by Anonymous on 5/20/2008 08:19:00 AM

Here's a wee bit of cognitive dissonance with your coffee, courtesy of TheStreet.com:

Neighborhoods across the U.S. are being ransacked.

In fact, about 50% of homes have substantial damage following foreclosure, according to a survey of 1,500 real estate agents by Campbell Communications in Washington, D.C. (This is not just due to homeowners looting their foreclosing properties; some do not have the financial capabilities for the home's upkeep, and other times vandals are responsible.)

To keep real estate agents from being left to sell homes with floor and carpet damages, holes in the wall, and removed appliances, a preventive measure is being offered to homeowners facing foreclosure known as "cash for keys."

I have been wanting some real numbers--not just a few splashy anecdotes--about the "trash out" thing. This is because it's exactly the sort of car-crash story the press loves, so it's the sort of thing always in danger of getting overstated (like the "burn outs").

The thing is, "trash outs" have as far as I know existed ever since the invention of foreclosure; they were simply rather rare. Not that most foreclosed homes were ever in pristine condition. But that's the thing: for most of my experience in this business the vast majority of REO damage was in fact due to the mortgagor's inability to afford repairs (indeed, the exploding water heater that damaged several hundred square feet of carpet might well have been the financial catastrophe that sent a struggling household into foreclosure in the first place). The rest was a function of vacancy: either vandalism or simply weather damage like frozen pipes, green pools, brown lawns, etc.

So I'm a touch skeptical about the claim that 50% of REO has "substantial damage" and most of that is willful trashing of the property. It would have been nice for the reporter to supply the details here. I became even more skeptical when I read this:

Lenders see cash for keys as a small price to pay when compared with the cost of repairs. Indeed, the price impact when people damage their houses can be up to 25% of what the home is worth, according to Campbell Communications. (That means a $400,000 home's repairs might cost around $100,000.)

I freely admit it has been a while since my wrinkled reptilian snout has had to read a lot of detailed repair estimates. However, I think I need someone to explain to me how anyone can do $100,000 worth of damage to a three-bedroom two-and-a-half bathroom home with doors that are not wide enough to admit a backhoe. I suppose it's possible, but can the average repair bill be even close to that?

Then there's this:

How many people are biting?

It depends. Cash for keys is not always considered a bargain by homeowners. Losing their home and credit is a heavy burden.

"Most people don't want cash for keys," says the researcher Popik. "They want their credit ratings to stay intact."

Having been assured by all kinds of people that homeowners are just ruthlessly walking away, I'm struggling with the idea that they're too pissed to collect an extra couple grand for the keys. They'd rather "mail them in" and get nothing? Because this might have something to do with their credit ratings? They really think they can make more than $3,000 net ripping out the furnace and selling it on eBay? That's easier than taking a check from the servicer?

My theory is that whenever the emerging popular narratives are this contradictory--homeowners are cold and calculating enough to just walk away from an upside-down investment, but they are also emotional and irrational enough to prefer the revenge of knocking holes in the drywall to getting a check to cover moving expenses; they can afford their mortgages but choose not to pay them, but they also can't afford basic maintenance before the foreclosure; they care about their credit ratings except they don't care about their credit ratings; they are the victims of servicers who won't answer the phone, but they are also bitter people who thumb their noses at a generous check the servicer is offering--we have an excellent opportunity to recognize that:

1. The category "homeowner" is extremely diverse.

2. All kinds of people do all kinds of things for all kinds of reasons, not all of which are obvious to anyone including the people who do these things.

3. Any discussion of "psychology" that assumes a universal, perfectly consistent and easily-predictable human response to falling home values or foreclosures is not a very sophisticated understanding of human psychology (Hi, Dr. Shiller!).

4. Any argument about "bailouts" that seems to depend on characterizing all homeowners in the same way, and imputing to them all the same experiences and motives and the same responses to incentives or disincentives, is not worth listening to.

5. I wouldn't hang a dog on the basis of a survey of real estate agents at this point.

by Calculated Risk on 5/19/2008 11:19:00 PM

“I used to take the weak ones. Now I’m taking the whole herd.”
Boat Repo Man Jeff Henderson

From David Streitfeld at the NY Times: Economic Tide Is Rising for Repo Man

Some people lose their house or their boat to abrupt setbacks: illness, job loss, divorce. [49-year-old Robert] Dahmen, who works as a technology manager for a car manufacturer, belongs to a second, probably larger group: he simply spent beyond his means. He is one of the millions of reasons the consumer-powered American economy did so well for most of this decade, and one of the reasons its prospects look so bleak now.
...
He originally bought a smaller, more affordable boat, but a salesman talked him into an upgrade. “Oh yeah, I said, that would be cool.”
...
The merriment came at a price, though. Toy Box cost $175,000.

... Meanwhile, he lost his condominium when his mortgage readjusted and those payments went up. His 401(k) is down to $9,000.

“I oversaturated myself with long-term debt,” he said. “It was a risk, a calculated risk. I obviously lost.” He is declaring bankruptcy.
...
From now on, Mr. Dahmen said, the consumer economy would have to get by without him. “I have no intention of ever buying anything, ever,” he said. “I don’t think I could if I wanted to.”

There is much more in the article about the boat repo business.

by Anonymous on 5/19/2008 05:30:00 PM

I fear that if the complaint in this case is written with anything like the care and clarity of this press release, Downey probably has little to worry about.

The Complaint charges that Downey and certain of its officers and directors violated federal securities laws by issuing materially false statements regarding the Company's financial results. Specifically, the Complaint alleges that defendants concealed the following: (i) Downey's portfolio of Option ARMs contained millions of dollars worth of impaired and risky securities, many of which were backed by subprime mortgage loans; (ii) prior to the Class Period, Downey had seen Countrywide's growth and had started to get more aggressive in acquiring loans from brokers such that the loans were extremely risky; (iii) defendants failed to properly account for highly leveraged loans; (iv) Downey had very little real underwriting, which led to large numbers of bad loans; and (v) Downey had not adequately reserved for Option ARM loans, which provided that during the initial term of the loan borrowers could pay only as much as they desired with any underpayment being added to the loan balance.

I can't wait to find out what the evidentiary standard is for (ii).

by Calculated Risk on 5/19/2008 05:01:00 PM

From Reuters: U.S. senators say have deal on housing rescue bill

The two top members of the U.S. Senate Banking Committee announced on Monday that they have a deal that will create a multi-billion dollar mortgage rescue fund and a new regulator for Fannie Mae and Freddie Mac.

No specifics yet.

And from the WSJ: New Housing Deal Reached

The committee didn't immediately release details of the agreement and what changes had been made to the bill. The legislation combines the regulatory reforms for government-sponsored enterprises Fannie Mae and Freddie Mac with a proposal to use the Federal Housing Administration to offer up to $300 billion in federal guarantees to help refinance struggling borrowers into new mortgage loans.

by Calculated Risk on 5/19/2008 01:19:00 PM

From DataQuick: Southland home sales highest in eight months

Southern California home sales surged last month to the highest level since August as bargain shoppers took advantage of price slashing. Although some higher-end costal markets also posted gains, the swell in transactions mainly reflects more sales of homes under $500,000 in inland areas where depreciation and foreclosures have been greatest, a real estate information service reported.

A total of 15,615 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in April. That was up 21.9 percent from 12,808 the previous month but down 19 percent from 19,269 in April last year, according to DataQuick Information Systems.

Sales from March to April have risen on average 1.2 percent since 1988, when DataQuick's statistics begin. Although last month's sales total was the highest for any month since August 2007, when 17,755 homes sold, it was still the weakest April since April 1995, when 15,303 homes sold, and the second-lowest April on record. Last month was 38 percent below of the April average of 25,311 sales.

Post-foreclosure homes continued to play a major role in the Southland market. Of all the homes that resold in April, 37.5 percent had been foreclosed on at some point in the prior 12 months, compared with a revised 35.8 percent in March and 4.6 percent a year ago. Across the six-county area, "foreclosure resales" ranged from 26.9 percent of resale activity in Orange County to 52.7 percent in Riverside County.

Last month's upswing in sales was most pronounced for homes priced under $500,000, which accounted for two-thirds of the Southland's sales gain over March. Riverside County, the epicenter of Southland foreclosure activity and price declines, posted the region's only year-over-year sales increase -– that county's first in two years.
...
"Quite a few more buyers stepped off the sidelines last month to snap up homes at substantial discounts relative to the market's short-lived peak," said Marshall Prentice, DataQuick president. "It's no surprise, given the magnitude of the price declines in inland areas and the fact sales have been so amazingly low for so long. We continue to look for evidence of a sales bounce in the mid-priced and higher-end markets along the coast. If the higher conforming loan limits are making a difference in those areas, it's certainly not a large one, at least not as of the end of April."

The median price paid for a Southland home was $385,000 last month, unchanged from March but down 23.8 percent from the peak median of $505,000 in April 2007.
...
Foreclosure activity is at record levels ...
emphasis added

This is interesting. The pickup in sales is mostly in the areas with steep price declines and severe foreclosure activity (like the Inland Empire).

by Calculated Risk on 5/19/2008 12:16:00 PM

From Reuters: US Commercial property price fall most since 2000 -Moody's

Moody's said prices of retail properties have dropped 5.7 percent from their peak in 2007, compared with declines of 3.4 percent for apartment buildings and 2.3 percent for industrial real estate, respectively. Office property prices are down 2 percent from their peak, according to quarterly data.

On a monthly basis, commercial property prices fell 2.3 percent in March, the most since Moody's began collecting the data in 2000.

The CRE bust is here.

by Anonymous on 5/19/2008 10:28:00 AM

Ken Harney reports in the LAT:

The FHA, which for decades has used a one-size-fits-all approach to pricing its insurance on home loans, plans to shift to a "risk-based" system keyed to FICO scores and down payments, beginning as early as mid-July. Private-sector lenders and insurers have priced interest rates and premiums using sliding scales of FICO scores and down-payment amounts since the mid-1990s.

The agency's move, which will cover new applications including "jumbo" loans up to $729,750 in high-cost markets through December, will bring the FHA in line with the private sector's main approach. . . .

Under the old approach, [Montgomery] noted, buyers with stellar FICO scores paid the same premiums as borrowers with poor scores. That amounted to a pricing inequity for applicants who presented a low risk of default on loans and an inappropriate subsidy of applicants who were likely to default.

A study of an entire year's applications turned up the additional fact that the FHA's lower-income borrowers typically had higher FICO scores than those with larger incomes.

"Is it counterintuitive? Yes," Montgomery said.

According to the study, applicants with FICO scores of 680 to 850 had a median income of $48,756 last year, while those with low scores of 500 to 559 had a median income of $53,388. Fair Isaac Corp.'s FICO scores range from about 300 to 850 -- the higher, the better -- and are predictive of future defaults and foreclosures. Even at rock-bottom down payments of 3%, applicants with lower incomes had higher credit scores than applicants with bigger incomes making similar-size down payments.

I would like to get my hands on that study, which I haven't yet found online. (If any of you have a link, please drop it in the comments.) I did locate this HUD document that outlines the actual premium schedule currently proposed; it provides only one chart with aggregated information on income/FICO breakouts for 2007 FHA applicants in the Appendix. You might be interested to know that the original proposal for risk-based premium pricing distinguished between source of downpayment funds, with borrowers using such things as the notorious DAP (seller-funded "assistance") paying higher premiums than borrowers making downpayments from their own funds or a gift from relatives. That provision has been eliminated.

As far as I know, there is better data on relative performance of FHA loans with or without DAP than there is on relative performance of FHA loans with FICOs just over or just under 600. But HUD is forging ahead with FICO-based pricing while pulling back on downpayment-source-based pricing. I'm having some problems with that.

I think it's important to concede that FICOs do indeed have an established track record of establishing relative default probabilities. The trouble we have had recently with FICOs is mostly, in my view, that they were relied on to offset extremely high risk characteristics in loans with a lot of "risk layering." The problem is not that a 90% LTV loan with a 720 FICO won't outperform, statistically, a 90% loan with a 620 FICO. It will, although it isn't always clear that the difference in performance is all that substantial. The problem is that a 100% loan with a 720 FICO will not necessarily outperform a 90% loan with a 620 FICO. The idea that a high(er) FICO offsets lack of downpayment or high DTI is currently dying a painful death.

The difficulty, however, with deciding that a (theoretical) 90% loan with a 720 should pay a lower risk premium than a 90% loan with a 620 (all other things being equal) is the problem of calibration. How significant is the difference in default probability? Of course, with the FHA premiums the question is how significant the difference in default probability is in some pretty small FICO buckets that are already well within the "subprime" or high-default-probability range. For instance, in the highest-LTV group of loans, the new upfront premium is 200 bps for FICOs from 560 to 599 and 225 bps for FICOs from 500 to 559. But is there really a significant difference in default probabilities in these two FICO buckets? Enough to warrant 25 bps in premium? I would really like to see more information on how HUD calculated all this.

Part of what is bothering me is this set of charts provided in a recent Moody's investor presentation. These numbers are based on a representative sampling of loans closed between the first quarter of 2006 and the second quarter of 2007.

This is of course only one data point, but it certainly raises a question in my mind about making FICO-based premium distinctions within the general category of subprime FICOs, particularly since in the new premium scheme a loan with a downpayment made by the builder gets treated the same as a loan with a downpayment coming from the borrower's own funds. I would really like to see the work on this one.

It gets Nerdier from here . . .

by Calculated Risk on 5/19/2008 09:53:00 AM

From the WSJ: Lowe's Posts 18% Fall in Net, Lowers Earnings Outlook

Lowe's Cos. reported an 18% drop in fiscal first-quarter net income and lowered its outlook for the year ...

Looking forward, the ... company lowered its guidance ... with same-store sales expected to fall 6% to 7%.

Chairman and Chief Executive Robert A. Niblock said consumer confidence slipped during the latest quarter and discretionary home purchases were called back, reflecting "the generally poor economic outlook" due to housing pressures, rising food and fuel prices and "a more negative employment picture."

Based on previous housing downturns, there is much more pain to come for the home improvement bust. For a couple of historical charts on home improvement spending, see More on Home Improvement Investment.

by Calculated Risk on 5/18/2008 11:00:00 PM

First a great quote via CNNMoney:

"On the commercial side, best I can tell the problems are in all of it - offices, retail, hotels. I think we will see a prolonged decline."
Kermit Baker, chief economist for the American Institute of Architects, CNNMoney May 17, 2008

Wow. Clearly Kermit Baker is not a NAR economist! I think he is correct, and here is my analysis of three key categories of commercial: office buildings, multimerchandise shopping, and lodging with some estimated declines in investment.

And from a Reuters article: Retail properties dressed for distress

The retail sector is expected to soften through 2009, according to a report by real estate brokerage Marcus & Millichap. The report, obtained by Reuters, forecasts the overall retail real estate vacancy rate will rise 1.4 percentage points this year to 11.1 percent, after a 0.9 percentage-point increase last year.
...
While demand slows, the supply of new shopping centers is expected to continue to grow, albeit at a slower pace. Marcus & Millichap forecasts about 131 million square feet of new shopping centers should be completed this year, down from 145 million square feet in 2007.
...
Properties in once-hot residential markets of southwest Florida; the California's Inland Empire areas, such as Riverside and San Bernardino; Phoenix; and Las Vegas are of particular concern.

"In some of those markets, what you saw were properties that were built to service a consumer base that never materialized," [Spencer Haber, chief executive of H2 Capital Partners] said.

Another great quote: "a consumer base that never materialized".

For more, here is my recent and somewhat lengthy overview on CRE.

by Calculated Risk on 5/18/2008 08:58:00 PM

From the WSJ: PIK and Roll: Companies Seize On Perks of Loose Lending Terms

Last week costume-jewelry retailer Claire's Stores Inc. told investors it intends to pay interest on $350 million of its bonds with additional debt rather than cash.
...
Seven companies have flipped the switch on $2.4 billion in PIK-toggle bonds, according to Standard & Poor's Leveraged Commentary & Data. Univision Communications Inc., which recently tapped its revolving-credit agreement with banks for $700 million in cash, also may switch to paying interest on some of its PIK-toggle bonds with debt, a Fitch Ratings report suggested.

Bonds with PIK (payment-in-kind) toggles are the NegAms of the corporate world. Paying debt with more debt can't be a good thing. This shows how loose the lending standards were for corporate debt.