California foreclosure blog

The much-anticipated housing bill goes to the President for signature today.

Hopefully, this bill will be a step in the right direction.

In addition to the Fannie Mae/Freddie Mac and new FHA features in the bill, there's a less publicized set of safeguards that I think is a great thing: additional help for veterans and active duty military personnel.

In the interest of disclosure, I was raised a Navy brat - my father served for over twenty years, and in many ways, so did his family. I have some personal experience and knowledge regarding how these measures will provide some much needed relief for our men and women in uniform, our veterans, and their families.

There is a measure that extends the waiting period from three months to nine months before a lender can foreclose on an active duty service member returning from service abroad, and a new measure that freezes a service member's mortgage interest rate for a year after returning from service. There's also an increase of the VA loan guarantee amount, and an increase in benefits for disabled vets to pay for home accessibility adaptations. There's even a mandate to the Department of Defense to set up financial counseling services for active duty service personnel and veterans.

In an era where many are happy to put yellow ribbon magnets on their cars, but few realize the magnitude of the sacrifices our men and women in uniform make for our country, it's great that service members and veterans will benefit from the housing bill.

RealtyTrac released its second quarter 2008 foreclosure numbers:

National total of NODs, Sale Notices, and post-auction deeds (known as Trustee's Deeds in California): 739,714

California total (same document types as shown above): 202,599. That's about 27.4% of the national total.

Increases over Q1 '08 - National, up 14%; California, up 19%.

Increases over Q2 '07 - National, up 121%; California, up 198%.

The RealtyTrac data, when combined with recent DataQuick foreclosure information, paints a grim picture indeed, as most people now facing foreclosure will end up losing their homes - that is, unless additional regulatory efforts help stem this tidal wave of loan failures.

CNNMoney has a great overview of the proposed FHA homeowner rescue plan included in the foreclosure / Fannie-Freddie bill. The bill should go before the Senate for a vote on Saturday, where it is expected to be approved. The President has indicated that he will sign the bill upon receipt from the Congress.

Here's how the $300 billion program will work:

Homeowners with loans issued between January 2005 and June 2007 (must be owner occupied), who are spending at least 31% of their gross monthly income on their loans, are eligible. The owners must be able to show that they will not be able to keep up with payments as scheduled, but the owners need not be in default. For owners behind on payments, a certification is required stating that the owner has not deliberately fallen behind to take advantage of the program.

Existing home equity loans or home equity lines of credit must be paid off before the owner will qualify for FHA financing. For many owners with two home loans, this feature may put the program out of reach.

The owner's existing senior lender must agree to write down its loan balance to no more than 90% of the home's current, FHA appraised value. For many senior loans, this will require the lender to agree to write down a portion of the loan's principal balance. The senior lender is not required to participate in the process - the program is voluntary for existing lenders. Conventional belief is that lenders will sign on because their losses are likely to be smaller under a writedown than if the lender takes the property through foreclosure.

The new loan is subject to applicable FHA guidelines and approval.

Once the new loan is in place, homeowners cannot take out an equity loan for 5 years, unless the loan is for property repairs or maintenance. All equity loans will be subject to FHA approval, and the maximum combined LTV allowed will be 95%.

There are owner costs assoiated with the FHA loans: insurance premiums for the FHA guarantee, 1.5% of the principal balance annually, a 3% (of the loan's principal balance) exit fee to FHA upon resale or refinance, and a sliding scale share of equity appreciation - starting at 100% in the first year, dropping 10% per year until the split reaches 50%.

I've heard some people grumble about some of the program features, especially the junior debt retirement requirement and equity split. Yes, many people will be locked out of the program if they can't make peace with their junior lenders, and yes, a 50/50 or more profit split with the FHA does seem a bit high.

But perhaps that's the point.

Here in California, I watched in horror as too many people started viewing their home not as their home, but as their piggy bank. Or worse yet, there were far too many people with absolutely no investment or real estate experience who went out and bought several properties with no money down because they fancied themselves land barons.

The FHA plan is not for people who did these things. And because taxpayers have to back the FHA guarantees, it's probably a good thing that the FHA plan is set up to weed those people out.

As expected, the House of Representatives approved the much-anticipated foreclosure rescue / Fannie Mae / Freddie Mac rescue bill. The vote was 272 to 152 in favor of the measure.

The Senate was set to take up the measure on Wednesday, but internal wrangling has delayed a Senate vote until this Friday or Saturday.

The President has withdrawn his veto threat, so it looks like the bill could be signed into law by early next week - and not a moment too soon for some 400,000 srtuggling homeowners.

New figures from DataQuick are confirming the grim reality that many Californians are suffering under: more people are heading towards foreclosure, and a greater percentage of them end up losing their homes.

For Q2 '08, 121,341 new Notices of Default recorded in California, up 6.6% compared to the first quarter of 2008, and up 33.5% compared to Q2 '07.

Trustee's Deeds (the post-auction deed that actually removes an owner from title after foreclosure) totaled 63,061 for the quarter. That's the highest quarterly figure ever - DataQuick started tracking the figure in 1992.

But the statistic that deserves the most attention is the cure rate: it fell to a dismal 22% for the second quarter. This translates to a California homeowner in default having a nearly 4 in 5 chance of losing their home. The cure rate is down from 32% in the first quarter of 2008, and from 54.6% back in the second quarter of 2007.

The current cure rate means that a California homeowner in foreclosure will lose their home (rather than finding a way to cure their default) 78% of the time. That's nearly 5 to 1 odds against the homeowner. Truly ghastly.

At the current cure rate, 94,646 (I rounded up 94,645.98) of the 121,341 new defaults for the second quarter will end up going to auction, and most of those will end up as REOs.

Take these figures to the lender for all your short sale clients - they may not get it the first time you tell them, but it couldn't hurt.

Governor Schwarzenegger announced yesterday that $200 million in bond-financed low interest rate loans will be made available for up to 1,000 first time home buyers. The target properties: vacant foreclosed properties in some of the California communities hardest hit by the current foreclosure wave.

The program, called the Community Stabilization Home Loan Program, was announced in Stockton, the reigning U.S. foreclosure capital. The program will be administered through the California Housing Finance Agency ("CHFA"), a state agency that promotes home ownership for low to moderate income Californians through a variety of programs.

Okay, so it's only 800 to 1,000 homes, or a fraction of a percent of this year's foreclosure total or current REO inventory in California. And yes, the money ends up with the banks who own the REOs, so in a way, it's a bailout.

But it's something. The rates are fixed and below market rates, so the buyers should be able to keep up with loan payments, and participating lender sellers are said to be selling the homes at at least 12% below current market value.

As long as CHFA's underwriting guidelines hold water (I'm pretty sure they do), and as long as the lenders are basing "current market value" on sources other than zillow or trulia, then maybe this program will be the first step in helping stabilize some of the California communities that have been devastated by the foreclosure boom.

As stated by Senator Christopher Dodd last week, "Nothing concentrates the mind like a death sentence."

It appears that some may have their financial death sentences commuted later this week, as the combined foreclosure rescue and Fannie-Freddie rescue bill comes up for a vote. The bill has the support of the aforementioned Senate Banking Committee Chair Senator Dodd, as well as House Banking Committee Financial Services Committee Chair Barney Frank, and Treasury Secretary Henry Paulson.

The President's threatened veto of the housing bill, because of nearly $4 billion in funds to assist local governments in buying and fixing foreclosed properties, now rings hollow because of the attachment of the Fannie-Freddie rescue. Yes, it seems that politics really does make for strange bedfellows, as Congressional Democrats find themselves defending the Republican Administration. Meanwhile, Congressional Republicans (long time opponents of Fannie and Freddie) have to balance their disdain for the bill against keeping their constituents happy. This bill may become very hard to vote against between now and Wednesday, especially for those in Congress seeking re-election in November.

It's definitely been a wild, hold-your-breath kind of week regarding America's current "big three" mortgage players.

Countrywide's internal practices are now out in the open, thanks to California Attorney General Jerry Brown. In a court filing yesterday, the A.G. outlines the company's incentives to loan officers and wholesale brokers to sell more expensive loans to borrowers than their credit ratings warranted, and the poor quality of the company's current loan portfolio. Subprime and option ARMs, which account for about one sixth of Countrywide's entire portfolio, have delinquency rates that indicate many loans should never have been made: nearly half of one portfolio's subprime loans, and over 20% of its option ARMs were delinquent as of April 30, 2008 according to the court documents. A Bank of America spokesperson notes that nearly 10% of all Countrywide loans are currently in some stage of delinquency. That means Countrywide's loan delinquency rate is more than double the current national rate of 4.5%. The current national rate is triple the high end of the historical delinquency cycle: usually, loan delinquencies range between 0.5% and 1.5%.

Meanwhile, the saga with Fannie Mae and Freddie Mac continues in Washington and New York. Freddie has filed a registration statement with the SEC to make a new stock offering, with hopes of raising up to $10 billion in new capital, mostly from current shareholders, On Capitol Hill, the Congress plans to vote on the Fannie/Freddie rescue as part of the larger foreclosure rescue bill. Congressional Democrats are playing a high-stakes game of chicken with the Administration over how the funds get allocated. Many in Congress want to cap taxpayer exposure to Fannie and Freddie losses, but Treasury Secretary Paulson contends that a cap would scare investors away. Before this week, the President threatened to veto any housing bill that included a proposed $3.9 billion for local governments to buy and rehab foreclosed properties. Now, each side needs the other to get the deal done because the Fannie/Freddie measures have been added to the housing bill.

Hopefully, we'll be breathing a collective sigh of relief by this time next week.

Well, they call economics the "dismal science" for a reason: economists at Moody's estimate that U.S. defaults will reach 2.5 million for 2008, a rate of about 4.5 percent of all home loans.

That's roughly triple the historical high end of the foreclosure cycle - defaults have generally ranged from 0.5% to 1.5% of outstanding loans.

The Moody's 2008 default estimate is significantly more than the earlier estimate of 1.69 million predicted by Credit Suisse back in June.

JULY 15, 2008 UPDATE**: Congress is working with the Bush Administration to include the proposed Fannie and Freddie plan with the Congress' larger foreclosure aid plan. As recently as last week, the House and Senate were working on a revised version of the bill that would garner enough votes to override a promised Presidential veto. Now, it looks like a deal is in the works that would allow passage of nearly all of the proposed borrower protections, along with the Fannie and Freddie provisions.

What a difference a week makes.

Over the weekend, the Federal Reserve and the Treasury Department announced the preliminary details of a plan to assist Fannie Mae and Freddie Mac. The faltering mortgage giants are going to get expanded access to short term loans at the Fed's discount rate.

While all the details are not yet clear (mainly because Congress has to approve some of the proposed measures), the announcements have started to stem off fears of an imminent failure of one or both of the companies. Stocks are trading higher, and the US Dollar gained in early trading Monday. The dollar increase is welcome news because it has the effect of driving down the price of oil.

There are some who think that the worst is not quite over for shareholders, because the announcements do nothing tangible for shareholders. Goldman Sachs analyst Daniel Zimmerman thinks that Fannie & Freddie shares could still lose an additional 35% of their value.

While the Fed and Treasury announcements may not save shareholders, the plan may help bolster the economy. And let's face it, our economy can use avery little bit of help it can get right now.