Monday, March 15, 2010

2010: REOs or Short Sales?

by Bill McBride on 3/15/2010 11:20:00 PM

Paul Jackson has a great post at HousingWire: Housing Recovery is Spelled R-E-O

[U]sing LPS data, for all loans more than 90 days in arrears, the average days delinquent is now at 272 days—up from 204 days in early 2008. For loans in foreclosure, the aging numbers are even more staggering: loans in this bucket average 410 days delinquent, up from 260 days delinquent in early 2008.

Ponder those numbers for just a second. On average, severely delinquent borrowers have gone more than 9 months without making a mortgage payment—and yet foreclosure has not yet started for them. For those borrowers who are in the foreclosure process, it’s been an average of 13.6 months—more than one full year—since they last made any payment on their mortgage.
Ahhh ... the "Squatter Stimulus Plan" - live mortgage free (but not worry free).

But Paul thinks foreclosures (REOs) will be the answer, not short sales:
For some, short sales will be an important solution—but don’t kid yourself: the hype currently surrounding short sales and the HAFA program will prove to be short-lived ...
He gives two main reasons for foreclosures over short sales: 1) 2nd liens, and 2) that HAFA has the same qualifications as HAMP. I agree that 2nd liens pose a serious problem, but on the qualifications, Paul writes:
The HAFA program, going into effect on April 5, is getting plenty of attention—and the program’s heart is in the right place. But most are forgetting that it’s an extension of HAMP, the government’s loan modification program that has seen tepid success at best thus far. A loan must first be HAMP-eligible in order for anyone (borrower, servicer, or investor) to qualify for the program’s various incentive payments for short sale or deed-in-lieu.

Which means any of the guidelines applicable to the HAMP program—loan in default or default imminent, within UPB [CR: unpaid principal balance] guidelines, owner-occupied, and originated prior to 2009—still apply.
But lets review the qualifications for HAFA:
  • The property is the borrower’s principal residence;
  • The mortgage loan is a first lien mortgage originated on or before January 1, 2009;
  • The mortgage is delinquent or default is reasonably foreseeable;
  • The current unpaid principal balance is equal to or less than $729,7501; and
  • The borrower’s total monthly mortgage payment (as defined in Supplemental Directive
    09-01) exceeds 31 percent of the borrower’s gross income.
  • If we look at the HAMP program stats (see page 6), the median front end DTI (debt to income) for permanent mods was 45%, and the back end DTI was an astounding 76.4%! And these are the borrowers who made it to permanent status!

    Many borrowers who meet the HAMP qualifications never even get a trial program because their DTI ratios are so high there is just no way they will make it to a permanent mod. The servicers turn them down on the spot. These are the borrowers eligible for the HAFA program right away - and looking at the HAMP DTI stats I suspect this is a much larger group of borrowers than will ever get a permanent mod. So, although I think REOs will play a key role, I think short sales will also be very important.

    More on Short Sales at HousingWire:
  • from Jacob Gaffney: LPS Starts New Short Sale Service
    As 2010 gears up to be the ‘Year of the Short Sale,’ Lenders Processing Service (LPS), the integrated technology provider, is jumping on opportunities such a situation offers by launching its own short sale service to clients.
  • from Jon Prior: Equator Oversees 125,000 Automated Short Sales in Four Months
    In a report that may be considered numerical ammunition to the argument that short sales are heating up faster than modifications, Equator announced that it ushered along more than 125,000 short sale transactions, from November to February, since launching an automated short sale platform.
    Note: Yes, I predicted that 2010 would be the year of the short sale, although I think economist Tom Lawler was first.