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Archive for the ‘housing crisis’ Category

Am I the only one or is the fact that the loan to deposit ratios (blue lines) are so high scary?

Bank Health Ratios - Wells Fargo, Citibank, Chase, Bank of America

Bank Health Ratios - Wells Fargo, Citibank, Chase, Bank of America

What happens if the non performing ratio goes up?

Full article: How’s your bank doing?

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Loan Modifications, touted as one solution to the housing crisis, haven’t lived up to their promise. For one thing, they seem quite difficult to get. A cbsnews article suggests this is because of potential problems with the banks’ balance sheet causing by lurking bad home equity loans. The theory goes, if the banks recognized the true value of these loans, the writedowns to their balance sheets would be in the billions, causing losses and a possible need to increase the amount of regulatory capital they have on hand. For those of you that have been following the financial crisis, you’ll know there has been efforts to force the banks to increase the amount of cash they have to offset the amount of money they have lent out in loans. This is what is meant by regulatory capital.

The article shows a Reuters image I’ve captured here.

Bank exposure to unsecured home equity loans

Bank exposure to unsecured home equity loans

This raised some questions in my mind.

  • Why is this impacting requested loan modifications where there is no second lien present? I can understand the reluctance to modify the second lien so that it loses most of it’s value, but I don’t think this explain the many loan modifications that are not getting through as there is no second lien or home equity loan.
  • What the heck is a “unsecured home equity loan”? A home equity loan by definition is secured by real estate. Otherwise it is just a personal loan. So I did some research. Apparently, a home equity loan becomes “unsecured” when the there is no equity to support it (it’s an underwater loan). If this is the explanation I think the “40% writedown” may be too conservative. In distress situations, the second lien is usually wiped out almost completely.

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Troubled homeowners who have gone through a foreclosure or a short sale may have a lurking problem that could cause them problems years down the road. Even though you think you may have put a bad chapter in your life behind you, the lender can still come after you with a deficiency judgment.

A deficiency judgment is when the lender sues you for the difference between the loan amount and the amount they (the lender) realized when the house was sold. Whether it was through a short sale or sold as a bank owned property may not matter.

Yahoo finance published an article that illustrates the problem with several examples. In one, a borrower even signed a document at a short sale closing that gave the lender permission to come after him.

If you are in a short sale, make sure you get agreement (in writing) that the lender will not pursue a deficiency judgment against you. If you have lost a house through foreclosure, whether the lender can come after you will depend on the state the house was in.

If you are in a recourse state, the lender can pursue a deficiency judgment against you. Per The New Republic blog, the non recourse states are Alaska, Arizona, California, Iowa, Minnesota, Montana, North Carolina, North Dakota, Oregon, Washington and Wisconsin. However, even iin these states, a lender may have recourse with second liens and refinanced loans. Regardless, consulting an attorney is needed for advice on your specific situation.

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Strategic defaults are on the rise. The number of “strategic defaults” doubled from 2007 and 2008 (588,000 in 2008) and now comprise more than a quarter of mortgage defaults. I’ve also seen both 16% and 17% quoted.

So what is a strategic default? A strategic default is when a homeowner (presumably includes investors) walks away from his mortgage payment when he or she is still fully able to pay.

Strategic defaulters get special scorn for their actions. Never mind that it would take fully 60 years, in one example, to recoup their losses, you are a deadbeat for walking away according to Henry Paulson (even though it’s a “good business decision” in other arenas).

I wanted a more precise definition of is considered a strategic default, while I’m sure there are situations where it is perfectly clear that the borrower could afford the mortgage, it’s not always a black and white scenario. What if you could scrape together the money every month but it required a second job to do so? If you decided that after a year of insane workweeks you couldn’t keep it up, would you fall into the “strategically defaulting” camp?

Per studies done by Experian and Oliver Wyman people who strategically default have a different profile than the classic borrower in trouble. Borrowers who are strategic defaulters will typically have a high credit score and suddenly default on the mortgage without warning, but on no other debts. Compare this to the typical pattern of financial distress on multiple debts, where the mortgage payment is the last thing that a borrower will give up paying on. Strategic defaulters are typically concentrated in the negative equity markets and often have large mortgage balances.

The exact criteria that Experian-Wyman used to mine 24 million credit histories to find the 588,000 strategic defaults in 2008, is the following: “We define such borrowers as those who rolled straight from current to 180+ [days past due], while staying current on all their non-real estate debt obligations, 6 months after they first went 60 [days past due] on their mortgage.” With this definition, my “second job” scenario I outlined above, would be considered in scope.

The recommendation is to not offer these borrowers loan modifications. I guess the option of offering to reduce the principal balance still appears to be a foreign concept to the lenders.

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What do you do when a property you bought for 5.4 billion is now only worth 1.8 billion? Why you give it back to the lender of course.

Several people who track the commercial real estate market have warned of a coming wave of commercial property defaults that might make the current residential real estate problems look like peanuts. Adding credibility to this claim, Tishman Ventures recently defaulted on Stuyesvant Town & Peter Cooper Village in Manhattan and returned the property to its lenders in a deed-in-lieu arrangement.

With a loan more than double the property value, the action by Tishman makes financial sense. They are not the only ones giving property back to the banks, recently several towers in San Francisco bought by Morgan Stanley at the peak, were returned to the lender. Note the quote in the article: “This isn’t a default or foreclosure situation,” …. “We are going to give them the properties to get out of the loan obligation.”

The Huffington Post, a popular blog, contrasts the Stuyvesant situation with a borrower who is underwater on a mobile home. Entitled “Tishman Speyer Walked Away From Its Stuyvesant Town, Peter Cooper Village Mortgage. Why Can’t You?”, one has to wonder at the double standard here.

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Short sales would appear to be the best answer to a bad situation. The borrower can’t carry the mortgage payments, the loan is more than the house is worth. With a short sale, the lender agrees to take less than the loan in exchange for a buyer that keeps the house off their hands.

Seems like a better solution all around. Short sales reportedly are not as damaging to a credit rating than foreclosure, the legal costs of a foreclosure are avoided, and the bank typically gets more money (especially when the buyer is a retail buyer) than they would through foreclosing on the property, carrying the property and paying the holding costs, and then selling it as bank owned.

However as Robert B. Jacobs writes, the best solution isn’t always what happens. In one case the lender refused to release the seller from being liable for the difference between the selling price and the loan amount. So the property went through foreclosure instead. While foreclosure laws in each state are different, apparently in the state this foreclosure occurred (probably California), the lender lost recourse to go after the borrower for the difference. The saying “cutting off your nose to spite your face” seems appropriate here.

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The Treasury released new guidelines on short sales to “simplify” the process.   The new rules addressed the response period by the bank and second liens.   Starting in 2010 the banks now have 10 days to respond to a short sale offer.   It remains to be seen whether this will become a reality.   Banks are taking months (if not more) to respond to an offer.  The worse offenders are Chase, Bank Of America and National City (which is now PNC).  I know of several deals that have been waiting over 6 months.  So 30 days would be revolutionary, 10 days just simply amazing.

The Treasury also is trying to help out in situations where the second lien holder blocks the deal.  Usually in a short sale the second lien holder ends up taking a lot less or nothing, so many of them are holding out and refusing to take the loss.  The guidelines now caps the proceeds to subordinate lien holders to $3,000.

It really remains to see whether these guidelines will improve the situation.  The loss mitigation departments seem overwhelmed, and quite frankly it does appears that the banks are happy to just sit on the offer and wait.   Delaying means that their books look healthy for one more quarter, and maybe the market will turn around.  Foreclosure would cost them more but that’s not this quarter.  I know of one smaller bank that is refusing all short sales, they are foreclosing and then sitting on the properties, they must have some cash to back this strategy.

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