by Tanta on 6/10/2008 02:29:00 PM

Our soberer readers (I know we have them) will remember California Congresswoman Laura Richardson (D-Speculator), who is facing foreclosure proceedings on three homes. The uproar began with the foreclosure of sale her unoccupied "second home" in Sacramento, which Richardson claimed was an "error" on WaMu's part, since (she claimed) she had worked out a last-minute modification agreement with WaMu the week before the sale. According to the Daily Breeze, WaMu has filed paperwork to rescind the foreclosure sale, and the man who bought the home is not happy:

The real estate broker who bought Rep. Laura Richardson's house at a foreclosure sale last month is accusing her of receiving preferential treatment because her lender has issued a notice to rescind the sale.

James York, owner of Red Rock Mortgage, said he would file a lawsuit against Richardson and her lender, Washington Mutual, by the end of the week, and has every intention of keeping the house.

"I'm just amazed they've done this," York said. "They never would have done this for anybody else."

York bought the Sacramento home at a foreclosure auction on May 7 for $388,000. Richardson had not been making payments on the property for nearly a year, and had also gone into default on her two other houses in Long Beach and San Pedro.

Richardson, D-Long Beach, has said that the auction should never have been held, because she had worked out a loan modification agreement with her lender beforehand and had begun making payments.

Richardson continues to refuse to authorize WaMu to release any information on her case, although frankly I'm not sure if I were WaMu I'd want to talk about it. This smells terrible, indeed. Perhaps reporters could simply ask some general questions of WaMu about its foreclosure workout policies. Like:

• How often are modifications or repayment plans offered to owners of vacant investment properties with no or negative equity that have never been listed or rented?
• How often are modifications offered to borrowers with two other properties currently in foreclosure?
• How often are modifications arranged in the week before the scheduled trustee's sale, following nearly a year of no contact?
• Does WaMu's policy on modifications make any reference to requiring a "commitment to homeownership" on the borrower's part? How, normally, is that established?
• Does WaMu's policy on modifications make any reference to establishing that the borrower does not display a "disregard for debt obligations"? How, normally, is that established?

If, for instance, we had some evidence that stiffing creditors and getting the taxpayers to subsidize her financial imprudence was, like, a pattern of Richardson's long before the house payments went into default, would that, like, indicate that her mortgage problems may not have much to do with "extenuating circumstances"? WaMu may not be able to read a credit report, but the Press-Telegram ferreted this out:

In 2005, when she was still on the Long Beach City Council, she left one mechanic in a lurch with an unpaid bill, then later had her badly damaged BMW towed to an auto body shop but didn't pay for any work and abandoned the car there, owners of the businesses said this week.

The next day, Richardson began using a city-owned vehicle - putting almost 31,000 miles on it in about a year - and continued driving the car five days after she had left the council to serve in the state Assembly, city records show. . . .

Labreche said he spent months leaving messages on Richardson's cell phone voice mail, then he got a collection agency involved, but still the bill went unpaid. . . .

In December 2005, Lillegard filed for a mechanic's lien on Richardson's car to pay the towing, storage and administrative costs, he said. Lillegard said the lien was finalized in February 2006 and he sold the car to a junkyard, though a few days later - too late - Richardson sent him money to put toward the bill.

So in January of 2007, WaMu gave Richardson a 100% loan to purchase a second home, when her credit report would have shown recent derogatories related to the car repair bills, plus the payments on two other homes, on a State Assembly salary that I can't quite see being equal to her existing debts, let alone a new house payment. In other words, she got your basic subprime loan that relied on nothing other than a fervent belief in endless house price appreciation--in January of 2007. Or else she got a loan because she's a VIP.

I continue to want to know why WaMu is bailing out a deadbeat and a speculator at the expense of a good-faith buyer of a foreclosure property, and wasting operational capacity on a deal like this instead of working with struggling owner-occupants who might actually pay back the modified loan. I will leave it to the citizens of California to explain why you want this woman anywhere near fiscal, budgetary, or housing policy power.

(Hat tip to Brian!)

by Tanta on 6/06/2008 08:01:00 AM

Floyd Norris in the NYT:

This is a tale of sex, lies and foreclosures.

I figured you guys would need to read that.

by Tanta on 5/24/2008 06:37:00 AM

This is an update to post below on Rep. Laura Richardson's foreclosure woes.

Gene Maddaus of the Daily Breeze kindly forwarded today's additions to the saga. There are not two, but three homes owned by Richardson in foreclosure. And yes, she appears to have cashed out her primary residence back in 2006 to fund her campaign for State Assembly. So it looks like a pattern.

* * * * * *

I have been watching the story of Representative Linda Laura [Oops! --Ed.] Richardson and her foreclosure woes for a while now, while heretofore hesitating to post on it. For one thing, the original story--a member of Congress losing her expensive second home to foreclosure--had that kind of celebrity car-crash quality to it that I'm not especially interested in for the purposes of this blog. For another thing, posting about anything even tangentially related to politics invites the kind of comments that personally bore me to tears.

All that is still true, but the story has taken such an unfortunate turn that I feel obligated to weigh in on it. Specifically, Rep. Richardson is threatening us:

Rather than shy away from voting on mortgage-related bills, Richardson said her experiences could help her craft legislation to make sure others don't experience what she did. For example, she sees a need to add steps to inform property owners before their property can be sold.

"We have to ensure that lenders and lendees have the tools with proper timing to resolve this," she said.

If Rep. Richardson is going to base legislative proposals on her own experience, then it matters to the rest of us what that experience was. So click the link below if you can stand to hear about it.

* * * * * * * * * *

The story was originally reported in the Sacramento Capitol Weekly, and picked up by the Wall Street Journal, and thence covered by a number of blogs, with the storyline being that Rep. Richardson "walked away" from her home, a second home she purchased in Sacramento after being elected to the State Assembly. The "walk away" part came from a remark made by the real estate investor who purchased the home at the foreclosure auction, not Rep. Richardson or anyone who could be expected to understand her financial situation, but that didn't stop the phrase "walk away" from headlining blog posts.

Rep. Richardson has variously claimed at different times that the house was not in foreclosure, that she had worked out a modification with the lender, and that the lender improperly foreclosed after having agreed to accept her payments. Frankly, unless and until Rep. Richardson gives her lender, Washington Mutual, permission to tell its side of the story--I'm not holding my breath on that--we're unlikely to be able to sort out this mess of claims to my satisfaction, at least. It's possible that WaMu screwed this up--that it accepted payments on a workout plan with the understanding that foreclosure was "on hold" and then sold the property at auction the next week anyway. It's possible that Richardson's version of what went on is muddled, too. Without some more hard information I'm not inclined to assume the servicer did most of the screwing up, if for no other reason that we didn't find out until late yesterday, courtesy of the L.A. Land and Foreclosure Truth blogs, that Richardson's other home--her primary residence--was also in foreclosure proceedings as recently as March of this year, a detail that as far as I can tell Richardson never disclosed in all the previous discussion of the facts surrounding the foreclosure of her second home.

What part of this I am most interested in, right now, is the question of what in the hell exactly Richardson was thinking when she bought the Sacramento home in the first place. Since the story is quite complex, let's get straight on a few details. Richardson was a Long Beach City Council member who was elected to the state legislature in November of 2006. In January of 2007 she purchased a second home in Sacramento, presumably to live in during the Assembly session. In April 2007, the U.S. Congressional Representative from Richardson's district died, and Richardson entered an expensive race for that seat, winning in a special election in August of 2007. By December 2007 the Sacramento home was in default, and it was foreclosed in early May of 2008. The consensus in the published reports seems to be that Richardson spent what money she had on her campaign, not her bills. According to the AP:

Richardson, 46, makes nearly $170,000 as a member of Congress and was paid $113,000 during the eight months she served in the state Assembly in 2007 before her election to Congress. She also received a per diem total of $20,000 from California, according to a financial disclosure form she filed with the House of Representatives clerk.

It seems to me that all this focus on what happened after she bought the Sacramento home--running for the suddenly-available Congressional seat, changing jobs, etc.--is obscuring the issue of the original transaction.

In November of 2006, Richardson already owned a home in Long Beach. As a newly-elected state representative, she would have been required to maintain her principal residence in her district, but she would also have had to make some arrangements for staying in Sacramento during Assembly sessions, given the length of the commute from L.A. County to the state capitol. She seems to have told the AP reporter that "Lawmakers are required to maintain two residences while other people don't have to," which is not exactly the way I'd have put it. Lawmakers are required to maintain one primary residence (which need not be owned) in their district. They are not required to buy a home at the capitol (of California or the U.S.); many legislators do rent. Richardson is a single woman with no children, yet she felt "required" to purchase a 3-bedroom, 1 1/2 bathroom home in what sounds like one of Sacramento's pricier neighborhoods for $535,500, with no downpayment and with $15,000 in closing cost contributions from the property seller. (The NAR median price in Sacramento in the first quarter of 2007 was $365,300.)

I have no idea what loan terms Richardson got for a 100% LTV second home purchase in January 2007, but I'm going to guess that if she got something like a 7.00% interest only loan (without additional mortgage insurance), she got a pretty darn good deal. If she got that good a deal, her monthly interest payment would have been $3123.75. Assuming taxes and insurance of 1.50% of the property value, her total payment would have been $3793.13.

The AP reports that Richardson's salary as a state representative was $113,000 in 2007, and she received $20,000 in per diem payments (which are, of course, intended to offset the additional expense of traveling to and staying in the Capitol during sessions). I assume the per diem is non-taxable, so I'll gross it up to $25,000. That gives me an annual income of $138,000 or a gross monthly income of $11,500.

The total payment on the second home, then, with my sunny assumptions about loan terms, comes to 33% of Richardson's gross income. I have no idea what the payment is for her principal residence in Long Beach. I have no idea what other debt she might have. I am ignoring her congressional race and job changes and all that because at the point she took out this mortgage, that was all in the future and Richardson didn't know that the incumbent would die suddenly and all that. I'm just trying to figure out what went through this woman's mind when she decided it was a wise financial move to spend one-third of her pre-tax income on a second home. (There's no point trying to figure out what went through the lender's mind at the time. There just isn't.)

Now, Richardson has this to say about herself:

"I'm Laura Richardson. I'm an American, I'm a single woman who had four employment changes in less than four months," Richardson told the AP. "I had to figure out just like every other American how I could restructure the obligations that I had with the income I had."

Yeah, well, I'm Tanta, I'm an American, I'm a single woman, and I say you're full of it. You need to show us what your plan for affording this home was before the job changes, girlfriend. You might also tell me why you felt you needed such an expensive second home when you had no money to put down on it or even to pay your own closing costs. As it happens, the Mercury News/AP reported that by June of 2007--five months after purchase--you had a lien filed for unpaid utility bills. You didn't budget for the lights?

But what are we going to get? We're going to get Richardson all fired up in Congress about tinkering with foreclosure notice timing, which is last I knew a question of state, not federal, law, and which has as far as I can see squat to do with why this loan failed.

Quite honestly, if WaMu did give Richardson some loan modification deal, I'd really like to know what went through the Loss Mit Department's collective and individual minds when they signed off on that. Sure, Richardson's salary went up to $170,000 when she became a member of the U.S. Congress, but what does she need a home in Sacramento for after that? Where's she going to live in Washington, DC? And, well, her principal residence was also in the process of foreclosure at the same time. I suppose I might have offered a short sale or deed-in-lieu here, but a modification? Why would anybody do that? Because she's a Congresswoman?

I'm quite sure Richardson wants to be treated like just a plain old American and not get special treatment. Well, I was kind of hard on a plain old American the other day who wrote a "hardship letter" that didn't pass muster with me. I feel obligated to tell Richardson that she sounds like a real estate speculator who bought a home she obviously couldn't afford, defaulted on it, and now wants WaMu to basically subsidize her Congressional campaign by lowering her mortgage payment or forgiving debt. And that's . . . disgusting. At the risk of sounding like Angelo.

I know some of you are thinking that maybe poor Ms. Richardson got taken advantage of by some fast-talking REALTOR who encouraged her to buy more house than she could afford. According to Pete Viles at L.A. Land,

She likes the Realtors, and they like her. She filed financial disclosure forms with the House Ethics Committee reporting the National Assn. of Realtors flew her to Las Vegas in November to help swear in the new president of the association, Realtor Dick Gaylord of Long Beach.

In suggested remarks* at the NAR gathering, also filed with the House, Richardson's script read: "I might be one of the newest members of Congress but I am not a new member of the REALTOR Party. When I needed help to win a tough primary, REALTORS stood up and backed me even though I was the underdog."

--Real estate industry professionals have given her $39,500 in campaign contributions in the current election cycle, according to Open Secrets.

No wonder she's blaming the lender.

Yes, I Can Stand to Hear About This.

by Tanta on 5/18/2008 05:25:00 PM

Thanks to Clint for this terrifying story in The Oregonian:

Fitzsimons, of Prineville, started his first residential construction company, called Sunrise Northwest, when he was 19. In August 2004, he joined forces with close friend Shannon Egeland, co-founding Desert Sun. . . .

At its peak, Desert Sun employed more than 110 people. The company's success enabled Fitzsimons to buy expensive toys, including a 2006 Ferrari 430 Spider, boasting a base ticket price in excess of $200,000.

Desert Sun had no retirement plan, but it did offer the employee homeownership program, which its Web site likened to a 401(k).

The plan seemed straightforward enough: Desert Sun would build a home for employees, taking care of design, materials and construction. Employees could buy the completed home from Desert Sun at cost and assume monthly mortgage payments, or sell it and split proceeds 50-50 with the company. . . .

The Desert Sun plan was not without risk for participants. The company pledged to cover all costs, but to fund the building, employees had to take out construction loans in their own names. . . .

Deschutes County property records indicate that the company enjoyed six-figure profits on the sales of some of the lots.

On July 5, 2007, for example, Desert Sun Holdings bought lot 24 in the Village Meadows subdivision in Sisters from Redmond-based Allen-Rose Homes for $155,000. That same day, the company flipped the lot to employee Roger Howell for $269,900.

And, of course, this all seems to have been effected by fraudulent mortgage applications. Read the whole thing, but put down your drink before the last paragraph.

by Tanta on 1/31/2008 07:43:00 AM

PBS (thanks, ES!):

JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: You wouldn't call Sandra Sanchez a real estate speculator. The mother of two teaches at a private school. Two years ago, with a daughter headed off to college and the real estate boom in full swing, she purchased this house as an investment property. It seemed like a good idea at the time.

I have no idea why I wouldn't call Ms. Sanchez a real estate speculator, since as far as I can tell she was speculating in real estate. I'm sure she's an amateur speculator, but that's rather the point, isn't it?

YASTINE: Sandra Sanchez, struggling now to make payments on two homes, thinks the GOP and Democratic candidates are beginning to pay attention.

SANCHEZ: I think they're seriously thinking about the matter. And they know that a lot of the votes come from the average people, so you have to focus on the needs of the average people. You cannot sit back and let things happen to people.

YASTINE: With that in mind, Sanchez says she'll vote today and reevaluate come November. She hopes her homes haven't been foreclosed upon by then.

I'm guessing that we could, certainly, sit back and let things happen to speculators. Hence the fig leaf.

by Tanta on 1/18/2008 12:15:00 PM

The MBA has a report out on foreclosure and workout data from the third quarter of 2007 (thanks, Clyde!). The data is in tabular form that's a bit unwieldy, but here's part of the summary:

[D]uring the third quarter the approximately 54 thousand loan modifications done and 183 thousand repayment plans put into place exceeded the number of foreclosures started, excluding those cases where the borrower was an investor/speculator, where the borrower could not be located or would not respond to mortgage servicers, and when the borrower failed to perform under a plan or modification already in place.

Of the foreclosure actions started in the third quarter of 2007, 18percent were on properties that were not occupied by the owners, 23 percent were in cases where the borrower did not respond or could not be located, and 29 percent were cases where the borrower defaulted despite already having a repayment plan or loan modification in place. . . . the degree to which invest investor-owned properties drove foreclosures in the third quarter differed widely by state and by loan type. They ranged from a high of 35 percent of prime ARM foreclosures in Montana to a low of 6 percent of prime fixed-rate foreclosures in South Dakota. For the nation, investor loans comprised 18 percent of subprime ARM foreclosures, 28 percent of subprime fixed-rate foreclosures, 18 percent of prime ARM foreclosures and 14 percent of prime fixed-rate foreclosures. Table 6 shows, for example, that while 11 percent of foreclosures on prime ARM and prime fixed-rate loans were on non-owner occupied properties, the percentages for subprime loans were almost double that — 19 percent for subprime ARMs and 20 percent for subprime fixed-rate. In Ohio, a state that has had some of the highest foreclosure rates in the nation, investor owned properties accounted for 21 percent of subprime ARM foreclosures and 34 percent of subprime fixed-rate foreclosures, versus 18 percent of prime ARM and 14 percent of prime fixed-rate foreclosures. Nevada had among the highest investor-owned share of foreclosures, with investors accounting for 36 percent of subprime fixed-rate foreclosures, 18 percent of subprime ARM foreclosures, 24 percent of prime ARM foreclosures and 14 percent of prime fixed-rate foreclosures.

Borrowers who could not be located or who would not respond to repeated attempts by lenders to contact them accounted for 23 percent of all foreclosures in the third quarter, 21 percent of subprime ARM foreclosures, 21 percent of subprime ARM [sic; FRM?] foreclosures, 17 percent of prime ARM foreclosures and 33 percent of prime fixed-rate foreclosures. Thus, as a percent of foreclosures, the inability to get a borrower to respond to a mortgage servicer is a much bigger problem for prime-fixed rate borrowers than for subprime borrowers. Again the results differed widely by state and loan type. The highest was 69 percent for prime fixed-rate foreclosures in Oklahoma versus a low of 7 percent of prime ARM foreclosures in Wisconsin. Table 7 shows that in Ohio and Michigan, 25 and 26 percent respectively of all foreclosures started in those states were for borrowers who would not respond to repeated attempts to contact them or could not be located.

Borrowers who had worked with their lenders and established loan modification or formal repayment plans, and then failed to perform according to those plans, accounted for 29 percent of all foreclosures in the third quarter. The inability of borrowers to meet the terms of their repayment plans or loan modifications accounted for 40 percent of subprime ARM foreclosures, 37 percent of subprime fixed foreclosures, 17 percent of prime ARM foreclosures and 14 percent of prime fixed foreclosures. Table 8 shows that the states of Vermont, North Dakota, New Mexico and Arkansas, with little else in common, had the highest shares of foreclosures due to the inability of borrowers to live up to prior plans.

During the third quarter, mortgage servicers put in place approximately 183 thousand repayment plans and modified the rates or terms on approximately 54 thousand loans. Lenders modified approximately 13 thousand subprime ARM loans, 15 thousand subprime fixed rate loans, 4 thousand prime ARM loans and 21 thousand prime fixed-rate loans. In addition, servicers negotiated formal repayment plans with approximately 91 thousand subprime ARM borrowers, 30 thousand subprime fixed-rate borrowers, 37 thousand prime ARM borrowers and 25 thousand prime fixed-rate borrowers.
During this period the industry did approximately one thousand deed in lieu transactions and nine thousand short sales.

In an effort to put these numbers into context, Tables 9 through 13 also provide a comparison with the repayment plan and loan modification numbers. They show a breakdown of the number of foreclosures started net of those that clearly could not be helped due to reasons already discussed — investor-owned, borrower would not respond or could not be located, or borrower failed to live up to an agreement already in place. As previously discussed, the
percentages were adjusted downward to eliminate double counting for those borrowers who fell into more than one category. Therefore, while an estimated 166 thousand subprime ARM foreclosures were started during the third quarter, only 50 thousand did not fall into one of those three categories. In comparison, about 90 thousand repayment plans were renegotiated and 13 thousand loan modifications were done, for a total of 103 thousand.

Of the net 50 thousand foreclosures, many of these likely occurred due to the traditional reasons for default, loss of job, divorce, illness or excessive debt burden relative to income, not just the impact of rate resets, thus eliminating any possible benefit of a rate freeze.

What jumps out at me:

1. For the purpose of this study, servicers identified "investor-owned" loans as those with a billing address different from the property address. This is a much better measure than the occupancy code the databases carry, since it is based on the declarations made by the borrower at loan closing, and we know how reliable some of those were. There would be no distinction here between a property that was never occupied by the owner and one that was occupied originally but subsequently rented.

2. The vast number of forbearances relative to modifications should give us all pause. As its name implies, forbearance is the servicer's agreement to forbear from foreclosing for a temporary, stipulated period of time, during which the borrower agrees to resume making contractual payments and make up the delinquent payments, generally in an extra monthly installment. While it is possible that a modified loan was not delinquent prior to the modification, all forbearances by definition were previously delinquent. Forbearances are faster and cheaper than modifications; servicing agreements generally give the servicer wide latitude to enter into forbearances. It is quite possible (although this issue is not addressed in the MBA report) that many forbearances are the initial stage of a modification deal: the borrower is in essence put on a "probationary" plan to catch up on payments at a temporarily reduced level, and given a permanent modification only if the borrower performs at the forbearance terms. The precise situation in which a forbearance makes sense--a borrower who occupies and is committed to homeownership and who is experiencing some temporary inability to make payments--is the precise situation in which the "Hope Now" plan makes most sense. It therefore troubles me to see no discussion of whether forbearances are being used as an initial stage of the modification process, or as a cheap, not-well-thought-out substitute that is setting repayment installments too high for borrowers to reach.

3. The data on borrowers not located or not responding merely raises the question of why that is the case. We really need to know more about this borrower group: some will be "demoralized" borrowers who simply cannot cope adequately with their distress; some will be speculators not caught with the billing address check; some will no doubt have been straw borrowers. Some will be ruthless senders of "jingle mail." But without further information, we're not able to say from this data what the best response is to this group.

by Tanta on 1/02/2008 09:32:00 AM

Go here, and then go here.

(Sorry, I'm in the middle of installing software. That requires attention to my dishwasher.)

. . . Install is going quite well, thanks.

by Tanta on 12/14/2007 10:50:00 AM

BusinessWeek sums it up: "Dog Days at Cerberus."

Here's one for the Things You Have To Read A Couple of Times At Least To Assure Yourself That It's Not Just You File:

Now, say sources close to Cerberus, the $26 billion firm has slowed its pace of dealmaking with the credit crunch in full force. It's also focusing more rigorously on the troubled holdings in its portfolio—some of which may have blindsided the firm. The situation has prompted concern that Cerberus' returns may suffer. This comes at a time when all players are under pressure. "Industry returns have been extraordinary, 20% to 30% a year," says Katharina Lichtner, managing director of the private equity advisory firm Capital Dynamics. "Returns will come down, revert to a more normal 16%."

And what kind of socially redeeming value will Cerberus be adding to the mortgage biz for that perfectly normal 16%?

It's unclear just how much work it will take to fix GMAC, the financing arm of General Motors (GM). A Cerberus-led group paid $14 billion for a 51% stake in September, 2006. Cerberus wasn't exactly an industry newcomer. It had a front row seat at the subprime show with Aegis Mortgage, a lender it took control of in 1996. Yet Cerberus jumped into GMAC at exactly the wrong moment. Price defends the move: "There was one time to buy GMAC. We wanted it and took action."

The short story? Aegis filed for bankruptcy in August, and GMAC's mortgage group ResCap has been bleeding red ink. Cerberus watched GMAC continue to make subprime loans in the first quarter but has since reined it in. It wasn't fast enough to prevent the pain. ResCap has lost $3.4 billion so far this year, forcing GMAC to pump $2 billion into the business to help it survive the mortgage mess. And Lehman Brothers analyst Brian Johnson forecasts an additional $1.3 billion hit this quarter and $600 million in 2008. "I don't think anyone is panicked," says one Cerberus insider. But "we sure as hell didn't expect GMAC to be what it turned out to be."

Those problems may put a kink in the firm's strategy. Cerberus, which also owns 80.1% of struggling automaker Chrysler, wants to merge the lending operations of both companies. By doing so, it could reap massive savings on back office and loan processing operations, boosting returns at both GMAC and Chrysler.

Cut back office at a mortgage servicer. Put people who can service car loans in charge of mortgage loans. That's exactly what we need right now. Dog days at Cerberus, or just doghouse for the rest of us?

Let me just observe that GMAC's mortgage servicing unit was already pretty "stripped down" in its heyday. That was its business model: cheap servicing. I can't wait to see what happens when you make it cheaper.

by Tanta on 11/19/2007 10:10:00 AM

From the New York Times (thanks, jm!):

The House on Thursday passed a broad mortgage act that includes protections for renters. The House act, which the lending industry has opposed, would require new owners to continue the leases of tenants for up to six months after foreclosure.

There are few bigger indictments of the lending practices of the last few years than the apparent fact that people mortgaged investment properties, found a creditworthy renter who never failed to make the monthly rental payment, and still ended up in foreclosure.

As the Times notes, it is hard to say how many renters and properties are affected here; we have seen quite a bit of reporting suggesting that many if not most of these foreclosed "investment" properties are vacant. The real impact of this legislation should be on lender guidelines and practices (and pricing) for making investment property loans in the residential mortgage portfolio (instead of the commercial or small business loan portfolio, where some of us think they belong).

If you know that you face an automatic six months between foreclosure and REO marketing (assuming you don't list and market the house until it is vacant), you just might get serious about operating income analysis and evaluating the seriousness and plausibility of a first-time landlord's ability to manage a property. You might also get more diligent about catching implausible claims of owner-occpancy before you close loans.

On the other hand, I suspect this will put a screeching halt to "workout" arrangements that allow an owner some time to find a tenant for a property that isn't cash-flowing. Any servicer who knows that there isn't a lease today would obviously elect to file the FC before one materializes. Since my sympathy for amateur "investors" who basically already get a better deal (the rate on a residential mortgage loan instead of a commercial loan) than they deserve is limited, I'm not sure this problem should concern anyone unduly.

I do hope it opens up some discussion of the whole issue of the GSEs and FHA and depository lenders, specifically, being allowed to buy/insure/originate investment loans in the single-family residential programs. Insofar as there are always some kind of taxpayer subsidies involved here--either in the insurance of these loans or the tax breaks for the investor or both--you have programs supposed to stimulate or provide capital for homeownership being used to goose the profits of RE investors. If there is some social or economic benefit to doing that, then I think those loans should run through something like the Small Business Administration or another kind of program explicitly designed to support entrepreneurship. Including them in programs that are supposed to be about owner-occupied housing distorts incentives and creates the kind of servicing problems we see here: it is, after all, true that residential mortgage servicers aren't exactly set up to be emergency substitute landlords. A specialized rental property lender/servicer might be. And might charge the true cost of that in the interest rate. Which might make speculation in single-family housing less attractive. Which doesn't strike me at least as a big bummer.

by Tanta on 10/22/2007 09:45:00 AM

Via the New York Times:

“The market’s really low right now, so you can get a good price,” said Lori Crook, a food server at Keys Cafe who said she was looking for a place she could fix up and sell. “Even if you can’t sell it right away, if you just sit on it and sit on it, it will go up.”

The auction involved a tiny fraction of foreclosures in the state. Julie Gugin, executive director of the nonprofit Minnesota Homeownership Center, projected statewide foreclosures at 20,000 this year, up from 11,000 last year, based on data from sheriffs’ sales. . . .

“This is such a stark and dramatic illustration of how serious the problem is,” said Ron Elwood, a lawyer at the Legal Services Advocacy Project, which lobbies in the interest of low-income residents. “The reality is, half the reason 300 homes are being auctioned off is that speculators tried to make a killing and failed to do so.” In Minneapolis, 55 percent of foreclosures this year involved houses not occupied by their owners, according to county records.

But instead of alarming buyers about the risks, the auction of so many foreclosures at once was an invitation to speculators, small and large. Some, including Bryan Kihle and Jim Casha, who bought a four-bedroom house for $145,000, bid without seeing the properties. “I just looked at the picture and thought if we got it cheap enough, we could rent it for a year, then sell it when the market goes back up,” said Mr. Kihle, a building contractor.

Some day this war's going to start.

by Tanta on 9/24/2007 02:34:00 PM

Ye Gods. That's almost as bad as laundry in the backyard.

The Wall Street Journal treats us to "The Invasion of Renters." I for one am unable to determine how far my leg is being pulled here, or how seriously this reporter is taking his own story. We begin with the familiar narrative build-up:

Mark Spector was happy with his new neighborhood. Then the renters started moving in.

In 2004, Mr. Spector and his wife, Deanna, paid $350,000 for a six-bedroom house in Bridgewater, a new development in Wesley Chapel, Fla., about 25 miles north of Tampa. They moved into their home and looked forward to meeting their neighbors.

Then Florida's once-feverish housing market started to cool. Investors who'd bought a large percentage of the properties in Bridgewater found they couldn't flip them for a quick profit, and brought in tenants, instead. By last year, Mr. Spector estimates, close to half of the residents in the subdivision of 750-plus homes were renters.

I have no idea how Mr. Spector can keep tabs on the occupancy status of 750 homes; I'm just glad he isn't my neighbor. Anyway, you're wondering what happened next, right?

The result, Mr. Spector says: overgrown lawns, drug deals in the park and loud parties in the "frat houses" down the street. "You'll see some driveways with a dozen cars parked in the driveway and on the grass," he says.

So, basically, we don't like abandoned homes, we don't like unsold homes, and we don't like renters. We also don't want to drop our sales prices so that those homes can be sold to owner-occupants. I am torn between wondering how bad those parties really are--as if owner-occupants never have parties that involve more than 12 parked cars--and wondering what people expected in the no-doc mortgage frenzy. Anecdotal evidence suggests that at least some of those no-doc loans involved drug money laundering to start with. How renters could be worse news than the owners is hard to fathom.

The extent of the problem is also hard to get a grasp on:

In another manifestation of the housing slump, thousands of property owners across the country are now renting out homes they cannot sell. As a result, developments and condos that once were largely owner-occupied are filling up with renters who some neighbors say are less engaged in their communities and less concerned about maintenance.

"Thousands"? Across the whole country? How many thousands?

I don't know, but I do know that mixing horror stories of drug deals and criminal complaints with stuff like this is not winning sufficient sympathy from me:

Denver, Colo., resident Neval Gupta says that when his 63-unit condo complex began running into problems as the number of renters grew, the board stepped up enforcement of its rules, including bans on storing bicycles on balconies and doing auto repairs in the parking garage. "We really crack down on the owners now to be accountable for their renters," says Mr. Gupta, the president of the condo board. "We do have a problem with some owners who put any renter they can find in there."

Mr. Gupta and other residents say such vigilance has helped cut down on some problems. But it has also created new ones. Craig White, who bought his unit as an investment and rents it out, says his last tenants left when they got tired of being "harassed" by over-zealous owner-occupants. "If you put your bike out [on the balcony] for a day or two, you're going to get a phone call," Mr. White says.

Just exactly when did "auto repairs" become a problematic thing to do in a garage? Are we really talking about someone blocking access with a major engine rebuild, or just some poor sap topping off the washer fluid? Do you trust anyone who has convulsions over a bike on a balcony to tell the difference?

Of course, plenty of renters cut their grass, take in the garbage cans and turn down the music at 9 p.m. And not all homeowners are model neighbors. Denise Bower, of Community Management, Inc., which manages 122 developments around Portland, Ore., says renters are often more responsive to complaints because they know they run the risk of losing their leases if they don't. "I have more problems with owners, by far," Ms. Bower says. "They get stubborn."

No, really? Might that stubborness be why some of these owners "have to" rent the place? Can't get more than what you paid in 2005?

by Calculated Risk on 9/21/2007 11:48:00 AM

From Fed Vice Chairman Donald L. Kohn: Success and Failure of Monetary Policy since the 1950s. An excerpt on the causes of the housing bubble:

"... it is far too soon to pass judgment on what went wrong in the U.S. housing market and why. I suspect that, when studies are done with cooler reflection, the causes of the swing in house prices will be seen as less a consequence of monetary policy and more a result of the emotions of excessive optimism followed by fear experienced every so often in the marketplace through the ages. To some extent, too, the amplitude of the housing cycle was heightened by the newness of the subprime market, the fragmentation of regulatory oversight responsibility for that market, and the complexity and opacity of the newer instruments for transforming and distributing risk. Low policy interest rates early in this decade helped feed the initial rise in house prices. However, the worst excesses in the market probably occurred when short-term rates were already well on their way to more normal levels, but longer-term rates were held down by a variety of forces. And similar, sometimes even sharper, trajectories of house prices have been witnessed in some economies in which the central banks said they were paying more attention to asset prices."

Many very lengthy papers will be written on the causes of the bubble. Agree or disagree, Kohn touches on a few key points: monetary policy definitely contributed to the initial surge in prices, lax oversight - Kohn says because of "fragmentation of regulatory oversight responsibility" - allowed the bubble to expand, and speculation played a key role. I'll post on what I consider the key causes this weekend.