The Skinny

Foreclosures Down from Last Month, Up From Last Year

Minnesota home foreclosures in 2008 are currently on pace to beat 2007, which itself was a record year. A short but informative Star Tribune article digs into the numbers from RealtyTrac:

"The number of June filings in Minnesota was 75 percent higher than in June 2007, but 23 percent lower than in May 2008."

75 percent higher, folks. So clearly we're not out of the woods yet. This is a market reality that we're likely going to have to live with for the next few years. There is a silver lining to these numbers, though:

"...one in every 1,348 Minnesota households received a foreclosure notice in June -- considerably better than the nation as a whole, where one in every 501 households entered foreclosure."

Overall, Minnesota ranks 29th amongst the 50 states in our foreclosure rate, down from 25th last month. The highest foreclosure states are those areas which saw the biggest price appreciation and now have damaged affordability—Nevada, California and Arizona. For perspective, Nevada saw foreclosure proceedings begin for one in every 122 households in June, and California was close behind at one in every 192 (from a Reuters article).

While we're on the subject, keep your eyes open in the next two weeks for an updated Q2 market report on Twin Cities foreclosures and short sales. For a friendly reminder, here's a link to the Q1 report.

Seller-Financed Down Payment Assistance: Friend or Foe?

When zero-down mortgages were all the rage during the boom years, eager buyers with little savings understandably took advantage. In the present day—after two years of huge bank losses brought upon by rising foreclosures, short sales and loan defaults—well, let's just say that lenders aren't exactly looking to give away free money without a little collateral in return.

So zero-down mortgages must be gone, then, right? Well, no, actually.

Zero-down mortgages are effectively gone in the conventional mortgage market, with at least a 5% down payment required on loans in that sector for even those with credit that sparkles like Vanna White's teeth. However, zero-down mortgages are alive and well in the FHA mortgage market, just in a slightly altered state, through the infamous seller-funded down payment assistance programs (DAP).

Most of you are likely familiar with this method, it having been in existence for quite some time, but it bears a re-visit considering its recent revival from the dead and renewed prominence.

Scenario: A buyer wants to buy a property but has no money to put into the loan for collateral. FHA loans "require" a 3 percent down payment for approval. To circumvent this financial hurdle, the buyer asks the seller of the property to "donate" 3 percent of the purchase price to a non-profit like this one or this one who specialize in down-payment assistance. After collecting a small fee for their trouble, usually a few hundred bones, the non-profit then "donates" the 3 percent back to the buyer, who uses it as a down payment on the loan they could previously not be underwritten for.

Some have called it legal money laundering. Others call it the best hope for first-time buyers in this challenging housing market.

Since the traditional credit markets constricted last year, DAP has had its cobwebs dusted off and been pulled from its spot at the back of shelf. From a recent WSJ article:

"The FHA estimates that down payments provided by nonprofit groups account for 34% of all 200,000 loans backed by the FHA so far this year, up from 18% in all of 2003 and less than 2% in 2000. And the agency says that borrowers are two to three times as likely to default on their payments when they receive a down payment from a nonprofit."

And aye, matey, there's the rub. Some claim that the trouble with DAP and it's rebirth in 2008 is that it only leads to the same ailment our market is already trying to recover from: foreclosure. Here's a chart from the very same WSJ article:

Note the 15+% loan default rate on DAP loans, a big difference from the roughly 6% default rate for traditionally borrowed FHA loans.

The FHA has even publicly proclaimed that it wants to eliminate DAP in the months ahead for fears of becoming insolvent, necessitating public taxpayer support to keep their loans serviced:

"The Federal Housing Administration expects to lose $4.6 billion because of unexpectedly high default rates on home loans, officials said Monday.

Brian D. Montgomery, the F.H.A. commissioner, attributed the unanticipated losses primarily to the agency’s seller-financed down payment mortgage program, which has suffered from high delinquency and foreclosure rates in recent years."

Whether or not the FHA is successful in removing DAP from its offerings remains to be seen. As a highly regulated public entity, simply wishing something away isn't that easy.

Regardless, what do you think? With some claiming that lending standards have gotten too tight already and others claiming that they're not tight enough, where does DAP fit in to the discussion? Friend or foe?

For an "uber-nerd" look at how DAP works, check this: DAP for Uber-Nerds.

Weekly Market Activity Report 6.23.08

Home sales are continuing along a relatively smooth course so far this summer, with newly signed purchase agreements (pending sales) increasing by 3.8 percent over last year for the week ending June 14. Over the last six weeks, pending sales are behind the same time period in 2007 by only 30 sales, or 0.6 percent. When you compare that to the consistent 15–20 percent declines of the last few years, this is welcome news.

Simply matching last year's numbers does not allow home sellers to celebrate recovering buyer interest in their properties. Plus, we need to keep some perspective on what types of sales are comprising this new stabilization of activity. A hearty 27.9 percent of purchase agreements from the last six weeks were made on lender-mediated foreclosures or short sales. Buyer activity is being propped up by the increased market share of these types of properties.

Traditional sales over the same six-week period are down 21.0 percent from last year, while lender-mediated sales are up 284.5 percent from 406 sales last year to 1,561 this year. So the traditional seller still faces some challenges—and some new and very different competition.

All told, heavy buyer interest in lender-mediated properties is viewed as a positive sign. We need the prevalent lender-mediated inventory to be absorbed before our market can return to some semblance of order. The sooner these properties are worked through the market cycle, the sooner that the mist of uncertainty they bring to negotiation, appraisal and home value will lift.

How Much Has Affordability Really Improved?

One of the chief causes of declining home sales in both the Twin Cities and national housing markets was the troubling affordability picture. As we've discussed countless times before, consumer income was outpaced in growth almost three-to-one from 1992 to 2005:

This is the the darker side of the boom-year housing price increases. To use formal economics terminology, home values got so crazy-out-of-wack with consumer income that the writing was already on the wall for our housing market far before the credit crunch and dampened consumer confidence added fuel to the downward trajectory. Those are just instances of adding insult to injury, really.

So it stands to reason, then, that if affordability were to improve then buyers would have reason to flock back en masse and restore a semblance of balance to the market proceedings. Right? Right (assuming they can now save for a down-payment and come to the table with good credit).

So it has been with great joy that we've watched our Housing Affordability Index (HAI) figures increase over the last two years, brought up to higher, healthier levels by falling home prices and relatively stable interest rates. The picture being painted was one of an attractive, low-cost environment with affordability levels unseen since 2003.

But let's think about this further.

After perfecting the foreclosure and short sale search methodology used in our recent report on the subject, we can parse out those types of properties from the general population. This gives us an important new layer to this picture.

The hearty price declines in our data that were so crucial to improving the affordability picture aren't being experienced uniformly. The increased market share of foreclosures and short sales has been dragging our overall median price down, all while the traditional, non-lender-mediated home has only seen a slight decline in value. Like this:

The major gains in affordability can be found in the foreclosure and short sale market. So perhaps a more accurate way to describe the current Twin Cities affordability picture is that a segment of the market has seen dramatic improvements in affordability.

If affordability is crucial to our market recovery, but is still a troubling issue in the traditional sales market, it could very easily mean further price declines are in-store for the non-bank-mediated market.

An alternative opinion is that the differences between the two property types are so severe that today's real estate consumer is willing to pay more for a traditional property than a lender-mediated one. I'm not sure I have the answer as of yet as to which theory sounds more compelling.

All we can say for certain right now is that the affordability picture is still a little more complex than we'd originally thought.

Reactions from the Blogosphere to "Foreclosures and Shortsales in the Twin Cities Housing Market"

As you probably already know, last month we released "Foreclosures and Shortsales in the Twin Cities Housing Market" -- a special research report that examines the growing prevelance of these lender-mediated properties, using a unique new methodology to track them in MLS data.

We all knew that reactions to the report would likely be passionate, thoughtful and important. With Web 2.0 advances giving us all new platforms with which to share ideas, we can now view these reactions publicly, on the infamous interweb through blog posts, follow up comment discussions, message boards, etc.

In the interest of spirited debate and intellectual curiousity, here's a few notable blog reactions to the report:

• Behind the Mortgage is a great Twin Cities mortgage blog. The 14 comment responses to this initial post on the report run the gamut from perplexing oversimplification and negativity to thoughtful debate. Click here to view.
• Calculated Risk is a national housing and economy blog with a robust daily viewer constituency. Though based in Southern California, they took an interest in our report, posted a well-done blog post that digs into Minneapolis Case-Schiller Index data, and immediately provoked 88 comments from around the country. Click here to view.
• Over at the Web Digs blog, a frustrated seller saw the report as a welcome sign. Click here to view.
• Aaron Dickinson, the report's co-author, has posted several engaging items on his blog, Twin Cities Real Estate Blog, that build upon the data of the report and dig further into the subject. Click here to view.

Any we missed? Let us know.

Policy and a Pint

If you listened to 89.3 The Current anytime in April or May, you likely heard this: "Everyone knows the mortgage market is in crisis and that it's dragging down the rest of the economy. But what caused it? How can we get out of it? And how can homeowners and potential buyers in Minnesota protect themselves?"

That was the call to action for a May 15 "casual gath" at the Varsity Theater in Dinkytown called "Policy and a Pint," a periodic event cohosted by the Citizens League and 89.3 The Current that involves yummy appetizers, comfortable couches, and, yes, beer. I had a pint of Grain Belt Premium.

Richard Todd from the Federal Reserve and personal finance writer Kara McGuire from the Star Tribune were on hand, and the event was moderated by 89.3 The Current DJ Steve Seel.

Before things really got going, Richard Todd thankfully echoed a message MAAR has been sending for a couple of years now:

"There just isn't one story," he said. McGuire backed up that notion with a funny little foray into blame gaming. She pulled out a sheet of paper and rattled off a list that included mortgage brokers, the lending industry, Wall Street, rating agencies (Moody's, The Fed), regulators, and the buyers themselves (as part of "irrational exuberance"). Kara called today's situation an "ugly cocktail of events."

The event was titled "The Mortgage Meltdown" so lending was the primary topic of the day. There was some foundation-laying talk about adjustable rate mortgages, Fannie Mae, Freddie Mac, credit scores, and foreclosure. Todd, again, offered a learned voice to the cyclical nature of homeownership and pricing.

It was noted that people in the mortgage industry expect to see an explosion in FHA loans, maybe because these loans don't look so closely at credit scores. All the same, folks can now expect 5 to 10 percent down and proof of viable employment to be the norm. With home prices still not in the same ballpark as incomes for a lot of metro residents, even 5 percent could be a problem.

Why are buyers waiting to take advantage of this incredible buyer's market? Maybe they aren't waiting. Maybe they simply don't have the money. A down economy means a down economy, yo, and sometimes a $600 economic stimulus check represents just a month of gas and groceries, not the earnest money for an offer on a new home.

The question-and-answer session was terrific. Like this:

How come someone who can't afford their $150K home gets pushed into foreclosure by a spiking ARM and then the bank turns around and sells to someone else for $50K? Why not just restructure the loan rather than allowing this emotional and financial loss?

The answer is complex, of course, but the basic reasoning is because many banks believe they would just be extending the inevitable for the homeowner in trouble. If they got into the mess in the first place, they are likely to do so again. Still, loan modification products are out there and may see an increase if the foreclosure numbers continue to head upwards beyond basic irresponsibility.

The rental market came into question as one attendee noted that his rent just went up $100. "It's important to maintain a healthy renter market," said Todd. There is, however, a feeling that rents are on the way up as more people seem to be remaining in rentals, whether by choice or force of market. It was suggested that we can expect to see a return to favor of contract-for-deed and rent-to-own arrangements.

There was an event afterparty hosted by the Citizens League at the Loring Pasta Bar in a private room on the second floor. I had a Fat Tire, talked to some PR people and some homeowners, and, overall, had a much better time than I thought I would. More on that tomorrow.

Realtors and Banks: Can't We All Just Get Along?

With foreclosures and short sales becoming more than just a passing foot-note in the Twin Cities housing market, lenders and banks are being forced to dip their toes in waters they'd likely rather avoid.

Whether they like it or not, they're being forced to sell real estate.

This is causing some growing pains, naturally. Financial institutions haven't structured their day-to-day operations to sell real estate, nor is that a business they've typically shown any sustained interest in. Marketing, staging, luring buyers, negotiating the purchase and handling the legal minutiae of title transfer are not exactly in their wheelhouse. In a perfect world, they'd likely be content with just sticking to their bread and butter -- lending and receiving money.

So what happens when organizations not well-equipped to perform a crucial task are asked to perform that crucial task with increasing frequency? Everyone gets a little testy, of course.

The common refrain from the Realtor community is that dealing with banks who represent foreclosures and short sales is far more difficult than working with a traditional seller. The litany of complaints typically centers around the bureaucratic delays, the interminably long waits, the indifference, the unwillingness to negotiate, etc. Local real estate blogger Teresa Boardman explains her own sob story:

"Recently while dealing with a bank on a short sale I could not reach the employee in charge of the file.  I was told that he was the only one that I could talk to about the particular property.  His voice mail box would not accept messages, because it was full.  He was on vacation, but I had no way of knowing that."

These are common and legitimate gripes, or "beefs."

The resounding response from the lender community is that foreclosures and short sales are sticky, expensive situations which require due diligence and thorough research and review—thus necessitating a longer wait time and a little bit of patience. Over at the Calculated Risk blog, they're firing back:

"Is it the job of the Loss Mitigation Department to care about clearing your local RE market? No. Is it their job to care about keeping your buyer wiggling on the hook long enough to get papers signed? No. Is a short sale supposed to be a painless alternative to foreclosure for anyone involved? No. There are no painless alternatives. There shouldn't be. There cannot be."

This too, is a legitimate beef.

Yes, purchasing foreclosures and short sales can be a time and labor-intensive process, prone to longer waits and confusion. Yes, this does introduce another element of uncertainty to the local market that it doesn't need.

But no, it's likely not going away anytime soon. And banks and lenders, like everyone touched by foreclosure, are honestly trying to stop the bleeding any way they can. The only real elixirs to this mess are time, patience and some empathy. Here's to hoping that both sides can meet halfway on the first two and actively engage in the third.

"Jingle Mail"

With home values around the country in decline, being "upside down" on one's mortgage is far more common these days.

Some estimate that 5-10% of American homeowners are in some form of negative equity, with the potential for more to fall into that category in 2008 and 2009 as home values are dragged down by the increasing market share of lender-mediated foreclosures and short sales. If you're a homeowner, owing more on your mortgage than your home can fetch on the open market puts you in a tough position—especially if you have an unexpected and extended loss of income.

So what options does an upside down homeowner have?

Option # 1: Suck it up, work through it, make the payments, wait out the tough market and enjoy your home all the while.

Option # 2: Walk away from the mortgage and all obligations, leaving your credit damaged but your lender holding the bag.

Beyond a simple sense of obligation to do "what's right," what would really keep a distressed homeowner from choosing Option # 2? The economic incentives in this scenario are structured such that walking away from a monthly cash obligation on a declining asset might actually justify the sizable dent in your credit score. So does that mean that across the country from sea to sea there are mass legions of consumers voluntarily going back to renting? That there's hundreds of thousands sending their lender the dreaded "jingle mail," so named by the sound of keys to the now-abandoned home rattling around in the packages in the lender's mailbox?

According to many, no. Filed under "Fake Trends," the Free Exchange Blog from The Economist tackles the issues surrounding this myth and directs us to some relevant web content. Click here to view the full post; it's worth the read.

In sum, people respond to far more than just economic incentives (emotional and social incentives are insidiously powerful) and, perhaps more importantly, buy houses for reasons that extend beyond their financial benefits.

In other words, owning a home is not like owning a stock. No one's particularly enamored with the idea of owning Apple stock on principle alone (unless, I suppose, you have one of these). Most own Apple stock solely because it's a good investment for their financial portfolio.

Homes are different. They're where where we live, sleep, eat, breath and drink beers on our back porches. The fact that you get to build a little wealth in your back pocket over a long period of time is a nice bonus, but it's not necessarily the main attraction.