More Foreclosure Problems on the Horizon

The Congressional Oversight Panel released new findings yesterday that the mess we are facing with foreclosures may have more far reaching implications for the economy than we had initially believed.  While the Treasury Department asserts that the issues with foreclosure filings do not pose a systemic threat to the overall financial system, the COP believes that such a finding is premature.  Their report states, "Clear and uncontested property rights are the foundation of the housing market.  If these rights fall into question, that foundation could collapse."

The COP's main concerns appear to be:  1. Whether mortgage servicers can actually prove that they own the loans they are servicing, 2. The broader implications to the economy if they cannot.  For instance, what happens to the value of mortgage-backed securities if on a widespread level the securities are not backed by the collateral that the servicers are purporting to own.  The COP finds that if the servicers do not actually own the loans, the loan modifications they have agreed to may be invalid.  Additionally, foreclosures they have initiated may be nullified.

To prepare for the massive crash that the COP fears may occur, they are encouraging the Treasury Department and the Federal Reserve to order new stress tests for the banks to make sure that they can withstand the losses they will incur if the problem does become "systemic."

In addition, the Senate held hearings yesterday on mortgage servicing and foreclosure practices, and tomorrow the House is holding a hearing on "robo signing" and whether ownership of loans that were being sold was properly transferred during the real estate boom.  Recommendations being floated right now include forcing banks to sell off their servicing divisions to help eliminate conflicts of interest.

It seems to me that the COP and the Congressmen and Senators are overlooking a couple of very important points.  1.  The practice of using services such as MERS to transfer ownership of deeds of trust from one servicer to another without re-recording was and is an accepted industry practice.  To now find that the servicing transfers are improper is absurd when the practice was known to regulators at the time that it was taking place.  2.  We have Americans living in homes they have not paid a penny on for over 400 days.  To continue to stall and delay the foreclosures of these properties is not good for the communities, and it is also not good for the individuals in question who need to move out of houses they cannot afford and get into housing they can afford. 

The other issue here is the proposal of another stress test.  When the Treasury conducted the first round of stress tests, they raised reserve requirements for banks so high that many smaller banks could not survive and ended up in conservatorship.  By now doing another round of stress tests and possibly raising the bar again, the FDIC may end up with conservatorship of still more banks.  But does this really serve the public good, or does it just serve to further consolidate the banking system into a few giants?  Free market principles say that competition is good, but competition cannot exist, much less thrive, when the government constantly changes the rules to favor bigger banks over smaller ones.

Instead of taking preemptive action for a catastrophe that many do not believe will occur, the government needs to allow the banking system to work through the foreclosures so that those houses can go on the market and be resold.  By continuing to find ways to stall this process and put additional burdens on the banks, the COP may well create the crisis they claim they want to avert.

Do You Want to See Something Really Scary?

Do you remember Twilight Zone--The Movie?  I did not see it--my mother was extremely strict and never allowed us to watch horror movies or even light comedy containing anything that smacked of the occult.  But I remember my father coming back from a trip and telling us that he had been driving with his nephew on a dark, wood-lined road when his nephew told about the scene from Twilight Zone where a set of characters are in a car at night trying to scare each other.  Finally, one of them says to the driver of the car, "Do you want to see something really scary?"  When his friend agrees, he turns his face away and when he turns back he has become a monster who kills the young man who is driving.

If Hollywood were making that movie today, rather than having the actor turn into a monster, he could just hold up the foreclosure statistics released by RealtyTrac and thereby cause his friend to die of massive heart failure.  The report that Realty Trac released yesterday shows that cities in California, Florida, Nevada, and Arizona account for 13 of the hardest hit areas in the United States.  Las Vegas is leading the pack with a wide lead--Realty Trac reports that one out of every 25 homes in Las Vegas has had some kind of foreclosure filing.  Cape Coral, Florida comes in at number 2 with one in 35 homes in default, followed by Modesto, California with one in 36.  While Las Vegas led percentage wise, in terms of numbers, Miami led the way with 59,000 properties with filings.

The glut of foreclosures has created some great opportunities.  One group of buyers I know is busy purchasing Las Vegas foreclosures for cash.  They tell me that homes previously valued at $250,000 can be purchased for $40,000 cash right now and then used as rental properties.  But since the scandal broke over robo-signing and the investigation into whether the banks own the properties they are foreclosing on, there has been a dramatic dip in foreclosures and in foreclosure purchases.  According to CNN money, bank owned properties are still the safest ones to buy, as long as title insurance is available for the properties; but skittish buyers may shy away from foreclosures because of  fears that the original owners may be able to redeem the properties if the foreclosures are found to be improper.

But one group of investors is apparently not scared at all--the Australians.  A CNN money report out today says that an Australian based firm with offices in Orlando, Florida, is introducing Australian investors to the U.S. foreclosure market.  Since the unemployment in Australia is about 5.1% and the Australian dollar is strong, our friends from down under have money to spend and they are spending it here in the U.S. buying up our foreclosed on properties and turning them into rental real estate.   Australians are even reportedly cashing in the equity in their own homes to get the money to buy houses in the U.S.   According to the author of the CNN money report, the Australians conduct tours--mini reconnaissance missions--to scout out the areas in which they are purchasing, talk to the locals and get a feel for the local economy.  One real estate broker in the Phoenix area says that she has helped Australians buy 16 properties in six weeks.  Says, Andrew Allen, founder of MyUSAProperty which arranges the tours, "The beauty is, the U.S. economy will recover one day... You guys have hit a rough patch, but we know you'll be back with flying colors."

I wonder if Allen understands that a huge dynamic in our own crash was speculative investing by those who borrowed money with the hopes of getting rich in real estate.  If his predictions are wrong and our market stays bad, our real estate woes could jump the ocean to another continent to take down a population who cashed out of their own homes to buy our distressed properties.  Pretty scary if you ask me.