Discounts converge – short sales now better than foreclosures
Short sales, once a rare event in local real estate market, today are nearly as prevalent as foreclosures as lenders seek to avoid adding to their foreclosure inventories and troubled homeowners opt for a faster way out of default. Historically, foreclosures have been discounted 10% or more. Now, as short sales become more popular, the difference between and short-sale discounts and foreclosure discounts is shrinking, according to the latest LPS Home Price Index. In April 2007, as the housing bubble burst, foreclosures sold at a 19% discount and short sales sold at a discount of 10%. As the volumes of both forms of distressed sales have increased, so have the discounts, but short sale discounts have increased more. Today foreclosures sell at a 29% average discount and short sales at an average discount of 23%, a difference of only 6%.
The shrinking discount may make short sales more attractive to buyers than foreclosures. In general, home sellers undergoing short sales are motivated to do so to protect their credit to the extent possible and they tend to maintain better condition of their properties than borrowers undergoing foreclosure. Foreclosures also may be vacant for long periods of time. Today’s average processing timeline for foreclosures is about a year, and substantially higher in some judicial states. With a short sale, the property may not be vacated at all during the sales process. LPS suggests that the task of managing the large number of distressed properties in the market today is immense, which may, in some cases, contribute to suboptimal pricing of some distressed properties. Since 2007, discounts for both foreclosures and short sales have increased, but short-sale discounts increased a bit faster.
PPI falls
The Labor Department said on Friday its seasonally adjusted producer price index (PPI) dropped 0.2% last month. That was the first drop of the year and the biggest decline since October. Economists polled by Reuters had expected prices at farms, factories and refineries to be flat. The decline left wholesale prices 1.9% higher in April that a year earlier, the weakest reading since October 2009. Wholesale prices excluding volatile food and energy costs rose in line with economists’ expectations, up 0.2% after March’s 0.3% gain. The drop in PPI was due to a 1.4% decline in energy prices, the biggest drop since October. Gasoline costs slumped 1.7%, while prices also fell for residential natural gas and liquefied petroleum gas. The producer price index outside food and energy was pushed up by a 0.4% increase in the index for pharmaceuticals. Higher prices for civilian aircraft also pushed up the core index. In the 12 months to April, core producer prices increased 2.7% after rising 2.9% the previous month. April’s reading was the lowest since August and just below analysts’ expectations.
Olick – mortgage market hampers recovery
“The Realtors say it, the home builders say it, and now the chairman of the Federal Reserve is saying it: ‘Some creditworthy borrowers are still having trouble getting a mortgage.’ Loose mortgage underwriting is largely blamed for the housing crash, and as a result the credit markets have swung in the opposite direction, some say too far. ‘You’ll see fewer willing lenders at 660 than you do at the top end of the scale,’ notes Bankrate.com’s Greg McBride, referring to FICO scores (Fair Isaac Corporation). Twenty five% of Americans today have a FICO credit score lower than 650, and twelve% more are below 700. While the Federal Housing Administration (FHA), the government’s mortgage insurer, is supposed to be serving borrowers with lower credit scores, the average FICO for an FHA loan in March was 701. ‘It’s often the lender regarding the higher score,’ says Rick Sharga of Carrington Mortgage Holdings. Despite the FHA insurance, lenders just won’t take the chance.
Many borrowers who lost big during the housing crash are now fighting to regain their credit, but the time it takes to do that depends largely on how high their credit score was to begin with. According to FIC, a borrower with a credit score above 780 who lost a home to foreclosure will need 7 years of unblemished credit to regain their standing. A borrower who started at 680 will need just three years. Just being late on mortgage payments, up to ninety days, will drop your credit score 80 points if you started at 680 but 130 points if you were at 780. The higher you start, the harder you fall. And it is not just credit standing in the way of a home loan. In order to get today’s record low interest rates, you need to put 20% down on the home. For a $300,000 home, that’s $60,000. On top of that you often have a 6% brokers fee and then closing costs, which averaged just over $4000 last year, according to Bankrate.com. If you do have lower credit, or a lower down payment, you will have to pay private mortgage insurance. If you don’t have much money to put down, and you do have lower credit, the FHA is your only option now, but fees and premiums are going up there as well. 27% of home purchase financing in March of this year came from FHA loans, according to Campbell/Inside Mortgage Finance, but that was just before fees went up. The FHA share of mortgage originations has been dropping precipitously since then.
As the housing market recovers, and home prices stabilize, one might assume the credit markets would loosen as well. That has not been the case so far, according to a recent Federal Reserve survey of bankers. In fact, mortgages will likely get more expensive, as federal regulators move closer to new rules concerning risk retention in mortgage lending. In addition to fees, credit and down payment, just less than a quarter of homeowners with a mortgage owe more on that loan than their home is currently worth. These so-called ‘underwater’ borrowers are therefore trapped, unless they have enough cash to put out and are willing to eat their losses. There are also many more who are in a near-negative equity position, which means they do not have enough equity in their homes to cover a new down payment, closing costs and brokers fees. That knocks a lot of potential buyers out of today’s market. There is no question that we must not return to the lax lending of the past, where borrowers were asked no questions and offered whatever they wished. There is a question of how tight the mortgage market needs to be, when housing is still the chief impediment to overall economic recovery.”
Subprime is back
Mortgage backed securities are hot again. Many of the hedge fund traders gathered at the Skybridge Alternatives investor summit at the Bellagio Hotel in Las Vegas are enthusiastically seeking out the once “toxic” mortgage bonds for their portfolios. Even Kyle Bass, the Texan hedge fund manager who made billions shorting mortgage bonds in the years before the financial crisis, is bullish on mortgage credit. The “worst” bonds, those not backed by Fannie Mae and Freddie Mac, could see gains of 15%, he said Thursday. The primary attraction of the bonds is their price. Although in recent months the bonds have rallied by as much as 20%, they still trade at steep discounts to par value. Last year they fell 40%. The hedge fund mangers attracted to the bonds believe that even with massive defaults, they will continue to generate cash flows in excess of what current market prices indicate. Some of the enthusiasm for the bonds is rooted in the idea that the housing market may be reaching a bottom. If home prices began to rise, mortgage defaults would likely decline and the prices of the bonds rise. But some traders believe that even if housing declines further and the economy stalls, the bonds could be profitable because the Federal Reserve would step in and buy them as part of a new round of quantitative easing.
NAHB – 55+ confidence up
Builder confidence in the 55+ housing market for single-family homes had a significant increase in the first quarter of 2012 compared to the same period a year ago, according to the latest National Association of Home Builders’ (NAHB) 55+ Housing Market Index (HMI) released today. The index increased 10 points to 27, and although 27 is relatively low for an index that lies on a scale of 0 to 100, it is nevertheless the highest reading since the inception of the index in 2008. The 55+ single-family HMI measures builder sentiment based on a survey that asks if current sales, prospective buyer traffic and anticipated six-month sales for that market are good, fair or poor (high, average or low for traffic). An index number below 50 indicates that more builders view conditions as poor than good. All index components remain well below 50, but increased considerably from a year ago, each reaching an all-time high: Present sales rose 12 points to 27, expected sales for the next six months increased eight points to 32 and traffic of prospective buyers rose nine points to 26. The 55+ multifamily condo HMI remains the weakest of the 55+ housing market indices, but also recorded an all-time high at 15, up seven points from a year ago. All index components showed an increase compared to a year ago: Present sales rose five points to 14, expected sales for the next six months increased seven points to 20 and traffic of prospective buyers jumped nine points to 15. The 55+ multifamily rentals continue to lead the way in the overall 55+ housing market. Present production climbed 11 points to 31, expected future production increased eight points to 35, current demand for existing units rose three points to 42 and expected future demand increased one point to 45.
MOODY’s issues capital warning
Moody’s has warned that the tendency of global banks to avoid new capital requirement rules and load up on debt will continue to put pressure on their creditworthiness. The credit rating agency announced it was placing 17 banks on review for a downgrade earlier this year, citing “vulnerabilities” in the companies’ vast and volatile capital markets businesses. Moody’s caution could see all 17 banks downgraded when the review is finally completed, expected to happen in mid-June. Three of the banks, Credit Suisse, Morgan Stanley, and UBS, face as much as a three-notch downgrade; 10 face a two-notch slide and four a one-notch drop. The potential downgrades have become a talking point on Wall Street, with some bankers openly criticizing Moody’s and others privately attempting to change the agency’s mind in closed-door meetings.
Commercial real estate improves slightly
Conditions in the commercial real estate sector improved in the first quarter, but investors and executives are worried about some of the commercial mortgages set to mature in the coming year and the market’s general lack of interest in sub-A real estate assets, real estate executives said. Executives in the industry provided this “luke warm” feedback in the latest Real Estate Roundtable quarterly sentiment survey. The survey’s overall confidence index is at 70, which shows confidence in the industry to be more favorable than not. Still, that index score is down from a reading of 77 in the first quarter of 2011, but up from a score of 59 in the fourth quarter of 2011. To get the index number higher, the job market will have to improve, bringing demand for commercial real estate assets in the below Class-A category with it, the executives said. “Fostering a commercial real estate recovery that extends beyond so-called class A or trophy assets in gateway markets still depends on an improved jobs picture, more confidence among businesses and consumers, and reduced uncertainty on looming tax and budget issues,” said roundtable chairman Daniel Neidich. “Our Q2 survey confirms the need for swift policy action to boost employment, business investment, and economic certainty.” Another issue delaying full confidence in commercial real estate is the overall economy and uncertainty about how the US will handle economic issues and issues related to employment and business investment.
Foreclosure-rescue company president arrested
The president of a Palm Beach County foreclosure-rescue company was arrested Thursday and charged with several counts of fraud, including acting as a loan originator without a license, after an investigation that included law enforcement officials from Boca Raton to Tallahassee. Guilfort Dieuvil, 38, is president of the Nationwide Investment Firm Corp., a for-profit company that has homeowners quitclaim deed their properties to it with promises to broker a short sale or loan modification, while also defending the case in court. The arrest comes after The Palm Beach Post revealed, in a series of four articles beginning in November, lawsuits, police reports and letters to state officials from homeowners complaining that instead of getting the help they sought, they unwittingly signed over the deeds to their homes. Some claim they were threatened with eviction and left with debt on properties to which they no longer have title. Details of the investigation that led to Dieuvil’s arrest were not available late yesterday, but Boca Raton Police Department officer Sandra Boonenberg said detectives from her department worked in conjunction with other agencies on the case.
