All is Fair Game

Updates 02/18/2010
February 18th, 2010 9:42 AM


The relentless wave of foreclosures that has steadily swelled and battered the housing industry for a good three years seems to have retreated in January, but it’s not enough to mean the storm has passed – RealtyTrac says a resurgence is likely.

The company’s January 2010 U.S. Foreclosure Market Report released Thursday shows that foreclosure filings – including default notices, scheduled auctions, and bank repossessions – were reported on 315,716 U.S. properties during the month – or one in every 409 housing units. That figure represents a decrease of nearly 10 percent from the previous month but is still 15 percent above the level reported in January 2009. Last month’s decline follows a 14 percent month-to-month increase in filings recorded in December 2009.

“January foreclosure numbers are exhibiting a pattern very similar to a year ago: a double-digit percentage jump in December foreclosure activity followed by a 10 percent drop in January,” said James J. Saccacio, CEO of RealtyTrac. “If history repeats itself we will see a surge in the numbers over the next few months as lenders foreclose on delinquent loans where neither the existing loan modification programs or the new short sale and deed-in-lieu of foreclosure alternatives works.”

According to RealtyTrac’s market analysis, REO activity nationwide was down 5 percent in January compared to

the previous month but still up 31 percent from January 2009. Default notices were down 12 percent from December but up 4 percent from year-ago levels, and scheduled foreclosure auctions were down 11 percent for the month but increased 15 percent from January 2009.

The same usual suspects sat at the top of RealtyTrac’s list of states with the highest foreclosure rates. Despite a year-over-year decrease in foreclosure activity of nearly 18 percent, Nevada’s foreclosure rate remained the highest for the 37th straight month. One in every 95 Nevada housing units received a foreclosure filing in January – more than four times the national average.

A 4 percent month-over-month increase in foreclosure activity boosted Arizona’s foreclosure rate to second highest among the states in January. One in every 129 Arizona homes was in some stage of foreclosure during the month.

Foreclosure activity decreased by double-digit percentages from the previous month in both California and Florida, and the two states registered nearly identical foreclosure rates – one in every 187 housing units receiving a foreclosure filing. California’s foreclosure rate was statistically higher by a slim margin and ranked third highest among the states while Florida came in at No. 4.

With one in every 231 housing units receiving a foreclosure filing, Utah registered the nation’s fifth highest state foreclosure rate, despite a nearly 12 percent month-over-month decrease in activity.

Other states rounding out the top 10 list were Idaho, Michigan, Illinois, Oregon, and Georgia.

In terms of the number of properties in foreclosure (as opposed to the rate), six states account for nearly 60 percent of the national total: California, Florida, Arizona, Illinois, Michigan, and Texas.

Phoenix was the only top 10 metro area to post a monthly increase in foreclosure filings, while Las Vegas documented the highest metro foreclosure rate with one in every 82 homes in some stage of foreclosure last month.



The new Appraiser Independence (ML 2009-28) requirements for Federal Housing Administration (FHA) loans officially took effect February 15, 2010. Originally planned for a January 1, 2010 implementation, the enactment was delayed to provide the FHA and lenders with additional time to adjust systems to accommodate the changes.

Many of the new guidelines are similar to the Home Valuation Code of Conduct (HVCC), which has been in place since May 1, 2009 for Freddie Mac and Fannie Mae loans. Under FHA’s rules, appraisers are required to receive reasonable and customary compensation and cannot be affiliated with lending agencies. In addition, appraisers are required to have familiarity, experience, and knowledge in the geographic location of the properties being appraised, and higher standards have been adopted for the process of ordering appraisals.

Under FHA’s new guidelines, mortgage brokers are prohibited from directly ordering appraisals for FHA loans. Title/Appraisal Vender Management Association (TAVMA), a Wexford, Pennsylvania-based trade association that represents some of the nation’s largest appraisal management companies (AMCs), said its members are prepared to help lenders comply with the changes in appraisal ordering.

Jeff Schurman, executive director of TAVMA, said the association’s members already have significant panels of FHA-certified appraisers. There are more than 51,000 FHA-approved appraisers nationwide, and TAVMA’s five largest member currently work with over 20,000 of these, he explained.

Based on the vociferous reaction to the HVCC, of which many Appraiser Independence guidelines were mirrored after, Schurman said he expects that mortgage brokers and independent appraisers with strong business ties to brokers and realtors will again protest these changes. He said there will likely be significant pushback and claims from many that the rules will create bottlenecks, shift work to less-experienced appraisers, and delay deals.

More than 60,000 local appraisers currently work with AMCs, which provide approximately 60 percent of all appraisals in the mortgage industry. Schurman said when you consider this, it stands to reason that AMCs will have a presence in virtually every market-including working on FHA transactions.


Lenders do not need any more inventory on their books. I have noticed some of the hardheads have recently changed their position on foreclosures. They are willing to consider loss mitigation or any type of work out terms they can get not to have these homes go into foreclosure. I have been amazed at some of the losses the larger banks have taken for instance, a home in the Atlanta, GA market was foreclosed on in the amount of $1,400.000.00. This was a very large custom home that needed little work. The lender foreclosed and sold that home for $450,000.00. Do you think the current owner might have been able to make payments on that $450,000.00 loan. This is just one illustration and there are many more. I used to believe in the education system of our colleges and other schools but this just go's to show you that common sense is not that common in America today. We are now entering the commercial downfall of delinquent loans. I will cover that in another blog.

Greg J Shelley 


Mortgage Applications Decrease

Despite low and stable interest rates, mortgage applications fell for the week ending February 5, 2010, according to the Weekly Mortgage Applications Survey released Wednesday by the Mortgage Bankers Association (MBA).

The Market Composite Index, a measure of mortgage loan application volume, decreased 1.2 percent on a seasonally-adjusted basis from the prior week. This decline was the result of a 7 percent drop in the seasonally-adjusted

Purchase Index from week-to-week. The Refinance Index remained strong though, increasing 1.4 percent during the same period.

According to the survey, the four-week moving average for the seasonally-adjusted Market Index was up 3.8 percent. In addition, the four-week moving average for the seasonally-adjusted Purchase Index jumped 0.8 percent, and this average surged 4.8 percent for the Refinance Index.

The share of mortgage activity changed only slightly. The refinance share inched up to 69.7 percent of total applications, increasing just 0.05 percent from the previous week. The adjustable-rate mortgage (ARM) share of activity was unchanged from the previous week, coming in at 4.5 percent of total applications.

MBA reported that interest rates during this same period remained relatively low. The average rate for 30-year fixed mortgages dropped to 4.94 percent from 5.01 percent the week prior, and the average rate for 15-year fixed mortgages remained unchanged at 4.33 percent. Additionally, the average rate for one-year ARMs decreased to 6.68 percent from 6.70 percent.

Homeowner Confidence Shrinks to Lowest Level on Record

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RISMEDIA, February 18, 2010—American homeowners’ confidence in their own home’s value during the fourth quarter fell to the lowest level in seven quarters, with just one in five (20%) believing their own home’s value increased during 2009, according to the Zillow Q4 Homeowner Confidence Survey. In reality, 28% of homes increased in value during the year, according to Zillow’s Fourth Quarter Real Estate Market Reports.

That resulted in a Zillow Home Value Misperception Index of negative two–the closest to zero on record since Zillow introduced the index in the second quarter of 2008, when the index was at 32. A Misperception Index of zero would mean homeowners perceptions’ were in line with actual values. A negative Misperception Index indicates that homeowners are overly cynical about their own home’s value when compared with reality. This is the first time the national index was negative.

Half of homeowners believe their own homes lost value during 2009, while 30% believed their home’s value stayed the same. In reality, 65% of homes lost value during the year, and values remained the same for 7%.

“Not My Home” Sentiment Fades as Homeowner Attitudes Shift
The results demonstrate the “not my home” sentiment that was once prominent among American homeowners has faded. One year ago, nearly half (47%) of homeowners believed values in their local market would decrease in the next six months. However, when asked about their own home, fewer than one in three (30%) believed their own home’s value would decrease.

Now that gap has shrunk, with 22% of homeowners believing their local market will lose value over the next six months and 14% believing their own home will lose value. “Homeowners are finally succumbing to the notion that, in most areas, declining home values over the past year are no longer the exception, they are the rule,” said Dr. Stan Humphries, Zillow chief economist. “Almost three times as many people believe their home’s value will increase over the next six months as believe it will decrease in value, a level of optimism that is likely to outpace actual performance in the near-term. Given recent news about the stabilization of home values in some markets, I can see why homeowners are so optimistic. However, home values in many markets are still under substantial downward pressure from high levels of foreclosures and we don’t believe we’ll see a definitive bottom nationally until the second quarter of this year. We’re not out of the woods yet.”

About Own Homes’ Values:
Homeowners in the Northeast and West are overly cynical about the value of their home. Three-quarters (78%) of Northeastern homeowners said their home lost value or stayed the same in the past year when just over half (58%) of the homes actually did. This disparity between perception and reality resulted in a Misperception Index of -14, making Northeasterners the least aligned with reality. Western homeowners, who were the most optimistic and the least aligned with reality last quarter, did an about-face in the fourth quarter. They now are slightly cynical with a Misperception Index of -5.

For more information, visit

Risky CRE Lending Deadly for Banks

FDIC Audits Point to Risky CRE Lending; Congress Warns of Dangers to Banking System
February 17, 2010
The autopsy of 16 bank fatalities completed this year have identified commercial real estate lending as the primary killer in more than half (nine) of the cases, and an accomplice in one other.

In the seven cases in which CRE was not specified, the primary culprit for the bank failures was identified as lending for acquisition and construction of development projects.

When the FDIC's Deposit Insurance Fund incurs a material loss at an insured depository institution, the FDIC Inspector General is required to make a written report identifying the causes of the loss. A material loss is defined as anything more than $25 million or 2% of an institution's total assets.

In reviewing the 16 material loss reports completed this year on banks that all closed last spring and summer, it becomes clear just how much of a toll commercial real estate took on these financial institutions. The closing of those banks has resulted in losses so far for the FDIC of $2.34 billion. The 16 banks audited had total assets of $7.62 billion at the time they were shut down. They were based in states from coast to coast including: Washington, Wyoming, California, Nevada, Utah, Colorado, Texas, Illinois, Georgia and North Carolina.

Last year in total, 140 banks failed with total assets of $170 billion. While the total cost to the Deposit Insurance Fund has not been tallied, losses have been averaging about 30% of assets. That would calculate to losses for the fund of about $52 billion for last year.

"Federal Reserve examiners are reporting a sharp deterioration in the credit performance of loans in banks' portfolios and loans in commercial mortgage-backed securities (CMBS)," Jon D. Greenlee, associate director, Division of Banking Supervision and Regulation for the Federal Reserve Board, told the Congressional Oversight Panel at a Field Hearing in January. "Of the approximately $3.5 trillion of outstanding debt associated with CRE, including loans for multifamily housing developments, about $1.7 trillion was held on the books of banks and thrifts, and an additional $900 billion represented collateral for CMBS, with other investors holding the remaining balance of $900 billion."

"Of note, more than $500 billion of CRE loans will mature each year over the next few years," Greenlee continued in his testimony. "In addition to losses caused by declining property cash flows and deteriorating conditions for construction loans, losses will also be boosted by the depreciating collateral value underlying those maturing loans. These losses will place continued pressure on banks' earnings, especially those of smaller regional and community banks that have high concentrations of CRE loans."

The U.S. Congress created the Congressional Oversight Panel in the fall of 2008 to review the current state of financial markets and the regulatory systems overseeing them. The panel was empowered to hold hearings, review official data, and write reports on actions taken by Treasury and financial institutions and their effect on the economy.

The Congressional Oversight Panel compiled extensive research and data on the state of commercial real estate and took comments from Greenlee and many others before issuing a 189-page report this past week entitled: Commercial Real Estate Losses and the Risk to Financial Stability.

The report is starkly downbeat in its assessment of CRE risks on the banking system.

"Over the next few years, a wave of commercial real estate loan failures could threaten America‘s already-weakened financial system. The Congressional Oversight Panel is deeply concerned that commercial loan losses could jeopardize the stability of many banks, particularly the nation‘s mid-size and smaller banks, and that as the damage spreads beyond individual banks that it will contribute to prolonged weakness throughout the economy," the report concluded.

Between 2010 and 2014, about $1.4 trillion in commercial real estate loans are expected to reach the end of their terms. By Congressional Oversight Panel estimates nearly $700 billion of that debt is presently 'underwater,' a situation in which the borrower owes more than the current value of the underlying property.

"It is difficult to predict either the number of foreclosures to come or who will be most immediately affected," the report concluded. "In the worst case scenario, hundreds more community and mid-sized banks could face insolvency. Because these banks play a critical role in financing the small businesses that could help the American economy create new jobs, their widespread failure could disrupt local communities, undermine the economic recovery, and extend an already painful recession."

The problems facing commercial real estate have no single cause, according to the Congressional Oversight Panel. The loans they identified as most likely to fail were made at the height of the real estate bubble when commercial real estate values had been driven above sustainable levels and loans. The panel also noted that many loans were made carelessly in a rush for profit.

Other loans were potentially sound when made but the severe recession has translated into fewer retail customers, less frequent vacations, decreased demand for office space, and a weaker apartment market, all factors that increased the likelihood of default on commercial real estate loans.

Even borrowers who own profitable properties may be unable to refinance their loans as they face tightened underwriting standards, increased demands for additional investment by borrowers, and restricted credit.

The FDIC material loss reports also made it clear that most of the failed banks were either too aggressive in growing their commercial real estate lending portfolios and/or too ill prepared to manage the consequences. Specifically the FDIC auditors questioned the banks' loan underwriting standards on chasing deals either out of their territories or not consistent with their business plans. Those actions, in turn, prompted banks to pursue risky transitory and costly deposits to fund their growth.

The following is a summary of the reports examining the 16 banking failures.

  • New Frontier Bank, Greeley, CO; $1.8 bil. in assets New Frontier failed because its board and management did not implement adequate risk management practices pertaining to rapid growth and significant concentrations of residential acquisition, development and construction (ADC) and agricultural loans.

  • First Bank of Beverly Hills, Calabasas, CA; $1.3 bil. in assets First Bank failed because its board and management did not adequately manage the risks associated with the institution's heavy concentrations in commercial real estate (CRE) and ADC loans and investments in mortgage backed securities (MBS).

  • Cooperative Bank, Wilmington, NC; $973.6 mil. in assets Cooperative Bank failed because its board and management did not adequately manage the risk associated with the institution's aggressive real estate lending, particularly in the area of residential.

  • Strategic Capital Bank, Champaign, IL; $537.1 mil. in assets Strategic Capital's failure can be attributed to the board and management's speculative and ill-timed growth strategy involving high-risk assets and volatile funding. Strategic Capital's rapid growth strategy was in contravention to long-standing supervisory guidance related to CRE concentrations and securities.

  • Cape Fear Bank, Wilmington, NC; $466.8 mil. in assets Cape Fear failed because its board and management did not implement effective risk management practices pertaining to rapid growth and significant concentrations of CRE and ADC loans.

  • Mirae Bank, Los Angeles, CA; $410 mil. in assets Mirae failed because its board and management pursued an aggressive growth strategy centered in CRE lending and failed to ensure sound loan underwriting practices.

  • Southern Community Bank, Fayetteville, GA; $380.6 mil. in assets Southern Community failed because of a rapid deterioration in asset quality that led to loan and operational losses that quickly eroded the bank's capital. The majority of Southern Community's lending was in CRE, with a particular focus on ADC loans.

  • Westsound Bank, Bremerton, WA; $324.1 mil. in assets Westsound failed because its board and management did not implement risk management practices commensurate with rapid asset growth and a loan portfolio with significant concentrations in higher-risk ADC loans.

  • America West Bank, Layton, UT; $310 mil. in assets America West Bank failed because the bank's board and management deviated from the bank's business plan and did not effectively manage the risks associated with rapid growth in CRE and ADC lending.

  • FirstCity Bank, Stockbridge, GA; $291.3 mil. in assets FirstCity failed because its board and management pursued a strategy of aggressive growth centered in ADC lending.

  • Great Basin Bank, Elko, NV; $228.8 mil. in assets Great Basin failed because its board did not ensure that bank management identified, measured, monitored, and controlled the risk associated with the institution's lending activities. The institution's loan portfolio included, but was not limited to, out-of-territory purchased participation loans from areas that experienced a significant economic downturn starting in 2007, and a concentration in CRE loans.

  • Bank of Lincolnwood, Lincolnwood, IL; $217.4 mil. in assets Lincolnwood failed because the bank's board and management did not implement adequate risk management practices pertaining to a significant concentration in ADC loans.

  • Millennium State Bank, Dallas, TX; $121.4 mil. in assets MSB's failure can be attributed to inadequate management and board oversight, an aggressive growth strategy centered in CRE lending, weak loan underwriting and credit administration, poor earnings, and an inadequate funding strategy.

  • American Southern Bank, Kennesaw, GA; $113.4 mil. in assets American Southern failed because its board and management materially deviated from its business plan by pursuing a strategy of growth centered in ADC lending.

  • MetroPacific Bank, Irvine, CA; $75.2 mil. in assets MetroPacific, a de novo bank, failed primarily because it lacked stable and consistent management and oversight as a result of significant turnover in key management positions. The bank's board and management were particularly ineffective in implementing risk management practices pertaining to adherence to the bank's business plan and rapid growth and concentrations in CRE and ADC loans.

  • Bank of Wyoming, Thermopolis, WY; $72.8 mil. in assets The Bank of Wyoming's failure can be attributed to the board and management's pursuit of loan growth funded significantly with brokered and other non-core deposits. The bank's loan portfolio was concentrated in CRE and ADC loans made to out-of-area borrowers, obtained through loan brokers and participations purchased.

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Posted by Greg Shelley Phd on February 18th, 2010 9:42 AMPost a Comment

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