“The bill - a response to rising foreclosure rates statewide - sailed through the Assembly last week, but seems to have shallow support among Republican leaders in the Senate, where it may not go to a vote. Frustrated Senate Democrats on Wednesday held a news conference to demand that Senate Majority Leader Joseph L. Bruno allow a vote on the measure. They called the freeze a step that could keep thousands of New Yorkers in their homes by allowing them time to talk to housing experts and negotiate with lenders.”

from KnowledgePlex

The article also states that New York already has consumer protections in place and takes an average of 445 days to complete a foreclosure.  How much time does a homeowner need to get counseling?  There’s a very strong temptation for politicians to get involved in hot button issues that provide publicity.  Does it really serve the public, or is it just to serve the politician?

There’s an article today in USA Today about foreclosures and the mental health impacts foreclosure can have on the homeowners involved. The piece takes more of a personal approach rather than hard numbers and statistics, which is to be expected from USA Today, but it does provide a little reminder for those working in the foreclosure industry that there are people involved in the process, not just values and purchase prices.

On a personal level, the article reminded me of a house I saw many years ago where the owners just left.  I’m sure they took some clothes and personal effects, but the house was fully furnished with high end quality furniture including home electronics such as televisions, computers and stereos, family pictures were all still on the walls.  The closets were all filled with clothes, the kid’s rooms still had toys and video games.  I don’t really understand why anyone would leave literally tens of thousands of dollars worth of possessions behind even if they are going to lose the house, but it does indicate some of the huge stresses impacting those homeowners suffering through a foreclosure.

Comps, or comparable sales, are the most accurate indicator of a residential property’s market value.  Similar homes with a similar square footage that have recently sold will show you a price that buyers are willing to pay in your market.  Some adjustments need to be made for individual property condition and amenities that one home may have that others don’t, but comps will give you a typical selling price.

Changes in many markets means you need to look a little deeper at the comparable sales and it’s not a bad idea to gather sales that have completed not just in the last three months, but also over the last six months to a year.  You won’t be using the older comps to establish a current value, but it will give you a trend line.  If all the older comps are at a much higher value, with six month old comps somewhat lower and current comps lower yet, you’re in a declining market.  If the comps haven’t really moved much, or there’s a slight downward movement, you aren’t going to be too concerned about price declines.  They might happen, but probably not quickly or severely.

Current listing prices also need to be looked at fairly closely.  In an area I’ve been watching, there are many properties listed at a price they could have obtained before the recent credit problems.  Those properties aren’t selling and undoubtedly won’t sell until the owners realize the market has fundamentally changed.  Not too much point in attempting lowball offers, because the owners aren’t basing decisions on reality.  There are also some owners following our market down, lowering their price but only after the market has gone below their new price point.  They’ll eventually take the property off the market, or accept what they’ll consider a ridiculously lowball offer, or perhaps lose the home to foreclosure.  The only properties that are selling in a reasonable time frame in my market are the ones that are priced in accordance with the recent comparable sales.  You can’t rely just on the comps, because if you base a purchase decision solely on the comps only to find out later there are equivalent properties listed for sale below the price you paid, you’re effectively underwater.

Analyzing comps for the last year will give you an indication of the trend, the current comparable sales will give you a likely current market value, properties currently listed for sale will either verify the trend and/or show a point of stability has been reached.  That might sound like a lot of work to do just to get an idea of a property’s value, but if you are investing significant amounts of money into a property, you should be willing to spend an hour or two making sure your price is right.

The IRS has provisions for excluding income from the discharge of debt. The IRS also attempts to explain what can be excluded:
Questions and Answers on Home Foreclosure and Debt Cancellation

The link is provided for informational purposes, I’m not going to interpret it.

According to Fox news

Michael Jackson’s Neverland ranch is still scheduled for foreclosure auction although the auction was postponed from it’s earlier date.  Frankly, I thought this had already happened a long time ago and was kind of surprised to see it back in the news.  Does anybody really care anymore?

Washington Post has an article about a coalition attempting to persuade Americans to increase their savings rate and reduce their dependency on debt.  Good luck with that.

Television, which is a major source of entertainment for many Americans, is a continuous stream of images and advertisements based on consumption.  I can’t really imagine new shows being produced that glorify driving a ten year old paid off car to the park to spend quality time with the family.  I’m sure, however, that new shows will be produced promoting either directly or indirectly the newest cars, phones, other technological gadgets and overall lifestyle.  Saving is boring, spending is trendy.

I tend to believe the only way Americans will change their spending/savings patterns is if their exposure to advertising bombardment is reduced.  I just don’t see that happening.

“A dozen protesters walked into a downtown bank branch at noon Thursday to demand greater action in relieving the county’s housing foreclosure crisis.” from The Sun
Now I mostly use a bank branch located in a grocery store, so there’s only a counter and not much floor space and my first mental image of a dozen protesters clambering over the counter and cramming in the limited floor space made me laugh. All they wanted was for the bank to put a six month moratorium on homeowner foreclosures and adjust all delinquent loans to lower fixed payments, they weren’t demanding world peace or anything else not normally handled on the branch level.

This was nothing more than an attempt to gain a little local publicity with absolutely no chance of any benefit deriving from their action.  Acorn has done some good things in the past, I’m hoping this is just an incident that won’t be repeated in other places.

“We showed the public (how) uncooperative the bank is at the local level, which is consistent with their national stance toward this crisis,” said Bobbi Jo Chavarria, lead organizer for ACORN’s local chapter.

You go into a bank branch that can’t do what you’d like, call them uncooperative, then state the whole bank is uncooperative on a national basis.  Well, Bobbi Jo, you got your name in the paper, but you certainly did not do anything for distressed homeowners either in the Inland Empire or nationally.

The House passed a bill sponsored by Maxine Waters of California that will provide 15 Billion dollars to individual states for the purchase, rehab and resale of foreclosed homes. It appears this is an attempt to avoid blight in areas with high numbers of foreclosures. There’s a story if you want to read it here

Now most people could do quite a lot with 15 billion, but how far will it actually go towards preventing foreclosure blight?  Of course, the money won’t be split equally among states because that’s not the way politicians work, but if it was split equally amongst 50 states, each state would get 300 million dollars.

In Los Angeles, California that would allow the purchase of about 667 homes at the median price of $450,000 with 42,647 homes already on the market.  Cleveland, Ohio has a median price of $145,000 so they could purchase a whopping 2,069 homes with 19,959 homes already on the market.  Miami, Florida has a median price of $285,000 so they could purchase 1,053 homes and I’m sure there wouldn’t be any problem at all competing with the 118,793 properties already on the market.

When real estate markets are declining, you really only want to be buying if you can either buy at a very substantial discount from current market value and resell quickly or you are buying at a substantial discount and the property will cashflow through the downturn.  Either strategy is fine, but I’m guessing states would use the money to buy at market value, suffer continuing price decline and rent the properties on a negative cashflow basis.  Why not, it’s federal (your) money, not theirs.

After reading yet another politician’s proposed solution to foreclosure problems and shaking my head at the stupidity of it all, I decided yield spread premiums need some explanation. YSPs are often trumpeted in the news as this huge secretive lending method of raking thousands of dollars from unsuspecting borrowers. YSPs can be used that way, be there are also other uses.

When a person applies for a home loan, purchase or refinance, there are usually different options in the amount of fees charged and options in the interest rate of the loan. Some of the fees are fairly fixed, such as for title insurance and possibly escrow fees, but some of the single largest fees are “points”. A point is simply 1% of the loan amount with two different types of points being charged. Origination points are what the lender charges to originate the loan, discount points can be used to reduce the interest rate on your loan. If the interest rate on the loan is higher than the lowest possible interest rate the borrower qualified for, then a yield spread premium is paid to the originating lender.

That last paragraph was a little cumbersome, so let’s recap.
You pay discount points, you get a lower interest rate.
You pay a higher interest rate, the originating lender gets the yield spread premium.

Market forces tend to keep most abuses in check because people shopping for home loans follow interest rates very closely and they’ll be aware if their quoted rate is higher than what is available from other lenders. So why should there even be a YSP?

Let’s take Joe, an average borrower who doesn’t have much money saved but has been diligently making his house payments for the last several years. Interest rates have dropped and he can save quite a bit of money on his monthly payment by refinancing, but he doesn’t have money in the bank to pay for the loan fees and doesn’t want to increase his loan amount to cover those refinance loan costs. Using a slightly higher interest rate and the YSP due to that higher rate, the originating lender can pay for origination fees and loan costs allowing Joe to get a new lower interest rate with no out of pocket costs and no increase in his loan balance.

YSPs have their place and can serve a useful purpose, legislation requiring the absolute lowest interest rate possible might protect some people, but there are an awful lot of “Joes” out there that certainly won’t be helped.

There’s been very significant amount of news reports over the past few months regarding various branches of the U.S. government and their attempts to solve the foreclosure crisis through the use of government sponsored foreclosure bailouts. Some of these bailouts are for the lenders involved, think Bear Stearns, and many new proposals are designed to help homeowners keep their probably over-encumbered property.

People who’ve worked in lending or foreclosure related business know that sustainable housing payments, including property taxes and insurance, shouldn’t exceed about a third of the borrower’s monthly gross income. This isn’t something new, or some complex economic theory, it’s just a simple concept based on affordability and historical data. The increased housing prices in many markets over the past years was a direct result of loan underwriting that didn’t include this simple concept of affordability, but was based on the borrower’s ability to fog a mirror. If you were breathing, you could get a home loan.

Current news still often reports the current foreclosure issues as being sub-prime related, or that borrowers were duped into a “bad” loan. That isn’t really very accurate as virtually every borrower in the high priced rapidly appreciating market got a “bad loan”. Loan products considered mainstream, such as piggyback loans along with a primary loan, required either no or very little down payment from the borrower. So now, when values start a decline, those borrowers are looking at large loan balances with high payments and a property that’s worth less and less every month. The emergence of “walkaway” programs is one reflection of how many people are in this situation. Fed Chairman Ben Bernanke also addressed this: ” However, another factor is now playing an increasing role in many markets: declines in home values, which reduce homeowners’ equity and may consequently affect their ability or incentive to make the financial sacrifices necessary to stay in their homes.” Note the use of the word “incentive” in regards to people wanting to keep their homes.

Housing price correction is obvious and it will continue until some equilibrium is reached when local area incomes are sufficient to make an affordable house payment. Those are the fundamentals that provide home price stabilization, prices cannot be forced to remain at a given level no matter how much money or incentives are provided in an attempt to alter that price fluctuation.

So why are the various bailout programs being proposed?
There is without a doubt some political posturing involved in some of the proposed programs or programs actually in place, but that isn’t the biggest motivator. Bailout programs, whether for individual homeowners, or for lenders to “offload” some of their defaulted/defaulting loans to government sponsored agencies, are simply to slow the price declines to a manageable level without losing major lenders along the way. While some people feel CountryWide should have been shuttered long ago, when a company is closed they no longer have employees who contribute to the overall economy. If enough lenders close, then you have significant economic impacts outside the housing sector.

I’m no fan of Bernanke, but I think a recent statement of his is significant: “But high rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets, and the broader economy. Therefore, doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers. It’s in everybody’s interest.”

May 5, 2008 Bernanke Speech