Thursday, July 9, 2009

Global No Confidence Vote: Revenge Of Subprime

The Thing That Will Not Die has returned from beyond to haunt the housing markets once again. Yes folks, subprime mortgages are back, and all those homes foreclosed upon last year are still clogging up the balance sheets of big banks.

Now we're seeing the Revenge of Subprime: all those homes are being sold back into the market in bulk so that the banks can get whatever money they can for them instead of holding on through falling home prices. Yves Smith at NakedCap runs down the details:
Now we have a new side effect of securitization: trusts dumping foreclosed houses. This looks to be a tragedy of the commons. While it seems rational for owners of foreclosed houses to liquidate inventory and move on (in theory, price discovery and market clearing are a good thing), the servicers are selling in bulk. If you have a lot of sellers dumping inventory at the same time, that is likely to produce an overshoot of housing price declines below historical levels in terms of relationship to rental prices and incomes.

The Wall Street Journal profiles the development in Atlanta, and Georgia has one of the fastest foreclosure timetables in the country, so this trend will be coming to your market soon.

From the Wall Street Journal:
The U.S. housing market is facing new downward pressure as holders of subprime-mortgage bonds flood the market with foreclosed homes at prices that are much lower than where many banks are willing to sell.

While nationwide figures are scarce, a review of thousands of foreclosures in the Atlanta area shows that trusts managing pools of securitized mortgages sold six times as many properties as banks during the six months ended March 31. And homes dumped by subprime bondholders sold for thousands of dollars less on average than bank-owned properties, the data show.
Yves here. That does not prove conclusively that the servicers are truly getting worse prices. The banks presumably were able to offload the best homes, and what is left will probably sell at deeper discounts. Back to the story:
Experts say this is a bad omen for residential real-estate prices and homeowners trying to sell or refinance, because the fire sales, many to cover soured subprime loans, put downward pressure on the value of nearby homes. All of this undermines federal efforts to stabilize the housing market and revive the broader economy....

In the Atlanta area, hit hard by foreclosures and declining home values in the past two years, mortgage-backed securitization entities completed 6,260 foreclosures in last year's fourth quarter and the first quarter of 200...

Of those foreclosures, securitization entities sold 2,963 homes during the same period for an average of 62% of the original loan amount. Banks unloaded just 442 of the homes they foreclosed upon, with an average selling price of 69% of the original loan amount.

There still is much more inventory that mortgage-servicing firms are racing to sell for securitization trusts. Such entities tend to sell in bulk so that they can cut losses, finding it more cost-efficient to move homes through foreclosure and subsequent sale than to try to restructure the mortgage with the borrower...

According to Karen Weaver, global head of securitization research at Deutsche Bank AG, the steepest losses are on subprime loans, where lenders generally are recovering just 26% of the original loan amount....
Yves here. Read that last sentence again. Stunning. But that also says you could do ridiculously deep principal reductions and still come out ahead.
26% of the original loan amount? Good lord, that's insane!

In other words, mortgage loan servicers are stuck with piles of homes they haven't been able to sell individually. It's gotten to the point where they are now selling all these subprime properties at fire sale rates...and in mass quantities. That is putting tremendous downward pressure on the low end of the housing market once again.

In other words, we're looking at yet another wave of price-crashing in the housing market. There was evidence in Q2 that there was some price stabilization at the low end of the housing market (while prices were still tumbling in high end homes). That evidence however is getting swamped as we speak by mortgage servicers unloading thousands of low-end homes into the markets.

In other words, housing prices may even accelerate their overall fall into Q3 and Q4 if this trend keeps up. Couple that with resetting rates of ARMs in the second half of the year and it's possible in some areas to see housing prices fall as fast or even faster as they did back in 2008. That would be an unmitigated disaster right now, and would seem to indicate that we're increasingly at risk for a double-dip recession.

After all, banks like Morgan Stanley are trying to go right back to selling near-junk bonds as AAA offerings, starting up the Great Game Of Three Card Monte once again. Q3 2009 is beginning to look more and more like Q3 2008, folks.

Be prepared.

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