Laurie Goodman of Amherst Securities Group LP is one of the most respected housing market analysts around today. A quick Google of “Laurie Goodman Housing Crisis” will bring up a number of recent articles about her analysis of the housing market.
Recently Laurie testified before congress on the state of the U.S. housing market. In her testimony, a copy of which is available here, she said, in September of 2011, that if housing prices fall another 10%, the housing market would likely see a “death spiral” of falling property values and resulting defaults, as more and more home owners watch their property value drop well below what they owe on their mortgage.
Her report also stated that “Loan To Value is now the primary predictor of loan default. Thus, the more a given property drops in value, the more likely the borrower is to default on the mortgage, regardless of their ability to pay”. Her analysis is predicting that 8 to 10 million foreclosures will happen over the next 6 years or so.
At the end of 2011, 3 months after Laurie Goodman testified before congress, the most recent Case-Schiller report dated February 28, 2012, shows that housing prices have continued to fall some 3.8% during the 4th quarter of 2011 alone. At this rate, it would only take a few more months of bad housing data for some markets like Atlanta to reach Goodman’s 10% threshold.
In her report, Goodman pointed out in detail that there is also a serious supply-demand problem, and recommended that the government institute a program to sell off blocks of bulk REO properties to investors, as a way to help create demand and get these foreclosed properties off of the government books. Fannie and Freddie are losing billions in taxpayer dollars, and something must be done to get rid of the REO’s they already own, before hundreds of thousands more hit their books.
With Goodman’s recommendations in mind, the FHFA has instituted a bulk REO sale program, with a pilot project that is rolling out now. This program has identified several major cities with hundreds of REO properties that have been targeted for sale in a block of several hundred or more, to large, well qualified investors. Atlanta, GA, my home town, happens to be at the top of this list, with an initial block of 572 properties currently being offered for sale.
In December of 2011 the Case-Schiller Index said that home prices in Atlanta had fallen a chart topping 11.7% over the past year. With this kind of price erosion, it’s easy to understand why Atlanta would top the list of markets targeted for a bulk REO sale.
But when it comes to bulk sales of single family homes with a requirement that they be rented, the property management logistics are mind boggling. As a practical matter, managing a number of single family homes in a block large enough to relieve Fannie and Freddie of their REO burden has never been done before. And the present consensus among many Atlanta investors who are familiar with the program is that off-loading the hundreds of thousands of existing REO properties to private investment companies will be very difficult, if not impossible.
While it’s relatively easy to manage large apartment complexes with hundreds of units all in one place, owning and managing hundreds or thousands of single family properties, even if they are all located in a relatively small geographic area is a totally different animal.
Many local Atlanta investors that I’ve spoken to about this program agree that as it is currently configured, the program will likely not have too many takers. Indeed, the qualifying criteria are extremely high, while the fact is that most single family investors are much smaller operations. The program does not allow for participation by smaller investors, who make up the vast majority of single family rental property owners.
Goodman also recommended that Fannie and Freddie figure out a way to write down mortgage principal to help stem the tide of defaults related to high loan balances and falling home values. Underwater borrowers are much more likely to default as their property value continues to decrease. But rewriting mortgage principal is opposed by many in the mortgage and finance industry, who believe that some borrowers may stop paying if they believe that they can get their mortgage balance reduced.
Finally, delinquent borrowers, who are trying desperately to avoid or stop a foreclosure on their home, through loan modification or principal reduction programs, are finding the process to be very confusing and frustrating.
There are a variety of federal and state programs, each with their own set of requirements to qualify. And most of the mortgage servicers are doing a terrible job of helping borrowers understand what those requirements are. I have direct personal experience with this, as I’ve been working with dozens of borrowers in foreclosure over the past 3 years. I can tell you that some times it’s as if they make up rules on the spur of the moment.
Just today I was told by a Wells Fargo Home Mortgage representative that a recently submitted package asking for a loan modification was rejected because the borrower had not signed every single page of the package, including even maps and comparable market analysis documents. In three years of working on foreclosure cases, it was the first time I’d ever been told that a borrower had to sign every single document submitted with a package, even if it was the comparable market analysis or a map of a subdivision.
I checked Well’s Fargo’s website and could not find this specific requirement listed anywhere. Even if the banks do publish guidelines for submission, they are difficult to find, and most representatives you talk to give you different rules and requirements. As it turned out, this particular mortgage was an FHA, and was not eligible for the modification we were requesting. But Wells did not tell me that. I discovered it from doing research elsewhere. Even if the borrower had signed every single document, Well’s was not allowed to modify this particular mortgage anyway, because of other rules governing FHA mortgages.
Between Laurie Goodman’s thorough analysis of the housing market data, and her ominious predictions of another 8 to 10 million foreclosures, the difficulties with ramping up the present REO bulk sale program for single family properties, and the totally confusing maze of issues that borrowers in foreclosure face in trying to get something done to save their property, it would seem that there is little hope of avoiding a continued erosion of housing prices. If Goodman’s assessment is correct, we are already well on our way to a “death spiral” in many of the hardest hit markets around the nation.
Donna S. Robinson is a 16 year veteran of the real estate industry. Her book, “Fundamentals And Strategies For Buying and Selling Homes” is available on her website at www.RealtyBizConsulting.com, the book contains creative ideas for buying and selling homes, as well as important info on choosing the right property.