Home Short Sales Rise in ‘Dramatic Shift’ That May Boost Prices
Oct. 18 (Bloomberg) — U.S. home prices may get a boost from an unlikely source: a pickup in sales of properties in default before they reach the stage where they are repossessed by the bank and sold.
There has been a “dramatic shift” in banks’ willingness to sell a property for less than the mortgage balance to avoid foreclosing, said Ron Peltier, chairman and chief executive officer of HomeServices of America Inc., the second-biggest U.S. residential brokerage.
The transactions, known as short sales, typically change hands at a discount of about 20 percent to homes not in financial distress, compared with a 40 percent price cut for bank-owned homes, according to RealtyTrac Inc. Short sales jumped 19 percent in the second quarter from the prior three months while foreclosure sales were flat, the data seller said.
“Banks have become much more supportive of short sales,” said Peltier, whose Minneapolis-based company is a unit of Warren Buffett’s Berkshire Hathaway Inc. “That’s better for the lenders, who have smaller losses on a short sale, and it’s going to be better for homeowners, who won’t have as much psychological distress as a foreclosure.”
Distressed sales brokered by HomeServices used to be 60 percent foreclosures and 40 percent short sales, Peltier said in an interview at Bloomberg headquarters in New York. Now, that ratio has flipped, according to the CEO, whose company is second in size to NRT LLC, a unit of Realogy Corp. in Parsippany, New Jersey, that owns the Coldwell Banker brand.
Default Backlog
“There’s a huge backlog of homes in default that the banks want to get rid of,” said Thomas Popik, research director for Campbell Surveys in Washington. “They don’t want to be homeowners.”
Banks are being more agreeable to short sales as foreclosures slow following a yearlong probe of so-called robo- signing, or pushing through unverified default documents. Foreclosure filings have fallen for 12 straight months through September as banks work through a backlog of paperwork, according to RealtyTrac.
Almost a third of all home transactions in August were foreclosures or short sales, according to the National Association of Realtors. While short sales were flat compared with a year earlier, the trade group’s count only includes deals completed with a broker, and short sales often are handled directly with lenders.
Quicker Approvals
Banks are not only approving more short sales, they’re doing it in less time. In the second quarter, short-sale homes, also known as pre-foreclosures, sold an average 245 days after default, down from 256 days in the previous period, according to Irvine, California-based RealtyTrac. That reversed three straight quarters of increases.
The time frame remains a lot longer than traditional sales. In a normal transaction, a buyer bids on a home and gets a decision from its owners within days, if not hours. Getting a bank response to a short-sale offer can take two months or more.
“No matter how streamlined a short sale may be, it’s always going to be a frustrating experience,” Popik said. “Too many people are involved — investors, servicers, owners, real estate brokers, mortgage insurance companies.”
Half of troubled mortgages have so-called second liens, such as home equity lines of credit, according to the Treasury Department, so there may be two mortgage holders with a stake in a short sale. If the property has mortgage insurance, that company may be involved in the negotiations as well.
Neighborhood Values
Because short sales typically are occupied soon after the deal, neighboring properties take less of a hit in values, according to Popik. Prices for distressed homes often are used by appraisers to gauge surrounding values, even if the nearby homes aren’t in default. Also, owners who voluntarily give up their homes tend to leave them in better shape than people who are evicted, reducing costs for banks, he said.
“Anytime a short sale can be substituted for a foreclosure, it’s going to prop up prices and it’s going to cut losses because it’s going to sell for more,” he said.
Home values have declined 31 percent in the last five years, according to the S&P/Case-Shiller index of values in 20 U.S. cities, as competition from foreclosures pressures sellers to lower their asking prices. The resulting crash was worse than the 27 percent plunge in values during the Depression, said Stan Humphries, chief economist of Zillow Inc., a Seattle-based real estate information company.
Underwater Borrowers
The drop in home values has pushed almost a quarter of U.S. mortgage borrowers underwater, meaning their debt is more than their homes are worth, according to a report by CoreLogic Inc., a real estate data company in Santa Ana, California. That so- called negative equity prevents owners from conducting traditional deals because they would have to pay the difference between their loan balance and the sale price.
Short-sellers can negotiate with banks to forgive the unpaid portion, according to Steve Beede, an attorney in Fair Oaks, California, who specializes in dealing with loans in default. Even if they succeed, a second-lien holder in most states can pursue people for mortgage-payoff shortfalls, he said.
Banks are starting to “get their act together” with short sales, said Cameron Novak, a broker with The Homefinding Center in Corona, California. The company handles about 15 of the transactions a month, he said.
“There’s been improvement in the last few months, and response times are getting to be a little quicker,” Cameron said in a telephone interview. “It’s about time.”
To contact the reporter on this story: Kathleen M. Howley in Chicago at kmhowley@bloomberg.net .
To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net .

Today’s economic news actually became totally irrelevant once pre-market
trading pointed towards a weak morning in stocks. Neither of today’s releases is
considered to be highly important to the markets, so the sizable losses in
stocks are the main influence on today’s bond trading and mortgage rates. This
will likely be the case tomorrow also with nothing on the agenda to detract from
the stock volatility or fuel confidence in the economy. Accordingly, look for
the stock markets to give us a good indication of which direction mortgage rates
are headed the rest of today and tomorrow.

Just in case you are tracking the economic data we did get today, the Labor
Department said that 423,000 new claims for unemployment benefits were filed
last week. This was a decline from the previous week’s revised total of 432,000,
hinting that the labor market was a bit better last week than the previous.
However, it was still a larger number of claims than many had expected, making
the data favorable for the bond market and mortgage rates.

The Conference Board released its Leading Economic Indicators (LEI) for
August, with an announcement of a 0.3% increase. That means the data is
predicting some economic growth over the next few months, but nothing that is
alarming to the bond market. The increase was a little higher than forecasts, so
we can consider the data negative for bonds and mortgage pricing. Fortunately,
this data does not draw enough attention, especially on such a volatile day in
stocks, to impact today’s mortgage pricing.

Let’s see how the afternoon goes for stocks. If they are able to gain some
momentum during afternoon hours, we could see a much calmer open tomorrow that
may lead to bonds giving back a little of today’s gains. At the moment, that
doesn’t look like a viable possibility, but with two days of sizable losses in
the major indexes, I would not be surprised to see some stabilization tomorrow.
That may mean an end the latest rally in mortgage rates, at least for the next
few trading days. Therefore, we may want to shift to a lock recommendation for
mid-term periods if we do indeed see anything but more weakness in stocks
tomorrow.

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report

By: Peter Miller, www.HSH.com May 10, 2011

Do you remember when the recession ended? That would be in June 2009, at least according to the National Bureau of Economic Research.

Still waiting on things to get better

When recessions end the reasonable expectation is that things will get better. That has certainly been true for some sectors of the economy, say large financial institutions and major oil companies, but not for all.

Another expected byproduct of better times should be higher interest rates. After all, in an expanding economy there should be more competition for dollars as companies expand, so mortgage rates and other financing costs should trend higher.

Given this background it’s surprising that mortgage quotes remain around 5 percent. This is good news for those who want to buy property or refinance, but in a broader sense perhaps the news is not so good.

Less demand=lower mortgage rates

“Declining home prices and a high level of foreclosures continue to affect housing tenure decisions,” said Frank Nothaft, Freddie Mac’s chief economist. “Between the third quarter of last year and the first quarter of 2011, the housing stock experienced a decline of nearly 400,000 homeowners on net, according to the Census Bureau. However, the National Association of Realtors reported that during the same period there were almost 700,000 first-time homebuyers, which suggests gross losses may have been closer to 1.1 million homeowners over the October-through-March timeframe.”

So if there are 1.1 million fewer households seeking mortgage loans, then we have less demand and therefore little leverage to push up mortgage rates.

Low mortgage rates can only do so much

Low mortgage rates should be a marketplace stimulus, but to take advantage of such interest levels, borrowers need to have jobs, steady income and robust savings. In too many cases, that’s not the reality.

In the past few years, millions of homeowners have been foreclosed on. The end result is that we now have a large population of people who are effectively excluded from the housing market for the next five years or so. Although these people have been foreclosed on, their old homes continue to exist and they must still live somewhere. In addition, we have millions more who have not seen a pay increase in either real or cash terms and thus cannot act on today’s low mortgage rates.

Meanwhile, the federal funds rate–the rate banks charge each other for overnight loans–is at between 0 percent and 0.25 percent, while the discount rate–the rate banks are charged to borrow from the Federal Reserve–is at 0.75 percent.

Businesses not expanding, few jobs being created

In other words, there are huge amounts of cash available for expansion and development, but businesses either are not getting the money or are electing not to spend on expansion. The result is that unemployment remains stubbornly high and home prices remain stubbornly low.

An interesting example of this lack of expansion concerns the company 3M. Earlier this year, the company announced that the best possible use of $7 billion was to buy back its own stock:

“Today’s announcement reflects the strength of our business model and our confidence in the future,” said George W. Buckley, 3M chairman, president and CEO. “Our strong balance sheet and outstanding free cash flow allow us to fund growth investments and continue our legacy of returning significant cash to shareholders.”

Over the past five years, says the company, 3M “has returned over $15 billion to shareholders through a combination of dividends and share repurchases. 3M has paid dividends to its shareholders without interruption for more than 94 years.”

But about that $7 billion: there’s no research, no factory expansion within the U.S., no acquisitions, and no additional marketing which represents a better use of all this money?

How about taking $500 million–a pittance–and starting a job-creating, energy-efficient home builder using 3M products? Or how about spending $1 billion to extend low-rate mortgages to all 3M’s U.S. employees, even those who don’t get executive bonuses? Or $2 billion to winterize 80,000 Minnesota homes so thousands of local workers could be employed?

So yes, the recession may be officially over–but certainly not for everyone. And that’s one important reason why mortgage rates remain so low.

Peter G. Miller is syndicated to more than 100 newspapers and operates the real estate news site, OurBroker.com.

Updated on May 16, 2011 11:09:26 AM EDT EST Monday’s bond market has opened in negative territory, extending Friday’s late selling. The stock markets are showing minor losses with the Dow down 10 points and the Nasdaq down 8 points. The bond market is currently down 4/32, which should push this morning’s mortgage rates higher by approximately .125 – .250 of a discount point over Friday’s morning pricing.

There is no relevant economic data scheduled for release today. Therefore, look for the stock markets to have the biggest influence on this afternoon’s mortgage rates also. If the major indexes move well into positive ground, we could see bond prices fall further and mortgage rates revise higher later today.

The week’s first data is April’s Housing Starts early tomorrow morning. This data measures housing sector strength and mortgage credit demand by tracking newly issued permits and actual starts of new home construction. It is expected to show an increase in new starts from March’s readings. Since this report is not considered to be of high importance to the bond market, it likely will have little impact on mortgage rates unless it varies greatly from forecasts.

April’s Industrial Production will also be posted tomorrow morning. It measures manufacturing sector strength by tracking output at U.S. factories, mines and utilities. The 9:15 AM ET release is expected to show a 0.5% increase in production, indicating that manufacturing activity is growing. A smaller than expected increase in output would be good news for the bond market and mortgage rates because it would indicate that the manufacturing sector is not as strong as thought. This report is equally important to the markets as the earlier housing report, so they both will likely need to show unexpected strength or weakness for them to cause a sizable movement in mortgage rates.

Overall, it looks like we may see a fairly calm week in mortgage rates unless something unexpected happens or the stock markets make a big move upward or downward. I can’t really label one particular day as the most important one. If the stock markets remain fairly calm, I would guess the middle part of the week will probably be the most active for mortgage pricing. However, sizable gains or losses in the major stock indexes could influence bonds and mortgage rates more than this week’s economic data can.

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