When the next wave of REO activity hits, it will be unlike any other past cycle in the distressed mortgage market and will be heavily influenced by some of the leftover problem loans from the last downturn, as well as new defaults created from those loans, servicing and changing ownership of more recent originations, according to the president of the National REO Brokers Association.
And that downturn in the housing market is on the near horizon, adds Michael Krein.
"The mortgage industry — and in particular the default/REO industry — has always been cyclical, and typically, inversely related to the general real estate market," Krein told several hundred attendees at the 2015 National REO Brokers Association Education Conference in Broomfield, Colo.
"However, it is always the overheating of the general real estate market that characteristically foreshadows a resurgent REO market," he continued. "We have now had almost six straight years of rising or 'recovering' real estate prices — that is probably the longest continual uptick in real estate prices in over 100 years."
It's a view I've often stated before — a downturn in the housing market is on the near horizon. Krein was formerly a very successful real estate broker for several decades in Nevada, and at one time, the largest REO broker in the United States. And in the interest of full disclosure, Krein is also the CEO of RIO Software Solutions, for which I serve as senior vice president.
He went on to point out that the precise beginning and end of each cycle is never a precise point, as there is always an overlap during the transition.
"This is exactly the point we are in now," he added. "This will be my sixth market cycle and although each one has shared some of the same components, it should not be said that history is necessarily repeating itself, as each cycle can truly be considered somewhat unique."
One such problem is the reset of home equity line of credit and Home Affordable Modification Program loans. As Krein sees it, especially after having conversations with executives at RealtyTrac, the numbers being reported about these resets are actually under-reported — only considering HELOCs with a loan-to-value over 125% of fair market value being at risk. Krein believes the problem is likely to be four to five times larger, because many borrowers with a HELOC and LTV ratios over 90% may choose to do a strategic default, because technically, by factoring in the cost of sale of real estate, anything over 90% LTV is still "underwater."
"We are still in a very strange period in the real estate industry, as there have been so many changes that have occurred that no one would have previously imagined," Krein said. "There is now more data available than ever before, yet many reports and conclusions being published are much more clouded."
Mark Twain is credited as once saying: "There are lies, damned lies, and statistics." To many today, that would appear to be the case now, because so many reports are focusing on such incredibly narrow bands of information in order to generate reporting outcomes that suit their agenda or narrative.
A case in point would include a recent report from the California Association of Realtors indicating that, "a solid housing market continues as California’s pending home sales dial higher from a year ago for [the] fifth straight month."
The CAR report states that with the California housing market continuing its upward trend, pending home sales registered their fifth straight annual gain, with the last three months being in the double-digits.
Overall, the report continues, "the competitive market persists with more sales and bigger premiums paid above list price."
While it is indisputable that California is experiencing tremendous home price increases due to high demand and low inventories of available housing, there are many other less anomalous markets where home prices are as stagnant as wages for middle-class Americans. And in some cases, home prices are decreasing.
Many factors, including the worsening Housing Affordability index; a continuing rapid rise in rents; continued unemployment (including those who have left the job market altogether); underemployment; predictions of rising interest rates by Federal Reserve Chair Janet Yellen; a still abysmal economic environment; and global instability, are all coming together to make my predictions that a new downturn is coming — and those of Mike Krein, and other housing industry analysts — seem more plausible every week.
Lynn Effinger is Senior Vice President-Institutional Services for RIO Software Solutions Inc.