Tag Archives: foreclosures

New News from the US

US home prices aren’t done falling. According to the National Association of Realtors, the median price in the third quarter dropped in 111 out of 150 markets. That’s pretty accurate, comprehensive and scary. The average price was down another 4.7% in the quarter.

Foreclosures, on the other hand, are a totally misleading statistic. October’s foreclosures are up 7% from the previous month, but down 31% from last year. Down 31%? You’d think that’d be good news.

Well, not really. If you remember, at the beginning of this year it came out that lenders were foreclosing on families without any proof that they actually owned the property. So they were doing foreclosures where they didn’t have the mortgage and couldn’t prove the debt. And that’s resulted in millions of stalled foreclosures. In about half the US states the lender needs to go to court to prove they’re the owner of the home. If they can’t do that – they can’t foreclose until they get their paperwork in order – or located in the first place!

So foreclosures have gone down to a trickle for most of this year. The mortgage loans are still in arrears, but it’s just given people a lot more time in their home. When they pick up again, foreclosures will set all kinds of new records just to catch up. There are still millions out there, and millions of homeowners over 90 days past due.

Right now, 10.7 million homeowners, which is 22% of all homes with loans on them, owe more than they’re worth. That’s staggering enough, but the average they owe, over and above their value is $52,000, according to CoreLogic, as of November 2011.

Add to that another 2.4 million who have less than $5,000 of equity and it’s over 27% of all homeowners.

In Nevada, one of the hardest hit states, at one point over 70% of homes were underwater, and it’s still at 58%. Some states are better off than others, but nationally, there is over $700 more owing on homes than their values.

It’s pretty sad and there really isn’t an end in sight for years and years. THAT is one of the biggest drags on the economy. And the lesson for us: Don’t finance more on your home than you can afford, avoid another line of credit which gambles your house away, and focus more on getting your debt down than up. Because 100% of all homes in trouble are ones with a mortgage. Nobody has ever lost their home once it’s paid off.

The New U.S. Foreclosure Nightmare

What a difference a couple of weeks can make. Two weeks ago, a judge in the U.S. was going through a large number of foreclosure applications. But he noticed something strange: All the applications were executed, and sworn out, by the same person. At that point, he started to ask questions about the validity of the affidavits, and things unraveled in a hurry – nation-wide.

With tens of thousands of foreclosures every month, it turns out that lenders were robo-signing these affidavits. That is, they were just mass signing them, but there wasn’t any of the work done to verify that the lender actually had the right to foreclose, and had the right to the title of the property. Some people were signing legal documents on over a thousand foreclosure applications in a day! Just think about that: They were filing applications to foreclose without even being sure they had the mortgage loan, and certainly without the backup documentation to prove it!

In Canada, mortgages are made by a lender, and held by the lender. So if your mortgage was made by the bank of George that is where the mortgage is held. So if there is a foreclosure, it’s a no-brainer to prove that the bank of George is the lender. But in the U.S., mortgages are administered by third-party servicers who collect the payments, send demand letters, etc. The actual mortgage is sliced and diced, re-packaged, and sold on Wall Street. So a piece of your mortgage is held by an investor in Saudi Arabia, some by a pension fund in Toronto, and another piece by a bank in England. Just imagine that nightmare to prove who the actual mortgage holder is!

Many politicians want all foreclosures stopped. That’s just insane, of course, because it rewards people who aren’t paying their mortgages. But what is happening is that the Attorney Generals in almost every state are now launching investigations and the heat is squarely on lenders who are scrambling like mad, cancelling foreclosures, starting from scratch in others, and giving up on many others.

A few years ago, foreclosures had a bad rap, and pretty much nobody, except high-risk speculators, wanted to buy them. Now, with the majority of all listings being foreclosures, they were hot and selling. After all, it was one way to get a really good deal on a home. People are already being burned badly because of their greed and lack of knowledge. Weekend seminars on how to get rich buying foreclosures charge $3,000 to $10,000, and are a total rip off. Lots of people go to the courthouse steps where foreclosures are first auctioned off, they bid pretty blindly, and discover that they don’t have clear title, and often, that the city, or tax department, has a big lien on the house.

Now, it would be a huge gamble to buy any foreclosed property in the U.S., because the risk is huge. You’ve bought it, but who is to say that the bank had a right to sell it to you in the first place? Yes, there have been sales which have been reversed, where there is proof the lender never had a right to foreclose in the first place.

It is a legal nightmare, and mark my words: The ripples from this will last for a decade.

The Sad News About our Savings and Debt Loads

US household debt to disposable income is still at 122% as of April. In normal times of the economy and employment levels, anything past 100% isn’t sustainable over an extended period of time. That is, you cannot continuously spend more than you earn. It is a recipe for financial trouble in the long term, and obviously means we can’t save. In Canada, even through the recession, we Canadians kept spending. Our household debt is now 146% of disposable income. We may be more conservative than Americans, we may have lower total debt levels but we’re spending a lot more, over and above what we earn, than our American friends.

On that same issue, the Bank of Canada says that, by 2012, one in 10 households will be spending 40% or more of their household income just paying debt. What does that leave to live on? Already 32% of households have no savings. So it stands to reason that, the more we pay towards our debts, the less money we have to live on, or save.

The National Foundation of Credit Counseling just released a study that, last year, the average person had over $2,000 in unexpected expenses! I keep talking about how critical it is that all of us have a basic emergency fund with two weeks of pay set aside – that’s another reason why. We all know there WILL be an emergency. We just don’t know when, what, or how big it’ll be. What an emergency fund does is to turn a panic and crisis into a minor inconvenience, because we have the money! If not, here we go again…using credit, and thinking that’s a solution, and going further in debt once again. Find a way to have two weeks worth of your pay in an emergency account that you don’t touch for anything else.

According to a company called RealtyTrac, foreclosures in the US, in the first quarter of 2010, are UP 35% over the same time period of 2009. And the credit bureau, Trans Union, found that mortgage arrears are rising, and not falling. In Nevada, 16% of homeowners are in arrears, it’s 15% in Florida, and 11% in Arizona and California.

In Canada, according to a report by the Canadian Association of Accredited Mortgage Professionals, there are about 375,000 people with mortgages who are challenged by their current payments. I don’t know what their definition of challenged means, but it sounds like a problem. If rates increase by just one percent, they expect another half million people could be in trouble. That goes back to what we talked about in the security of a fixed rate, instead of a variable rate mortgage.

Is It Right or Wrong?

Today, here are two moral dilemma stories. What do you think? Are either, or both of these, right, or wrong?

A number of years ago, in Michigan, some dealers experimented with a system that had a computer chip installed in vehicles which were financed. If the payments were past due, the owner would get a warning from this electronic signal in the car. It warned that the vehicle would become inoperable if the payment was not made within three days. Another warning came through the car the following day. Then, on day three, the car’s electronic system was automatically shut down, and wouldn’t start. Talk about a way to get someone’s attention to make their payment!

The dealerships were able to finance the vehicles with this software for a lower interest rate, because the risk of arrears was much lower on these loans. It resulted in a lot less repossessions, but the backlash was so huge, the technology didn’t take off to any large degree. Very bad idea, or would you buy it with the mindset that it’s reasonable not to drive something you can’t afford to pay?

Last year, in the U.S., between 700,000 and one million people walked away from their homes – but not in a typical foreclosure.

Strategic defaults are foreclosures of homes were the mortgage holder HAS the money, and HAS the ability to pay, but chooses not to. These people owe more on their home than the value, and make a conscious decision to stop making the payments. It will give them six months or so free housing until the bank comes to foreclose. At that point they walk away, reasoning, they’re saving themselves tens or hundreds of thousands of dollars paying a debt that is way more than their home is worth. They literally trash their credit, but reason that they are still way ahead, financially, by now being able to walk away from their home. In many interviews, on various programs, a lot of these homeowners were asked if they didn’t feel guilty, or some moral obligation to pay the mortgage that they CAN pay and voluntarily signed. The answer has always been no.

If you have the financial ability to pay, would you walk away if you owed $10,000 more than your home was worth? What about $50,000? What about when the value of your home has dropped by 50% or more such as many places in Arizona, Florida, or California have experienced?

Before you answer that, you should know something else. The biggest apartment complex in the world is Stuyvesant Village in New York. We’re talking 11,000 apartments and 18 highrises. In January, they defaulted on a $4.4 billion mortgage and voluntarily walked away. And who was one of the big five investors? The Church of England.

More Stories and Insights from the U.S.

Last week we discussed some real on-the-ground stories from Phoenix. Here are a few more insights worth sharing:

First and foremost, something very critical that separates us from the current U.S. policy. We spoke briefly last week about Prime Minister Harper traveling the country stating how well we are doing as Canadians in this economy. And he’s right. This isn’t about politics, although in the interest of full-disclosure, I’m a fiscal conservative. I believe that much of the intervention in the U.S. economy by the government is doing nothing more than creating a phony and temporary sugar high. Cash for clunkers was $3 billion of tax money to sell 700,000 cars – the car market is now dead again.

There’s an $8,000 tax credit for first time home purchasers. I guarantee you, when that expires in November, the housing market will die off again. Foreclosures are still increasing, and there are more than 17 million people out of work – and that’s still rising. The only way to get the economy back to health is to create jobs, and to reduce the killer debt load the average American is under.

If you believe the government programs are a blessing and not a temporary fix – just wait a year for them to expire, and you’ll see the results. Until then, you might not like Prime Minister Harper’s policies, but as a former economist, he knows that governments can’t be the solution to everything.

General Motors has now begun to sell new vehicles on the giant auction site e-bay. The trial with their California dealers was last month, but you can bet it’ll be back nation-wide. And GM is now working on a $4,000 vehicle. Tata Motors is selling their inexpensive one in India right now for $2,000, and they already have European certification, so you know they’re coming to North America at around $5,000 or so. Yes, GM is behind again – but not as far as usual.

Anyone who travels a fair bit will love this story: For some time now, there has been an on-going, multi-country investigation into illegal price fixing by airlines into their fuel surcharges. The CEO of Virgin Atlantic has already admitted to it. But it’s sad that any company that’s convicted will only have to pay a fine. And that fine will be way less than they made in profits from the fuel surcharges. Some of these executives should spend some jail time!

News from the US

Late last year we talked about the coming opportunities of buying real estate in the U.S. At that time, it seemed reasonable to be talking the fall of this year.

But you can forget that. The mortgage problems aren’t anywhere near an end and right now the problems are feeding on themselves and making things worse and not better.

There are a ton of foreclosures, averaging around 7,000 A DAY, and that’s bad enough by itself. But what’s happening now is that people who have been paying all the way along are becoming hard-pressed and discouraged.

They’ve seen foreclosures all around them but have been paying on a home that’ worth nowhere near what they owe. Ballpark? $50 to $100,000 or more in the hole. So many of those are now mailing back their keys and giving up. Banks call it jingle-mails as the keys are mailed back to them.

Others, and in growing numbers, are looking down the street at a foreclosure. That house, same street, so probably very similar in size, etc. is now $100,000 or so less than they owe! So many people are now buying that foreclosed home, setting up the mortgage and then sending back the keys to their home. Yes, this buying and bailing as it’s called, wrecks their credit rating, but they’ve first bought another home on the same block.

It’s not right, it’s not moral, but it’s happening in ever increasing numbers while Congress keeps coming up with bailout plans, the vast majority of which are designed to help lenders and not homeowners.

It doesn’t help that mortgage lenders are totally overwhelmed and often don’t even return calls, never mind helping homeowners restructure their loans and the whole process keeps feeding on itself: Foreclosures get dumped on the market at any price, more people are forced to re-finance at higher rates they can’t afford, seeing their home dropping more and more in value as foreclosures surround them, giving up on their payments, which puts even more houses into foreclosure.

Oh, and a recent survey reports that about half of all foreclosures have significant damage such as ruined floors, carpets, holes punched into walls and missing appliances, all of which reduce the home values by about another 25%, according to the survey.

In Miami, the home inventory is about three years, based on normal sales volume – and what on earth is “normal” these days. And even in Arizona, it’s more than a years’ worth of surplus inventory.

So hurry up and wait…maybe next fall if you’re thinking of buying down there.