage the construction of offshore wind farms.  The SolarCity deal is Google’s seventh green energy investment, totaling more than $680 million.

Typically, a rooftop solar system costs $25,000 to $30,000, which is beyond the means of many homeowners.  Instead, solar providers like SolarCity, SunRun and Sungevity pay for the system with money borrowed from a bank or a specially-designed fund similar to the one that Google has created.  The resident then pays a set rate for the power generated which is lower than or approximately the same as local electricity.  Typically, s 5-kilowatt system will generate 7,000 kilowatt-hours of power annually, or about 60 percent of the household’s annual use.  The homeowner buys remaining electric power from the local utility, typically enjoys lower overall power bills and has some protection against potentially higher traditional electricity prices.  Electricity prices have not risen in recent months, but are expected to rise in coming years as the cost of increasingly stringent clean-air regulations are passed on to customers.  If the solar company is to make money and the homeowner save money, there must be a combination of high local electric rates, state and local subsidies, as well as low installation costs.  Then there is the matter of sunshine.  A house with solar panels should have a roof that faces South that is not shaded by trees or other buildings.

“You have full flexibility in what you want to pay on a monthly basis,” said SolarCity CEO Lyndon Rive, who pointed out that homeowners are charged only for the electricity the company’s solar panels generate at or below market rates.  If the panels produce more power than the home uses, the consumer gets a credit.  “It’s actually a win-win,” Rive said.  “This industry is going gangbusters despite the economy,” said Danny Kennedy, founder of Oakland-based Sungevity.  According to Kennedy, the lease option his company started offering in March 2010 has pushed sales “through the roof.”  He expects to complete 30,000 leases in 2011, up from 10,000 in 2010.

California and Colorado accounted for more than a third of the residential solar market leases in the 1st quarter of 2011, according to a report from the Solar Energy Industries Association (SEIA).  The growth reflects that of the overall solar panel market, which expanded at an average annual rate of 69 percent since 2000, including 100 percent in 2010, according to SEIA, which expects the market to double this year.

Google has chosen to invest in clean energy projects because of the potential returns and the potential to impact the industry.   “We hope that Google’s leadership in the space will encourage other corporate investors,” Rive said.  There definitely is room for other investors to get involved: Fewer than 0.1 percent of American homes currently have rooftop solar panels, but that number is expected to grow to 2.4 percent by 2020, according to Bloomberg New Energy Finance. It’s highly likely that Google-financed companies like SolarCity will have a role in that growth.

The SolarCity project is not Google’s first venture into the clean energy market.  The firm has invested $168 million in California’s Ivanpah solar farm and another $100 million in the world’s biggest wind farm.  That is the $2 billion Shepherds Flat project,  near Arlington, OR, that will stretch over 77 square kilometers of north-central Oregon and generate enough energy for 235,000 homes.  The project, which will go into operation in 2012, is being developed by Caithness Energy.

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Equity Loans Putting Homeowners Under Water

Thursday, June 23rd, 2011

Homeowners who took out second mortgages, or borrowed against their homes to use the money as a cash advance,  may regret their decisions.  Close to 40 percent are now underwater on their loans — owing more than their home is worth, according to CoreLogic Data.  The data show 38 percent of borrowers who took second mortgages are now under water, compared with 18 percent of mortgage holders who haven’t taken out home equity loans.  The study did not examine how the cash was used.  This type of negative equity can result from increased mortgage debt, a decline in home value — or both.  Additionally, the report found that during the 1st quarter of 2011 the number of underwater homeowners fell to 22.7 percent from 23.1 percent in the 4th quarter of 2010.   Although this decrease may seem like good news, it is due to the fact that completed foreclosures lessened the total number of homeowners in the market.

The study illustrates the consequences of easy borrowing amid the housing boom’s inflated prices.  Home-equity loans, which total approximately 10 percent of the mortgage market, have been a problem for both homeowners and lenders.  Second mortgages are any loan taken out on a property that is in addition to the first mortgage; they include home-equity loans and lines of credit.  Second mortgages are taking a toll on a fitful recovery, in which housing has been the weakest spot.  The S&P/Case-Shiller National Index recently showed that home prices fell another 4.2 percent nationally in the 1st quarter, its third straight quarter of price declines after a modest recovery in early 2010.  Across the country, prices have fallen 34 percent since peaking in 2006.  The inventory of unsold homes will take more than nine months to sell, according to the National Association of Realtors.  This is approximately 50 percent longer than is considered a healthy market.  “When a homeowner’s house is under water, “it’s harder to get a credit card or a car loan, you can’t put your home up for a small business loan,” said Mark Zandi, chief economist at Moody’s Analytics.  “There are all sorts of little, pernicious effects that you don’t necessarily think about.”

Writing on the Mortgage Rates &Trends:  Mortgage Blog, Michael Kraus says “Unsurprisingly, there is a strong correlation between negative equity and home equity loans.  Thirty-eight percent of borrowers with home equity loans are under water.  Those with negative equity and HELOCs (home equity lines of credit) are down $98,000 on average, compared to $52,000 for those without HELOCs.  Intuitively, this makes a ton of sense and serves to illustrate the danger of using your home equity as an ATM.  Hindsight being 20/20, of course.  The negative equity problem remains the most acute in all the same places.  Nevada leads the nation in negative equity, with an incredible 63 percent of Nevada homeowners with mortgages under water.  Fifty percent of mortgaged Arizona homes are upside down, followed by Florida (46 percent), Michigan (36 percent), and California (31 percent).  These figures have changed relatively little since the last report on home equity, and negative equity will likely remain a massive problem in these markets for years to come.  Also of interest is the amount that the average borrower with negative equity is underwater.  Across the country, the average person who has negative equity is $65,000 underwater.  The highest average negative equity is in New York ($129,000), followed by Massachusetts ($120,000), Connecticut ($111,000), Hawaii ($98,000), and California ($93,000).  These areas typically have the highest home prices, so the high amounts of negative equity make sense.”

Treating your home as an ATM by taking out a second loan puts owners in the position of being more than twice as likely as single-mortgage homeowners to owe more than it’s worth.  This scenario isn’t what economic leaders had pictured.  During the housing market’s boom years, Federal Reserve chairman Alan Greenspan promoted second mortgages and home-equity loans as a way to tap homeowners’ most valuable asset to pay bills or buy a car.  Then the bubble burst.  Because home values are still falling, those loans have now become just another burdensome payment.

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As Global Oil Consumption – and Prices – Rise, OPEC Rejects Increased Production

Monday, June 20th, 2011

As gas prices seesaw up and down at the pump and Americans reluctantly pay more to fill their tanks as the economy slows, OPEC (the Organization of Petroleum Exporting States) could not agree on whether or not to increase production and provide some relief. The two key factors are Saudi Arabia and Iran. At an unusually contentious meeting, the 12-nation group could not reach agreement on new production targets.  That sets the stage for higher prices for oil and gas later this year as world demand for oil rises faster than supplies.  Saudi Arabia favored an increase in output, which likely would have translated to lower oil prices.  Other countries – such as Iran — resisted, arguing that oil supplies are adequate to meet demand and current prices are on target.  “We are unable to reach consensus,” OPEC Secretary General Abdullah Al-Badri said.  Saudi oil minister Ali Naimi called the meeting “one of the worst ever.”

Writing on the Salon website,Andrew Leonard points out that China is partially to blame for high prices at the gas pump.  According to Leonard, “If you want to know why gas prices are high, and why, in the long run, they will keep getting higher, all you need to do is peruse BP’s Statistical Review of World Energy 2011 report. Bottom line:  World oil consumption hit an all-time record high of 87.4 million barrels a day in 2010, driven by a surge in demand from emerging nations, but primarily led by China.  China has now overtaken the U.S. as the world’s largest energy consumer, with demand for all kinds of energy growing 11.2 percent in 2010.  In 2010, Chinese oil consumption grew by 860,000 barrels a day.  Since 2000, China’s oil consumption has grown an incredible 90 percent.  Supply, globally, is not keeping up with demand growth. And barring a major global economic meltdown, that dynamic is not going to change.  The rest of the world is going to continue to consume more oil, and finding and developing new sources of oil is going to continue to get more expensive.  And Obama can’t do a damn thing about it, except to put in place policies that encourage U.S. consumers to consume as little oil as possible.”

The Saudis and the Iranians frequently lock horns over pricing at OPEC meetings.  Typically, however, member nations follow Saudi Arabia’s lead, which produces most of the group’s oil.  This time the Saudi-Iranian rivalry resulted in a deadlock.  The International Energy Agency (IEA) had urged oil producers to put more crude on the market.  “Ongoing supply disruptions, as well as the fragile state of the global economy, call for a prompt increase in supply,” the agency said.  Iran, the second largest OPEC member after Saudi Arabia, is the leading price “hawk,” favoring expensive oil.  Saudi Arabia has consistently acted to moderate prices.

“Looking to the remainder of this year, the expected supply/demand balance indicates a tightening market,” OPEC’s report said. “As a result, global inventories could continue to decline as the market enters a period of high seasonal demand.”  OPEC’s member nations include Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

According to the IEA, demand for OPEC crude will average 29.95 million bpd (barrels per day)  in the 2nd half of 2011, or 1.2 million bpd more than April production of 28.75 million bpd.  Analysts said OPEC’s report had minimal impact on oil prices and a bigger focus would be the IEA’s latest forecasts.  “It’s absolutely market neutral,” said Olivier Jakob of Petromatrix.  “What’s going to matter more is the IEA report when we will be able to see if there are any more changes.”  OPEC’s May oil output rose by approximately 171,000 bpd to 28.97 million bpd as extra supplies from Saudi Arabia, Nigeria and Iraq offset declining production from Libya.  The report said Saudi output totaled 8.86 million bpd in May.  Saudi newspaper al-Hayat reported that Riyadh would boost supplies to 10 million bpd in July and oil traders said the kingdom was offering more to Asian customers, because they are driving the increase in global demand.  The world is expected to use 1.38 million bpd of oil more this year than in 2010, OPEC’s report said.

OPEC’s daily production is bound by quotas of 26.32 million bpd in May of 2011, according to the group’s monthly report.  That’s an increase from 26.17 million bpd in April, OPEC said.  Saudi Arabian output climbed to 8.86 million bpd in May, compared with 8.8 million in April.  OPEC’s total supply, including Iraq, was 28.97 million bpd May compared with 28.8 million the previous month.  Libyan supplies fell to 169,000 bpd in May as the conflict between forces loyal to Muammar Qaddafi and anti- government rebels halted output.  That compares with an average 1.56 million last year.  OPEC, which provides approximately 40 percent of the world’s crude oil, announced its biggest-ever supply cuts in late 2008 when the financial crisis caused a collapse in global demand.  The decision capped production at 24.845 million bpd for all members except Iraq, which is exempt from the quota system.

“Now we are unhappy that we did not reach a decision but this is not the end of the world,” al-Badri said.”It was not political, it was really an economic situation.  Of course, for the past six years we have enjoyed a very relaxed atmosphere, now we have some tension.  I hope we will overcome it.”

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Foreclosed Homes Total a Three-Year Supply

Tuesday, June 14th, 2011

The current national inventory of foreclosed homes represents a three-year supply, according to RealtyTrac.  Not surprisingly, that is depressing home prices.  “This is very bad for the economy,” said Rick Sharga, a RealtyTrac spokesman.

In Las Vegas, the foreclosure situation is so dire that more than half of all homes sold in Nevada are foreclosures.  In California and Arizona, 45 percent of sales are foreclosures; that totals 28 percent of all existing home sales during the 1st quarter of 2011.

Additionally, the nation’s stock of foreclosed homes are selling at deep discounts, particularly REOS, which are bank-owned homes.  The typical REO sold for about 35 percent less than comparable properties, according to RealtyTrac.  In some areas, the discounts were ever steeper: In New York, the discount for REOs was 53 percent during the 1st quarter and almost 50 percent in Illinois, Ohio, and Wisconsin.

“Short sales,” homes where the selling price is less than what is owed by the borrowers, are also dragging down the market.  These sell for an average nine percent discount.  When you consider both REOs and short sales, Ohio had the biggest discount of any state, at 41 percent.

During the 1st quarter, there were 158,000 sales involving distressed properties nationally, less than half the nearly 350,000 during the same period of 2009.  With the slower pace of sales, it will take three years to sell off the inventory of 1.9 million distressed properties, according to Sharga.  “Even if you look at REOs alone, it will take 24 months to clear them and that’s without any new foreclosures at all coming into the system,” he said.

RealtyTrac found that the average sales price of properties in some stage of foreclosure, scheduled for auction or bank-owned — was $168,321, down 1.89 percent from the 4th quarter of 2010.

A total of 158,434 bank-owned homes and those in some stage of foreclosure were purchased during the 1st quarter, a 16 percent decline from the 4th quarter of last year and down 36 percent from the 1st quarter 2010 total.  Bank-owned properties that sold in the 1st quarter had been repossessed an average of 176 days before the sale, while properties that sold in earlier stages of foreclosure in the 1st quarter were in foreclosure an average of 228 days before they were sold.  According to James J. Saccacio, chief executive officer of RealtyTrac, “While this is probably helping to keep home prices relatively stable, it is also delaying the housing recovery.  At the first quarter foreclosure sales pace, it would take exactly three years to clear the current inventory of 1.9 million properties already on the banks’ books, or in foreclosure.”

Foreclosures are particularly attractive to all-cash buyers who demand discounts,  pushing down the value of all properties.  More than 75 percent of American cities experienced price declines in the 1st quarter.  Bank-owned homes totaled 107,143 sales in the 1st quarter, down 11 percent from the 4th quarter and almost 30 percent from 2010.  Sales of homes in default or scheduled for auction totaled 51,291, a 26 percent decline, according to RealtyTrac.  That was less than half the peak of 348,629 distressed deals in the 1st quarter of 2009.

Writing on the website 24/7wallstreet.com,  Douglas A. McIntyer offers an interesting perspective.  “Any economist will say that when some homes are sold at 27 percent below the normal market, all home prices will be pulled lower.  That may be the key to the home market recovery.  Foreclosure inventory will continue to rise as banks put more backlogged homes onto the market.  The glut will probably push down the average of all homes by several percent. This may be a reason home prices are predicted to fall another 10 percent this year.  Buyers will not come back to the housing market until they believe that prices are too good to resist.  That may mean homes that sold for $500,000 in 2005 will have to sell for $300,000 next year.  Prices will not be driven down quickly without the reduction in inventory of foreclosed homes.  There has to be a bottom to prices.  The sooner it is found the better.  The housing market is more than half dead.  The only tonic is a belief by buyers that prices are so remarkably low that new buyers will make money on a house and not lose it.  If the housing market is to continue to drop, the drop needs to be swift.  Mortgage rates are near all-time lows.  Inflation and concerns about the value of Treasuries due to the U.S. national deficit could change that.  Home prices that are viewed as affordable need to be married with low mortgage rates for the market to catch fire.”

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Foreclosures Are Down, So Why Isn’t That Good News?

Tuesday, June 7th, 2011

There’s good news and bad news about foreclosures.  Although the number of foreclosures fell to their lowest rate in 4 ½ years in April, the reason is a delay in processing the orders, not because Americans are experiencing less trouble paying their mortgages.  “Foreclosure activity decreased on an annual basis for the seventh straight month in April, bringing foreclosure activity to a 40-month low,” James J. Saccacio, chief executive officer of foreclosure data company RealtyTrac, said.  “This slowdown continues to be largely the result of massive delays in processing foreclosures rather than the result of a housing recovery that is lifting people out of foreclosure.”

According to Saccacio, “The first delay occurs between delinquency and foreclosure, when lenders and services are no longer automatically pushing loans that are more than 90 days delinquent into foreclosure but are waiting longer to allow for loan modifications, short sales and possibly other disposition alternatives.  Data from the Mortgage Bankers Association shows that about 3.7 million properties are in this seriously delinquent stage.  The second delay occurs after foreclosure has started, when lenders are taking much longer than they were just a few years ago to complete the foreclosure process.”

Nationally, homes typically are taking 400 days to go from the initial default notice to bank repossession, an increase when compared with 340 days a year earlier and 151 days in the 1st quarter of 2007, RealtyTrac said.

According to RealtyTrac’s report,  219,258 American homes were involved in the foreclosure process in April, either having received a notice of default, been scheduled for auction or been repossessed.  This is nine percent less than from March and a 34 percent cut from April 2010.  The report also shows one in every 593 American homes received a foreclosure filing during April 2011.  In New York, it took a property 900 days to go through the process.  In Florida, it was 619 days and in California, 330 days.

Nevada tops the list of states for foreclosures in proportion to its population, with one out of every 97 homes receiving a foreclosure filing in April.  Arizona ranked second.  Although Arizona foreclosures fell 15 percent,  REOs (bank repossessions) rose 22 percent, keeping the state in second place for the fifth consecutive month.  One in every 205 homes received a foreclosure filing.  Similarly, a 22 percent jump in REOs kept California in third place for a sixth month despite a decline in activity, with one in every 240 units affected during the month.  Other states in the top five are Utah (one of every 322) and Idaho (one of every 325).

Just ten states account for 70 percent of all foreclosure activity.  The first two in terms of numbers of foreclosures, California with 55,869 filings and Florida with 19,649 and the fourth, Michigan with 12,996, have large populations.  Arizona and Nevada, with relatively small populations rank in the top five by virtue of numbers as well as foreclosure rate with 13,419 filings and 11,761 filings.  The next five states with the greatest number of foreclosures are Illinois, Texas, Georgia, Ohio, and Colorado.

Writing in The Atlantic, Daniel Indiviglio notes that “It’s hard to see how this is good news for the housing market.  Prices are likely falling more slowly since the foreclosures aren’t hitting the market as quickly as they should be.  But they cannot be held up artificially — the decline will just happen over a longer period of time instead of quickly and steeply.  That means it will take longer for the housing market to hit its true bottom.  Only when that occurs can a recovery begin.  In other words, banks’ failure to process foreclosures in a timely manner will prolong the housing market’s struggles.”

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Reinventing Fannie and Freddie

Thursday, June 2nd, 2011

The initial steps to dismantle Fannie Mae and Freddie Mac are underway with the introduction of a bipartisan bill in the House of Representatives that would replace the mortgage giants with a minimum of five companies that would issue mortgage-backed securities with significant federal regulation.  The compromise legislation proposed by Representative John Campbell (R-CA) and Representative Gary Peters (D-MI) is likely to be the only plan that will attract sufficient support from both parties on a politically volatile subject, especially at a time when gridlock looms over issues such as how to curb federal spending.  The bailout of the two companies has cost taxpayers upwards of $100 billion.

According to Representative Campbell, “Rather than putting out a political marker, we can move a piece of legislation that is significant…and can actually become law.  The only other approach that’s out there in a bill is one that replaces Fannie and Freddie with nothing.”  Other policymakers, such as Treasury Secretary Timothy Geithner, have discussed the merits of a limited but unambiguous government guarantee of securities backed by certain types of mortgages.  The new entities – similar to Fannie and Freddie — would be limited to purchasing loans that meet certain standards, including size caps.  The difference would be that the firms would be required to hold much more capital than Fannie and Freddie.  Only the mortgage-backed securities that they issue –not the companies themselves — would enjoy federal guarantees.  The companies would operate similarly to public utilities and likely will not have exchange-listed shares.

Critics say the proposal risks recreating the same dynamics that led Fannie and Freddie to use their government ties to take risks that harmed taxpayers.  “In reality, this is almost surely going to be terrible,” said Dwight Jaffee, finance professor at the University of California, Berkeley.   Government insurance programs, he says, inevitably lead to “a catastrophe.”  Advocates argue that taxpayers will be less exposed to losses because borrowers will have to make significant downpayments.  Additionally, the new firms will have to hold more capital.  Additionally, the firms will be required pay a fee for government backing to finance a catastrophic insurance fund, much as the Federal Deposit Insurance Corporation levies fees and handles bank failures.

The mortgage and housing industry support a continued government role in supporting mortgage lending, including the Mortgage Bankers Association, National Association of Realtors and National Association of Home Builders.

The agencies are still hemorrhaging money.  For example, Fannie Mae reported a loss of $8.7 billion for the 1st quarter of 2011, which included a $2.2 billion dividend payment to the Treasury Department.  The loss was significantly less than the $13 billion reported one year ago.  “We need to manage our credit book — our old legacy book very vigorously,” said Fannie Mae President and CEO Michael Williams.  But that is not in conflict with helping distressed homeowners.  “Helping people to avoid foreclosure is a good thing,” Williams said.

Action must be taken to keep the mortgage market afloat and provide securitization for investments.  According to a Washington Post editorial,  “The housing market is still in deep trouble.  Prices nationwide have fallen by about a third since the peak in 2006 — and they appear to be trending down again.  The resulting hit to household wealth may hinder the recovery, which is already sluggish.  Small wonder that various advocates for housing are once again asking Washington for help.  But in at least one area, the prescription would be worse than the disease.  We refer to calls for extending the current elevated limit on the size of loans eligible for securitization by Fannie Mae and Freddie Mac, the mortgage-finance giants operating under government control.  Congress ‘temporarily’ raised the limit to a maximum of $729,759 in certain markets in response to the sudden evaporation of private liquidity during the 2008 crisis, but that measure is set to lapse at the end of September.  At that point, the limit will not revert to the pre-crisis maximum of $417,000 in most of the country but to a level set in relation to local medians — and capped at $625,000.  But the Obama administration has supported a reversion to lower loan limits as the first step in gradually reforming the mortgage security market and reducing taxpayer exposure to Fannie and Freddie.  The administration’s goal is to lure cash-rich would-be mortgage securitizers back into the market, starting with the high end.  Treasury Secretary Timothy F. Geithner has described this as “crowding in” private capital, and it is the rare housing policy proposal that has enjoyed a measure of bipartisan support.”

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