This post first appeared on Minyanville.

There’s a good amount of buzz surrounding the Wall Street Journal’s piece on the staggering number of homeowners underwater on their mortgages. This, on the same day the Case-Shiller Home Price Index posted its fourth consecutive month-over-month increase.

Mixed signals? Possibly. But in reality, these two seemingly disparate data points suggest that even as foreclosure moratoria continue to keep bank-owned properties off the market — which is artificially limiting supply and creating the illusion of a tight housing market (the supply of existing homes is back to historical norms) — behind the scenes, more and more borrowers are falling behind, and staying that way.

The number of mortgages in the “90+ delinquency but not yet foreclosed” bucket is still growing and the rate of change is yet to slow. The looming backlog of foreclosures not yet completed is growing much faster than banks can (or are allowed to) push them through the system. Lender Processing Services (LPS), a spinoff of Fidelity National Information Services Inc. (FIS) estimates that 710,000 mortgages are more than six months delinquent but not yet in foreclosure. A year ago, that number was “just” 203,000.

So what does all this mean?

While another leg down in housing is certainly in the cards, another cliff-dive isn’t the likely scenario. Rather, a continued slow bleed, with increasing localization as certain markets recover while others languish. Second home and jumbo markets are still under pressure, even as investors feast on low-priced homes in some of the country’s seedier neighborhoods. But as long as the US government dominates the secondary market for mortgages (FHA/Fannie Mae (FNM)/Freddie Mac (FRE)/VA, etc), mortgages will be available to qualified (and unqualified, in the case of the FHA) buyers.

Betting on another all-out collapse in residential housing prices is akin to betting on the bankruptcy of the US government. Could it happen? Sure, but that certainly isn’t the base case.

A much more interesting (and profitable) bet is to find areas that have fundamental (ie, demographic) drivers for demand, and looking for affordable submarkets where demand is strong and not driven by the FHA. Are there a ton of these neighborhoods around? Nope, but they’re out there if you know how and where to look.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Despite recent reports to the contrary, the impending stabilization of the housing market is a myth. While declines in certain markets are coming to an end, real estate, in general, is still in freefall.

Last November, amidst a great deal of media fanfare, Fannie Mae (FNM) and Freddie Mac (FRE) enacted a temporary foreclosure moratorium, angling to give renewed loan modification efforts a chance to work. All the major financial news outlets jumped on the story, loudly proclaiming the mortgage giants were doing their part to give the housing market a chance to lick its wounds.

Then last week, without so much as a nod from the Wall Street Journal, Bloomberg or CNBC, the foreclosure ban was quietly lifted, right on schedule. A nod to the Washington Independent and Calculated Risk for picking up the story.

This is a not-insignificant development in the round of bottom-calling that’s gripped the world of real-estate punditry and prognostication.

Two datapoints are to blame for this misplaced optimism: A month-over-month increase in February new home sales, and one in existing home sales. In addition to rising transactions in the most depressed markets, many cite the eagerness of big banks like JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC) to get foreclosed properties off their books a a sign supply is quickly being eaten through.

Meanwhile, reality tells a very different story.

In yesterday’s San Francisco Chronicle, Carolyn Said revealed a phenomenon familiar to real-estate insiders, but little appreciated by the financial world at large: phantom supply. Also known as “shadow inventory,” phantom supply represents homes banks have repossessed, but have yet to sell. In other words, it’s the pipeline of foreclosures still to come on the market.

According to data from RealtyTrac, a foreclosure monitoring service, banks are selling less than half the homes they take back from borrowers. This analysis is echoed by courthouse auction results, which show the vast majority of foreclosures are delayed, rather than being taken back by banks. Even fewer are being sold to third parties, which means asking prices are still too high.

Couple banks’ unwillingness to take back, market and sell properties with Fannie and Freddie’s recent lifting of their foreclosure ban, and improving housing data could prove to be short-lived. As one well-informed California real estate broker and Minyan writes, ”There is a huge logjam [of foreclosures]. With Fannie and Freddie’s recent announcement, the logjam may be coming undone.”

To be sure, being negative on the housing market is beating a very, very dead horse. However, with the spin experts at the National Association of Realtors flooding the market with ads — and with media cries of “stabilization” – prospective homebuyers should be skeptical of anyone who says the best deals will pass them by if they don’t act now.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Countrywide was to subprime lending what Thornburg Mortgage was to jumbo-prime.

Now, both are out of business.

Thornburg said it expects to file for Chapter 11 bankruptcy protection, ending a nearly 2-year struggle to fend off creditors and survive the credit crunch. The company, once the country’s second largest independent mortgage lender, specialized in making jumbo loans to borrowers perceived to have little credit risk. Ever since the market for its mortgage-backed securities evaporated in the summer of 2007, however, Thornurg has been under siege.

In what now seems like ancient history, Countrywide nearly collapsed as its short-term commercial papers seized up, and investors fled Thornburg in droves. The Federal Reserve stepped in and shocked the market back to life, but the revival was short-lived. Enough damage had been done that any financial institution holding even highly rated securities backed by residential mortgages had a target on its back.

Thornburg’s stock was delisted last December as a series of last-ditch efforts by CEO Larry Goldstone failed to save the company. With investors buying nothing by government-backed Fannie Mae (FNM) and Freddie Mac (FRE) mortgages, Thornburg’s bread and butter — jumbo loans — became virtually worthless.

Although Thornburg’s demise was a foregone conclusion months ago, the fate of a company many once believed immune illustrates how far we’ve come from what began as a “subprime” problem.

High-end real estate is now fully engaged in the nation’s housing slump. Prime loans are souring faster than subprime ones as job losses spread up the socioeconomic ladder. Manhattan’s real-estate market is in the news again, as sales continue to plunge and prices follow suit.

Here in the San Francisco Bay Area, where expensive homes dominate many markets, high-end buying activity has slowed to a trickle. The chart below, from Cirios Real Estate shows purchases over $1,000,000 since the broader housing market peaked in 2005. Even without the statistical wizardry of seasonal adjusting the data, the trend is clear: America’s wealthy aren’t buying.

click to enlarge

Sales figures don’t look much better in the first quarter of this year, even though broad sales activity is up month-over-month. The bifurcation of the real-estate market continues, as troubles in the high end are picking up the slack while low-end markets grope for a bottom.

Foreclosures are even happening in some of the country’s wealthiest communities. In many of these markets, denial reigns as owners clong to the belief that the slump is temporary, their paper losses transitory. But as deleveraging continues, asset prices continue to fall, and forced liquidations creep towards the very wealthy, reality is slowly setting in.

By ANDREW JEFFERY

This post first appeared on Minyanville.

From expansive estates in the Hamptons to mansions on the Malibu cliffs, the rich are watching their vast real-estate wealth evaporate before their eyes.

Perhaps no market epitomizes the ultimate surrender of high-end real estate than the island of Manhattan, where housing prices had held relatively stable until quite recently, despite broad declines across the country.

Turmoil on Wall Street, the collapse of Lehman Brothers, and layoffs at big employers like Citigroup (C), JPMorgan (JPM), Morgan Stanley (MS) and Goldman Sachs (GS) have finally taken their toll on the once-proud market for overpriced, undersized refuges from the concrete jungle.

The Wall Street Journal reports housing inventory in Manhattan jumped 39% in the fourth quarter as sales plunged – even as prices managed to eke out a 3.1% gain from a year ago.
Meanwhile, condominiums and cooperative apartments currently under contract to be purchased are selling at a whopping 20% below the prices paid just last summer. As sales data reflecting those transactions emerge in the coming months, Manhattanites may finally wake up to the reality that their housing market is no longer immune from the afflictions the rest of the country knows all too well.

Compounding the effects of an abysmal bonus season throughout the financial industry, ongoing job cuts, and generally weak economic conditions, lenders continue to scale back the availability of so-called jumbo mortgages. These loans, too big to fit within the ever-narrowing lending guidelines of Fannie Mae (FNM) and Freddie Mac (FRE), don’t qualify for a government guarantee.

Banks take on more risk by originating these loans, and charge higher rates for the pleasure. Bankrate.com (RATE) reports jumbo rates remain more than 1.5% higher than their smaller, conventional counterparts.

Since most Manhattan condos and co-ops are purchased with jumbo loans, these persistently high rates mean prices on the island are being only marginally supported by recent, aggressive moves by the Federal Reserve and Treasury Department to spur home buying.

Wells Fargo (WFC), now the nation’s largest mortgage lender after completing its acquisition of Wachovia, isn’t helping matters for high-end buyers. The California-based bank announced yesterday it would stop offering jumbo loans through its wholesale (or broker-originated) channel. MortgageDaily.com reports Wells cited low market demand and higher risks in its decision to suspend jumbo offerings for mortgage brokers.

The ongoing financial crisis, which arguably originated in the narrow winding streets of Wall Street, has now come full circle. The same bankers, traders and financiers who levered houses up beyond all rationality are now seeing the dark side of structured finance gone awry.

Some will wisely sell now, while they still can, take their lumps and move on. Others, stubbornly clinging to their former glory, are likely to go down with the ship.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Speculators have been flocking to California for centuries. Gold, computers, absurd dot.com start-ups, real estate - if it’s an asset, it’s probably boomed and busted in the Golden State.

The bursting of the latest bubble — real estate — is still in progress, as foreclosures push up inventory and drag down prices. Nevertheless, for every speculator that got burned on the way down, reinforcements are flooding the state with new money, hoping they’ll be lucky enough to pick the bottom.

In a trend that’s just beginning to emerge from the smoldering ashes of California’s housing market, the next wave of buyers could be armed with armloads of cash that’s red, rather than green. The Chinese are coming.

The Los Angeles Times paints a colorful picture of “Caravans of cash-rich Chinese in Hummers and Lincoln Navigators weaving through American neighborhoods in recent months, looking for foreclosures and other bargain properties to buy.”

What used to consist of small-scale, individual trips by wealthy Chinese buyers to scout for properties have turned into massive, safari-like operations. According to the Financial Times, SouFun.com, the biggest real estate website in China, received over 300 inquiries within days of announcing a home-prospecting trip to California.

For now, the groups are focusing on areas with existing Chinese populations, making San Francisco and Los Angeles prime targets. Almost 20% of San Franciscans hail from China; parts of LA, specifically the UC Riverside area and the San Gabriel Valley, boast large Chinese American communities.

And while not every potential Chinese investor is itching for a foreclosed tract house, a penchant for paying cash makes them desirable buyers in troubled markets. Big lenders like JPMorgan (JPM), Bank of America (BAC) (thanks, in part, to Countrywide) and Citigroup (C) have massive portfolios of foreclosed homes they’re trying to unload. Countrywide has over 6200 in California alone, up from 3900 just a year ago.

With mortgages increasingly tough to come by, banks are typically willing to knock 10% or so off the asking price for a cash bid. Countless sales have been falling through because the buyer can’t line up a loan, and cash is now king in the world of distressed home sales. This is no secret, and investors trying to snap up foreclosed properties at the courthouse steps tell stories of buyers showing up with millions of dollars in cashier’s checks at the ready.

Experts in China, however, are urging caution. Home prices in California are down 40% by some measures, but few expect the declines to taper off any time soon.

One tour operator told the LA Times he aims to give visitors a better sense of what life is like in America before they take the plunge: “What we sell is the culture, American culture.”

And what better souvenir to take home from a trip to the US than a shiny new…house.

This post first appeared on Minyanville.

Banning foreclosures is starting to gain momentum in Washington: This isn’t good.

Barak Obama, the current frontrunner in the race for the White House, recently floated a plan for a 90-day moratorium on foreclosures by certain banks, along with other initiatives to revive the economy.

While Obama’s heart may be in the right place with respect to homeowners, current efforts to stem foreclosures by making it harder for banks to take back houses are largely misguided. Preventing banks from exercising their rights as debt holders could have negative consequences for all homeowners. For the ones facing foreclosure, a moratorium is likely to delay in the inevitable.

Mortgage rates are kept low largely because banks can repossess a home if the borrower stops making payments. Even if a homeowner declares bankruptcy, the it can still take back the house. It may seem cruel, but it’s one of the primary reasons banks are willing to give out hundreds of thousands of dollars in support of home ownership.

By taking away their loss mitigation tool, or even by threatening to limit their ability to foreclose, banks will demand a higher return for the risk they undertake in lending. This means higher interest rates, tighter qualification requirements and home prices far lower than they are today.

We must find effective ways to limit the damage of the housing market’s collapse without endangering the eventual recovery of one of America’s most essential markets.

Case in point: California. The epicenter of the housing market’s implosion recently enacted legislation forcing lenders to jump through additional hoops before starting the foreclosure process. Aimed at finding common ground between lenders and troubled borrowers, the state saw a dramatic 62% drop in notice of default filings — which mark the start of the foreclosure process — a month after the new law took effect.

On the surface this may sound encouraging, but digging deeper, it appears the data simply reflect a brief interruption in the prevailing trend. Sean O’Toole, founder of research firm ForeclosureRadar, told Housing Wire:

Given the significant negative equity now occurring in most California foreclosures, modifying loans to affordable levels either requires large principal balance reductions, or extending the unsustainable teaser rates that created the foreclosure crisis in the first place.

Wide-scale adoption of large principal balance reductions also poses significant risks, as they are likely to encourage non-defaulting homeowners to default in the hopes of securing similar reductions. As such, either type of loan modification is likely to result in increased default, and/or foreclosure activity in the future, a consequence clearly not intended.

Foreclosures are a necessary, if painful, aspect of the housing cycle – and a requisite part of any sustainable market recovery. And while there are measures the government can take to prevent foreclosures without sacrificing the necessary price discovery the market so desperately needs, they must not be banned outright. Not even for a few months.

The guilty are being punished, albeit slowly.

Bank of America (BAC) recently had to fork over $8 billion to settle lawsuits filed against Countrywide, which it purchased earlier this year. Fannie Mae (FNM) and Freddie Mac (FRE) are being sued by angry shareholders who felt they were misled about the companies’ financial strength. Bear Stearns is gone, as are IndyMac and Lehman Brothers. And While this may offer little solace to upside-down homeowners, it’s evidence the free market is still functioning (however deep it may become buried under government intervention).

Significant increases in mortgage regulations are already in the works: A more restrictive set of rules is the only sure bet in today’s housing market.  However, in so doing, it’s important that we not block out an entire subsection of the population - those with poor or undeveloped credit, who are nonetheless worthy of and responsible enough to own a home.

These distinctions were badly blurred and blatantly exploited during the boom, but that’s not reason enough to preclude millions of deserving families from realizing the American dream of homeownership in the decades to come.