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PSBJ Foreclosure Atricle

lannypoffolannypoffo
edited March 2009 in Seattle Real Estate
Interesting article in the Puget Sound Business Journal today about Foreclosures:

PSBJ

The article ends with the anecdotal story of a couple driven to bankruptcy by purchasing a home they could not afford desiring to purchase again... even though they have successfully found a bigger and better rental at less than half the cost of their previous mortgage. I do have to ask "from whence does this mentality come?"

Also some interesting stats about the carrying costs of a REO house, and how much increase there has been in REO properties in 2008 vs earlier years.

Worth a quick read.

Lanny

Comments

  • The_TimThe_Tim
    Like thousands of others around the country, Charlene and Joseph Binfet can no longer make payments on their $303,000 mortgage. They've considered their options: a short sale, potential government rescue or working out new loan terms. They're not sure how it's going to work out.

    Charlene and one of her three teenage sons have driven out on a whim to see a rental property, listed for only $1,500 a month on a real estate website.
    At first, Charlene thinks it's too good to be true.

    How can such a spacious property — with a house that's 900 square feet larger than their current home — cost less than half their monthly mortgage payment?
    What the hell? $1,500 a month is less than half the monthly payment on their $303,000 mortgage?!? Does not compute.

    Running the numbers, to get a payment over $3,000 on a $303,000 mortgage would require an interest rate over 10%. Who has a rate that high? Nobody. The article says they "owned" their place for four years. Prevailing interest rates four years ago were around 5.75%.

    Some piece of critical information is missing from this little anecdote.
  • deejayohdeejayoh
    well, they are probably paying $300/month in taxes

    maybe have carried back a second for the downpayment at 10-11%?
  • The_TimThe_Tim
    deejayoh wrote:
    well, they are probably paying $300/month in taxes

    maybe have carried back a second for the downpayment at 10-11%?
    My 10% interest rate calculation includes $300/month in taxes. If we're talking about just principal and interest, the required rate is more like 11.5%.
  • deejayohdeejayoh
    Wow. I suspect the writer never check the number they were given for reasonableness.

    More quality "investigative journalism" I guess. Can't go without that.
  • lannypoffolannypoffo
    I think the anecdotal story was an interesting aside that detracts from some of the more central questions that the story brings forward.

    For example if the carrying cost of an REO property is about 10% (and understandably this probably isn't a magic number, but may vary somewhat from bank to bank, and location to location) and the market price has deteriorated by 13% over the course of the past year
    The median price of a single-family home in King County has fallen about 13 percent in the past year.

    and they [investors] typically pay only 65 cents to 75 cents on the dollar, Hall said. Paying more is just too risky.

    This indicates what a typical "discount" that banks "should" be willing to take in principle reduction in an efficient market. My quick calculation puts the clearance price at about 25% off bubble prices is what banks should find palatable in principle reduction.
    Mounting losses are making banks more willing to deal.

    "Foreclosures really are our last choice," said Susan Greenwald, a senior vice president and director of family lending operations at HomeStreet Bank. The Seattle-based bank services 42,000 mortgage loans backed by Fannie Mae, Freddie Mac, Federal Housing Administration and Veterans Administration lending programs, along with a small portfolio of its own home loans.

    Greenwald estimates the bank is able to work out new payment programs about 90 percent of the time. As a result, the bank only has one foreclosure in Seattle, Greenwald said.

    But possibly banks in Seattle haven't experienced enough pain to realize that this really is the best path forward? Are they still counting on Seattle being a relatively solid housing market? Or are they waiting for a government handout?
    It helps that the housing market here isn't as bad as other parts of the country. She points out that just over two dozen Fannie Mae loans are in foreclosure in Seattle, compared with more than 900 in Phoenix.

    But there are limits to what banks are putting on the table. Even the Obama administration's new homeowner affordability plan requires loan modifications to cost less than foreclosure, she said.

    "At the end of the day, it is still a business," Greenwald said. "We still have to look out for the financial interests of the lenders in servicing the loans."

    Regardless - in the long term banks will be willing to settle, and albeit slowly may be coming around.
    "They absolutely will reduce the principal owed," said Hall of Vestus Foreclosure Group. "They would much rather take the discount now than take it later. In a normal market a bank may not care if it gets the house back — it can sell it for close to the debt owed. Now that is not the case."

    This would be greatly helpful in getting the market back to reality - because if houses were priced by the market correctly, then "reasonable" credit to purchase them would also follow.

    Lanny
  • WestSideBillyWestSideBilly
    P&I on a 0 down loan at 7% would be about $1700/month. Even with taxes, PMI, and a really bad interest rate... no way.

    Interesting trail of public records... looks like a few refinances.
  • The_TimThe_Tim
    WestSideBilly wrote:
    Interesting trail of public records... looks like a few refinances.
    Indeed. I hadn't even thought to look at that. Looks like the purchase in 12/2004 (2 loans maybe), some kind of refi in 12/2005, another in 07/2006, and yet another in 11/2006.

    The Notice of Trustee sale does indicate an amount of $303,000 on the loan, but their original purchase price was only $255,000. So where the heck did that extra $50k go? Hmm...
  • jillaynejillayne
    Is this the same couple that discharged a second bankruptcy before buying? If so then that would mean higher interest rates but I think Tim found the problem: serial refinancing and extracting more and more equity until there's none left.
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