FEB 2, 2012

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Risky Business

The 'State of the Union' ... Too Little Too Late?' A Brief Lesson from History.

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President Obama's recent State of the Union speech, as widely predicted, turned out to be a campaign speech rather than objective, substantive oratory.  GOP candidate Mitt Romney characterized the Obama speech as a 'Groundhog Day' event ... more of the same optimistic promises of things to come.  Three years after taking office, the country is clearly in worse shape than when Obama took office. Despite massive federal spending and two major 'quantitative easing' programs, the U.S. economy, specifically unemployment and housing, is still on 'life support.'  Home values continue to fall, and new home sales hit record lows not seen since the early 1960's.  Official unemployment figures have ticked downward a bit, but are still at staggeringly high rates.

Now comes word that Fed Chief Ben Bernanke will be teaching a series of classes at George Washington University.  I'm reminded of the old saying that 'Those who can do, those who can't teach.”  The idea of Bernanke presuming to teach others anything about economic policy, or the efficacy of current fed policy, seems laughable especially given the failure of the current administration's efforts to stabilize the U.S. economy.  Bernanke himself has indicated that yet another round of 'QE' is likely this Spring.

The real issue, at least to Mortgage Servicing News readers, is what do these macro economic trends mean to the REO industry?  Does Washington or the Obama administration have either the means or the ability to substantially change things and turn the tide of the gargantuan crisis and lugubrious state of housing?  President Obama has indicated his desire to make mortgage refinancing at the current low interest rates available to more American homeowners.  His 'end run' around Congress appointing Richard Cordray as head of the Consumer Financial Protection Bureau infuriated many House and Senate Republicans. Cordray had been sending out e-mails inviting consumers to share their experiences with him, but collecting anecdotal evidence from people who have suffered as a result of abuse, wrongdoing or inattention from financial institutions is unlikely to have any real impact.  It's a nice gesture, however the exercise would appear to be aimed primarily at bolstering Obama's re-election prospects.

The fact remains that very little has been done by either the government or financial institutions to address the problems the vast majority of American homeowners are facing.  Millions have already lost their homes and jobs, and millions more are in various stages of delinquency and/or foreclosure, waiting for the proverbial 'axe' to fall. But there's still no shortage of commentators and media pundits who spout statistics of improving employment numbers and increasing home values.

 The actual numbers, however, tell a very different story.  Myopic real estate agents are quick to cite improvement in the housing market if they recently closed an escrow.  For every broker who managed to see a home purchase or sale transaction through to successful conclusion, however, there are dozens who haven't collected a commission for months or even years. I am contacted frequently by real estate agents and brokers who are desperate to be added to the 'approved lists' of agents that represent lenders on their REO sales.  Recent reports indicate that 20% or more of all home sales are foreclosure related.  I suspect that number is much higher.  Some statisticians actually count foreclosure or trustee sales of homes as part of total home sales.  That perverse logic would suggest that a car repossession is a 'sale,' simply because possession changed hands.  A home or condo that is subject to a trustee or sheriff sale hardly constitutes a retail sale between a private buyer and seller. In fact, a large percentage of lender-owned properties that are sold at public auction are simply taken back by the lenders themselves based on their own 'credit bids', since many such sales simply attract no other bidders.

Mass home auctions to dispose of lender-owned properties have become quite popular and are heavily promoted.  Some of these auction companies report sales rates as high as 80%.  However, James Thorner, a staff writer for the Tampa Bay Times reported that a February 2009 auction by Real Estate Disposition Group (REDC) claimed it obtained bids for 131 of 176 homes offered.  REDC later admitted that only 75 of the 176 homes actually sold.  Further research of public records by Thorner failed to show evidence of a single closing as a result of that auction ... not one. If these auctions were truly successful, it would seem that they would have a meaningful impact on the huge inventory of lender-owned properties.  The evidence indicates otherwise.  There appears to be no real substitute for 'arms-length' real estate sales transactions.  This continues to be a painfully slow process, highly dependent on buyers obtaining financing.  And despite the fact that major lenders do in fact sell thousands of properties a month, in many cases they are taking even greater numbers of new properties back into REO inventories.  As long as the number of homes coming into inventory exceeds the number being sold, the problem continues to worsen.  Dropping home values, which are impacting most local real estate markets, only make prospective buyers more reluctant to commit to a purchase.  No one wants to buy a home today only to see it lose value a few months later.  As home sales prices ratchet lower and lower, they drag the values of neighboring homes down with them.  There doesn't appear to be an end in sight any time soon to this continuing downward spiral. 

Comments (1)
i applaud phil in his eloquence in presenting the viable and very important information here in this article. with his wealth of knowledge phil is definately going to survive this crisis and be a real estate magnet for many years to come...as a result he can join millionaire match dot com and meet many hot girls ready to take his riches from him...though he may endo up poor and max out his credit cards he will die with a smile on his face as the rest of us will be miserable and poor minus the hot girls from millionaire match dot com. may i make a suggestion to phil...try drinking more bombay saphires when the restaurant bill is being paid by each individual for what EACH individual acctually ATE AND DRANK rather than THE BILL being split evenly amongst your friends at the table resulting in them covering the costs of your many bombay saphires!!! i believe this would be the fair way to do it and if you are a fair drinker you will continue to drink five $15 saphires and thus pay for them yourself!! hope all is well...keep up the good work writing these articles.
Posted by ken cash | Wednesday, February 08 2012 at 9:23AM ET
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