High-End Homes Contributing More To Foreclosures

Persistent economic weakness and a slow and uncertain stock market recovery are creating pressure on the higher end US residential real estate markets. With nearly 10 percent of jumbo prime mortgages in delinquency and available credit scarce, some experts believe that a second wave of the housing crash is threatening. See the following post from Expected Returns for more.

For people who have become convinced that housing has bottomed, the coming 2nd wave down will come as a surprise. The odds favor more downside when unemployment is still rising and credit is contracting. Even with mortgage rates under 5% and first time homebuyer tax credits, there is little that can be done to pump up the housing market. Now comes news that the higher end markets are coming under pressure. From Reuters, for many U.S. wealthy, housing crisis still a squeeze:

Despite some signs that the worst of the U.S. residential housing crisis may be over, many wealthy homeowners are still being squeezed by the combination of weak home prices and the stock market crash.

"I think for wealthy homeowners it will get worse before it gets better," said Dennis Hedlund, founder of iEmergent, a forecaster for mortgage and real estate

Just wait until the stock market starts heading back down once again. A whole generation of wealthy individuals have become accustomed to high stock valuations and the fallacy that stocks always go up in the "long run". This illusion of wealth allowed Americans to consume beyond their means. After stocks go down 30-50%, and remain at those levels for a decade, expect frugality to become an entrenched mindset across the American population. This means no more housing bubbles, and housing valuations below multi-generational trendlines.

Massive Supply to Hit the Market

More unwanted supply of U.S. homes at the high end may also come from foreclosures. According to data from research firm First American CoreLogic, the rate at which wealthy homeowners are falling behind on their mortgage payments is increasing.

It says 9.4 percent of those with jumbo prime mortgages -- those over $417,000 -- are 90 days or more behind on their payments. This pales next to the 33.8 percent of subprime loans that are delinquent 90 days or more. But the rate is rising.

While the subprime delinquency rate is 1.3 times higher than a year ago, the jumbo prime delinquency rate is 2.6 times higher, suggesting that wealthy homeowners overstretched themselves financially much as their poorer counterparts did.

The point that I've been trying to make the past couple of months is that there is more pain to come in the higher end markets. Higher net worth individuals can weather any economic storm better than low income individuals, since they tend to have more savings and assets to liquidate to raise cash. But, persistent economic weakness eventually results in capitulation. Have we reached the point of capitulation for wealthy individuals? Apparently, we're getting close.

This post has been republished from Moses Kim's blog, Expected Returns.

How The Obama Home Loan Modification Program Works

Will Obama's new loan modification program make a significant impact on the housing market? If successful, millions of homeowners would be saved from foreclosure, preventing more foreclosures from flooding the banking and housing sectors. The following article from Blown Mortgage explains how the Obama Loan Modification Program will work.

The objectives of the Obama Loan Modifications program are rather ambitious, to help 7 million people (the number is also quoted as 9 million, depending who you ask) modify their loan in order to afford monthly mortgage payments. In fact the way the program is designed you can save money by modifying your loan. The government is seriously backing this program with their big guns, namely $75 billion of funding. As always with these programs there are technicalities to deal with but the gist is rather simple to understand.

The loan modification program provides incentives to banks and service providers to modify your loan to a more sustainable monthly payment if you qualify through the trial period. The three month trial period tests if you are on time with your payments.

If you are, you receive a bonus that goes towards paying the principal of your loan. After that, every year you pay your mortgage without being delinquent on any payment another bonus is paid towards your mortgage principal.

These bonuses are worth extra because they pay the actual cash you initially borrowed, on which you will not have to pay interest. Who qualifies? This is one of the prickly areas of the program. The Loan modification aid program was designed to be as open as possible. You don´t have to be behind in your payments to qualify, just struggling to meet the monthly payments with your current income.

However the issue gets a little complicated due to a clause that limits a lot of home owners that are struggling. You can only qualify if your mortgage represents more than 30% of your monthly income. If it is less you will not qualify. This clause is actually under revision due to the fact that most borrowers don´t only owe on their mortgage but on their car, their credit cards, etc… This causes some of the most desperate home owners that owe money from various lenders not to qualify for the help they need. There are two main groups that can qualify for loan modification.

Those that want a loan modification but that didn´t qualify because the value of their home dropped and those that are on the brink of foreclosure. Either of these groups can get a loan modification if they comply with the programs requirements.

This post has been republished from Blown-Mortgage, a mortgage news and analysis site.

Foreclosure Numbers Going In Wrong Direction

As long as foreclosures keep climbing, the housing market will be poisoned with bank owned properties. Now it's not just sub-prime or ARM borrowers that are defaulting but the average American with solid credit who are now driving up foreclosure numbers. See the following article from Mortgage Roadmap that discusses the worsening foreclosure epidemic.

The news on housing foreclosures isn't getting any better. In fact, it's getting worse.

According to a story in the Wall Street Journal, one in every eight U.S. households with mortgages was either in foreclosure or behind on its mortgage payments in the second quarter of this year.

The most frightening thing about these new numbers is that many of these foreclosures on on households with good credit that took out safe, conservative mortgage loans.

The national economy, of course, is the culprit here. Too many people have lost their jobs during this economic slump. And they're not able to find new ones. Suddenly, a mortgage payment that was doable during good times is an impossibility.

The bottom line, unfortunately, is that the foreclosure crisis won't ease until the nation's unemployment rate starts seriously dropping. Homes became far too expensive during the recent housing boom. This means that mortgage loans, and the monthly payments that come with them, took up a greater percentage of homeowners' monthly income.

We are now seeing the results: When the economy is sailing along, and jobs are plentiful, homeowners can make their mortgage payments. When a bump occurs, though, and jobs start disappearing? Those mortgage payments are far out of reach for too many homeowners.

This article has been republished from The Mortgage Roadmap.

1 in 10 Californians With Home Loan Are In Default

With California's default rate climbing to a staggering 9.5%, it makes you wonder how prices could rebound with the flood of foreclosures adding to the unsold inventory. Tim Iacono from The Mess That Greenspan Made, writes about a couple of prominent housing market experts that apparently don't fear the falling knife of home prices, having recently purchased property despite the scary housing climate.

I wonder if Peter Hong at the Los Angeles Times has any doubts or regrets about buying a house back in November as recounted here, a story that, surprisingly, shows up near the top in a Google search on Peter Hong buys a house.

It would be only natural to have at least a couple of weird thoughts rolling around in your head, especially when you have to write about stuff like this in order to pay your mortgage:

California's default rate soars to 9.5%
Delinquencies in June are up sharply from a year ago, when 6% of borrowers were behind on their loans.
By Peter Y. Hong

About 1 in 10 Californians with a home loan is now in default, and there's growing evidence that the mortgage meltdown is spreading to commercial real estate.

The home mortgage delinquency rate -- the percentage of borrowers who have missed several payments and are in the first stage of foreclosure -- climbed in June to 9.5% in California and 9.9% in Los Angeles County, according to First American CoreLogic.

The staggering number of home mortgage defaults probably will lead to large numbers of foreclosures through at least this year, housing experts say.

"It's probably a given we'll see a high number of foreclosures in the next couple of quarters due to the level of defaults plus the recession and jobs lost. There's plenty more pain to come," said Andrew LePage, an analyst for real estate research firm MDA DataQuick of San Diego.

At least he's not like the serial bankruptcy Edmund Andrews family of the New York Times...

Peter's story was actually quite interesting - about what he and his wife went through in buying a bank repo and their desire to simply have a place they can call their own after selling their condo back in 2005 and renting for a few years.

I wonder whether, if he knew then what he knows now, he'd have made the same decision.

If unemployment weren't such a pernicious problem in the entire state of California, maybe things would look a little different, but falling home prices and rising unemployment tend to feed on each other.

Foreclosures should pick up even more now that various government moratoriums and voluntary foreclosure freezes by lenders have expired.

But LePage said the rate of foreclosures may not reach the record level set last year if lenders increase loan modifications or approve more "short sales," in which homes are sold for less than their mortgage amounts.

The mortgage delinquency rate in June was up sharply from a year ago, when 6% of California mortgages were delinquent and 5.2% in Los Angeles County were in default.

Like Dean Baker, who reportedly bought a house recently so he could enjoy it before the summer ended, Peter may find that he could have bought an even better house for the same money or the same house for less if he'd just waited another year or two.

Dean Baker, the prominent Washington, D.C., housing economist who saw the bubble coming and sold his condo in 2004, recently bought a house. Baker said he thinks the market still has more room to fall, but he wanted to enjoy his backyard this summer and was willing to pay a premium if it comes to that. He said he's OK with a 5% to 10% further decline in his home value, but "if it goes down 20% I'll be upset."

With the prospect of housing price bottoms being such long and drawn out affairs, is it really that important to be able to paint a room the color you want? You can buy a lot of happiness for the probable tens of thousands of dollars that both Peter and Dean would likely have saved by waiting another year or so.

The falling knife of house prices is clearly not dropping as fast as it was a while back, but it is definitely still falling, despite what you may have read in the mainstream media this week.

This post was republished from Tim Iacono's blog, The Mess That Greenspan Made.

Foreclosures Far Outpacing Mortgage Modifications

While the Obama Administration's foreclosure prevention efforts have been mildly successful at helping hundreds of thousands of homeowners to modify their loans, this is just a fraction of the 1.8 million foreclosures in the first half of 2009 alone. Dan Rafter, from Mortgage-Roadmap, discusses why jobs are the key to stemming the tidal wave of foreclosures in the US.

Pres. Barack Obama's foreclosure-prevention program has seen some successes: Mortgage companies have offered to modify more than 406,000 existing mortgage loans, hopefully to keep homeowners from losing their residences to foreclosure. The program seems to be on track to offer loan modifications to 3 million to 4 million homeowners in the next few years.

But there's one problem with all this: The rate of housing foreclosures is far surpassing the number of loan modifications, according to a story in BusinessWeek.

The BusinessWeek story cites data showing that there have already been 1.8 million housing foreclosures in the first half of this year. That makes that 406,000-plus loan-modification figure look a bit paltry. The story also says that the country will see anywhere from 3 million to 4 million new housing foreclosures during the next two years.

It's going to take an awful lot of mortgage-loan modifications to stem this tide. Of course, the real way to stop this wave of housing foreclosures is to get people working again. With the national unemployment rate nearing 10 percent, there are just too many people out of work these days.

When you don't have a job, it's awfully hard to make those mortgage payments. That's the big issue right now. And until this changes, all the government foreclosure-prevention programs won't really make a big dent in the record number of foreclosures now hitting the country.

This post has been republished from Mortgage Roadmap, a mortgage news and analysis site.

Adjustable Rate Mortgages Storm Is Brewing

A storm of adjustable rate mortgage foreclosures could be on the horizon according to the Wall Street Journal. In April 36.9% of these loans are at least 60 days delinquent, which means a large number of foreclosures may soon strike the housing market. See the following post by Tim Iacono.

The chart below was promptly whipped up after reading this report($) in today's Wall Street Journal about just how fast Option-ARMs are souring as compared to subprime loans.



It's not so much that the default rates for Option-ARMs have exceeded that of subprimes loans for three months running, but that the absolute numbers are so high.

More than one-third of all Option-ARMs (called Pick-A-Pay loans below) are in default and most of these are likely to make it to the foreclosure stage eventually.

Option ARMs were typically issued to creditworthy homeowners and allow borrowers to make a range of monthly payments. The payment options include a partial-interest payment that adds the unpaid interest to the loan's balance. On many such loans, balances have risen while values of the underlying properties have plummeted amid the housing crisis.

As of April, 36.9% of Pick-A-Pay loans were at least 60 days past due, while 19% were in foreclosure, according to data from First American CoreLogic, a unit of Santa Ana, Calif.-based First American Corp. In contrast, 33.9% of subprime loans were delinquent, with 14.5% of those loans in foreclosure, the figures show.

Payment-option mortgages are heavily concentrated in the worst-hit regions in the housing market, including California and Florida, making borrowers inordinately vulnerable to declining property values. The deepening loan turmoil could mean higher-than-expected losses for Wells Fargo & Co., J.P. Morgan Chase & Co. and the Federal Deposit Insurance Corp.'s own insurance fund.

"The realization of the issues related to option ARMs is just beginning," said Chris Marinac, director of research at Atlanta-based FIG Partners.

If memory serves, the wackiest thing about Option-ARMs a few years ago was that banks could book the interest and principal payments as income even though they weren't actually receiving the money - the vast majority of borrowers were only making the lowest payment that didn't even cover the full amount of the interest due that month.

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

Adjustable Rate Mortgages Could Fuel The Next Wave Of Foreclosures

The record number of foreclosures may not include a large pool of adjustable rate mortgages that are scheduled to increase in the next few years. This ticking time bomb could cause an aftershock of foreclosures hitting the market in the future, even after the current wave ends. Dan Rafter from Mortgage Roadmap explains.

I'd like to think that we've seen the worst of the foreclosure crisis. I'd like to think that we'll be seeing fewer homes fall into foreclosure, and fewer homeowners missing their mortgage payments.

I'd like to think all that. Unfortunately, I can't.

What I really think is that the number of housing foreclosures is only going to rise in the coming months. And, unfortunately, many economic analysts agree with me.

A story in the Miami Herald focuses on the plight of homeowners who during the housing boom took out option adjustable rate mortgages. In these type of loans, borrowers can decide to pay less than what their monthly balance is. The difference is simply added to borrowers' outstanding loan balances.

The big problem — other than the fact that too many borrowers have delayed paying down the principal on their mortgage loans by using these products — is that many of these option adjustable rate mortgages are set to adjust to higher interest rates between 2009 and 2012. Many homeowners won't be able to make the higher monthly mortgage payments that result. At the same time, they won't be able to refinance because they won't have paid off enough on their home loans.

Because home values have fallen drastically over the last two years, many homeowners with these mortgage products will actually owe more on their homes than what they are worth.

Some financial experts believe that the wave of foreclosures we'll see from these loans will rival or better the wave we're seeing now.

This, of course, is just more bad news for an industry that's already reeling.

This article can also be viewed at Mortgage Roadmap.

Senate Bill 61 Could Lower Debt Of Struggling Homeowners

For struggling home owners on the verge of foreclosure who are asking where their bailout is, they may get some help in changes to the Chapter 13 bankruptcy law. Senate Bill 61, if passed, could help homeowners stay in their homes. For more on this see the following post by Diana Golobay from HousingWire.

As shocking as it is, the story of the pay-option adjustable-rate mortgage (ARM) has become old news: A borrower buys a huge home worth $1m with a mortgage that seems too good to be true at little more than $2,500 per month.

After the bills start coming in, however, the borrower realizes it really was too good to be true. The bill had only prompted the minimum due, even though the total amount payable was more like $5,000. The bank conveniently loaned the borrower the remainder each month and tacked it onto the principal.

Then the monthly rate reset. The pile of debt that initially grew bit by bit now swells into a mountain.

And the borrower? Stuffed under too many helpings of debt, underwater on the home and losing any chance or hope to refinance.

Some groups, like the mortgage loan restructuring business segment of the Law Offices of Joseph R. Manning, Jr., promise relief through mortgage modification (although what can be said about the success of these efforts when the mortgages are already too deep underwater to qualify for refinance is unknown).

Sean Reynolds, the managing director of the legal office’s restructuring business, calls pay-option ARMs the next wave of defaults plaguing the luxury home market — where many of these ARMs cropped up, as the average borrower couldn’t afford them any other way. The law office is even prepared to go after lenders, brokers and servicers that violate borrowers’ rights, according to a media statement.

Without getting into what responsibility the borrowers are expected to take in the origination process, it’s understandable that home owners would attempt to do something about all that debt, regardless of whether they can actually repay it.

It’s no wonder that consumers who took out pay option ARMs, subprime mortgages and other heaping helpings of debt are finding themselves in dire straits. With already expensive mortgage payments about to explode with reset rates, some home owners might even have to pass debts from one form to another to make ends meet each month.

One such option, credit card debt, is showing signs of the strain as some home owners are forced to use credit cards for living expenses after the mortgage payment wipes out a substantial portion of monthly income.

TransUnion.com, one of the major US credit bureaus, found the average bank card borrower’s debt inched up 0.82% to $5,776 in Q109 and is up 4.09% from the year-ago quarter. Meanwhile, the bank card delinquency rate of borrowers 90+ days past due on one or more of their cards rose 1.32% in Q109 and is up 9.1% from the year-ago period.

“As the recession entered its sixth quarter, we saw continued increases in average bankcard balances, as consumers struggled to meet repayment obligations in a job market that continues to deteriorate,” says Ezra Becker, director of consulting and strategy at TransUnion’s financial services group, in a media statement today.

With the US unemployment rate now up to 9.4%, some borrowers that had relied first on refinanced mortgages and then on credit cards to get by may soon find themselves facing an unhappy alternative: foreclosure, repossession or bankruptcy.

In May alone, US consumer bankruptcy filings were up 37% from the year-ago levels, according to the American Bankruptcy Institute (ABI). The total volume of filings in the month — 124,838 — stayed roughly level with April’s volume — 125,618 — although Chapter 13 filings made up 27% of all consumer cases in May, above the April rate.

A Chapter 13 case allows the debtor to keep his or her possessions and property, and to pay creditors under a budgeted plan. And, if Senate Bill 61 eventually goes through, a Chapter 13 debtor might also qualify for his or her bankruptcy judge to forgive — or “cram down” — a portion of the home mortgage balance or otherwise modify the mortgage to ensure affordability of payments going forward, again passing the debt further away from the borrower.

“As consumers continue to face increasing levels of unemployment and rising foreclosure rates, bankruptcy filings will continue to accelerate as families seek financial relief from the tough economic climate,” said ABI executive director Samuel Gerdano in a media statement.

With the ABI predicting more than 1.4m new bankruptcies by year-end, it seems like the cycle will continue to unwind as long as the housing market stumbles along toward bottom.

This article has been reposted from HousingWire. View the article on HousingWire's mortgage finance news website here.

Are Real Estate Prices Stabilizing?

Real estate prices are still falling across the country, but for the first time in over a year the monthly declined failed to set a new record. This is leading some analysts to believe that the real estate market just might be stabilizing. This is potentially good news, but investors should remember that while prices might be stabilizing, it could still be awhile before prices stop dropping altogether. For more on this, read the following article from HousingWire.

Home prices in major metropolitan areas continued to fall in February; however, for the first time in 16 months, the annual decline did not set a new record, possibly suggesting early signs of market stabilization.

The S&P/Case-Shiller 10-City and 20-City Home Price Indices released Tuesday recorded nationwide, annual declines of 18.8% and 18.6%, respectively. This is a slight improvement from the returns reported for January, which fell by 19.4% and 19.0%.

“While the declines in residential real estate continued into February, we witnessed some deceleration in the rate of decline in some of the markets,” says David M. Blitzer, chairman of the Index Committee at Standard & Poor’s. “All 20 metro areas recorded a monthly decline in February, but 16 of the 20 metro areas saw an improvement in their monthly returns compared to January.”

Still, the indices show an ongoing, broad-based decline in the prices of existing single family homes across the United States, with 10 of the 20 metro areas studied showing record rates of annual decline, and 15 posting declines in excess of 10%.

In terms of annual declines, the three worst performing cities as of February are once again, located in the Sunbelt, each reporting negative returns in excess of 30%. Phoenix was down 35.2%, Las Vegas declined 31.7% and San Francisco fell 31.0%. Dallas, Denver and Boston faired the best, down a significantly lesser 4.5%, 5.7% and 7.2%, respectively. Dallas also holds the distinction of being the best performer for the month, returning -0.3%, according to the report.

As of February 2009, average home prices across the United States are at levels similar to those seen in third-quarter 2003. And despite the deceleration in home price declines seen in February, from the peak in mid 2006, home prices are still down over 30%.

Standard & Poor’s Blitzer says, “we will certainly need a few more months of data before we can determine if home prices are finally turning around.”

This article can also be found on housingwire.com.

Banks Believed To Be Holding Around 600,000 Foreclosure Properties Off Market

RealtyTrac believes that banks are keeping around 600,000 foreclosure properties nationwide off the market. This number would represent a huge portion of the available housing stock, and it is believed that banks could be strategically withholding these properties in order to prevent the housing market from collapsing even further. For more on this, read the following blog post from Tim Iacono.

If ever there were a "squishy" data set, one that is quite difficult to get a good handle on due to the paucity of reliable, publicly available data, it is the inventory of foreclosed homes that have yet to make it onto the resale market.

A report by Carolyn Said in the San Francisco Chronicle provided the first graphic on the subject that I've seen, an image that was splashed across the front page of yesterday's paper.
With bank repossessions and notices of default set to pick up dramatically in some parts of the country as detailed by Mr. Mortgage the other day, all the prognosticators with rosy housing outlooks for 2009 may be in for a wake up call come summer time.

If the Alt-A and Option ARM loans begin to sour in large numbers (as many predict) at about the same time that banks look to unload some of their inventory after all the recent optimism, there could be another big leg down in home prices.

Some details from the SF Gate story:

A vast "shadow inventory" of foreclosed homes that banks are holding off the market could wreak havoc with the already battered real estate sector, industry observers say.

Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. And foreclosures, which banks unload at fire-sale prices, are a major factor driving home values down.

"We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market," said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. "California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You'd have further depreciation and carnage."

In a recent study, RealtyTrac compared its database of bank-repossessed homes to MLS listings of for-sale homes in four states, including California. It found a significant disparity - only 30 percent of the foreclosures were listed for sale in the Multiple Listing Service. The remainder is known in the industry as "shadow inventory."

You have to wonder about a bank like BofA, after having acquired Countrywide and their stable of bank owned properties, as to exactly how these properties are being valued in light of changing mark-to-market rules and critical earnings announcements.

Everyone seems to be sooooo anxious for the banking sector to show some stability so we can all get on with our stock investing lives again but, if it is coming via the accounting "sleight of hand" that some believe is the real reason for holding back these properties (i.e., valuing them much higher than today's market would), we may all be in for a big letdown.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

The Fundamental Problem Behind The Housing Crash

To understand why we got into this housing mess, there is no need to look further than the recent findings from the "Future of Finance Initiative." It took awhile for these geniuses to figure it out, but they found that in order to avoid mass foreclosures — lenders to make sure borrowers can actually pay back the loans. Wow, just think, if they could have figured that out sooner we never would have ended up in the situation we have today. I guess we know for next time, right? Tim Iacono looks closer at the report and adds some insight in his blog post below.

There's a special 14-page report in today's Wall Street Journal presenting the findings of last week's Future of Finance Initiative, a gathering of 100 of the "brightest minds in finance" tasked with the job of charting a path forward from our precarious current position.

No, former Fed chief Alan Greenspan was not included.

Astonishingly, not once, not twice, but at least three times, the fixing of one of the most fundamental errors of the last six or seven years is prominently featured in the many recommendation sections, what would have undoubtedly stopped the global credit bubble in its tracks years ago if someone other than "crazy housing bubble bloggers" and a few rogue economists would have brought attention to it and been able to do something about it.

This recommendation appears in Principles for Change, an interview with Peter Fisher of BlackRock Inc., it is a key element of Princeton Economic Professor Alan S. Blinder's recommendations enumerated in The Future of Banking, and it is featured as number one in a list of of almost two dozen "principles for rebuilding the financial system" in a summary section (no link found).

It's pretty simple - borrowers must be able to repay loans from income.

Gussied up a little bit for the paper it looks like this:

Minimum Underwriting Standards. Bank management and bank examiners must enforce the banks' minimum underwriting standards, focused on the borrowers' ability to repay debt from income. The bank supervisors' authority must extend beyond banks to all bank agents, such as mortgage brokers.

Maybe it's just me, but, to some of us who could see this all developing back in the first half of the decade - when Fannie and Freddie first starting having problems in 2002 and 2003, then when Wall Street got involved in a big way in 2004 and 2005, and then in 2006 when everyone laughed about "all you have to do to get a home loan is to fog a mirror" - this is just about the most ridiculous example of how maybe these guys aren't all the bright after all.

What were they saying five years ago and why did it take them so long to have this epiphany?

Alan Blinder was singing the praises of the former Fed chairman up until the housing bubble had unquestionably burst, and now he's charged with charting the new course for banking?

In just about every interview that I ever did back around the time that the housing bubble was peaking and popping, I'd always say something like the following:

All anyone has to do is spend some time in a mortgage loan office and you'll quickly see that there's no way these people are going to pay this money back. When the median home price is ten times the median income, the only way that money is getting paid back is if they sell the house at a profit and that will only work so long as home prices keep going up.

What does it say about policymakers that they couldn't see this simple truth?

When the former and current Federal Reserve Chairmen - the position that was once considered to be the second most powerful in the world behind only the U.S. president - dismiss out of hand the possibility of home prices ever declining, what hope do we have that they'll not do something equally as stupid next time?

Were they all so deluded by the apparent prosperity of our late, great asset-based economy that these wizards of the financial world were unable to see something so simple, only now realizing just how huge this simple error was?

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Median Sales Price In Southern California Stops Falling

Could the real estate market bottom finally be here? A recent report shows that the median sales price in Southern California has stopped falling — at least for one month. In some places values have even started to rise again. Although it is easy to get excited about this report, Tim Iacono does offer some warning in his blog post below.

Dataquick reported February real estate sales data for Southern California earlier today and it looks as though the median price stopped declining for the first time in almost two years.

After dropping to a six-year low last month, the median price across all of Southern California held steady at just $250,000 - that still sounds like a lot of money.

You'd likely agree if you've ever seen a median home in Southern California.

As shown above, prices in all six counties are now down more than forty percent from their peak and San Berdoo looks as though it may crack the minus 60 percent threshold as soon as next month.

Median home prices going back to late 2002 are shown below - note that both San Diego and Orange County posted advances from January to February.

Since Marshall "almost all if not all of those gains are here to stay" Prentice is now retired, new DataQuick President John Walsh provides the commentary:

The market is so tilted away from normal mainstream activity that it's impossible to generalize or predict based on the atypical patterns we're seeing. That means that normal demand and supply is building up. The floodgates could open once mortgage credit starts to open up.

Well, maybe if the banks sense that things are stabilizing a bit, we'll see a flood of bank-owned properties on the market, but it's hard to imagine you really need floodgates to hold back demand right about now given the state of the local economy.

Foreclosures were said to account for 56.4 percent of all February sales, unchanged from last month, up from a 36.2 percent share a year ago.

These distressed sales have contributed to year-over-year price declines that now far exceed any of the annual gains a few years back, prices in the Inland Empire continuing to plunge while declines in other areas slow.

Pricing in my old stomping ground of Ventura County have improved dramatically over the last couple months, from an annual decline of 36 percent in December to a drop of just 27 percent in February.

In the words of inimitable groundskeeper Carl Spackler from the 1980 movie classic Caddyshack, "So we got that goin' for us, which is nice".

This post can also be viewed at themessthatgreenspanmade.blogspot.com.

Why The Government Can’t Fix The Housing Crisis

It appears the government is ready and willing to do whatever it takes to fix the housing crisis, but there is one little problem: They can’t. As part of the new stimulus package, there will likely be a $15,000 homebuyer tax credit, and not just for first-time homebuyers, but for all homebuyers purchasing a primary residence. In addition, the government will likely attempt to drive mortgage rates down to around 4.5 percent and work particularly hard to modify troubled loans to keep homeowners out of foreclosure. With these new measures in place the housing market will surely recover…right?

The answer to that question depends on your definition of recovery. Will it be enough to stop prices from falling, and possibly even help them start going up again? It’s definitely possible, but the problem won’t be fixed even if prices do turn around. Artificially inflated prices caused the housing crisis in the first place. Homeownership became an attractive option for more people than ever before through financing options that were cheap and widely available—a little too widely available, we are now discovering. ARMs, interest-only and other creative loan programs kept monthly payments low, and people could suddenly afford a more expensive house—or so it appeared. When interest rates started rising and ARMs reset, housing values stopped climbing and all hell broke loose.

So why would we believe that artificially boosting housing values will be sustainable this time? What do we think will happen when mortgage rates rise again and the tax credits expire? We won’t have to worry about ARMs resetting this time around because they are now shunned by banks for the most part, but the fundamental problem remains that housing is just too expensive compared to income. Interest rates can’t stay this low forever, and the tax credit will expire after the end of the year. Then homebuyers will only have their personal income to rely on to pay for their homes. This is how it has always been (minus government intervention), and it is how it should be. People making $50,000 a year shouldn’t be living in a $400,000 house—It’s that simple. People need to live within their means, but the government doesn’t seem to grasp this and keeps pushing measures to modify home loans. We can try to modify people’s loans all day long, but if they can’t afford their homes, then they can’t afford their homes. According to the Wall Street Journal, over 40 percent of borrowers were at least 60 days past due eight months after their loan was modified. It seems to me that these loan modifications are just delaying the inevitable and costing banks and taxpayers more money.

Before the housing crisis can truly end, housing prices must come into balance with incomes. When this happens, the problem will solve itself. When buying a home starts to make more sense than renting, people will start buying again. It isn’t that hard to figure out. Spending taxpayer money to prop up housing is not only a waste, but an unethical perpetuation of the problem. It is completely unfair to renters as well as our youth. Unfortunately, those groups represent the minority, so their voice isn’t likely to be heard. If these measures are passed, expect to pay handsomely for it and to see another bubble burst a few years from now. At least this time no one should be able to use the excuse that they didn’t see it coming.

New Home Sales Continue Their Plunge

The December existing home sales report shocked everyone when it showed an increase over 6 percent, however, the new home sales report was not quite as optimistic. The new home sales report showed more of the same, a drop in sales activity and an increase in inventory. Tim Iacono from The Mess That Greenspan Made dives deeper into this report in his blog post below.

The Census Bureau reported(.pdf) new home sales fell to record lows in December and, after revisions to prior months' data (as shown below), inventory has skyrocketed.

New home sales plunged 14.7 percent from November to a seasonally adjusted annualized rate of just 331,000 units and downward revisions to prior months' data totaled another 40,000 pushing the inventory of unsold homes to 12.9 months of supply, also a record.

For the entire year of 2008, new home sales totaled just 482,000 units, a decline of 38 percent from 2007, to the lowest level in 26 years.

The median price for a new home plunged 6.0 percent, from $219,700 in November to $206,500 in December, and is now down 9.3 percent on a year-over-year basis.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

What Will The Fed Do To Stimulate The Economy Now?

Bernanke and the Fed already played their last interest rate card, so if they can't lower rates what else can they do to get the economy back on track? There is a lot of speculation going around right now about what they might do, but we shall find out for ourselves later today. James Picerno from The Capital Spectator talks about the Fed meeting and the economy in general, adding some valuable input in his blog post below.

The press release that follows the Fed's FOMC meeting today may offer clues about how the central bank will proceed now that it's out of conventional monetary policy ammunition. Then again, maybe not. We're all trapped in gray zone of trial and error about what to do next and the Federal Reserve is also now faced with grasping at straws.

Typically, an afternoon FOMC press release attracts interest for an update on where short-term interest rates are headed. Today, and probably for some time to come, everyone already knows the answer. The Fed controls short rates, starting with the all-powerful Fed funds, but with the effective Fed funds at roughly 0.16%, the mystery about what comes next is, like the price of money, virtually nil.

Yet Bernanke and company may yet surprise us by dropping fresh clues about how the Fed plans to practice unconventional monetary policy from here on out—quantitative easing, to use the phrase of the dismal science. The details are a work in progress, although the immediate goal is still clear: stabilize general price levels.

We won't belabor the issue of deflation today, in part because we've discussed it often in recent months, including here and here. Let's just say that the D risk is still very much with us, and so the Fed has a fair amount of work to do in the months ahead.

The market appears to understand this, at least by way of monitoring Fed funds futures. For the year ahead, all the contracts are expecting Fed funds to remain under 60 basis points, and quite a bit lower for the immediate future.

Long rates remain in a holding pattern as well. The yield on the benchmark 10-year Treasury Note is in the 2.5% range and it may go lower yet, depending on what the next round of inflation reports reveal, although those won't arrive for several weeks.

Meantime, there's plenty of guesswork about what the Fed's next move. "With rates going nowhere for some time, the market's focus will be on whether the Fed will be looking to buy government (or corporate) securities in the near future," Sacha Tihanyi, an analyst at Scotia Capital, opines via AFP.

John Authers in today's FT argues that the critical variable is housing prices. What can the central bank do on that front? "The Fed can give details on quantitative easing— the ugly phrase for the art of buying bonds so as to push down the yields they pay, and stimulate the economy with lower rates, especially for mortgages," he writes. "If there is a single key variable to determine when the crisis in the US banking system can be brought under control, it is house prices. The further they fall, the higher the likely default rate on the mortgage-backed securities that banks now hold on their balance sheets."

Unfortunately, the news on housing prices is still discouraging, even after several years of a falling market. One of the latest bits of housing data shows that prices fell again last month even as sales perked up. Existing home sales rose 6.5% in December, albeit driven by distressed sales at bargain prices, the National Association of Realtors reports. Nonetheless, the median national price of existing homes in the U.S. still dropped by a hefty 15.3% last month.

Even if the Fed is successful in fending off deflation, which we expect it will be, that by itself isn't a cure for what ails the economy. "Ben Bernanke is rightly concerned about deflation right now," Desmond Lachman of the American Enterprise Institute explains in The Christian Science Monitor. But that's merely step one in a multi-step recovery program. "Getting inflation back into the system … is not going to be sufficient," Lachman notes.

Convincing banks to lend and consumers and businesses to borrow is arguably the next big step beyond containing the deflation risk. Solving the latter will be easy by comparison. The real challenge will come later this year in trying to promote growth. But first things first, and so we await today's Fed commentary.

This post can also be viewed on capitalspectator.com.

Existing Home Sales Rise Unexpectedly: Is The End Near?

There has been a lot of talk this morning about the unexpected rise in existing home sales in December, and specifically whether or not it signals the beginning of the end. Unfortunately, we also saw a less positive statistic released: The median home sale price fell 15.3 percent in 2008—the largest drop on record since 1968, according to the Associated Press (AP). So what exactly are we to make of these statistics?

In my mind, this is positive news overall. First and foremost, property values are still too high and they will continue their decline until they reach equilibrium with income levels. That prices dropped so much means that we are ever closer to that point. Increased home sales in December is also a good sign, but one must wonder how much can be attributed to suppressed mortgage rates.

Most homebuyers do not look at the overall cost of the home, but rather focus on how much money they need to put down and the resulting monthly mortgage payment. When mortgage rates were under 5 percent, that dream home was suddenly within reach, and many people came down off the fence to buy. As rates rise again the opposite will happen.

Let’s also not lose site of the fact that thousands of people are losing their jobs every day, and as long as job losses and layoffs are on the rise, it is hard to imagine that the real estate market or any other sector of the economy will recover any time soon. And let’s keep in mind that although home sales increased in December, overall 2008 saw 13 percent fewer home sales than in 2007 and the lowest total since 1997, according to the AP.

This correction was necessary, and we are closer to recovery every day. I wouldn’t get too excited about it yet, as we should expect to see an over-correction before total recovery in this type of market, but as the chart below further illustrates, we are getting closer to what appears to be an historical equilibrium.

*Chart from The Mess That Greenspan Made.

New Construction Continues To Fall

It is no secret that builders are hurting, and some experts predict that upwards of half of them will be out of business before this economic crisis is over. The tough real estate market plagued by indecisive buyers and oversupply, combined with the restrictive lending environment, means that even those builders who manage to stay in business are still going to be hurting. It should be no surprise then that new construction is reaching all time lows. Overall it is a good thing, and something that needs to happen in order to allow the market to recover, but it is painful for builders nonetheless. Tim Iacono from The Mess That Greenspan Made looks closer at the latest new homes report and offers his take in his blog post below.

The Census Bureau reports new home construction reached record lows last month, a fitting end to the worst year in the home building business since record keeping began in 1959.
Housing starts fell 15.5 percent in December to a seasonally adjusted, annualized rate of just 550,000, worse than the previous low of 651,000 set in November.

In population-adjusted terms, the previous record monthly lows in the low-700,000 range set in the mid-1970s are about double the current rate of home building, an astonishing statistic.

For example, prior to 2008, the low-water mark was 709,000 in May of 1975 which would be just over one million after adjusting for the growth in the U.S. population.

During all of 2008, housing starts totaled just 904,000, a decline of 33.3 percent from the level of 1.36 million units in 2007. The previous low was in 1991 when 1.01 million units were started, a total that, after adjusting for the increase in population was actually worse than last year.

Building permits, a leading indicator for new home construction, dropped to an annual rate of 549,000 in December, a decline of 10.7 percent from November, and also a record low.

This follows yesterday's dismal report by the National Association of Home Builders that pessimism has reached new all-time lows. The monthly confidence survey dropped to just 8 in January, down from 9 in December. Recall that, not more than two years ago, this index was over 50.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Buying A New Home? You Better Be Careful...

Just in case you needed one more thing to worry about, a recent article published in the New York Times should have you thinking twice about buying a home in a new subdivision. The article is titled, “Banks Foreclose on Builders With Perfect Records.” The article talks about how banks are starting to do such things as call for extra collateral from builders—even if they have never missed a payment—essentially dooming them to failure. If you have purchased or are planning to purchase a home in a new subdivision that has not yet been completed, this could be horrible news for you.

Builders rely heavily on credit to function, and now that credit is being restricted even for the best borrowers, builders are in serious trouble. According to the New York Times article, already we have seen more than 20,000 builders nationwide go out of business. Before the carnage is finished, the total will likely swell to more than 50,000, according to Ivy Zelman, a housing analyst quoted in the article. That total would represent more than half of all U.S. builders. So why exactly should new home buyers be worried?

When you purchase a home in a new subdivision, part of the purchase price is based on community features and factors. The subdivision might have a nice park for the kids, or just great, overall family appeal. These are things that sell people on wanting to move into that particular neighborhood. The problem in new subdivisions is that typically people buy homes before the community is finished. If the builder were to go out of business, it is possible that the community might not be finished for a long time, if ever. Not only is it possible that early homebuyers might not ever see the clubhouse that they were promised, or that neighborhood park, but they may also be forced to look at partially built, rotting homes for a few years. In case you didn’t connect the dots already, that means that resell values of existing homes in those communities are likely to plummet.

The worst part about this is that these buyers could be completely blindsided. It doesn’t even matter if they went so far as to make sure that the builder looked financially sound and was current on payments to the bank. The banks are so scared about the collapsing real estate market—especially in the sun belt region—that they are prematurely foreclosing on these builders right now. If the banks are prepared to go to these dramatic lengths, regardless of payment history, who knows what they will do next? It seems that as a homebuyer, you can only protect yourself by paying for nothing but what you see. Don’t bother looking at the master plan with the salesperson. Just walk outside, look around and ask yourself whether this house is worth its price, even if nothing else gets finished. If it isn’t: Move on.

16,000 Homeowners Get Early Christmas Present From Freddie and Fannie

In an attempt to stop the flow of foreclosures that is ravaging the companies, Freddie Mac and Fannie Mae have decided to put a temporary hold on new foreclosures and evictions. This hold will last till early 2009 and is meant to give homeowners the chance to work out loan modifications, hopefully allowing them to stay in their homes. Between the two companies this move is expected to affect around 16,000 homeowners facing foreclosure, according to the Wall Street Journal. So it seems that these 16,000 homeowners are getting a nice little Christmas present from Freddie and Fannie, as well as from taxpayers I presume.

If nothing else, it will be interesting to see how this idea works. I was skeptical at best when the foreclosure moratorium was discussed during the presidential debates, and I still don’t think this will work as well as they are hoping. Nevertheless, this shall give us an opportunity to test the program on a smaller scale, which it could open up the door for similar action by other lenders if it works.

My problem with this strategy: I predict that ultimately the homeowners will still be foreclosed on, but they will enjoy some free time in their homes. If the homeowner doesn’t stay in the home, or somehow sell it, then the delay will just put the lender in even worse shape than before. Because in the case of Freddie and Fannie this equates to taxpayers taking on the burden, I’m not too fond of the idea. It will work out better if the companies are selective about who qualifies for a foreclosure delay, but if they offer it to all owner occupants it is doomed to failure. The problem is most people are in foreclosure for a serious reason: Some people lost their jobs, some can’t afford the payment (with or without loan modification) and some people are choosing to enter into foreclosure because they are so far underwater on the house. The last reason is becoming a huge problem, and really should be the one most feared in this scenario. At least I can feel bad for the people who lost their jobs, or possibly even the poor sucker who got an interest only ARM sold to them that they couldn’t afford, but it is hard to feel bad for someone who can afford the payment and just wants out of their contract. Why on earth would we want to give these people another month, two or three of free housing? If they aren’t going to pay their mortgage and just plan on working the system, why should taxpayers be stuck with the bill? We already have to deal with the fact that we are going to lose money on the foreclosure, so why add anything else?

It will be interesting to see how this all plays out. I have my doubts, and I hope that I’m proven wrong and that this plan saves taxpayers a bunch of money. But unless we are able to create a method to accurately identify the homeowners who want help and can be helped, this is doomed to fail.

Hope For Homeowners Program Is A Complete Failure

Many people were excited about the Hope for Homeowners program that was recently rolled out to help curb the growing number of foreclosures, and keep people in their homes. Unfortunately, as Anthony Freed points out in his blog post on Your Mortgage or Your Life, things did not quite turn out as planned.

As banks continue to line up for the taxpayer funded handouts designed to ease their withdrawals from years of dependence on high yields derived from ridiculously reckless lending practices, homeowners continue to seek avenues to prevent the looming possibility of foreclosure - typically cited as the root cause of the economic ‘crisis’ that currently grips world financial markets.

It’s reassuring to know that our dedicated civil servants are willing to put in the long hours required, on nights and weekends, to make sure their banking buddies and colleagues don’t have to suffer the same fate as many banking executives of late, having to retire with hundreds of millions of dollars that were fraudulently paid out as options and bonuses as reward for investing long and naked, and exposing their companies to tremendous risks.

By the way - none of those profits from the ‘boom’ are being appropriated in order to reimburse those now failing companies, and none of that money is going to be recovered in order to soften the blow to taxpayers.

That money is considered to be lawful compensation for a job poorly done. What is on the table is just exactly how much more bonuses they should get before their companies are declared illiquid then subsequently sold off to the lone bidder for pennies on the dollar, and how much of the bailout money they will use to buy up competitors instead of lending it out as promised.

And for the lowly taxpayer on whose backs both the illicit corporate profits as well as the cost of the bailout are borne? What has this unprecedented dash to action by the bureaucrats, political appointees, and elected representatives of the people wrought in the way of sanctuary from the economic tempest that has engulfed their citizenry?

How about the dandy “Hope for Homeowners” program, designed to help more than 400,000 homeowners avoid foreclosure by making as much as $300 billion dollars available for the effort. What a fantastic idea, it would seem at first glance. Of course, the Devil really is in the details.

As of today, October 27, 2008 - nearly four weeks since the program was unveiled - a remarkable 79 people have applied for the program (Fox News 8-27-08).

Yes, 79 homeowners have been accepted (Fox News 8-27-08).

There are at least 77 banks participating in the program. I am not going to try to do that math in my head, but my best guess is that each of those banks has only helped about one homeowner avoid foreclosure on average in that 27 day period.

With all of the poorly underwritten loans Countrywide booked - and the tens of billions of dollars in profits they made in the process - one would think they might be on the list of participating lenders. Not surprisingly, they are not. Although a unit of Bank of America now, there has been no indication they will assume the responsibility for modification of existing Countrywide loans.

My first impression was that this had to be due to a simple lack of awareness by the public that such a program was available to them. Not the case at all I have found. The program has generated a great deal of interest from distressed homeowners since it was unveiled.

Lenders have been deluged with inquiries from interested borrowers, and the Congressional Budget Office has estimated that this program could help as many as 400,000 homeowners through September 2011, when the program ends.

“Our phones have been going crazy,” said Anthony Logan, president of Group Capital Mortgage in Cerritos, Calif, a participating lender.

What’s the hold up? Why, it’s the program itself, which was designed almost certainly to fail. First of all, the program is completely voluntary for both the lenders and the participating banks. It also requires the lenders to forgive a portion of the original loan balance in an effort to bring the mortgage in line with the market and affordability for the borrower to enter a long term fixed mortgage.

It allows certain borrowers at risk of foreclosure to refinance into a 30- year fixed-rate loan insured by the Federal Housing Administration (FHA) if the current lender agrees to write down the existing loan to 90% of the home’s market value today. In plummeting areas such as California, if a lender holds a $500,000 mortgage and the home’s current appraisal comes in at $400,000, the lender would forgive $140,000 in all. Even before the program launched, lenders expressed concerns about the potentially enormous write downs they would face.

Incredibly, in the face of receiving the largest publicly funded bailout of private industry in history, supposedly caused by nonperforming securities backed by rapidly foreclosing mortgages, the banks themselves are refusing to use a portion of that bailout money to help alleviate the very circumstances that had predicated the public bailout in the first place.

“Refinancing into the new government-backed program requires your current lender’s approval. If the home’s value is less than the mortgage — which real estate data provider Zillow.com estimates applies to nearly one-third of American borrowers who bought in the last five years — the note’s owner must also agree to reduce the amount owed on the house to 90 percent of its current appraised value. If you owe $190,000 on a house that’s only worth that much, the bank would have to agree to reduce the loan to $171,000, giving up $19,000 in principal, plus interest.”

Meanwhile, two million families are expected to lose their homes to foreclosure in the next two years.

There is a serious leadership vacuum in this country, especially at the upper echelons of both government and business. Their priorities and policies are bankrupting our nation, and the close relationship between these private industries and our government regulatory agencies should be rigorously examined.

Henry Paulson, former CEO of Goldman Sachs, was one of the major architects and proponents of the “self-regulating” banking model developed in the 1990’s.

Heavy deregulation and the elimination of the safety barriers that had existed between the retail banks and investment banks, as well as the experimental distribution of risk to world-wide markets through untested financial vehicles, led to the erosion of the credit markets.

This system, partially conceived and enthusiastically advocated by Paulson, directly led to the current financial crisis that threatens the first worldwide depression since the 1930’s.

Now, for better or worse, we have handed the job of fixing this mess to the very people most instrumental in it’s cause, namely Paulson.

Is it any wonder that the phones are ringing off the hooks as desperate homeowners look for help and scramble to avert financial ruin by refinancing out of predatory loans, and yet only 79 loans being made to save them nationwide?

If it is not for lack of a program, and if it is not for a lack of interest on the borrowers part, that only leaves the failure of the program to the usual culprits - the banks.

“We know the interest from the public is there, and the next question that can’t be answered yet is are the lenders going to do this?” says Bill Glavin, special assistant to the FHA commissioner, who notes that it generally takes at least 45 to 60 days to complete the process for a regular FHA loan.”

Well Bill, here is your answer from them banks: “No.”

This article has been reposted from Your Mortgage or Your Life. The full post can also be viewed on Your Mortgage or Your Life.

Some Lenders Can’t Give Foreclosed Properties Away

So exactly how bad have things gotten in places like Detroit? Banks are having a hard time giving homes away. The Detroit News published a story last week which highlighted a recent transaction where a bank which had foreclosed on a property basically paid a buyer to take the property off their hands. The property was listed on the MLS for $1, but really that was only because, in order to make the sale legal, there has to be some transfer of wealth. In actuality, once you take into the account that the bank paid $500 toward the buyer's closing costs, they actually paid the buyer to take over the property. When all was said and done it was estimated in the Detroit News article that the bank paid around $10,000 to sell the home. This figure included approximately $3,500 in real estate commissions plus back taxes and water bills. For those who might be thinking this buyer got an amazing deal, though, let’s take a look at how this home got to the point it is at now.

According to the article, the home sold back in November 2006 for $65,000. At that time it was one of the nicest homes on the block. Last summer the home was foreclosed on by the bank; vandals broke into the home and stole everything of value, including the doors, plumbing, wiring, even the siding--everything, including the kitchen sink. One day, the real estate agency boarded up the home only to find the boards stolen the next day, used to board up another nearby home. You probably get the idea by now that this is not exactly the best neighborhood around. In addition, there is also the fact that taxes on this property run $3,900 a year. This new owner better run, not walk, to the court house and put in a request to challenge the property assessment or else this home may soon start eating away at their savings. Hopefully, too, they have some sort of understanding with the locals so that as they fix up the property the improvements aren’t immediately stolen. There is definitely a reason why it took 19 days to find a buyer even willing to take the property.

While Detroit happens to be one glaring example of the economic problems faced by some in our country, they are not alone. These $1 sales are common in other cities as well, including Cleveland. "And in some cities like Cleveland, judges aren't letting them [lenders] sit on the properties -- they're ordering them to tear them down or sell them,” Anthony Viola of Realty Corp. of America in Cleveland was quoted as saying in the Detroit News article.

Since it only costs around $5,000 to demolish a property, and that it cost the bank--at least for this transaction--around $10,000 to sell the home, it might make more financial sense to just demolish the home and hold onto the lot as an asset, which will hopefully be worth more someday in the future. Obviously, for this strategy to work, they would need to challenge the property tax assessment and get it lowered closer to the real value, which would be nothing. Once they did that they could sit on the property forever if they wanted (considering that they will be able to generate more income on the $5,000 savings then any expenses the vacant property might require), or they could even donate the property to charity, if they could find one to take it. Ultimately I wonder how much longer banks are even going to be willing to lend in neighborhoods like these. Something tells me it won’t be for much longer. Oh, that is unless of course the government is willing to guarantee the loans, which will probably happen. So next time it will probably be taxpayers who have the privilege to foot the bill on this. I don’t know about you, but I’m not excited about that prospect.

*For more information on this particular $1 house in Detroit see Zillow's excellent write up. They have a bunch more pictures as well.

*Photo courtesy of Bearing Group (MLS photo for 8111 Traverse St, the property mentioned in the article)

Judges Denying Foreclosures, But What’s The Point?

We’ve seen politicians proclaim the injustices of foreclosures, and now judges seem to be rallying around those ideas as well. The housing crisis has created two camps: one side which supports the homeowners, saying they were manipulated by the greedy lenders, and the other side which supports the lenders and their resolve to make a profit. The most popular side has obviously been the one supporting the homeowners; after all, it is much easier to feel for a family losing their home than a big multinational bank losing some money. Judges, though, are supposed to be impartial regardless of any personal feelings they may have.

The Wall Street Journal recently published an article about how a few judges from across the country have taken up the fight against foreclosures. They recount several cases where the judges seemingly go above and beyond in order to deny foreclosures. Here is one example as written in the article: “In June, the judge dismissed with prejudice two cases filed by a unit of Wells Fargo & Co. By doing online public-records research himself, the judge found that Wells Fargo didn't own the two loans, and his dismissals mean that even if Wells Fargo eventually obtained legal ownership, it could take up to another year to obtain foreclosure.” Wells Fargo said that they were acting as the trustee for a loan securitization trust which holds the mortgage, an arrangement which is pretty standard in the industry. This judge definitely went above and beyond in order to find a loophole which he could use to stop the foreclosure. And now, thanks to this judge, the homeowner gets to live in the home for another year on Wells Fargo’s dime. What the judge was trying to accomplish other than allowing the homeowner to mooch off the system for a while longer is not certain.

Wall Street Journal’s law blog author Amir Efrati tells another story of a judge named Arthur M. Schack. “In one of his foreclosure dismissals, Schack (Indiana, NYU Law) cited the film 'It’s a Wonderful Life' to make the point that homeowners now deal with 'large financial organizations, national and international in scope, motivated primarily by their interest in maximizing profit, and not necessarily by helping people.'” My question is, how does the fact the bank is trying to maximize profits have anything at all to do with the case? These major banks are all publicly traded and their main responsibility is to their shareholders and turning a profit, not helping people. I think Mr. Schack might be confusing these publicly traded banks with non-profit microfinance institutions.

Don’t get me wrong--I feel horrible that these people are losing their homes and having to go through the misery of foreclosure, but at the same time, I know that milking the financial system is not for the greater good. These judges can try all they want to delay the inevitable, but in the end these people are going to lose their homes. That’s the normal course of action when someone stops paying their mortgage payment. All that they are doing now is making life miserable for lenders and costing them more money in legal fees and lost interest. In case you didn’t guess it already, we can bet that those increased costs are going to find their way back to borrowers one way or another. So because these judges are making a stand and helping a few people, all the other borrowers out there can expect to pay the price. This isn’t exactly my idea of justice.

San Diego: Foreclosure Sanctuary Or Lender Hell?

In the latest attempt at the city level to curb foreclosures, San Diego city attorney Michael Aguirre filed suit yesterday against Bank of America and Countrywide, and is planning to file similar suits against Washington Mutual, Wachovia and Wells Fargo, to prevent the lenders from foreclosing on homes in the city, according to Reuters. “We would like to see San Diego become a foreclosure sanctuary,” Reuters quoted Aguirre as saying. This of course begs the question of whether San Diego will turn into a “foreclosure sanctuary” or a lender hell.

Aguirre’s intentions may be good at heart, but how can you justify something like this? Telling a business that they cannot collect on debts owed to them is ludicrous. Here are a couple quotes from Aguirre that appeared in the Reuters article that speak to his reasoning:

"The Countrywide executives who originated these subprime loans were engaged in a massive fraud on homeowners, borrowers and investors. They enriched themselves by over $1 billion."

"We have the big stick of being found in violation of the law and the carrot of taking something that is a nonperforming asset, that all these houses are, and making it a performing asset by keeping the families in it."

Sure, some Countrywide executives may have cut some corners and performed some questionable acts, but surely he doesn’t think that all the executives at all those major banks did the same thing? Furthermore, the Reuters article states that Aguirre's lawsuit, brought in the name of the people of California, names four current and former Countrywide officers, including former CEO Angelo Mozilo, and alleges they personally profited from selling shares of the lender's stock while knowing its subprime loans did not comply with company policies. My question is, what does this have to with the homeowners in foreclosure? This sounds like an issue between Countrywide, the aforementioned executives and the investors. As long as homeowners were getting the loans they thought they were getting, this has little to do with them. If a bank wants to break their own rules in order to fund some loans, that is their prerogative. They were not breaking federal or local laws with these loans, but company rules and guidelines.

The bigger issue here is if Aguirre is successful in his suit, and with the information I have seen I can’t imagine he will be, how will banks react to future mortgage lending in the city? If a bank knows that they are going to have to put up with people like Aguirre, who strongly favor homeowners over businesses, is it really worth the trouble to even lend in the city? I know if I were a bank in this situation, I would wash my hands of San Diego and focus my efforts elsewhere. If the city is telling me I can’t go after debtors who don’t pay me back, then I would have to think long and hard before I lent there.

Foreclosure Bill And $300 Billion Housing Bill Could Pass, Thanks To Fannie Mae and Freddie Mac

Democrats have been pushing a foreclosure bill that would provide $4 billion to states and cities to repurchase foreclosures and rehabilitate them, along with a more encompassing $300 billion housing bill. Republicans have strongly opposed the bills saying they represent a bailout of lenders, among other things. Now that the White House and Republicans want to get their Fannie Mae and Freddie Mac rescue bill passed ASAP, Democrats are trying to strike a deal.

The Fannie and Freddie rescue plan involves extending the government sponsored entities an unspecified line of credit (basically unlimited), along with establishing the right for the government to step in and buy equity positions in the company if they need to, according to the Wall Street Journal. The Congressional Budget Office estimates the cost of Treasury's proposals to the federal government to be in the tens of billions of dollars, according to the Wall Street Journal. This doesn’t sound so hot to us taxpayers, but if you consider what would happen if we let Fannie and Freddie fail, tens of billions of dollars doesn’t sound too bad. These two companies run the mortgage market, and if they go under, so too does the entire U.S. mortgage industry. It is one of those "you’re damned if you do, damned if you don’t" things.

While Democrats do recognize the importance of Fannie and Freddie, most are reluctant to give the companies a blank check. They want to make adjustments to the proposal, but Republicans want to see this thing done now. This is where politics comes into play: Now the Democrats are trying to push their foreclosure and/or housing bills to be passed in conjunction with the Freddie and Fannie one, and are threatening to hold talks up unless Republicans comply.

Whether or not Republicans give in remains to be seen, but I can’t help to think as a taxpayer that I’m getting the short end of the stick here. So you’re telling me that not only do you want to pass a bill that is going to cost us tens of billions of dollars, but now you want another $4 billion minimum (possibly $300 billion if the full housing bill is included) on top of that to bail out lenders who made dumb choices?

Foreclosures Account For 30 Percent Of All Real Estate Transactions

Back in 2004, foreclosures accounted for a mere 2 percent of real estate transactions nationwide; the fact that that number has now risen to 30 percent in Q1, according to Zillow.com gives a good glimpse into the state of the real estate market. While foreclosures are typically not a good thing, for the savvy investor, they most certainly can be. Some investors are turned off by foreclosures, because they are typically older, lower priced homes in undesirable areas, but this trend is also changing.

New homes are now making up an increasingly larger piece of the foreclosure market. In fact it is estimated by Credit Suisse that new home foreclosures will reach 1.69 million this year, according to an article from Dow Jones Newswire. This surge in foreclosures is of course in part the result of speculators who bought with the hopes of flipping the homes at a quick profit (not a very good strategy with new homes, FYI), as well as the fact that the overall market has tanked, leaving most people who bought recently (including new homes) underwater. With all these new homes coming on the market as foreclosures, investors have an opportunity to pick up some great properties that should be in good condition, assuming the homeowner doesn’t trash the place before they move out.

While the 30 percent nationwide number may seem pretty high, in some areas things are even more pronounced. Foreclosures account for 72 percent of all the real estate transactions in Stockton, Calif., and 45 percent of all the transactions in Las Vegas, according to the Dow Jones Newswire article.

Investors who are interested in going after these foreclosure opportunities should identify at which stage they want to enter the game: when the properties as pre-foreclosures, at the foreclosure auction or as REOs. One advantage to buying them as pre-foreclosures is that investors can potentially avoid much of the damage that angry homeowners tend to inflict on their homes before they take off. In addition, investors will have the opportunity to inspect the property before they buy it, and if they play their cards right, the opportunity to help someone avoid foreclosure while making some money themselves. On the other hand, the pre-foreclosure arena is quickly becoming locked down by many states as they try to protect homeowners from various scams. This is not to say it can’t be done in those states, but there are some potential liabilities and things investors need to be aware of (see our previous article about HB 2791).

Buying at auction typically allows for investors to grab the biggest bargains, but that is largely because of the extra risk they have to take. When buying at auction, buyers typically aren’t able to inspect the home prior to purchasing and there are no refunds. In addition, buyers have to bring cash to the auction, so they aren’t able to utilize leverage in these deals, at least upfront (there are some private lenders out there that will lend at low LTVs for investors to buy at auction, but all the ones I’ve seen charge ridiculous fees and interest rates).

Lastly, buying the property as an REO allows buyers to inspect the property, acquire financing and all that jazz. But in order for a property to make it to REO status it has to get through the first two stages, meaning that it is likely that the best deals have already been scooped up.

Cities Take Desperate Measures To Help Residents Avoid Foreclosure

To help stop the surging tide of foreclosures some cities have decided to take matters into their own hands, or in the case of Trenton N.J., place it in God’s hands. These cities have put their creative energy to work and are seemingly willing to do whatever it takes to keep residents in their homes. A recent Associated Press article talked about several creative measures being taken by cities:

In Philadelphia, the court decided to make it mandatory for lenders and homeowners to get together to try to work a deal out before they would proceed with a Sheriff sale. In addition, the court assigned homeowners volunteer attorneys and housing counselors.

In Cleveland, the city decided to sue lenders for hundreds of millions of dollars in damages stemming from loans they deemed to be predatory. Minneapolis and Buffalo are undertaking similar lawsuits. The lenders, of course, say that these lawsuits have zero merit and that they are simply an act of desperation on behalf of the cities.

In Jacksonville, Fla., residents in distress can apply for interest free loans of $5,000 which will be forgiven if they remain in their homes for at least five years. Louisville, Ky., has a similar program but they require residents to remain in their homes for 10 years.

Los Angeles is staffing foreclosure counselors in neighborhood centers for jobs and city services in addition to working with neighborhood councils.

Perhaps the most creative and useful--or most desperate, depending on one’s beliefs--comes from Trenton, N.J. Trenton’s mayor, Douglas H. Palmer, has requested all preachers in the city to preach at least one sermon on foreclosure in June. In addition, he has asked churches to distribute to their congregations materials meant to help people facing foreclosure. Many people from the churches are even wearing T-shirts that say “Save Trenton Homes!” with numbers for a help hotline on the back.

The number of foreclosures continue to rise, and it doesn’t appear that it is about to stop any time soon. As time goes on I would expect to see continued acts such as these from desperate people. I certainly don’t blame the cities for trying--at the very least, it shows their residents that they care about them and are willing to put up a fight. However, in the end, most of these desperate measures will fail to help. Trying to keep someone in a home they can’t afford is futile. We will have to accept that the market needs to correct itself, and next time around we as homeowners need to ensure that we don’t get ourselves into homes and mortgages that are more than we can handle. This housing crisis is one big learning experience for Americans: Don’t spend money you don’t have, or in the case of lenders, don't lend money to people who can’t pay it back. I just hope the federal government doesn’t pass the big bail out deal that changes the lesson around to don’t be afraid to spend more money than you have, or be careless with your lending, because the government will bail you out if it comes to it.

HB 2791: Better Drowned Than Eaten?

Foreclosure rescue scams have been rampant since the burst of the bubble, as homeowners sunk by predatory lenders reached out for help. Many legitimate foreclosure rescue investors sailed in, offering to help distressed homeowners keep their homes and some of their equity, but with them came a swarm of sharks promising the same and leaving these homeowners worse than before. These foreclosure scam artists prey on the good faith and desperation of people already stung by human greed. Putting it politely, their human worth ranks somewhere between “the scum behind a prison toilet” and “depleted uranium”.

It is thus with good reason that Washington state Attorney General Rob McKenna and other bill sponsors first brought HB 2791 to the table: to protect desperate homeowners who had already demonstrated a lack of understanding about the real estate market. Unfortunately, in its final form, the bill doesn’t make the process more transparent for homeowners. Instead, it makes the buying process so opaque and perilous that no sane investor, no matter how well-meaning, would dare attempt even a short-sale, lest they become the victim of a zealous seller.

Some honchos in the industry believe that ethical investors will not be affected by the bill, but I am not so optimistic. Says Dugald Allen, vice president and legislative committee chair for the Real Estate Association of Puget Sound:

“Ethical investors should have no concerns about this law at all. All it does is put...you in the spotlight to tell the truth, and if you are an ethical investor you’ve always been doing that. It focuses people back into win-win scenarios where sellers can, in fact, be assisted...and [buyers] can make a reasonable profit doing it.”

Given the difficulties and dangers posed by the bill, Allen is either extremely optimistic about investors’ ability to adapt to the new regulations, or he just believes there’s no such thing as an ethical investor involved with foreclosure rescue. I can’t really agree on either count.

Under this new legislation, the risk squarely falls more on the buyer, and now that even short-sales are included in the bill, options are further limited. Some distressed homeowners have demonstrated the belief that “the world owes them one” in the way they have extorted money from lenders by threatening to destroy and deface the property before abandoning it. Human greed is what compelled these scam artists to approach distressed homeowners, but with HB 2791 now putting fiduciary duty on the BUYER (or “home consultant”), the question is who will protect them from the sellers?

This bill may have started with good intentions, but by penning these drowning homeowners off from the sharks, this legislature has penned them off from their only lifeboats, too. With the foment we’ve already seen surrounding this new bill, some political careers may be dragged under if reasonable changes aren’t made...and soon.

Foreclosure Bailout: Why It Won’t Work

The foreclosure bailout plans that seem to be on the tongues of everyone in Washington these days are doomed to failure. I read an interesting piece by Holman W. Jenkins, Jr. in the Wall Street Journal that I thought I’d share. He points out the number one reason why these foreclosure bailout plans won’t work is that many people don’t even want the houses anymore.

He points out that the bulk of the foreclosure problems across the country are concentrated in a few areas such as Las Vegas, Sacramento, Phoenix and southern Florida. He contends that the people who bought homes in the outlying areas of these locations were making bets on demographic trends and commute patterns that proved to be incorrect. Many of these homes are in areas that no one wants to live right now, especially considering the high price of gas. A family that may have been willing to commute 50 or 60 miles in 2004 to get to work so that they could own their own home now isn’t so willing to take on a commute like that.

In the article Jenkins, Jr. also touches on the normal issues, such as people buying more home than they could afford in the first place, and falling home prices. The arguments here are that a foreclosure bailout is going to be hard-pressed to help someone stay in a home that they couldn’t ever afford--not then and not now. With falling home prices it brings to question again why the people would want to stay in the house if they are upside-down? If their home has depreciated by 20 percent, and they put down nothing when they bought the home, where is the incentive? These people would be better served by walking away from the home renting for 7 years, saving their money, then buying another home, but this time within their means.

Then Jenkins, Jr. talks about how even if homeowners wanted to participate in the foreclosure bailout plan, it is still a losing proposition for American taxpayers. “…the government plan, which would pay 85 cents on the dollar for mortgages now selling for 50 cents or less. True, the House bill gamely seeks to exclude speculators and homeowners who lied about their incomes. But an ill-equipped FHA would be a sitting duck for lenders who tacitly permit nonpayers to remain in homes just long enough to pass the bag to government” Jenkins, Jr. Wrote.

In conclusion Jenkins, Jr. says that that the housing problems going on right now aren’t the end of the world; we will survive. Most importantly he ends his article by saying, “One sure way to guarantee bubbles without end is to institutionalize that one-way bet. That's what a bailout would end up doing for those ultimately responsible for directing a large chunk of the nation's savings into unwanted, uneconomic housing.”

Personally, I couldn’t agree more. If we always come to the rescue of people who do dumb things, they will never learn. I think it is time to make the people who made poor decisions pay for their mistakes, learn from them and become better for it. In business and in life, this is how you improve: You try something and if it doesn’t work, you do it differently next time. The only lesson we are teaching people now is that if you screw up, no biggie--the government will bail you out, so feel free to take some extra risks. But if people suffer no consequences from their poor choices, they will never learn.

Housing Crash Contrarians Say “Buy!” But Who Buys That?

Housing Market Meltdown! Mortgage Crisis! Recession! Recession! Recession! The media sure is being an awful killjoy these days, aren’t they? Since when did the fourth estate care so much about real estate? Can’t they bring us some good news? Can’t they compare the market meltdown to rich, gooey fudge, or the collapse of our economy to a light-hearted game of Jenga?

As the news of the market grows increasingly dour and consumer confidence sinks further into the toilet, a few voices have arisen hither and thither, proclaiming that the market may not be as bad as it seems and that now may still be a good time to buy. Some of these voices go so far as to claim that our negativity may be our own worst enemy. One such voice belongs to Mr. Bob Mathe, a Realtor for Coldwell Banker quoted in the Oshkosh Northwestern. Mr. Mathe had the following wisdom to share:

"The market really hasn't been bad here. We're still selling stuff.”

Great news, Bob! “Stuff” is good, and “selling stuff” is even better. Really! Kudos!

Cultural and commercial meccas such as Oshkosh, which are ostensibly more recession-resistant, are seeing growth in housing prices. Mr. Mathe seems to think that it can only continue to go up, right? Because that’s not at all what people were saying before the market burst everywhere else. Could a guy named “Mathe” have his numbers so wrong? Heaven forefend! So why aren’t people buying?

When in doubt, blame the media:

"If the media would stop talking about it, people would not be so hesitant."

You’re right, Bob. I’m sick and tired of these party-poopers telling me to prepare for a storm. Sign me up for a dozen pre-construction condos. I just can’t go wrong!

But it isn’t just biased peons like Mathe that are preaching good vibrations. Seasoned guru Suze Orman also just released an article in which she states that buying a house now may not be such a bad idea, but she’s careful enough to specify areas of particular caution.

“All those stressed-out developers are motivated to make deals. That can mean sharp price discounts or great offers to help with your mortgage financing,” she advises, but is quick to remind readers that being surrounded by half-finished homes is hardly conducive to your home’s value appreciating. For a real horror story on this subject, see this recent article from the AP about residential projects abandoned or delayed in the wake of the housing crisis. Empty homes, new or not, can have serious ramifications for those living or investing nearby. This definitely applies to home buyers considering foreclosure properties as well.

With recent polls declaring that 60 percent of Americans will not purchase a home in the next two years, it’s no wonder that people like Mathe are rallying the consumer. These are lean years ahead, and even Orman’s position, at heart, is a carefully frosted bitter pill that ultimately admits that only a select few are in any position to be buying a home at this time, and even those who can find the funding and commit to “stay put for at least five years” are taking a risk.

So bring on the doom and gloom. Wishful thinking and betting on imaginary wealth are what caused the housing crash and the mortgage crisis, and erring on the side of caution may take a toll on the economy as a whole, but it’s the only way one can ride out this recession. “Buy now”? Don’t buy it...

This was a guest post by Trenton Flock, Web Editor at NuWire.

Foreclosure Revenge: Borrowers Say Pay Up Or Else

Home buyers facing foreclosure are giving lenders an ultimatum: Pay up, or else you will get the house back trashed. Investors who buy foreclosures know that many properties are found in bad shape, often without appliances, light fixtures, and other items which came with the house. It is common for homeowners facing foreclosure to rip every saleable thing out of the house, then take their frustration out on whatever is left. However, homeowners and lenders are coming to a compromise. Lenders are paying homeowners hundreds, or even thousands, of dollars for turning in the home in good shape. Ultimately, this works out better for both parties, but I can’t help but think that something isn’t right with this picture.

Here is an excerpt from a Wall Street Journal article on the topic:

“The owner, a 43-year-old man with two children who spoke on the condition that his name not be used, says he bought the property in 1993 for $140,000. Three years ago, he says he had the house appraised for $440,000 and took out a $207,000 home-equity loan to pay off credit-card bills and buy his wife a new van. His initial payments were an affordable $1,800 a month.

He fell behind, however, after he went through a divorce and his landscaping business faltered, just as his interest rate was rising. The man worked out a payment plan with the bank and borrowed heavily from his father, but, including penalties, his monthly payments rose to $4,000, he says. After two months, he says, he ran out of money, and the bank foreclosed.”

When I look at this example, I feel it is hard to put any blame on the bank. This guy pulled all the equity from his house, spent the money, and then had some personal issues that left him in a vulnerable situation. The bank worked with him on a payment plan, but he still couldn’t make the payments, so the bank foreclosed. Out of good faith, the bank also made him an offer of $500 to leave the house in good condition. He proceeded to reject that offer as not enough, and forced the bank to pay him $2,800.

So not only is the bank going to lose money on this deal, because the home isn’t worth what is owed on it, but they are paying this guy $2,800—even though he still owes them thousands. What is wrong with this picture? I understand completely why it is happening, but come on...what kind of precedent are we setting?

As Foreclosures Accumulate, Where Are The Opportunities For Investors?

The wave of foreclosures sweeping the nation has probably piqued the interest of most real estate investors. As more and more foreclosed homes flood the market, prices are plummeting, and there are seemingly more deals than one could ever hope to count. Should investors really be excited about these foreclosure opportunities? The answer to that question lies in one’s estimation of the real estate market.

Investors who believe that the market has hit bottom should seriously be looking at some of these foreclosure investment opportunities. Banks are becoming overloaded with REOs, and they are increasingly willing to deal with investors. This is not the case with all banks, but persistent investors are getting properties at 70 to 80 cents on the dollar, or even better in some instances. In Michigan and Ohio particularly, banks have more foreclosures than they can manage, and investors are getting especially attractive deals.

Investors should still use caution when looking at foreclosure investments. Areas that have a lot of foreclosures tend to be on the down trend. Neighborhoods that have a plethora of foreclosed homes are often faced with higher crime levels, lack of property upkeep and other negative features. This can lead to severe price drops in the neighborhood as it becomes less attractive to potential homebuyers. Unless investors are specifically looking for a neighborhood renewal project, they would do well to locate properties in neighborhoods which have not been as negatively affected by the downturn.

Investors must also consider that real estate prices could continue to slide. Even if one is able to buy a property for 70 cents on the dollar, if its value decreases another 20 or 30 percent, it no longer looks like such a good deal. In order to protect themselves, investors can look for properties which can be easily rented out to cover property expenses, including the mortgage. Cash flow property typically retains its value because it is not speculative like other investments, and investors can see the returns when they buy it.

If investors have the required funds, another foreclosure investment opportunity is to buy properties in bulk from lenders. Some lenders are more willing to offer discounts on their foreclosed properties if they can unload them in large quantities. Investors could then turn around and sell them off individually to other investors at a profit, or they could simply keep them for their own portfolio.

Foreclosures Increased 57 Percent In The Past Year

Foreclosure filings increased 57 percent from January 2007 to January 2008, according to a report released yesterday by RealtyTrac. Some states were hit by foreclosure much harder than others.

Nevada, despite actually experiencing a decrease in foreclosure activity between December 2007 and January 2008, was the state with the highest rate of foreclosures in the nation in January 2008. 6,087 properties in Nevada faced foreclosure filings in January 2008, according to the report.

And from January 2007 to January 2008, Nevada's foreclosure activity increased by 95 percent, according to the report.

"California’s January foreclosure rate ranked second highest among the states, and Florida’s January foreclosure rate ranked third highest. Other states with foreclosure rates ranking among the top 10 were Arizona, Colorado, Massachusetts, Georgia, Connecticut, Ohio and Michigan," according to the report.

Florida, Arizona, Georgia and Colorado each had individual markets that were ranked in NuWire's Top 10 Foreclosure Markets for 2007.

California had the second-highest rate of foreclosure filings, but the highest number of actual foreclosure filings, coming in at a total of 57,158 properties, according to the report. California had a 120 percent increase in foreclosure activity from January 2007 to January 2008.

Florida had the second highest total number of foreclosure filings, at 30,178 properties, and a 158 percent increase in foreclosure activity from January 2007 to January 2008, according to the report. "The Cape Coral-Fort Myers, Fla., metro area documented the highest January foreclosure rate among the 229 metro areas tracked," according to the report.

What does this mean for investors? For those who are interested in potentially getting great deals on properties, it means that opportunities abound. Investing in foreclosure properties was number three on NuWire's list of 2007's Top 10 Investments Under $25,000.

For more information on investing in foreclosures, see our previous articles Capitalizing on Record Foreclosures and Buying HUD Foreclosures: What Investors Should Know.

And if there are any investors who want to go all out when purchasing a foreclosure, they should keep their eyes on the headlines. Michael Jackson's infamous Neverland Ranch is set to be auctioned off unless he can come up with $24.5 million by March 19. For more details, see Eric's previous post Michael Jackson Facing Foreclosure: What's Next For Neverland Ranch?

This was a guest post from Trista Winnie, Associate Editor at NuWire. If you like what you read here you should check out CommonCensus, a blog where Trista contributes regularly.

Michael Jackson Facing Foreclosure: What’s Next For Neverland Ranch?

That’s right, not even Michael Jackson, “The King of Pop,” can distance himself from the foreclosure problems facing the country. According to the Associated Press, Michael Jackson will need to come up with $24.5 million by March 19 in order to save his famed Neverland Ranch from being auctioned off.

The starting bid amount will likely exceed $24.5 million, but considering the fame of Neverland ranch and the location outside Santa Barbara California, it might not be a bad investment. I imagine that this ranch could be turned into quite the tourist draw. Michael Jackson is still probably the biggest single name in music worldwide, and people will want to see his famed ranch. Just think of the tourist draw that Graceland has become. Not only is Michael Jackson a bigger name than Elvis, but the property is much more interesting than Graceland. People will pay money to see Neverland. Of that I’m sure. Even people who aren’t Michael Jackson fans would probably still pay to see the ranch just out of curiosity.

The main buildings could be turned into a museum, and much of the rest of the ranch subdivided and sold off, turned into a vineyard (Neverland winery could be an interesting novelty...), or any number of things depending on the investor’s preferences. Seeing as homes in that region, on just a couple acres, are going for $1-5 million a piece, and Neverland ranch is on somewhere between 2,500-2,900 acres (depending on which source you believe), there is substantial value in the land for sure.

That being said I’m not sure if the property will even make it to auction. It is likely that Jackson will figure some way out of this problem, but it is interesting to consider. Who knows? Maybe the next time that I’m in Santa Barbara, I’ll be able to take a full access tour of Neverland ranch, and maybe even a ride on Michael Jackson’s Ferris Wheel.