Foreclosure and Real Estate Blogs

I’ve been looking at some properties and found a couple of bank owned houses on the same street, separated by one house in between them.  In itself, the proximity of the two is kind of alarming, but the bigger question is how many other homes in that same area will end up going through the same process.  I’ve already talked about home pricing and affordability, these samples are just kind of anecdotal references to a process repeating itself in many of the “boom” areas.

Property #1
3 bedroom 2.5 bath 2949 square feet sold on the open market for $809,000 in May, 2005
HSBC took the property back for $824,240 in August, 2007
Currently listed for sale at $759,900 with no takers yet.

Property #2
3 bedroom 2 bath 1836 square feet sold on the open market for $850,000 in January, 2006
Argent took the property back for $712,720 in August, 2007 (probable drop in opening bid)
Currently listed for sale at $725,000 with no takers yet.

Housing prices in many areas are now a moving target, and that target is on a downward trend.

There’s been a lot written about home loans and securities lately with the emphasis on increasing foreclosure rates and the losses incurred by the holders of sub-prime securities.  That begs the question “What the hell is Fannie Mae and Freddie Mac, and why do I care?”

U.S. residential lending was far different in the fifties, rather than what we’ve got today.  Local banks, savings and loans, thrifts were all sources of financing, and although the loan terms weren’t too bad, it did require a 20% down payment to purchase a home.  Housing, and residential construction were subject to boom and bust periods often influenced by the availability of credit.

Fannie Mae was restructured in 1968 as a federally chartered corporation, Freddie Mac was created in 1970 to “compete” with Fannie Mae.  Both corporations are private, but are government sponsored and have lending advantages that aren’t available to non-sponsored lenders.  The explanation for what these organizations do isn’t hugely simple, but it is understandable.  They create CMOs or Collateralized Mortgage Obligations which entails combining a group of mortgages into a “pool”, then separating the future payments into “strips” with different risks and maturity dates.  Those strips are then sold as securities.

Many mortgage loans originated in recent times won’t be owned by a “lender”, they are originated to Fannie Mae or Freddie Mac guidelines, then sold into the secondary market.  The entity servicing(collecting payments) the loan may, or may not have an interest in the loan.

The use of CMOs in the past certainly helped stabilize housing markets and increased overall homeownership rates.  Where things went bad, IMHO, was when the demand for high returns led to the creation of CMOs for pools based on artificial or non-existent original loan documentation.  It was musical chairs with ever increasingly easy credit, the big problem being there were an awful lot of players and not too many chairs.

Fed Chairman Ben Bernanke testified in Feb., 2006 that:

“For example, a number of indicators point to a slowing in the housing market. Some cooling of the housing market is to be expected, and would not be inconsistent with continued solid growth of overall economic activity.
However, given the substantial gains in house prices and the high levels of home construction activity over the past several years, prices and construction could decelerate more rapidly than currently seems likely.
Slower growth in home equity in turn might lead households to boost their saving and trim their spending relative to current income by more than is now anticipated.”

That was a reasonable prediction. The “cooling of the housing market” part has pretty much happened in all the hot markets, but I haven’t seen much regarding the “households to boost their saving and trim their spending relative to current income” part.  What does that mean to me?  A predicted drop in consumer spending which will most likely lead to a rise in the unemployment rate.  It’s fairly obvious that unemployment will rise in construction, lending and real estate related industries, but when consumer spending declines, there isn’t as much demand for those goods and services that fly off the shelf during the “happy happy” times.

So here’s a prediction for how the real estate markets are going to move.  Gradual decline through 2010 for any area that has seen double digit valuation gains.  Why?  The crappy loans given to anyone breathing don’t finish the majority of their resets until 2010.  After 2010?  Probably more decline.  Housing prices move inversely to unemployment rates.  When unemployment is really low, housing prices tend to move up.  When unemployment goes up, housing prices tend to move downward.

I don’t know that there’s ever been a housing induced recession, but it looks like we’re going to get to experience one.  The good news, of course, is that those people who do not live in wildly inflated real estate markets probably won’t see too much of a decline.  Interesting times, indeed.