Tip of the Iceberg With Luxury Short Sales; Fannie, Citi Suspend Foreclosures for Holiday Season

Inquiring minds are reading Luxury-Home Owners in U.S. Use �Short Sales� as Defaults Rise

Homeowners with mortgages of more than $1 million are defaulting at almost twice the U.S. rate and some are turning to so-called short sales to unload properties as stock-market losses and pay cuts squeeze wealthy borrowers.

Payments on about 12 percent of mortgages exceeding $1 million were 90 days or more overdue in September, compared with 6.3 percent on loans less than $250,000 and 7.4 percent on all U.S. mortgages, according to data from First American CoreLogic Inc., a Santa Ana, California-based research firm. The rate for mortgages above $1 million was 4.7 percent a year earlier.

�You are just starting to see the tip of the iceberg with luxury short sales,� said Adrian Heyman, owner of Property Advisors, a real estate broker in Scottsdale, Arizona. �A lot of wealthy people are upside down in their mortgages and they just can�t afford the second or third vacation home anymore.�

There are 114,000 home loans of more than $1 million, according to First American. About a quarter of all mortgaged homes in the U.S. have loan balances bigger than their current value, known as being upside down or underwater, the data company said.

The entry-level segment of the housing market was aided this year by an $8,000 first-time buyers tax credit that pushed resales to a 6.1 million annual pace in October, the highest since February 2007, the National Association of Realtors said in a Nov. 23 report.

President Barack Obama signed a bill last month extending the program into next year. The new version keeps the first-time buyer benefit and makes a smaller credit available to some move- up buyers. It can�t be used for homes priced above $800,000.

The Fed purchases haven�t affected the high end of the market because they exclude so-called jumbo loans. Mortgages above the $729,750 limit set by Congress for the nation�s highest-priced markets cost almost 1 percentage point more than conforming loans, according to Keith Gumbinger, vice president at HSH Associates, a mortgage-data company in Pompton Plains, New Jersey. That�s quadruple the historic spread.

Losses on luxury short sales will be high.

Tthere is huge pent-up demand for short sales or walk aways at the high end, especially pay option ARMs for which Wells Fargo is loaded to the gills.

Short Sales Triple

After avoiding short sales for years Banks Take Losses on Short Sales as Foreclosures Soar.

Short sales almost tripled to 40,000 in the first six months of 2009 from the same period a year earlier. Yet for each short sale, there were 25 foreclosures started or completed in the first half of this year, according to data from the Office of Thrift Supervision and the Office of the Comptroller of the Currency.

�It�s really finally dawning on banks that they�re better off with a short sale,� said Richard Green, director of the Lusk Center for Real Estate at the University of Southern California in Los Angeles. �I think banks were in denial.�

Lenders have been reluctant to do such sales because they didn�t have procedures for employees to approve a financial loss for the company, said Alan White, assistant professor at Valparaiso University School of Law in Valparaiso, Indiana.

�A short sale requires somebody to stick their neck out and make a decision,� said White, an expert in consumer law and bankruptcy. �There are not good structures in place to incentivize losses.�

Bankers also have been slow to sign off on short sales because homeowner associations, mortgage insurers and second- lien holders may not agree to the terms of the deal, said Michael Frantantoni, vice president of single family research at the Mortgage Bankers Association.

Pressure is building to approve short sales as the number of delinquent mortgages has grown to 3.2 million and an estimated 7 million foreclosures loom in the next two to three years, according to Irvine, California-based RealtyTrac Inc., which compiles and sells U.S. mortgage delinquency data.

New Treasury Department guidelines for foreclosure alternatives scheduled to take effect in April 2010 will require lenders to consider borrowers for a short sale on their primary residence 30 days after missing two consecutive payments on a modified loan or after the borrower requests a short sale.

Treasury Plan

The Treasury Department would pay up to $1,500 for a homeowner to relocate, $1,000 to loan servicing companies that accept a sale and a maximum of $1,000 to help settle a second mortgage or subordinate lien. A lender must agree to release the borrower from all liability for repayment for the mortgage, under the Treasury plan.

�Pick-a-Pay� mortgages have among the highest rates of negative equity, because borrowers could select their monthly payments, often paying less than the interest, with the difference added to the principal. That formula means that total loan debt was increasing at a time property values were falling.

Wells Fargo held $87.8 billion of such loans as of Sept. 30, down $7.5 billion from the end of last year.

�Shadow Inventory� of U.S. Homes Climbs

Bloomberg is reporting �Shadow Inventory� of U.S. Homes Climbs.

The number of homes that may be in the pipeline for a sale because of foreclosure and delinquency climbed about 55 percent to 1.7 million at the end of September, according to estimates by First American CoreLogic. The �shadow inventory� rose from 1.1 million a year earlier.

There is much pent-up demand to sell from those hoping to get even, those trying to hang on but will fail, banks holding foreclosures off the market hoping home prices will rise, and foreclosures in the works.

Citigroup, Fannie Mae Suspend Forecloses For Holiday Season

CNNMoney notes Citi's holiday treat: No foreclosures for a month.

Citigroup will suspend foreclosures and evictions for 30 days, giving 4,000 at-risk borrowers a break during the holiday season, the company said Thursday.

The New York-based bank said distressed homeowners with first mortgage loans owned by CitiMortgage or CityFinancial North America who also meet certain other criteria will not be subject to foreclosure sales or notifications between Dec. 18 and Jan. 17.

Citi (C) said the suspension affects 2,000 borrowers scheduled to have foreclosure sales and another 2,000 that were to receive foreclosure notices during the period.

Fannie Mae (FNM) also announced Thursday that it was suspending all foreclosure evictions from Dec. 19 through Jan. 3. All owners and tenants living in foreclosed properties that the mortgage financing company holds will not be subject to evictions during the holidays.

$8,000 tax credits temporarily increased demand at the short end, but that demand will fade given the pool of people who want a home and can afford a home is not infinite.

Also rates will rise by 25-50 basis points when the Fed stops directly supporting the housing market. That too will affect sales.

Finally, fiscal stimulus is already showing signs of slowing and this temporary bounce in home prices will soon reverse unless the jobs picture starts improving, something I doubt happens.

New Rules For Short Sales

Note the rule changes in the second article. They are very significant.

1) Lenders have to consider short sales
2) A lender must agree to release the borrower from all liability for repayment for the mortgage.

If one can arrange a short-sale, that would likely be preferable to potential problems of walking away. Once again, Before Walking Away Consult An Attorney. That's probably not bad advice on a short sale either.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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