by Calculated Risk on 7/30/2008 03:28:00 PM

Mathew Padilla at the O.C. Register directs us to three foreclosure maps:

Notices of default by ZIP

Foreclosure density

Foreclosure percentage gains by ZIP

Click on graph for larger image in new window.

I've taken a portion of the current foreclosure map and animated it with the rate of increasing foreclosures. (click on map for animation)

This shows that foreclosures are spreading to the higher end areas of Orange County.

Although the high end areas will never have the elevated foreclosure rates we are seeing in the low end areas, it makes sense that the foreclosure crisis would spread. When I talked about this at the Inman Real Estate conference last week - and suggested agents should expect increasing foreclosures in high end areas - my comments were greeted with incredulity.

I wish I had this map with me.

On that topic, here is a repeat of a cartoon from Eric G. Lewis:



Eric G. Lewis is a freelance cartoonist living in Orange County, CA (used with permission).

Eric drew this cartoon in 2007, when many people in south Orange County, CA were stunned that prices could fall in their areas.

by Calculated Risk on 7/30/2008 11:27:00 AM

*** The post title is from Tanta.

President Bush signed the housing bill this morning. One of the provisions is for the elimination of Down-payment Assistance Programs (DAPs) for FHA loans.

The WSJ has some stats on how widespread DAPs had become: Builders Feel Pinch of Key Omission From the Housing Bill

[F]or the builders, the bill's elimination of seller-funded down-payment assistance on mortgages backed by the Federal Housing Administration is a big loss -- one that could eliminate as many as one in 10 home buyers from the market ... Starting in October, buyers using FHA loans can no longer accept down-payment "gifts" that are ultimately funded by the home seller, often a builder.
...
Miami-based Lennar Corp. used down-payment assistance on 33% of the mortgages it originated in the second quarter, while Ryland Group Inc. said 18% to 20% of its buyers used down-payment assistance during the first half of the year.
...
"There will undoubtedly be some impact, but we believe the buyers will adjust and the market will adjust," says Tim Eller, the chief executive of Centex Corp, which said that 25% of its sales in its fiscal year ended March 31 involved down-payment assistance.

Eliminating DAPs is a positive for the economy and housing. FHA loans using DAPs had significantly higher default rates than when the buyers actually made a down-payment.

"One in 10 home buyers". Wow. Not all of these buyers will disappear. Some buyers had the ability to make a down-payment, but used a DAP instead simply because they were available. Other buyers will borrow from parents and friends or will wait until they save the 3.5% down-payment.

The good news is default rates should decline on FHA loans.

by Anonymous on 7/30/2008 10:04:00 AM

If you haven't yet had a chance to read this article by John Gittelsohn in the Orange County Register about a real estate sale that was financed by Wells Fargo in January of this year, please do so now. And if you were, like most people, working on the assumption that lenders and other industry participants had at least cleaned up their acts in time for the 2008 mortgage vintage to be worth something, think again.

There isn't any significant fact about this transaction I can identify that isn't a red flag. A home in a foreclosure-wracked neighborhood was purchased at foreclosure auction in October of 2007 for $304,500, just over half what the defaulted buyer had paid in 2006. In January of 2008, the house was flipped to a non-English-speaking couple for an apparent sales price of $625,000 after some "sprucing up" by the property seller.

Ridiculous? Sure. It turns out that the seller provided the $125,000 down payment, and also executed an "addendum" to the sales contract agreeing to pay the buyers $30,000 in cash, cover the borrowers' first three mortgage payments, and toss in a 52-inch TV. Subtract out all that, and the true sales price of the property was $460,000. But apparently nobody did subtract out any of that, because Wells Fargo made a $500,000 loan to these buyers to purchase this property.

The OC Register reporter, bless his heart, tracked down the various parties who had their hands in this transaction, and got the following comments:

From the mortgage broker who put the deal together: "Whatever agreement the buyer and seller made, it was between them."

From the appraiser who dutifully came up with a value of $625,000: "Like Sanchez, she had no knowledge of the terms of the sale."

From the escrow agent who closed this loan: "It sounds to me like the seller helped out," she said. "If someone gave them $125,000, what's the problem? That's a beautiful thing, if you ask me."

From Wells Fargo: "In many instances, borrowers are able to use gifts from family members or friends for a portion of their down payment, provided the amount and source of the gifts are documented."

Excellent point, Wells Fargo. Too bad in this case the down payment didn't come from friends or family members and wasn't documented. Too bad that the broker who originated the loan seems to think the details of the purchase contract aren't any of his business. Too bad your escrow agent doesn't care where the down payment money came from, either. Too bad your appraiser has apparently never heard of the Uniform Standards of Professional Appraisal Practice, to which she is obligated to conform if she wants to do appraisals for Wells Fargo, that say she is required to inquire into "the terms of the sale."

I don't think the real issue with this story is the problem of whether or not to use foreclosure or "distressed" sales as comparables in an appraisal report. The problem is that there are no comparable sales of any kind that are a reliable measure of market value if they all involved transactions in which nobody ever actually bothered to verify and analyze the terms of the sale.

If this is the level of elementary due diligence we can expect after the most atrocious mortgage blowup in history, what will it take to scare people into doing their jobs?

by Calculated Risk on 7/30/2008 09:15:00 AM

From the Fed: Federal Reserve announces steps to enhance the effectiveness of its existing liquidity facilities

Actions taken by the Federal Reserve include:

Extension of the Primary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility (TSLF) through January 30, 2009.

The introduction of auctions of options on $50 billion of draws on the TSLF.

The introduction of 84-day Term Auction Facility (TAF) loans as a complement to 28-day TAF loans.

An increase in the Federal Reserve's swap line with the European Central Bank to $55 billion from $50 billion.

In light of continued fragile circumstances in financial markets, the Board has extended the PDCF through January 30, 2009, and the Board and the Federal Open Market Committee (FOMC) have extended the TSLF through that same date.
emphasis added

The PDCF program - that allows investment banks access to the discount window - was set to expire in September. The credit crisis continues ...

by Calculated Risk on 7/29/2008 08:39:00 PM

From Jim the Realtor (4 min 16 sec): A Countrywide REO, 3br/2ba, 1,100sf house sold for $465,000 in 2005, now being offered for $180,900. That is 39% of the 2005 price (61% off).

Vista is an improving area (in general), although this is a low end area. It's hard to believe someone paid $465,000 for this in 2005!

by Calculated Risk on 7/29/2008 08:03:00 PM

Just to post the official announcement.

From the LA Times: Mervyns department stores files for bankruptcy

"After careful consideration of available alternatives, the company's management board determined that a Chapter 11 filing was a necessary and prudent step that allows us to operate our business without interruption as we seek to restructure our debt and other obligations in a controlled, court-supervised environment," John Goodman, Mervyns chief executive officer, said in a statement.

It sounds like they will try to continue to operate.

by Calculated Risk on 7/29/2008 05:19:00 PM

"The housing market worsened in the June quarter, and I don't expect to see it improve this fiscal year,"
Tim Eller, chairman and CEO of Centex Corp.

Note that Centex's fiscal year starts in April, so the CEO is seeing no improvement through March 2009.

From Centex: (hat tip Ken) Centex Reports First Quarter Results

Fiscal 2009's first quarter revenues were $1.13 billion, 41% lower than the same quarter last year. The loss from continuing operations for the first quarter was $169 million ... up from a loss of $132 million ... in the previous year's fiscal first quarter. Included in the first quarter of fiscal 2009's loss from continuing operations are $80 million of impairments and other land-related charges, including the Company's share of joint venture impairments.

The land impairments continue.

From the Centex Investor Materials (from 8-K filed with SEC):

Market conditions worsened in the quarter

Foreclosures are rising

Employment is weakening

Consumer confidence is waning

Mortgage qualification standards are tightening

Traffic and sales have diminished

Not exactly the most positive investor material I've seen!

Also, Centex is one of the companies I use to track changes in cancellation rates. They didn't report cancellations in the 8-K, so we will have to wait for the 10-Q. Cancellations had been trending down for Centex, but with these very negative comments, we might see another increase in cancellation rates.

by Calculated Risk on 7/29/2008 05:13:00 PM

A little spillover from the Merrill Lynch CDO sale ...

From Bloomberg: Citigroup Markdowns May Rise $8 Billion, Analyst Says

Citigroup Inc. will probably write down the value of collateralized debt obligations by $8 billion in the third quarter, Deutsche Bank AG analyst Mike Mayo said ...

by Calculated Risk on 7/29/2008 03:53:00 PM

As part of the monthly house price release, Case-Shiller presents tiered price indices for 20 major cities.

The following graphs are for Los Angeles using both nominal and real (inflation adjusted) prices.

Click on graph for larger image in new window.

The first graph shows the nominal Case-Shiller prices for homes in Los Angeles.

The low price range is less than $401,614. Prices in this range have fallen 36.5% from the peak.

The mid-range is $401,614 to $606,600. Prices have fallen 29.8%.

The high price range is above $606,600. Prices in this range have fallen 20.0% from the peak.

The second graph shows the same data in real terms (inflation adjusted using CPI less shelter).

Looking at the data in real terms probably provides a better idea of how much further prices will fall. If prices fall to the January 2000 level in real terms (shown as 100 on the graph), then the high end has fallen about half way from the peak, and the low end about 2/3 of the way from the peak in Los Angeles.

I've noted this before: In a number of previous housing busts, real prices declined for 5 to 7 years before finally hitting bottom. That is my expectation for the duration of the price declines in the bubble areas. The bottom for real prices will probably be in the 2010 to 2012 period. The less bubbly areas will probably bottom sooner.

If this bust follows the historical pattern, we will continue to see real price declines for several more years, and the rate of decline will probably slow (imagine somewhat of a bell curve on those graphs).

by Calculated Risk on 7/29/2008 02:42:00 PM

More to come ... all is OK here. We were definitely rockin'

USGS is calling it 5.8.