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.
This woeful trend brings to mind the fate of the infamous RMS Titanic. The gash in the ill-fated liner's hull doomed it to sinking as soon as it struck the massive iceberg. Based upon ship designer Thomas Andrews' own observations, it was a mathematical certainty that Titanic would sink. As water poured into the hull and spilled over the top of the many watertight compartments, which did not extend to the full height of the ship, each subsequent compartment flooded, eventually dragging the ship down. Ironically, if the Titanic had struck the iceberg head-on, it would likely have remained afloat long enough for the rescue ship 'Carpathia' to arrive.
The actions of Captain Edward Smith, however, sought to try to side-skirt the berg in an effort to minimize damage to the vessel. Likewise, if the current administration would have faced the housing crisis head-on initially, and taken quick and decisive action, rather than hope it could 'keep it afloat' long enough for help to arrive, we might be in a very different situation today.
Another revealing aspect of the sinking of the Titanic is that nearly 90% of First-Class passengers survived, while most of the passengers in Third-Class or 'steerage', who were trapped below decks perished. Likewise, the 'First-Class' citizens of the U.S., those wealthiest of Americans recently referred to as the 'One-percent,' have fared well despite the deep recession. And like the second and third class passengers of the Titanic, who when they finally reached the boat deck to discover that all the lifeboats were gone, a lot of Americans find themselves without a 'lifeboat.' As George Santayana's famous quote goes, "Those who cannot remember the past, are condemned to repeat it,"
That quote is worth keeping in mind as the American 'Captains' of government and industry tout the U.S. economy as being 'unsinkable.'
(This is the ninth in a series of articles on the REO industry written by Philip Wegener)
Philip Wegener is a Los Angeles based mortgage-industry executive and President/CEO of Central Mortgage Asset Management.
