Loan Re-set Volume Challenges

[andviv]

From the NCE newsletter:

The foregoing chart shows that the largest number of loan re-sets is yet to
occur. The largest volume of re-sets will occur in March of 2008. This
leads many to conclude that there will be a corresponding growth in the
number of mortgages falling into arrears beginning after those dates. Since
mortgages are usually carried for at least 30 to 60 days before a notice of
default is filed by the lender, and since the foreclosure process takes
from one month to four months to complete, depending on the state, the full
effects of an increasing number of foreclosures will not be felt for a
minimum of approximately one year. At that point banks will be placing the
assets back on the sale market. The bottom line is that it is likely that
we have not yet felt the full effect of large numbers of loan re-sets. This
chart does not take into effect some significant factors such as: lender
willingness renegotiate difficult loans, the market availability of lower
interest loans, etc.

I thought this information would be interesting for the forum.

.

 

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[andviv]

I read this from two perspectives:

1. If you are not an expert yet then start getting ready.... become an expert in helping customers in pre-foreclosure and negotiating with the Loss Mitigation departments

2. Based on these numbers, from now until summer/fall next year will define how the banks and the government will react... Already the debt forgiveness treatment has changed so the rules are being rewritten as we speak...

 

[Russ H]

Looks like March through Sept 08 is going to be a good time to look at houses!

('course, we're always looking-- found one last night that's almost 40% below FMV.)

It needs a kitchen and some cleaning up. If that's about 25K, it makes it a smokin' deal.

We'll see. :smx7:

-Russ H.

 

[randallg99]

Great chart. This has been one of the factors in my decision upon waiting to buy new residential real estate but it is not the main factor.

you want a scary fact? if there is a spike in foreclosures from current levels, the lenders will be at serious risk of default... just the mere fact that Freddie and Fannie reduced quotas already spells trouble.

in other words- the lenders will not be able to even absorb lower payments thus must proceed to foreclosure only to face involuntary proceedings.... when I say lenders, I mean Wells, CountryWide, Wamu and others....

My main concern is that today's low ball offers will fall below FMV within the 2nd quarter 2008...

lastly, keep in mind the defaults will trail the re-sets... it will take several months of absorbed higher payments before defaults trickle into the system.... The dust may not settle until end of 08 or beginning of 09.

 

[randallg99]

wow... I just read the chart again and realized how significant the amount of refi's will be needed when the re-sets occur.

From Jan 07 to Mar 08, the re-sets will go from $22bil to $110bil... that's almost 5 times as much capital needed... Countrywide absolutely does not have the money to make 10bil of it happen. This will be the final nail in the coffin absent any increase in defaults.

 

[andviv]

if there is a spike in foreclosures from current levels, the lenders will be at serious risk of default... just the mere fact that Freddie and Fannie reduced quotas already spells trouble.

in other words- the lenders will not be able to even absorb lower payments thus must proceed to foreclosure only to face involuntary proceedings.... when I say lenders, I mean Wells, CountryWide, Wamu and others....

My main concern is that today's low ball offers will fall below FMV within the 2nd quarter 2008...

Randallg99, what do you mean by Freddi and Fannie's reduced quotas? I don't know what you are talking about here....

When you say the lenders will not be able to absorb lower payments so they will have to foreclose... why is that? that is also in my ignorance zone... why would banks prefer to foreclose instead of renegotiate the loan with the borrowers?

Yes, if there are still more foreclosures to come then today's low ball offers probably be below FMV next year... however if the plan is to hold the properties as rentals and they are cash flowing I don't see this as a big threat... although in that case flipping sounds more risky to me.

Russ, what is the plan for that property you just mentioned? rehab and sell or hold as rental? or is it another property for your B&B business?

In any case I found this topic to be very interesting.

 

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[Bilgefisher]

I read this from two perspectives:

1. If you are not an expert yet then start getting ready.... become an expert in helping customers in pre-foreclosure and negotiating with the Loss Mitigation departments

2. Based on these numbers, from now until summer/fall next year will define how the banks and the government will react... Already the debt forgiveness treatment has changed so the rules are being rewritten as we speak...

This is a good way to help folks, but if you happen to help someone in preforeclosure, understand the laws in your area. According to my attorney, in Colorado, if you help someone in preforeclosure you must register yourself as a foreclosure consultant. Once you do that, you can no longer have an interest in the property. One guy in particular in my county will be seeing some jail time and will in all likelihood lose his properties. Many of the law changes have happened within the last 2 years. I'm not saying avoid the preforeclosures, just do your homework.

 

[andviv]

Good point... we discussed the same topic here.

 

[Bilgefisher]

Good point... we discussed the same topic here.

LOL actually it was your post in that thread that got me to further investigate foreclosure laws in my state. Sorry for my short term memory.

 

[randallg99]

Randallg99, what do you mean by Freddi and Fannie's reduced quotas? I don't know what you are talking about here....

"quota" is actually the wrong term to use and the word in its place really should have been "target volume to sustain business" ... the big mortgage carriers our economy relies on is not able to fund as many deals as it once did due to liquidity problems. Marginal borrowers who once qualified will now be turned away and well qualified borrowers will have to jump through hoops to get their loans approved.

When you say the lenders will not be able to absorb lower payments so they will have to foreclose... why is that? that is also in my ignorance zone... why would banks prefer to foreclose instead of renegotiate the loan with the borrowers?

they may have no choice but to foreclose to build their asset base and generate some solvency or even collateral to create new funds via secondaries/pfds/bonds, etc.... the biz models are heavily reliant upon the higher payments to offset their own issued debt.

The lenders who originated riskier loans to grow their businesses cannot afford anymore defaults and the risk of future re-sets to higher rates/payments is ultimately a double whammy... the lenders were depending on the higher payments to fund their own interest payments are going to come up empty handed if the doom sayers have their way.

The bank's/lenders' perfect world has the re-sets follow original model of nominal defaults but reality is that defaults will dramatically jump based upon recent historical data.

lending companies fund their operations (not new loans) a couple of different ways with the largest of burdens being income directly from payments on outstanding loans.... if those loan payments are diminishing because of defaults, the lender will do whatever it can to keep at least some money coming in... renegotiating the payments/loan is akin to the theory of taking a half a loaf is better than none might hold true, but not for long... ultimately, the lender will have no choice but to either issue more bonds, preferreds or do secondary offerings all of which would be rated low thus have high interest paybacks.... which makes an expensive business much more costly to run.... but harsh reality is that if they do not get new funding themselves, the lenders will have no choice but to foreclose just to keep operations alive...

no other way to put it except it's like putting a band-aid on an amputee...

don't forget that the success of the mortgage companies relied heavily on the rapidly appreciating values of homes. Since the spreads were razor thin, the lenders depended on points, service fees and commissions for selling the loans and then the bundled packages were all "bonuses" over and above the normal revenue streams... they had money raining on them irregardless of the spreads but it's been a dry season due to drop in demand for mortgages at the retail level

accounting standards pose other problems.... the lenders were booking paper profits upfront due to the fixed loan structure and this was in itself created an enticing bottom line on the sheets for investors to invest in the mortgage companies via shares, bonds, preferreds, etc... investors have caught on and are now able to assess the risk with a sharper eye

In any case I found this topic to be very interesting.

ditto.

 

[andviv]

Bump.
March is almost here...
How's the market changed in the past few months?

The way I see it, banks have already started the process of packaging REOs and selling them to investors.
The new laws about debt forgiveness and not paying taxes for primary homes will only make the short sales more common in today's market, as the homeowners will have less concerns about selling for less than market price AND the debt. Will banks be more open to negotiate?

 

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[Runum]

Hey Andres I thought I read where Bush is going to veto the debt forgiveness bill. It hasn't happened yet. I guess it's stay tuned to as the worm turns...

http://money.cnn.com/2008/02/26/news/economy/veto_foreclosure.ap/index.htm?cnn=yes

I can say that I have noticed more REO activity around here lately. My RE agent is even mailing me a list of foreclosures heading to auction before they get there. I have looked into a couple of deals lately and lending seems to be tightening up as well. Happy hunting.:cheers:

 

[jimculler]

The FHA Secure will help a few of the defaulted people to refinance into a fixed rate. The problem with this program though is that it will require some equity (97% LTV rate and term). And so many people who will be adjusting this year, bought with no money down in the peak of the boom years (at least here in FL). So for those people it will still be forebearance, workout, or short sales as their options.

The more short sales we have, the worse the property values will get and the more short sales we will have. By ending 100% stated income programs between February and April of last year, we pretty much can be sure that the market will be a lot more stable by April 2009.

Until then we will all have to continue investing for cash flow and certainly not to hold an empty house to try and sell retail.

 

[hakrjak]

The problem with the government "helping" people who are going into foreclosure is that it's going to drive up interest rates for the rest of us. In the past month, 30yr fixed rates have already risen from 5.3% to 6.10% for no apparent reason. I don't think we need any extra stimulus here to push them even higher. If the government starts monkeying around with fixing people's arms, etc -- Who knows what the fallout could be.

I've always said, and it remains my view that keeping people in houses they can not afford does not help anyone. It doesn't help them, and it doesn't help the rest of the market that is trying to mount a recovery, if we can just get the government's boot off of our throats....

- Hakrjak

 

[jimculler]

We were at a record spread of 3% between the FED rate and the rate mortgage companies gave consumers on Monday. Those are the days where you were a sucker if you locked your rate (broker should have told you to float your rate).

The past 2 days have dropped .125, so its starting to come back down. Rates always go up faster than they come down. Meaning they go up by .25 and .5% at a time, and come back down by the .125 (kinda like gas goes up by 10 cents or more and floats down by pennies at a time).

A new Fed cut is expected in March, and I believe the spread between the FED and banks or GSE's will be 2.5- 2.7 or so. This means owner occupied fannie deals at 5.25-5.5 with no discount points should be coming again in the next few weeks. It happened ONE DAY in January, and then shot back up to 5.625 before sky rocketing (like you said for no apparent reason) to 6.125-6.25.

Bottom line, rates are coming back down, but they will not stay down forever when they do. It will be best to keep an eye out for that 5.25 or lower day, and lock immediately when it comes. Otherwise it will probably float back up and you missed the boat.

 

[andviv]

I found this other graph today... it seems there are more resets due in 2011.

 

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