Jim Banford

Everyone agrees that the housing market has been a pretty sick patient for a long time now. But not all agree on a cure.

Go to certain economic doctors and they will tell you that the cure for ailing home sales is job creation. Their prescription is that when enough people are employed again, the housing market will recover. But job growth has been practically non-existent with unemployment still near 10%, underemployment much higher and some forecasting a jobless recovery. Foreclosures continue glut the market with more than ever expected in 2010.

Since information is power in both health and economic matters, it's always a good idea to seek a second opinion.

Edward Pinto, a consultant to the mortgage-finance industry and former chief credit officer at Fannie Mae, isn't shy about offering some alternative medicine. He says very bluntly that the hole that's been dug by bad loans is too deep to be offset by a modest rise in future employment.
And Pinto strongly disagrees with the government response to the housing bust: to provide medicines (loan modifications) that prevent the market-clearing process and delay the inevitable purging of buyers who can't pay off even modified loans. I've never been much for purging myself but according to Pinto, the market needs to painfully cleanse (that's better) its system so that traditional housing forces can return to the scene.

What are traditional housing forces, Doctor?

Buyers with something at stake in their homes, in other words, a substantial down payment, along with the documented ability to cover all the monthly expenses associated with home ownership. "All we are doing is kicking the can down the street," Pinto said. "The loan modification programs that were designed to help people stay in their homes have been abject failures", depressing prices while foreclosures continue to flood the market.
So what should be done? Pinto would halt all housing stimulus funds and take some basic steps to curtail foreclosures. The initial steps would be tougher on at risk homeowners, but he believes they are critical to restore balance:

1. Separating borrowers who can qualify to pay a lesser mortgage amount from those who cannot.

2. Allowing lenders to accept deeds in lieu of foreclosure whereby the borrower deeds the property back to the lender and avoids the foreclosure process.

3. Banks lowering the loan amount and reducing mortgage principal amount to no less than 90 percent of loan-to-value and negotiating affordable terms and rates.

4. Make loans "judicial" enabling the bank to seek the borrowers' other assets in the event of default.

With all that in place, Pinto believes the result would be that only qualified borrowers would remain in homes, homes would cost less and many more genuine buyers would surface because the "bottom" has been reached. This sounds like tough and bitter medicine for those who lose their homes but Edward Pinto thinks it's the only way to finally cure what's ailing the housing market.

A January 2^nd article in the "New York Times" by Peter S.Goodman got it right by essentially stating that the Federal Government's Making Home Affordable program has been largely ineffective and likely is causing more harm than good.

The article, U.S. loan Effort is Seen as Adding Housing Woes, covers a lot of ground but several of the main points brought by the sources referenced in the article are: 1) The Program has hurt an economic recovery by stalling the eventual outcome - foreclosure -- as most homeowners in foreclosure cannot make or choose not to make even a reduced monthly payment, and 2) the modifications along with the high re-default rate give homeowners the false sense in the short term that they can keep their home only to ultimately loose it to foreclosure.

By some estimates, the leading cause of loan default is not mortgage payment affordability but strategic in nature. Simply stated, the borrower understands that they owe, often by a large margin, more than the home is worth. He or she then decides the best course of action is to stop paying the loan as it would take many years to recover the lost equity. For example, a home purchased for $200,000 in 2006 and worth $100,000 today, a common scenario in Florida, will take almost 15 years at an average annual appreciation of 5% to be worth $200,000 again. I know of examples whereby a borrower buys a comparable home for half of what he owes and then stops making payments on the original home, thus securing the new home prior to taking the credit rating hit.

The government's efforts, via directives to the lenders, to modify loans is akin to putting a band aid on a broken arm in most instances. At some point, the arm will need to be reset and cast to ensure proper healing. Foreclosure, while painful in the short term, allows the lender to recover a portion of its loan loss and relend the money to a presumably higher credit quality borrower and put the home into the hands of someone more likely to be able to afford and maintain it, thus addressing the negative influence on the neighborhood of a poorly maintained home. Foreclosure is a necessary healing process.

Jim Banford

Florida Bank Owned Property Sales - Fall 2009. Sales of Bank Owned constitute upwards of 50% of all sales and the volume is rising. Real Estate Asset Disposition Corp. is the leading seller of bank owned properties in Florida. As the Broker and Owner of the firm, I have seen tremendous growth in both the volume of REO properties and the volume of REO sales taking place in the past 90 days.

I attended a Fannie Mae conference this week during which a presentation was given on the backlog of foreclosure cases throughout Florida. While it varies by County, many areas are seeing a 6-month delay in holding foreclosure sales. Historically, there was a 4 week time-frame between the Final Judgment and the foreclosure sale being held, currently, the delay is 6-months in many areas including Miami-Dade County. The cause of the delays generally involve the large number of foreclosure cases in the County Court systems combined with reduced County staffing to administer the caseload.

The result of the backlog is going to be a longer but steadier stream of bank owned properties coming onto the market rather than a flood of new properties at once. The longer stream of bank owned properties coming to market should allow for the current price stabilization to continue.

Jim Banford, President

For more information on Bank Owned Propertes in Florida