According to the latest reports on the U.S. housing market, the 96,400 homes hit with default notices last month were 7% less than in April and 22% less than in May 2009.
And that's not all. Foreclosure auctions were scheduled for the first time on 132,680 properties last month - 4% fewer than the month before and 16% fewer than in May a year ago, according to the Irvine, California-based RealtyTrac Inc.
In fact, foreclosure filings of all types - default notices, scheduled auctions and bank repossessions - were reported on 322,920 U.S. properties in May, a decline of 3%. All told, this latest report seems to have painted a picture of a gentle and steady recovery for the embattled U.S. housing market.
Unfortunately, these figures are quite deceptive - as is the reassuring portrait they helped create. Despite the apparent improvement in the foreclosure figures, there exist some dangerous undercurrents that threaten to further drag down U.S. housing prices - as well as U.S. investors.
Troubled Waters?
Despite the apparently reassuring May foreclosure report, a second-record month of home repossessions (with more to come) will put pressure on U.S. housing prices, the nation's banking sector, and the U.S. economy.
All those factors, in turn, will undermine the potential for continued strength in U.S. stock prices - even after a recent rebound that saw the major indices bounce back from temporary support levels.
Here's the problem. While the "headline" numbers - the summary statistics we cited above - appeared to portray an improving market, a look beneath the surface reveals those worrisome undercurrents.
Consider, for example, the statistics for actual bank repossessions. Those hit a record of 93,777 properties in May - a 1% increase over April's record and a whopping 44% up from the same month a year ago.
Here's another stunning stat: RealtyTrac's Foreclosure Market Report for May 2010 additionally announced that there were year-over-year increases in bank-repossession activity in each of the 50 states.
Commenting on the company's report, RealtyTrac Chief Executive Officer James J. Saccacio said that the "numbers in May continued and confirmed the trends we noticed in April: Overall foreclosure activity leveling off while lenders work through the backlog of distressed properties that have built up over the past 20 months. Defaults and scheduled auctions combined increased by 28% percent from 2007 to 2008 and another 32% from 2008 to 2009, creating a build-up of delayed bank repossessions. Lenders appear to be ramping up the pace of completing those forestalled foreclosures even while the inflow of delinquencies into the foreclosure process has slowed."
Delay and Pray
In spite of the record number of repossessions we've seen by banks and mortgage-service firms recently, millions of delinquent loans are still on banks' books and in mortgage pools. Banks, unwilling to take more write-downs or to incur the high cost of maintaining repossessed homes, have hidden behind federal and state government-foreclosure moratoriums and a host of modification programs designed to keep borrowers in their homes.
But this desperate tactic - known by industry insiders as "delay and pray" (or sometimes as "extend and pretend") - may have finally run its course in the U.S. housing market.
Instead of having a market in which U.S. housing prices are firming and heading higher, the expiration of the homebuyer-tax credit, stubbornly high unemployment, restrictive mortgage underwriting standards and a growing overhang of unsold properties is putting more downward pressure on home prices. Banks are realizing that the hoped-for "bounce" isn't coming and are beginning to take back more properties so they can unload them for as much as they can get before prices decline even more.
According to Lender Processing Services Inc. (NYSE: LPS), there are 3.5 million homes for sale today. Another 2.9 million have been repossessed or are in foreclosure, but have not yet hit the market. And 4.5 million borrowers are 30 days delinquent - a factoid that may cast an even larger shadow over the outlook for the U.S. housing market.
As bad as these numbers are, they still aren't telling the entire chilling story.
Bad News for Banks
In April, 12.7% of all U.S. mortgages were delinquent, but Lender Processing Services reported that only 3.18% of mortgages nationwide are in foreclosure.
Here's the truly frightening question: What will happen to U.S. housing market prices when foreclosures catch up with delinquent borrowers and the greater-than-50% of modified loans that are now re-defaulting? Once foreclosures are completed and titles to repossessed homes are in the hands of banks and mortgage servicers, they have no other option but to unload their unwanted inventory as fast a possible. Otherwise, they'll incur even more expenses - those involved with maintaining the properties, listing them and paying taxes on them.
Additionally, the vicious cycle of tumbling prices is likely to accelerate: As more distressed properties get dumped into a weak market, they can't help but establish lower comparable sales values for other area properties.
Of course, the weight of foreclosures, repossessions and dumping unwanted inventory on an already weak market also will further weaken bank balance sheets. Craig Emrick, a senior vice president at Moody's Investor's Service (NYSE: MCO), estimates that Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC), JPMorgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co. (NYSE: WFC) could record charge-offs of as much as $196 billion this year and next - an amount that's considerably higher than the $166 billion worth of loan losses taken in 2008 and 2009, during the height of the global financial crisis.
And it's not just the big banks that will take a licking. The community banks will feel the pain, as will the banks' banks - the Federal Home Loan Banks. Community banks and the FHLB are desperately trying to stave off what may be the inevitable.
A Terrifying Revelation
The Federal Home Loan Bank of San Francisco - the largest of 12 regional Federal Home Loan Banks, which are owned by community and other area banks and that make loans to their member banks from the pooled capital of their stockholding members - is in big trouble.
In a stunning revelation, which resulted from the San Francisco Home Loan Bank suing to force Wall Street dealers to repurchase $20 billion of mortgage-backed securities they claimed were sold to them based on "materially untrue and misleading statements," the Home Loan Bank had to identify the securities on its balance sheet.
Interestingly, while the San Francisco Home Loan Bank was suing because of huge losses claimed on the purchased securities, it was actually carrying those same securities on its books as if most of them would pay off in full. The San Francisco bank predicted credit losses on the $20 billion portfolio of $688 million, or about 5 cents on the dollar.
But according to Espen Robak, president of Pluris Valuation Advisors LLC - which analyzed the Bank's books on behalf of American Banker (magazine) and determined that the losses would more likely be in the $5 billion range - "the bank here has a highly aspirational view of what things are worth."
If the losses are real and realized, they would wipe out the bank's retained earnings, breaking the $100 par value of the bank's stock held by its members and preventing it from paying dividends to members. Additionally, it would make impossible the return of nearly $5 billion in capital stock that's likely being counted on by needy members.
What's happening at the San Francisco Home Loan Bank is obviously not an isolated case. The greater question is this: How many other banks are "mis-marking" the assets on their balance sheets, meaning they will face a continued erosion of those assets if a continued deterioration in the U.S. housing market causes housing prices to tumble further.
From this analysis of the undercurrents brewing below the often-optimistically spun headline news, it's clear that danger lurks in the housing market.
Investors are always looking for the story behind the news - or, at least, they should be.
And while a situation can always change, it's unlikely that the growing wave of repossessions will have anything other than a negative impact on the value of the nation's housing stock, its banks, its economy and the U.S. stock market.
[Editor's Note: Shah Gilani, a retired hedge-fund manager and renowned financial-crisis expert, walks the walk. In a recent Money Morning exposé, Gilani warned that high-frequency traders (HFT) were artificially pumping up market-volume numbers, meaning stocks were extremely susceptible to a downdraft.
When that downdraft came, Gilani was ready - and so were subscribers to his new advisory service: The Capital Wave Forecast. The next morning, because of that market move, investors were up 186% on a short-term euro play, and more than 300% on a call-option play on the VIX volatility index.
Gilani shows investors the monster "capital waves" now forming, will demonstrate how to profit from every one, and will make sure to highlight the market pitfalls that all too often sweep investors away.
Take a moment to check out Gilani's capital-wave-investing strategy - and the profit opportunities that he's watching as a result. And take a look at some of his most-recent essays, which are available free of charge. To read one of his most-popular essays, please click here.]
News and Related Story Links:
- Money Morning News Archive:
Stories by Shah Gilani
- Money Morning Capital-Waves Investing Series:
Capital Wave Investing: How to Transform These Four Global Threats Into Portfolio Profits - Money Morning News Archive:
Capital-Wave Investing News Stories - TrexGlobal.com:
U.S Foreclosure Activity Decreases 3% in May - RealtyTrac Inc:
Official Website
- Investopedia:
Mortgage Pools - Lexology.com:
You can "extend and pretend," "delay and pray," or "pay and pray" and not get criticized ... sort of - James J. Saccacio:
Official Bio
- Wikipedia:
Federal Home Loan Banks - Federal Home Loan Banks:
Official Website
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About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.
No! Can't believe it. Would bankers lie to us? But they only lie when their lips are moving.
Shah is one of the few in the industry that speaks the truth. With the economic stats in for May Obama et al are desperately searching for red herrings. Now he will arm wrestle BP and save the Gulf of Mexico. Next up maybe a showdown with NK and Iran. Anything to distract the hoover-head media from reporting what they should be reporting about our economy.
That Madoff is a mere piker compared to the Ponzi game the US Fed is running. Printing more $ than Americans or our creditors know about. A bank that refuses to be audited hiding behind the tax dodger that runs the US Treasury Department and our teleprompter President who sold out to Wall Street. As the sheeple head for the cliffs thinking it pasture.
Seems like their is a long way to go to get through the Housing diaster in the U.S.
Just wondered if any of these firms will be able to pull them selves into a profitable position.Ted Gyles
i would like to learn about gilanis capital wave investing ,but am sceptical of investing such a large amount up front not knowing if i can realy make any profits.lets make a deal i invest and show true profits then pay the fee.
There is a lot of free advice out there. You get what you pay for !!
Capital Waves is the best I have seen. Advance info with logical explanations
not hype !
Great article and one that portrays a portion of the smoke and mirrors that exists as the administration tries to shore up the perception of the economy and the so-called recovery. My personal opinion is that we are in for a major downturn as the perfect 'economic storm' continues to brew and this is one major component of that storm. If we take a broader view and combine this report with several other factors such as money to include printing of huge sums of cash (what happens when it starts to come back home), lack of transparency in government spending (what happened to Tarp?), the bailout of economically unsound firms (AIG, GM [Government Motors], etc.) and we add the instability of world economies currently shoring up the USD, then we throw in the pot other factors to make a great disaster soup. Let's add a dash of jobless recovery (really, can we please not take the census employment as recovery?), negative GDP growth (when you wash off the whitewash) and add a pinch of growing deficit and trade balance along with a hint of monetary trending dating back to the release of the dollar from the gold standard and, viola, there is the complete recipe for our future. What is worse is that, rather than face the facts and work to deal with this problem, our current administration has chosen to take the short-term fix approach (not a fix at all) and opted to use the smoke and mirrors economic repair kit to solve our horrific problems. But that is our broken political system and is a story for another day. Great article! Thanks!
Between 1998 and 2001 I bought for later re-sale 4 houses at CA Bay area trustee {foreclosure} auctions. Then I got out of the game because I thought the market was going nuts and the Fed would surely tighten lending, raise rates and cool things off. How wrong I was!
A lender only had to ask himself, "Would I run an ad, and loan a stranger hundreds of thousands of my own money based on unverified information?" Lenders were criminally insane, believing they could always pawn thses loans off on somebody else. The Fed was guilty of malfeasance that still takes my breath away.
Now seniors and boomers are being forced to prop up insolvent banks with zero savings rates. It also serves to herd them into risky investments with a view to propping up the markets. This is going to end very badly with a generation of retireds unable to support themselves. Meanwhile the bankers at the top will retire like kings.
After reading this article I'm getting depressed.
jj is getting as depressed as the economy
I appreciate that Shah Gilani throws 'cold water' on our faces to remind that not all is well. You can forget in all the hype! Great article … the small Network company I contract at is about to go under … state of the art product … but financing and VC very hard to come by … it's a shame that this country is pissing away tens-of-billions on 'bandaids' that won't work, funding that which should be killed, while a small promising startup can't even find 10 or 20 million despite extreme productivity and promise with a product that works and is needed. The 'capital' has been taken out of 'capitalism' and the road to recovery is going to be much more difficult than it otherwise would have been. The mortgage issue is a long-term overhang that will prevent Banks from making loans to many businesses that deserve the loan based on fundamentals, but won't get the loan anyway, arrrgghhh!
So at what point will all those that are frustrated their homes aren't worth what they are paying just decide to STOP making their mortgage payment???…even if they DO HAVE A JOB & THE MONEY! Why keep setting our money on fire??? – shouldn't everyone get a "work-out" ? Are banks going to agree to write down the principle on these loans and get us restarted at current market value?? And what IS THIS exactly…how will it be determined??? UGH! It is soooo frustrating to think their is NO "recovery" in sight……very depressing all the way around!
Shah Gilani’s essays are a valuable resource. I would like to learn his view on Obama’s Value Added Tax. What is in store for America should a VAT be imposed. I say imposed because Obama wants the “report” delivered right after the elections so that passage of a VAT could become law under a lame-duck session of Congress.
It seems like the plan is to inflate prices to keep them high. I looked at realtor.com and found that houses are still very expensive. I'm hoping that prices will come down so my children can afford to buy one.
Well done and thought out ! This does not even mention the commercial loans where the worst is still ahead of us . Any insights on that issue would be greatly appreciated .
Compared to Canada it sounds like the US banking and housing markets are on a totally different planet(ours appear to be stable). The lobbyists for greedy Wall St. prevailed over common sense and reason. The lack of answers that CEO's provided at hearings into Enron, Wall St., the Banks, and the BP disaster, suggest that they would not know how to replace a roll of toilet paper. Investors should reconcile the reality that paying top dollar to CEO's etc. gets you nothing extra. Many corporations are like hot air baloons – not sure which direction the wind will blow them. Today, China is the back seat driver of America's economy.
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Interesting that despite all the foreclosures etc., the cost of a 2×4 remains the same. The cost of building has, if anything, gone up over the course of this recession. I can only conclude that the current PRICE of real estate has absolutely nothing to do with its actual VALUE. In the end, after the dollar devalues and inflation has its go at the public purse, house values will remain constant while the numbers go through the roof. What does it matter if the PRICE is $1 or $1million when the VALUE is one loaf of bread? Which shell is the pea under today?
Interesting article. After reading this article, I was shocked to learn about US property.
The real estate has always been termed as golden industry to invest in USA but doing so without knowing the current financial status of the country would be a wrong decision!!!!