by Anonymous on 5/05/2008 09:02:00 AM

My attention was arrested by this story in today's Washington Post, which is not, actually, about "walk aways" at all. It's about borrowers getting mortgage modifications--that is, borrowers who are in fact making a real effort to stay in their homes. But one borrower's story here actually has more insight about the "walk away" meme, it seems to me, than any story I've read purportedly on that subject.

[The Ramseys] bought their Burtonsville home for $310,000 in June 2005 with two loans. The first, and larger, mortgage had a 6.4 percent interest rate due to increase after three years to as high as 12 percent. The second had a 10.2 percent rate. Their monthly payment was originally $2,000, not including homeowners association fees and taxes.

The rate jumped last summer. Eventually they were paying $3,050 a month. Her salary as a social worker and his as an insurance salesman wouldn't cover it. In July, they stopped paying.

Ramsey called her lender, Houston-based Litton Loan Servicing, but had trouble getting hold of anyone with decision-making authority. The company then scheduled foreclosure proceedings for Dec. 18. She called again to propose a short sale.

"I was willing to do whatever it took so that we didn't lose the house," she said.

Absorb that statement for a minute: in a short sale, you do "lose" your house. Whatever we're talking about here is psychological, not literal.

Litton turned down the short sale bid--it was only $200,000. Eventually the Ramseys got Litton to agree to a modification:

It took several weeks, but Cipollone got both mortgages down to 7 percent, fixed for 30 years. Litton also dropped the balance to $302,000 after the Ramseys contributed $3,000 for a down payment.

"I'm terribly excited," Ramsey said. "I wanted to pack up and leave my house because I want to, not because I'm going to go through a foreclosure situation, but because it's planned."

She doesn't plan on leaving anytime soon, but if she ever does, she said, it will be on her terms.

In a sense, Mrs. Ramsey understands what a foreclosure is much more clearly than people who talk about "walking away" do: a foreclosure is not "giving the house back to the bank." It is being forced to sell your property at public auction in order to satisfy a debt. To the Ramseys, it isn't actually "losing the house" that seems to be the real fear--they were willing, after all, to sell short. It's simply that a short sale "felt" voluntary; it felt like "a plan."

One of the reasons why nobody is really quantifying the "walk away" problem is that, in reality, there is no legal or logical distinction between a "walk away" and a "foreclosure," because they're both foreclosures. The only difference is that the former can be interpreted, psychologically, to mean that the borrower is "leaving my house because I want to," while the latter acknowledges that the sale of the home has been forced.

I'm guessing that we'll have a least a few commenters to this thread asserting that the Ramseys "should have just walked away." Their mortgage payment is back to its original level--around $2000 a month before taxes and insurance--but their mortgage is still seriously underwater and I for one wouldn't bet on how long it will take for its value to climb over the loan amount. Even in that part of Maryland, the Ramseys could probably cut their monthly housing expense in half by renting.

Such calculating advice, however, ignores the fact that to the Ramseys, foreclosure equals defeat, and they're realistic enough to realize that dressing it up in the euphemism of "walking away" doesn't change that. They are, in their own way, just as "ruthless" as the so-called walkers-away: they would, apparently, have been happy to see their lender take a $100,000-plus loss on a short sale to salve their pride. Human nature is like that; I have no real interest in heaping coals on the heads of the Ramseys. I am more interested in the way this story helpfully scrambles some confident assumptions about what motivates borrowers, and what really stigmatizes foreclosure in our current culture.

Servicers keep going on about a "sea change" in borrower attitudes about foreclosure. I just don't see that. I see borrowers whose actions suggest that foreclosure still carries a very powerful stigma, so much so that they are able to convince themselves that "walking away" is actually an "alternative" to foreclosure rather than a synonym for it. The Ramseys rather usefully remind us that "walking away" is not a financial strategy, it's a defense mechanism. If you can tell yourself that you are the one making the plan and executing the options, you avoid having to admit to being forced.

by Calculated Risk on 5/04/2008 11:06:00 PM

For those that missed it: In 2005, when the median house price in Orange County reached $603 thousand, the O.C. Register featured a house on the front page that had recently sold for $600 thousand. That house is now listed as a short sale for $439 thousand.

See: From Front Page to Short Sale

Note: the graph was made when the asking price was $559K, but the price was dropped to $439K on Saturday!). The graph shows how much further prices will probably decline in Orange County, CA.

Here is the July 2005 front page of the O.C. Register.

Here is the Redfin listing (see the 405 Freeway sign in the background).

by Calculated Risk on 5/04/2008 02:46:00 PM

Note: This is an update to a previous post using the February Case-Shiller Price Indices.

This first graph shows real Case-Shiller house prices for Los Angeles and the Composite 20 Index (20 large cities). The indices are adjusted with CPI less Shelter.

Click on graph for larger image.

The most obvious feature is the size of the current housing price bubble compared to the late '80s housing bubble in Los Angeles.

The Composite 20 bubble looks similar (although larger) to the previous Los Angeles bubble. (Note the Composite 20 index started in 2000).

Perhaps we can overlay the current Composite 20 bubble on top of the previous Los Angeles bubble and learn something about the possible duration of the current bust.

In the second graph, the real price peaks are lined up for late '80s bubble in Los Angeles, and the current Composite 20 bubble. Note that the real price peak for the Composite 20 was flat for several months, so the real peak was chosen as May '06. It could also be a few months later.

The peak and trough for the Los Angeles bubble are marked on the graph.

Prices are falling faster this time, probably because the bubble was larger.

It might be reasonable to expect that the dynamics of the current bust will be similar to the previous bust. After another year (or two) of rapidly falling prices, it's very likely that real prices will continue to fall - but at a slower pace. During the last few years of the bust, real prices will be flat or decline slowly - and the conventional wisdom will be that homes are a poor investment.

The Los Angeles bust took 86 months in real terms from peak to trough (about 7 years) using the Case-Shiller index. If the Composite 20 bust takes a similar amount of time, the real price bottom will happen in early 2013 or so. (But prices would be close in 2010).

by Anonymous on 5/04/2008 06:59:00 AM

The Washington Post finds two fresh victims of the RE bust, condo owners whose mean, nasty condo boards won't let them rent out their units:

. . . said Moss, who also is a real estate agent. . . . said Gozen, a mortgage loan officer.

Surely, if anyone understood the risk in trying to flip units in an owner-occupied project, it'd be these two, no? No.

Gozen:

"My idea was not to be a landlord. My idea was to flip them, but here I am. I am stuck with them," he said.

Gozen is applying for hardship exemptions from both condo boards, arguing that without a renter he will not be able to keep the properties and will be forced into foreclosure or will have to sell at a particularly low price -- either of which would drag down values for the entire building.

"I can only afford to pay their mortgages for a few months, and then I will have to go to foreclosure," he said. "If they would ease up on this until the market gets better, that would be great."

Why is it we can't get reporters to just ask a couple of Econ 101 questions when they interview these people? Like, how much would you rent it for? Would that be enough to cover 2005-era mortgage payments? If so, how does that compare to what the unit would sell for? If not, would the "market rent" you set here also "drag down values for the entire building"? And what's your plan for making up the difference? What's a "particularly" low price, anyway? At the end of it, what's the net difference to your neighbors of turning the thing into a rental project, which lowers values, makes financing for resales hard to get, and uses up the "hardship quota" of allowable rentals, versus establishing a painful but accurate new comp for an owner-occupied sale?

And, finally: do you really expect the short sale-style negotiation tactic--"accommodate me or I default on you"--to go over as well with your neighbors as it does with your servicer? I'm truly curious about that question. At least, in a short sale, the servicer is free of you after taking the loss: from the servicer's side, the deal can't get any worse down the road once you sell. What are you offering your condo board? A guarantee that you'll never skim the rent and end up defaulting anyway? A guarantee from a self-described flipper who doesn't appear to have disclosed intended occupancy quite accurately up-front when he bought the units in the first place? (If they were purchased as officially non-owner-occupied, why were they not rented immediately? Did you try but fail to rent them immediately? What am I missing here?)

I am prepared to have some sympathy for bona-fide owner-occupants who have fallen on unforeseen hard times and must now battle recalcitrant condo boards to be allowed to rent. I rather wish the Post had found one or two. Perhaps I should be more charitable on a Sunday morning, but I'm having a hard time working up sympathy for a couple of industry insiders who bought at the top of the market for speculative purposes and now want the rules re-written in the name of "protecting the neighbors" from a sale at market prices.

by Calculated Risk on 5/03/2008 09:22:00 PM

Off-topic (but probably of interest): From the WSJ Microsoft Withdraws Yahoo Offer After Sweetened Bid Is Rejected

Microsoft Corp. said it abandoned its offer for Yahoo Inc., as the two companies failed to bridge a gap between them on price.

Here is the Ballmer letter to Yahoo.

by Calculated Risk on 5/03/2008 06:11:00 PM

Update: Since I posted, the price has been slashed to $439K (hat tip DeathtoSpeculators). This is even a little below the February price according to Case-Shiller, but is still well above the likely eventual price.

This is an update to the story posted yesterday: From Front Page (in 2005) to Short Sale.

That house was featured on the front page of the O.C. Register - as a median priced home - when the median crossed $600,000 back in 2005. The same house is now offered for sale as a short sale.

There is no Case-Shiller index for Orange County alone (update: LA includes Orange County - hat tip sanity clause), for this graph I averaged the Los Angeles and San Diego indices:

Click on graph for larger image.

This graph shows the nominal prices for Orange County using the prices for the Traverse Drive house in 1994 as a reference.

Note: click here for front page story of Traverse Drive house in the July 19, 2005 O.C. Register.

It appears the price for the Traverse Drive house followed the Case-Shiller index pretty closely. It is now being offered as a short sale for $559 thousand, well above the $475 thousand that the Case-Shiller index would suggest for February 2008.

The dashed line shows the inflation adjusted prices, based on the Sept 1994 sales price. To reach the inflation adjusted price, the Traverse Drive house price would have to decline to $246 thousand - almost another 50% from the current Case-Shiller indicated price!

For areas with limited land and zoning restrictions (like Orange County), house prices might rise faster than inflation (depending on income growth). Even with a real annual price increase of 1% to 2% (on top of inflation), the Traverse Drive house would still only be selling for $280 to $320 thousand today (based on the '94 price)

Yes, nominal prices in Orange County are off about 22% from the peak, and real prices (inflation adjusted) are off about 26% from the peak - but prices will probably fall significantly from here.

by Calculated Risk on 5/03/2008 03:37:00 PM

From Reuters: JPMorgan says no near end to financial crisis: report

"We can only speculate how deep and how long the recession in the United States will really be and how that in turn will impact banks," [JPMorgan Chase & Co CEO] James Dimon told "Welt am Sonntag".

"But we are not done with the crisis for a long time," Dimon said ...

And from Goldman Sachs: Eye of the Storm (research report no link). Goldman argues there is a "gaping hole in the side of the U.S. economy" from falling house prices (significantly more price declines to come in their view) and too much supply.

[Fiancial market] relaxation is unlikely to mark the start of a sustainable recovery.

... the evidence for spillover effects from housing via the credit crunch, wealth effects, and multiplier effects in the broader economy is mounting, particularly as far as consumption is concerned. ... In an absolute sense, the data this week were clearly quite poor.

And from the WSJ: Downgrades Show Storm Isn't Over

ResCap's credit rating was cut deep into "junk" territory after it unveiled plans to restructure $14 billion of debt and possibly borrow billions more from its parent, GMAC LLC.

Countrywide's debt rating was slashed to junk from investment grade by Standard & Poor's after Bank of America Corp. said it isn't sure it will stand behind roughly $38 billion of Countrywide debt.

Credit markets have become substantially calmer since the Federal Reserve helped avert a complete collapse by Bear Stearns Cos. in March. Friday's downgrades were a reminder that other big financial institutions are still struggling under the weight of problem mortgages.

Being in the eye of the hurricane can lead some people into thinking the storm has passed. Maybe. But probably not.

With falling house prices, less mortgage equity extraction, less consumption, and falling business investment (especially for non-residential structures), there is more storm damage to come.

by Calculated Risk on 5/03/2008 10:24:00 AM

Report to The Secretary of the Treasury from The Treasury Borrowing Advisory Committee of the Securities Industry And Financial Markets Association

The Federal government's budget balance is deteriorating in fiscal year 2008. Weaker economic activity has dampened the pace of revenue collection and lifted growth in economically sensitive spending. A recent survey of primary dealers estimates that the deficit for the 2008 fiscal year ending in September will exceed $400 billion with some economists expecting a deficit of more than $500 billion--a significant deterioration from fiscal 2007's deficit of $163 billion. Economic stimulus measures will complement the forces widening the budget deficit. This year's shortfall may surpass fiscal year 2004 as the largest on record in nominal dollars.

by Calculated Risk on 5/02/2008 09:37:00 PM

This week I spoke with Jim Butler of the law firm Jeffer, Mangels, Butler & Marmaro about the state of hotel financing. Jim hosts a conference every year called Meet the Money® devoted to hotel finance that brings together hotel developers/investors and providers of debt and equity capital.

On the recent change in lending standards, Jim told me:

The liquidity crunch has greatly reduced capital availability for hospitality projects, but money still is available from more traditional (portfolio lending) sources, where the projects make sense and there is great sponsorship. But capital providers and consumers are having greater difficulty finding one another, and underwriting criteria are much tougher. LTVs have come down from 85-90% last summer to something closer to 50-55%, with mezz debt adding a little more leverage but at much greater cost than last year.
emphasis added

Imagine the housing market with 55% LTV for homes!

Click on graph for larger image.

This graph shows the strong growth in lodging in recent years (from the BEA supplemental tables)

With these tighter lending standards (and lower LTV loans), 2008 will probably be a tough year for hospitality development domestically.

Jim also told me that international growth is much stronger than domestic right now. This is similar to many other industries, and this raises the question of decoupling and recoupling of the U.S. and global economies - right now growth internationally is cushioning the U.S. slowdown.

For anyone interested, Jim writes a blog on hotel legal issues with the original title: Hotel Law Blog

by Calculated Risk on 5/02/2008 05:36:00 PM

The following image is of the front page of the O.C. Register from July 19, 2005. The featured house sold for $600K in July 2005, and is now listed on RedFin as a short sale for $559K (good luck!). (hat tip ID)

Click on photo for larger image.

Click here for PDF of entire front page. The caption read:

SOLD: Sergio and Monica Anaya and their two children left their rental and bought this three-bedroom Costa Mesa home after signing two loans (including an interest-only mortgage) and taking on two boarders who occupy one of the bedrooms.

Anyone surprised that didn't work out? The house previously sold in September 1994 for $177,500.

Using the Case-Shiller Home Price Indices for Los Angeles and San Diego (there is no index for Orange County), with typical appreciation for the area, the house should have sold for $567K to $592K in July 2005 based on the Sept '94 price. Pretty close.

Using the February 2008 Case-Shiller HPI, the house should now sell for $455K to $494K, well below the short sale asking price (once again based on the 1994 price).

One of the headlines in the Register is "Stuff of Memories", hence the title for this post. Another headline is "Expert expects $1 million median". Very funny.

Note that the 405 Freeway is directly behind the house (see freeway sign in photo).


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