Real Estate Information

The debate between two federal officials -- Treasury Secretary Henry Paulson and Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair -- over whether to use money from the $700 billion bailout fund to help at-risk homeowners avoid foreclosure took center stage when both regulators testified before the House Financial Services Committee today.

Yesterday, DSNews.com reported that the FDIC had revised its national foreclosure prevention proposal, dropping the price tag to $24 billion, from the $40 billion plan put forth by Bair late last month. According to Bair, even with a smaller budget, the FDIC's proposal will prevent foreclosure for 1.5 million homeowners.

However Paulson says he will not pay for Bair's, or any foreclosure assistance program, out of the $700 billion Troubled Asset Relief Program (TARP). He said the best way to turn the corner on the housing contraction and reduce foreclosures was to “increase access to lower cost mortgage lending” through recapitalization. Paulson told lawmakers, “Congress passed legislation to deal with financial instability, and that is what we are doing.”

However, Bair told the House Financial Services Committee, “The root cause of the current economic crisis [is] the failure to deal effectively with unaffordable loans and unnecessary foreclosures,” She said that the rescue package penned by Congress gives Paulson the specific authority to use loan guarantees and credit enhancements to foster loan modifications and prevent avoidable foreclosures.

Congressional leaders, such as Rep. Barney Frank (D-Massachusetts) and Rep. Maxine Waters (D-California), have long advocated for Bair to lead a national fight against foreclosure. They have repeatedly praised her for the systematic loan modification program implemented at IndyMac Bank, which has since been used as an industry model for banks' individual home retention initiatives and even the government's GSE loan modification program introduced last week.

House Financial Services Committee Chairman Frank said again today that he supported Bair's approach, and that he wanted to see some of the $700 billion bailout fund used to help troubled mortgage owners. “Some of this TARP money has to be used for mortgage foreclosure prevention,” Frank said.

As DSNews.com reported yesterday, President-elect Barack Obama has said that if there is not a national foreclosure assistance program in place by the time he takes office in January, he will make it one of his top priorities.

In what was said to be an unprecedented situation, even so much as an occurrence only happening once or twice in a hundred years, Henry Paulson, the present treasury secretary, says there’s plenty of work ahead to restore the U.S. economy. Paulson's notion is echoed by past and perhaps future treasury secretaries.

“Restoring the financial system will go a long way with helping the economy recover,” he said last night at a Wall Street Journal conference in Washington. “The economy has turned down, housing prices are still declining…the recovery process is going to take longer. There’s going to be stress in the capital markets for months.”

Paulson was joined by two of President-elect Barack Obama’s top economic advisers: Robert Rubin, Citigroup Inc. director and senior counselor and first-term treasury secretary for the Clinton Administration, as well as Lawrence Summers, Rubin’s successor during Clinton’s second term.

The current treasury secretary wasn’t alone in his sentiment regarding the nation’s long road toward recovery, as both Rubin and Summers agreed.

“I think that it’s a strong probability that the psychological crisis, the pervasive anxiety that we’re in right now will abate in a reasonable period of time,” Rubin said. “The single most important thing we can do right now is a very large fiscal stimulus married with a commitment, once the economy is healthy again, to put in place a multi-year program to get back to a sound fiscal position.”

Summers, who is currently being vetted as a strong candidate for treasury secretary in the Obama Administration, agreed with his predecessor, but said the fiscal stimulus should be speedy, substantial and sustained over a several-year interval. “We’re going to need some impetus to the economy over the next two to three years,” he said. “I think there is no question over the long term that we have to pay attention to the fiscal questions.”

The National Association of Business Economists (NABE) released a survey yesterday forecasting a prolonged recession and Paulson’s statements last night seemed to mirror NABE’s outlook.

“Business economists became decidedly more negative on the economic outlook for the next several quarters as a result of the intensification of credit market stresses and evidence of spillover to the real economy,” said NABE President Chris Varvares in a statement released yesterday.

Following a small contraction in the third quarter of this year, Varvares says NABE expects real GDP to decline at a 2.6 percent rate in the fourth quarter, implying growth of just 0.2 percent in 2008.

“With the recession continuing into 2009, GDP growth next year is expected to be a meager 0.7 percent. This would be the slowest growth over a two-year period since the early 1980s,” he said, also citing the projected dismal unemployment rate, forecast to hit 7.5 percent by the end of next year. NABE also predicts a drop in home prices of 3.5 percent next year, following a 6 percent drop in 2008.

Just last week, Paulson announced that the government's plan to purchase financial institutions' under-performing mortgages had been put on hold. Treasury put off the bailout’s original intent of purchasing bad loans and instead decided to continue injecting capital directly into financial markets.

During the first part of the Monday WSJ event, Paulson characterized the Treasury’s change of plans as an adaptation to what was happening in the financial markets.

“I’ve seen no experimentation in terms of the illiquid asset purchase program. I’ve seen just the opposite,” Paulson said. “We went to Congress and when the markets froze up we said we had a problem in terms of capital in banks, we have a systemic event, we’re facing the collapse of a finance system and the way we were going to approach it was to buy illiquid assets. And so we asked for $700 billion to buy illiquid assets to capitalize the banks. Then the situation got much worse. Institutions were failing…and so then what we said was, what we need to do is something that is more powerful and quicker.”

Paulson says Treasury moved very quickly, with “lightening speed” and took a step, along with the Federal Deposit Insurance Corp. and the Federal Reserve, in which he believes, stabilized the financial system.

“Then earlier last week, again I looked at it,” Paulson said. “Given the state of the economy, and given that we have roughly half that much left, and given what it takes to make a difference with the illiquid assets, we made a decision to not go ahead with that program and to keep working to develop other capital programs because we believe…capital is more powerful.”

The treasury secretary spoke of his meeting with Speaker of the House Nancy Pelosi and other leading Democrats hours before the Monday night event, where he and Fed Chairman Ben Bernanke provided an update to Congress on the $700 billion financial bailout.

“When we were there, we said we could see what was happening to the economy. We can see what’s coming. We foresaw what was coming. And we said if we don’t do this it’s going to be much, much worse,” he said. “Right now the American people see what’s happening with the economy, but what you don’t get credit for is what you prevented.”

With the first $350 billion in taxpayer funds currently being allocated, Pelosi and the other Dems rallied behind FDIC Chairman Sheila Bair's $24 billion proposal to prevent nearly 1.5 million foreclosures, according to Reuters.

Upon deteriorating economic news, including a steep rise in foreclosures and increased number of Americans filing for jobless claims, Pelosi issued a statement for resolve from Congress and the Bush Administration.

“The need for action is clear and urgent, but the Administration is failing to move aggressively to stem the tide of foreclosures and refusing to use the authority it has been given by Congress to help homeowners,” Pelosi said in her Nov. 13 statement. “Addressing the underlying problem of home foreclosures and stopping the drop in home values is necessary to restore confidence in our financial system, get credit moving again, and boost economic growth.”

As the Treasury works on a macro level and rapidly designs economic programs to fix credit markets, other problems exist, like the inability to bolster home retention programs for homeowners in distress.

“If the Administration is going to sponsor meaningful home retention programs among the major financial institutions, it needs to secure buy-in from investors (i.e., mortgage-backed securities pool trustees),” said Gerry Alt, president and COO of LOGS Network and HEART Financial Services, a division of LOGS that focuses on loans that have already been referred for foreclosure or bankruptcy legal representation. “Many of the potential workouts, short sales, and other foreclosure alternatives are thwarted by the inability of servicers to gain the consents they need to modify the terms of securitized loans. In many cases either the approval process takes too long, or consent is impossible under the terms of the pooling and servicing agreements, prior to placing the loan in foreclosure.”

ForeclosureRadar, a website that is said to track every California foreclosure with daily auction updates, issued its California Foreclosure Report for October this week. Foreclosure sales dropped by 39.1 percent from the prior month, due to significant increases in cancellations and postponements, the company said.

Under California law, scheduled foreclosure sales can be postponed for a period of up to one year, until they are either canceled or sold. According to ForeclosureRadar, cancellations, where the home is taken out of foreclosure, increased by 78 percent in October, resulting in nearly 20 percent of foreclosure sales scheduled for the month being called off.

Notice of Default filings, which start the foreclosure process, continue to be significantly impacted by CA State Senate Bill 1137, as lenders work through the new requirements the law imposes, ForeclosureRadar said. Based on the company's data, however, Notices of Trustee Sale rebounded after a significant drop the prior month.

A summary of ForeclosureRadar's findings include:

- Notice of Default filings increased slightly in October, up 2.8 percent from September, to a total of 16,810 filings. Year over year, Notice of Default filings are down 42.3 percent.
- Notices of Trustee Sale, which schedule the auction date and time, increased by 32.9 percent in October, to 25,408 filings. Despite the significant increase, this level of filings remains well below average levels earlier this year, as September levels were clearly impacted by CA State Senate Bill 1137.
- Properties taken to sale at auction declined by 39.1 percent from September, to 14,042 sales, with a combined loan balance of $6.39 Billion. This represents a 28.8 percent increase from the prior year.
- Lenders took back 94 percent of the properties taken to auction, with a combined loan value of $9.19 Billion. Third party purchases declined 24 percent from the prior month, but increased 25 percent (as a percentage of all foreclosure sales), due to the decline in sales activity.

“It is important to note that the significant decline in October foreclosure sales cannot be directly attributed to CA State Senate Bill 1137,” said Sean O'Toole, founder of ForeclosureRadar. “There were nearly 60,000 properties scheduled for sale at the beginning of October over which the law had no affect. The drop in foreclosure sales, therefore, can only be reasonably attributed to changes introduced by the lenders themselves and not in response to SB 1137.”

The increase in cancellations was led primarily by Countrywide, ForeclosureRadar stated, which saw a 460 percent increase in cancellations from the prior month, and a 48 percent decline in the number of properties they sold at auction. In early October, Bank of America, which acquired Countrywide earlier this year, announced an aggressive loan modification program for Countrywide borrowers who financed their homes with subprime or pay option adjustable rate mortgages (ARMs).

Other lenders in California had similar drops in foreclosure sales, though more often due to postponement, rather than cancellation, ForeclosureRadar reported. Statewide, the percentage of foreclosure sales that had postponed at least once, increased from 36 percent of sales to 58 percent of sales, with the average length of postponement increasing from 24 days to 42 days.

“It would be a mistake to conclude that the declines in foreclosure activity indicate that the foreclosure crisis is over,” O’Toole warned. “While lenders now appear to be embracing the concept of foreclosure moratoriums and loan modifications, neither typically address the core issue of negative equity. Most loan modifications focus on lowering payments to affordable levels by using unsustainably low interest rates, not unlike the ‘teaser rates’ that many have blamed for the current crisis.”

Based on ForeclosureRadar's October data, average discounts offered by lenders on the outstanding loan balance at foreclosure auction declined slightly from prior months, and averaged 36.1 percent statewide, with 33 percent of properties taken to auction being offered at discounts of 50 percent or more.

In its latest attempt to thaw the country's credit freeze, the U.S. Department of the Treasury, Federal Reserve, and Federal Deposit Insurance Corporation (FDIC) issued a joint statement yesterday urging banks to start lending again.

“The ongoing financial and economic stress has highlighted the crucial role that prudent bank lending practices play in promoting the nation's economic welfare,” the agencies said. “The recent policy actions are designed to help support responsible lending activities of banking organizations, enhance their ability to fund such lending, and enable banking organizations to better meet the credit needs of households and business.”

The statement calls on banks to step up and ensure that the needs of credit-worthy borrowers are met and to continue raising capital to support the nation's financial system. It also calls on financial institutions to take on aggressive loss mitigation and foreclosure prevention strategies and said banks should reassess their incentive and compensation policies.

To read the full statement issued by the three regulators, click here.

Webster Bank N.A., a subsidiary of Webster Financial Corporation, announced today that it is halting foreclosures for 90 days, becoming the latest bank to expand its mortgage assistance program to keep more families in their homes.

Under the new program, Webster will temporarily suspend foreclosure activity for at least 90 days for all qualified homeowners who were more than 30 days delinquent on their Webster residential mortgages as of Nov. 4, and work with those customers to structure more affordable payment plans so they can stay in their homes, the company said. Webster said it would also identify and reach out to borrowers who are at risk of falling behind on their mortgage payments.

“Our goal, as always, is to identify and meet the financial needs of our customers. During this challenging economic time, we feel a heightened responsibility to assist those who are under financial pressure and are threatened with the possibility of losing their homes,” said James C. Smith, Webster's chairman and CEO. “Just as my father did when he founded Webster Bank during the Great Depression, we will do everything in our power to keep people in their homes.”

To be eligible for the program, the mortgage must be owned by Webster, and the borrower must occupy the home as their principal residence, be working in “good faith” to stay current on their mortgage, and provide evidence of sufficient income to support a modified mortgage payment. The bank said mortgage assistance will focus on creating affordable, sustainable payment plans, and may include such options as: temporarily reducing the monthly payment, extending fixed payment periods on adjustable loans, extending mortgages beyond the current length, refinancing, or adjusting interest rates.

Webster is headquartered in Waterbury Connecticut. It has $17.5 billion in assets and 181 offices throughout Connecticut, Massachusetts, Rhode Island, and New York. Webster's announcement today follows similar initiatives by several major lenders, including Bank of America, JPMorgan Chase, Citigroup, and Fannie Mae and Freddie Mac.

RealtyTrac released its October 2008 U.S. Foreclosure Market Report today, which shows foreclosure filings — default notices, auction sale notices, and bank repossessions — were reported on 279,561 U.S. properties during the month, a 5 percent increase from the previous month and a 25 percent increase from October 2007. The report also shows one in every 452 U.S. housing units received a foreclosure filing in October, and a total of 84,868 properties were repossessed by lenders.

“We’ve seen sharp declines in new foreclosure filings after legislation mandating delays to the foreclosure process was signed into law in several states — most notably in California, where overall foreclosure activity was down by double-digit percentage points for the second straight month in October, and where default filings were 44 percent below October 2007 levels,” said James J. Saccacio, CEO of RealtyTrac. “Despite this, October marks the 34th consecutive month where U.S. foreclosure activity has increased compared to the prior year.

“While the intention behind this legislation — to prevent more foreclosures — is admirable, without a more integrated approach that includes significant loan modifications, the net effect may be merely delaying inevitable foreclosures. And in the meantime, the apparent slowing of foreclosure activity understates the severity of the foreclosure problem in these states,” Saccacio added.

Nevada, Arizona, Florida post top state foreclosure rates

Nevada posted the nation’s highest state foreclosure rate for the 22nd consecutive month in October, with one in every 74 housing units receiving a foreclosure filing during the month — more than six times the national average. Foreclosure filings were reported on 14,483 Nevada properties in October, an increase of 11 percent from the previous month and up nearly 119 percent from October 2007.

With one in every 149 housing units receiving a foreclosure filing in October, Arizona registered the second highest state foreclosure rate. Foreclosure filings were reported on 17,507 Arizona properties for the month, an increase of nearly 35 percent from the previous month and up 176 percent from October 2007.

One in every 157 Florida housing units received a foreclosure filing in October, the nation’s third highest state foreclosure rate. A total of 54,324 Florida properties received a foreclosure filing during the month, an increase of 13 percent from the previous month and up nearly 80 percent from October 2007.

Other states with foreclosure rates ranking among the top 10 were California, Colorado, Georgia, Michigan, New Jersey, Illinois, and Ohio.

California posts most foreclosures despite drop in activity

California foreclosure activity in October decreased 18 percent from the previous month, but the state still posted the highest number of properties with foreclosure filings for the month — 56,954. That total was down from a peak of more than 100,000 in August, but was still up 13 percent from October 2007.

Florida, Arizona and Nevada posted the second, third and fourth highest total foreclosure filings in October.

With 12,681 properties receiving a foreclosure filing last month, Illinois registered the nation’s fifth highest state total. The state’s foreclosure activity increased 24 percent from the previous month and was up 31 percent from October 2007.

Other states where total foreclosure filings landed among the 10 highest were Ohio, Michigan, Georgia, Texas, and New Jersey.

Las Vegas, Florida cities report highest metro foreclosure rates

Las Vegas documented the highest metropolitan foreclosure rate among the 230 metro areas tracked in the report, with one in every 62 housing units receiving a foreclosure filing in October — more than seven times the national average. Foreclosure filings were reported on 12,155 Las Vegas area properties during the month, an increase of nearly 6 percent from the previous month and up nearly 104 percent from October of 2007.

Four Florida metro areas posted foreclosure rates that ranked among the top 10 in October, led by Cape Coral-Fort Myers and Miami in the Nos. 2 and 3 spots. The other two were Fort Lauderdale at No. 8 and Orlando at No. 10.

California metro areas also accounted for four of the top 10 metro foreclosure rates in October, but that was down from previous months, when at least six California metro areas consistently ranked among the top 10. Stockton was the highest ranked California metro area at No. 4, with one in every 100 housing units receiving a foreclosure filing in October. Other California cities in the top 10 were Merced at No. 5, Riverside-San Bernardino at No. 7, and Modesto at No. 9. All four California metro areas experienced monthly decreases in foreclosure activity.

To view RealtyTrac's full report, including foreclosure breakdowns by state, click here.

U.S. Treasury Secretary Henry Paulson announced this afternoon that the government's plan to purchase financial institutions' under-performing mortgages has been put on hold. In fact, based on Paulson's remarks, it is unlikely that the Treasury will conduct any auctions to purchase bad loans and other troubled assets – the original intention of the $700 billion bailout package. Instead, the Department is expected to continue its efforts of injecting capital directly into the financial sector.

In discussing the best application of the now mis-named Troubled Asset Relief Program (TARP), Paulson said, “Our assessment at this time is that this [individual asset purchases] is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending.”

He remarked that the government has already taken the necessary steps to prevent a broad systemic economic failure. These steps include the initial $250 billion equity purchase program – a move that Paulson called “the fastest and most productive means of using our new authorities to stabilize our financial system” – and changes to the Federal Deposit Insurance Corporation's (FDIC's) agenda, such as a temporary guarantee on banks' unsecured debt and non-interest bearing transaction accounts.

“Both at home and around the world we have already seen signs of improvement,” Paulson told reporters. “Our system is stronger and more stable than just a few weeks ago.”

Paulson acknowledged that although we may be in a better economic position overall, one of the biggest challenges of a weak economy that must be addressed is the housing correction, and he stated that “both banks and non-banks may well need more capital given their troubled asset holdings.”

To that end, Paulson outlined three priorities for the remaining TARP funds. “First, we must continue to reinforce the stability of the financial system, so that banks and other institutions critical to the provision of credit are able to support economic recovery and growth,” he said. Second, the markets for securitizing credit outside of the banking system also need support, including credit card receivables, auto loans, and student loans. “This market, which is vital for lending and growth, has for all practical purposes ground to a halt,” Paulson said. And third, we must continue to explore ways to reduce the risk of foreclosure, he added.

“In crafting the financial rescue package, we and the Congress agreed that Treasury would use its leverage as a major purchaser of troubled mortgages to work with servicers and achieve more aggressive mortgage modification standards,” Paulson said. “Now that we are not planning to purchase illiquid mortgage assets, we must find another way to meet that commitment.”

The Treasury has already expressed a desire to extend rescue funding to businesses other than banks, such as insurers and other finance companies, and it has been under increasing pressure to provide assistance to the ailing auto sector. In addition, Paulson told reporters today that the Department might require recipients of future pay-outs to raise private capital to match the government's injection. “Stronger capital positions will enable financial institutions to better manage the illiquid assets on their books and better ensure that they remain healthy,” Paulson said.

Currently, the Treasury has just $60 billion left of the first rescue fund installment, after committing $250 billion to banks and buying an additional $40 billion preferred shares in American International Group (AIG). Either the current or next administration will have to put in a direct request to Congress for the second half of the $700 billion bailout money.

House Financial Services Chairman Barney Frank (D-Massachusetts) said that he strongly disagreed with the Treasury's plan to put asset purchases on hold. The rescue funding should be used for exactly that purpose, Frank said at a hearing on Capitol Hill, noting that Congress gave the Treasury explicit authority to buy up mortgage-backed securities and whole mortgage loans when it passed the Emergency Economic Stabilization Act (EESA).

You may recall that DSNews.com warned readers about the possibility of the asset purchase part of TARP falling by the wayside in an October article entitled “UPDATE: What About the Bad Mortgages?”

Home values in the United States posted their seventh consecutive quarterly decline, falling 9.7 percent year-over-year to a Zillow Home Value Index of $202,966, according to the third quarter Zillow Real Estate Market Reports released today.

The continued declines in value are causing more homeowners to sell their homes for less than the home's original purchase price, the company said. Over the past 12 months, 30.2 percent of homes sold were sold for a loss, up from 23.7 percent at the end of the second quarter. In 17 markets - 14 of which are in California - more than half of homes sold in the past year were sold for a loss.

The percentage of homeowners with negative equity remained fairly steady from the second to the third quarter as more foreclosures were completed and as median down payments rose in 61 markets, Zillow reported. One in seven (14.3 percent) of all homeowners across the country has negative equity, and of homeowners who bought in the last five years, almost one-third (29.5 percent) are underwater.

Meanwhile 27 of the 163 metropolitan statistical areas (MSAs) covered by Zillow's reports are experiencing longer-term impact, showing negative annualized value changes over the past five years, and 12 of the markets show flat five-year annualized returns. Most affected by long-term depreciation were hard-hit areas in California's Central Valley, like Stockton, where the five-year annualized change is -3.8 percent. Also affected are areas like Greater Boston, where the five-year annualized change is -1 percent, and the Cleveland area, where the change is -0.8 percent. Detroit experienced the worst overall long-term depreciation, with five-year annualized change at -3.1 percent. Nationally, five-year annualized change for the third quarter is 3.4 percent and 10-year annualized change is 6.1 percent.

“The fact that one-quarter of markets in Zillow's third quarter reports show negative or relatively flat annualized change over five years is an indication of the enormous amount of value that has been taken out of the real estate market through home value depreciation in the past few years,” said Dr. Stan Humphries, Zillow VP of data and analytics. “It's clear we are at a unique point in history; we've had seven consecutive quarters of decline, and we expect that to continue until at least the middle of next year. Most markets are still seeing five-year annualized returns, but we will see more markets slip into flat or negative long-term change as the economy continues to suffer, factors like job losses begin to further affect foreclosure rates, and home values continue to decline,” Humphries warned.

Foreclosures made up almost one in five (18.6 percent) of all transactions in the past 12 months. Not surprisingly, areas with the highest foreclosure rates are the markets with some of the greatest home value declines. In California's Central Valley, 57.6 percent of transactions in Merced were foreclosures, and in Stockton, foreclosures made up 56.4 percent of transactions. The New York metro area continued to have the lowest rate of foreclosures, with only 3.5 percent of all transactions being foreclosures.

It's not all bad news, however, Zillow said. Twelve of the 163 markets in the report experienced year-over-year change in value of more than 1 percent. Most of the bright spots were in the Carolinas and upstate New York, with the Ithaca, New York area experiencing a year-over-year change of 5.6 percent and the Rochester, New York area seeing a 3.1 percent increase. Home values in the Jacksonville, North Carolina area increased 3.9 percent and were up 3.4 percent in Winston-Salem, North Carolina. None of those markets experienced bubbles, but instead have seen steady year-over-year growth for the past eight years.

For more information, including the company's full national report, 163 local reports, and the Q3 Zillow Homeowner Confidence Survey, click here.