The green shoots are now officially guiding the Southern California housing market.  The sentiment has shifted in the region.  Even though some 40,000 foreclosed homes are sitting off in some fantasy banker balance sheet, many people are jumping back into the housing game.  For those purchasing at rock bottom prices in distressed areas like the […]

The green shoots are now officially guiding the Southern California housing market.  The sentiment has shifted in the region.  Even though some 40,000 foreclosed homes are sitting off in some fantasy banker balance sheet, many people are jumping back into the housing game.  For those purchasing at rock bottom prices in distressed areas like the Inland Empire, this may not be so bad.  After all, if you are able to purchase a home for $100,000 that once sold for $300,000 that in fact may be a good deal.  But if you are jumping into those mid-tier markets like Pasadena, Culver City, or Palms for example you will need to gear up for the next few years.

Earlier this week the Southern California home sale numbers showed another pop in sales and stabilization in price.  We have discussed how this can be a deceiving indicator especially for those mid-tier markets.  But let us look at the sales trend:

This data reflects the entire Southern California housing bubble for the decade.  What you’ll clearly see is the spring and summer seasonal jump in sales.  Like clockwork, this happened every single year until 2006 when the pop was weak.  In 2007, the market imploded and sales simply cratered.  Since that time, over 50 percent of home sales have been foreclosure resales.  Even last month, some 43 percent of homes that sold in the region were foreclosure resales.  Some would like to think that all the Alt-A and option ARM problems are long gone from the system.  Thanks to data from Loan Performance, I am now able to look at specific regions of the state and see how deep the Alt-A problems go.

We already know that Alt-A loans are toxic mortgage sludge.  These are loans spawned during the housing bubble and only served a devious purpose to feed the mania.  Option ARMs are a subset of the Alt-A universe and are arguably the worst mortgage product ever created.  These should be outlawed.  No good came from these loan products.  Of course, the housing industry would like you to believe that only doctors and high paid sitcom actors with 1099s took on these loan products, but the reality is these were given to HGTV hungry homebuyers who wanted to buy that $700,000 shack on a $100,000 income.  After all, they were then going to flip it in 2010 for $1 million.

This is the first article that I have seen that will break down the Alt-A mortgage universe for the entire state of California by region.  I’ve done many articles talking about the coming Alt-A problems but it focused more on statewide data.  This time we can dig deeper into the state.  The first thing we should establish is how toxic these mortgages are:

Source:  Loan Performance

What you’ll notice is that subprime loans have hit a plateau.  That is, of the current active loans nearly 45 percent are 60 days late.  The reality is, most of these loans will go bad and we still have a good number of subprime loans in the state.  The state still has over 500,000 subprime loans that are active.  We already knew this.  But take a look at the skyrocketing distress in Alt-A loans.  In April of 2008 13 percent of Alt-A loans in California were 60 days late.  As of April of 2009, that rate has jumped up to 28 percent.  Alt-A loans are toxic and with an average balance of $443,000 many are so underwater, that they don’t even qualify for refinances with the revised 125% LTV levels.
So let us take a look at where these loans are in California:

Source:  Loan Performance

What a shocker.  Millions, including myself just happen to live in the capital of Alt-A mortgages.  The vast majority of the Alt-A mortgages are in the Los Angeles and Orange County markets.  Of course, we have given examples of people in Pasadena, Culver City, and other so-called prime markets who over extended themselves and are now losing their homes.  Over 225,000 active Alt-A mortgages reside in the Los Angeles and Orange County markets.  Not to be out done, the Inland Empire (another region of Southern California) has close to 100,000 active Alt-A loans.  The San Diego market has over 70,000 Alt-A mortgages active.  All combined Southern California itself has roughly 400,000 active Alt-A mortgages and 28 percent of these loans in California are now 60 days late!  I think that puts the 24,000 homes sold in the region last month into perspective.

Referring back to the chart, you can see that Southern California wasn’t alone in this.  The Bay Area has approximately 90,000 active Alt-A mortgages.  San Jose and the Santa Clara region have over 35,000 active Alt-A loans.  What does this mean?  With the shadow inventory mounting and the losses growing, California is entering a housing zombie mode.
Let us not forget those subprime loans:

A ton of these toxic mortgages still exist.  The same players emerge yet again.  What this means is additional losses to banks and their already weak balance sheets.  But don’t think that California is alone here.  Nationwide there are over 2.5 million active Alt-A loans.  And the distress is resembling the California trend:

Source:  Loan Performance

The unfortunate aspect of this is we are making many mistakes that Japan did after their asset bubble burst.  We are bailing out the banks and allowing them to keep toxic assets on their books.  So instead of taking our medicine and finding true asset prices after the bubble burst, we are allowing banks to keep toxic waste on their books while they keep going to taxpayers for additional capital to keep them afloat.  That is why when Fannie Mae came back to the trough for billions it was no shock.  And some people were talking about them turning a profit when we took them under conservatorship.  Yeah right!  As you can tell from the earlier chart, prime loans are also facing higher distress.

One fact that stuck out with the Southern California sales data is the monthly mortgage payment.  Last month, of those that bought in the region the typical monthly mortgage payment was $1,180.  This is down from $1,710 reached last year.  Did you get that?  The typical monthly payment came in at $1,180.  This probably has to do with the following:

(a)  43 percent of home sales were foreclosure re-sales

(b)  19 percent of buyers were absentee or investors

Many investors are all cash buyers or have big change to put down so I’m sure this has pushed the mortgage payment average lower. Put this in contrast with the September 2007 data when the typical monthly mortgage payment came in at $2,400.  And I bet some of that included those Alt-A and option ARM toxic waste!  A teaser on a $600,000 mortgage.  We are not out of the woods.

Be wary for the following reasons:

(a)  Alt-A loans will be a problem.  How big?  We will find out in 2010 - 2012.

(b)  Shadow inventory IS a big deal.  Banks might be holding off simply to avoid taking further write-downs.  Their window is closing.  They are probably praying that the public-private investment program (PPIP) takes off soon.  Yet even if this gets shifted to the public, these loans are still junk.  At a certain point, the market will have to set the price.  If the banks continue holding off and then the government steps in, we have repeated Japan’s mistakes and you can kiss a few decades goodbye.

(c)  California is still over priced in many regions.  These regions just happen to have the biggest concentration of Alt-A loans.  With defaults spiking and distress rates looking like subprime, there is little rush to jump into the market right now.  And some believe prices will go up?  Hard to believe some people are using the priced out argument again.

(d)   The nation may be squeaking out of recession (by technical standards) but California is deeply rooted in a recession.  With an 11.6 percent unemployment rate and a 21 percent underemployment rate we have years of struggles facing us.  Ultimately you have to pay for your mortgage with an income and job losses do not help in this regard.  Many fail to understand the incestuous decade California experienced.  High paying jobs directly related to housing allowed those in the field to buy homes and thus create a mini self-sustaining bubble.  People drank their own Kool-Aid.  I’ve met only a couple of mortgage brokers for example that stashed away money during the good times.  Most blew it all.

(e)  We are entering the slow selling season.  Fall and winter are typically slower months for home sales.  This is going to align directly with the first massive wave of recasts hitting in Q1 of 2010.  And don’t forget we have the commercial real estate bust gearing up next year.  Some estimates put losses at 50 percent!

The Alt-A and option ARM tsunami is now on the horizon.  Instead of backing away, some people are getting their surfboards and jumping straight into the 100-foot wave.

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Alt-A, Option ARM, and Subprime Loans will Turn California into a Zombie Mortgage State. 28 Percent of Alt-A loans in California 60 Days Late. Alt-A Mortgages by California Region. 1.1 Million Alt-A and Subprime Mortgages Still Active.

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Filed under: AT and T (T), Federal Natl Mtge (FNM), Intuit Inc (INTU), salesforce.com inc (CRM), Suntech Power Hldgs ADS (STP)

Today was an options expiration date, and the stocks closed higher. We had strength early on from Europe, but then some very surprisingly good housing data caused added cheer. The data was taken as permanent, but much still points toward the bump up being temporary. Even a negative call for 222 more bank closures by Meredith Whitney failed to jolt the markets.

Here were today’s unofficial closing bell levels:

Dow 9,502.33 +152.28 (1.63%)
S&P 500 1,025.68 +18.31 (1.82%)
Nasdaq 2,020.36 +31.14 (1.57%)

Continue reading Closing Bell: Bear burgers for all!!! (STP, T, INTU, CRM, FNM, FRE)

Closing Bell: Bear burgers for all!!! (STP, T, INTU, CRM, FNM, FRE) originally appeared on BloggingStocks on Fri, 21 Aug 2009 16:09:00 EST. Please see our terms for use of feeds.

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Loan Modifications complaints have inundated the web and are starting to become background noise for those that are not involved in trying to get a loan modification. Recent reports from the Treasury department have reported who are the movers and who are the slackers in the loan modification industry.

One of these slackers was Wells and Fargo that pretty much leaded the list of worst mortgage providers when counting the percentage of eligible homeowners that had received a loan modification. The negative report from the Treasury department was not  the only complaint Wells and Fargo received.
KPHO recently reported about Mrs Batchelder. She was one of many viewers that complained about Wells and Fargo after viewing a news report from CBS 5. Mrs. Batchelder family hit financial rocks when her husband lost her job in 2007 and was forced to accept a lower paying one. They then started the slippery path of digging into family savings and selling unnecessary things to pay for the mortgage and meet medical expenses.  Mrs. Batchelder has been trying to reduce her mortgage payments for over a year in a desperate attempt to stay in her home with little success.

These and other negative PR reports have forced Wells and Fargo into action. Wells Fargo Executive Vice President Mary Coffin that works in the Home Mortgage Servicing Division acknowledged that the situation was not acceptable and that customer service in the Phoenix area was not up to scratch. She is reported to have said: “During the past few months we know there have been instances where it’s been unfortunate… where we haven’t appropriately communicated at a time when they’re anxious and they are going through a very difficult time in their life.”  “We want to change that… and get this taken care of and provide the service they deserve”.

A collective hear, hear is probably echoing around Phoenix. The hope is that this is not a matter of just words and mortgage providers get their act together on loan modifications and help home owners to get their lives back in track.

When asked about the terrible record of Wells and Fargo in loan modifications she replied “We’re behind the program. We want to continue see those numbers increase. But while doing that, we have continued to provide other modifications,” said Coffin.

It would be interesting to know what “other” loan modifications she is doing when the government is actually paying them to carry out the loan modifications the Government’s Loan Modification is backing. According the Mrs. Coffin Well Fargo completed 240,000 modifications but only 20,000 were represented in the figures from the Treasury Department.

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1. Where’s Wells Fargo in the TARP repayments?
2. Sources: Wells Fargo to Eliminate 100% Financing
3. Wells Fargo Subprime Lays Off 444

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1. Where’s Wells Fargo in the TARP repayments?
2. Sources: Wells Fargo to Eliminate 100% Financing
3. Wells Fargo Subprime Lays Off 444

Source [blownmortgage]

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Filed under: Microsoft (MSFT), Newsletters, Stocks to Buy

“One way to protect yourself in a difficult market environment is to buy shares in low-risk, blue chip companies; one outstanding examples is Microsoft (NASDAQ: MSFT),” suggest Kuen Chan & David Sandell.

In The Complete Investor, they explain, “The company is safe, strong, and able to grow even in a weak economy. It also has more than $25 billion in cash and equivalents and almost no debt.”

“Microsoft is near ubiquitous in the computer world. Some version of its Windows operating system runs on roughly 90% of all personal computers, while its Office Suite programs have more than 550 million users.

Continue reading Microsoft (MSFT): ‘Safe and strong’

Microsoft (MSFT): ‘Safe and strong’ originally appeared on BloggingStocks on Fri, 21 Aug 2009 14:00:00 EST. Please see our terms for use of feeds.

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Home loan modifications have been presented as the silver bullet that will kill the evil wolf scaring the living daylights out of investors and homeowners. The government does seem to be willing to place its money (or own money) where their collective mouth is. The White House has invested $75 billion of our hard earned bucks into the Making Homes Affordable with the hope that it will prevent 3 to 4 million Americans from losing their home to a bank foreclosure.

Unfortunately the plan is not exactly burning rubber and is off to a slow start. At the moment only 9% of eligible homeowners are taking advantage of the loan mod plan and have modified their loan terms. The government is not happy with these figures and have begun to pressure and arm-twist banks and lending institutions to get their finger out and start modifying. In a recent report the government named and shamed banks that were not pulling their corporate weight behind the mortgage modification program and are not facilitating the modifications borrowers need.

Why is this the case? Why are banks so slow to act?

There are various reasons, most of which we have already discussed in articles here at blownmortgage.com. These include:

1)    Banks are not currently set up for loan modifications. They are set to sell loans and then collect the payments not reduce principals and reduce interest.
2)    The large volume of loan mod applications in such a short period of time.
3)    Lack of information and understanding about the program and how it works.
4)    Mortgage backed securities.

Why mortgage backed securities?

Mortgage backed securities are products like futures and stocks companies can buy or sell. Obviously just like with the purchase of the stocks of a company the purchase of mortgage backed securities provides the owner with a say on how the mortgages are managed.

This is well illustrated by the story of many homeowners that cannot modify their loans because the company that has bought a security backed by their mortgage will not allow them. For instance Wells Fargo may say no to a loan modification you request even though they don’t own your mortgage.

This is caused by ambiguous rules and a rather shady web of interests and ownership. This is rather sad because it means that the group that is more likely to need help, those whose mortgages were sold or used as a security cannot receive the loan modification they need to stabilize their situation.

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1. S&P to Downgrade Coming to Alt-A Mortgage Backed Securities
2. The Fate of Mortgage Backed Securities
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Filed under: Earnings reports, ConAgra Foods (CAG), Kraft Foods’A’ (KFT)

The J.M. Smucker Company (NYSE: SJM), a food manufacturer famous for its jelly and baking products, reported a great first quarter on Friday. Adjusted earnings per share increased 12% to 92 cents. According to Reuters, management was able to beat expectations by a whopping 12 cents.

This is quite impressive given the fact that an analyst quoted by Reuters believes that more people eating at home are helping to fuel Smucker’s success. I say this because, if people are deciding to dine at home more often, they are most likely doing so because of the recession.

Continue reading J.M. Smucker kills estimates in Q1

J.M. Smucker kills estimates in Q1 originally appeared on BloggingStocks on Sat, 22 Aug 2009 09:10:00 EST. Please see our terms for use of feeds.

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Filed under: News Corp’B’ (NWS), Options

News Corporation (NYSE: NWS) was recently up 21 cents to $12.98. NWS is the owner of the Dow Jones Indexes, and is shopping the business to buyers, reports the WSJ. NWS September option implied volatility was at 43, October at 45; below its 26-week average of 54, according to Track Data, suggesting decreasing price movement.

CBOE Volatility Index S&P 500 Options: The VIX was down .25 to $24.84; The S&P 500 Index up 2.02%

Options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

Options Update: News Corporation volatility low originally appeared on BloggingStocks on Fri, 21 Aug 2009 16:45:00 EST. Please see our terms for use of feeds.

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The South Bay of Los Angeles in its broadest definition includes all cities south of the 105 freeway and places west of Long Beach.  It includes places like Manhattan Beach, Hermosa Beach, and today’s Real Home of Genius city Redondo Beach.  Now I know today people are jumping up left and right like a kid […]

The South Bay of Los Angeles in its broadest definition includes all cities south of the 105 freeway and places west of Long Beach.  It includes places like Manhattan Beach, Hermosa Beach, and today’s Real Home of Genius city Redondo Beach.  Now I know today people are jumping up left and right like a kid juiced up on sugary drinks because existing home sales have increased.  This headline is plastered all over the mainstream media.  But did you also know that the median sales price fell 15.1 percent last year to the current median sale price of $178,400?  Oh, and distressed sales accounted for 31 percent of all existing homes sold.  What you should get from this is simple.  Cheaper prices will drive sales even with conventional 30 year mortgages.  It’s all about price.

Nationwide it is likely we have bottomed in terms of sales.  But as we have discussed many times there will be two bottoms and one of those may have been reached:

The other bottom comes in the form of price and that still has a way to go.  The shadow inventory will keep pressure on housing prices especially in shady regions like California.  There seems to be a growing divide in terms of how things are now going to play out.  Some are arguing that the Alt-A and option ARM products are a tiny event and those waiting for a second flood of foreclosures will be surprised.  Their argument is banks will simply keep these homes off their books and will slowly trickle inventory into the market like some form of intravenous medicine drip.  They may be right but so much shadow inventory is building that at a certain point, something will have to give.  The only thing we can do at this point is look at the data and try to come up with an estimate of where we are heading.

My take on why something will have to give is this.  In Southern California we concluded that there were 40,000 REO properties in the dark shadows.  These are homes with no mortgage payment coming in.  As we all know, many of these notes are chopped up like hamburger and are beholden to various contractual agreements with investors.  Do you think investors are happy receiving no income stream?  My take is many of these banks are playing financial brinkmanship and are trying to hold their breath long enough to dump this stuff off to the government (aka public) and the public private investment program (PPIP) is one of those vehicles to perform this transaction.  In fact, that is why I have heard numerous stories of people not getting a notice of default from 6 to 12 months!  We already know that foreclosures are at record highs and rising:

The assumption that banks can hold this stuff indefinitely is wrong for a variety of reasons including banks have extremely low capital.  This will drain them further.  But they can’t sell because they will collapse since the market is moving with cheaper prices (i.e., see Friday’s existing home sales).  If we allow this to go on we have learned absolutely nothing from Japan and will repeat a lost decade here in the U.S.  And the proof is already occurring!  If we leave it up to the banks to determine policy, they would hold this stuff off forever while coming back to the government cheese each and every year until this is all worked out.  As you can see on a nationwide basis, if you set the price right people will buy.  Yet banks have no incentive to sell because they will implode as they should.  Even now, as the FDIC reaches a breaking point with its reserve insurance fees are going higher across the board and good banks are now subsidizing weak and irresponsible banks.  This story I’m sure is sounding very familiar to most of you.

At a certain point, there will need to be transparency in this market.  Just because it happens doesn’t mean they will flood the market with these properties but the public will be flooded with data.  Some think that the argument means that one day, a banking CEO is going to say, “hey, today is a nice sunny day.  I’m going to put 6,000 REOs on the MLS before I go eat some tacos.”  It doesn’t work that way.  But you can’t have no cash flow from properties and hold them off indefinitely.  That is how banks imploded in the first place!  The cash flow ran out.  People stopped paying.

Now assume the government assumes all the Alt-A and option ARM products on to their books.  Then what?  All you did was shifted the risk.  You still have over valued assets and the only thing that happened is you passed the hot potato to the public.  At a certain point there will need to be price discovery.  You can only have price discovery by putting these homes on the market.  Otherwise you follow Japan down the path of a lost decade because you will have these zombie banks and loans just eating tax brains forever.  Yes, I know we aren’t like Japan because we don’t save, we aren’t homogenous, and every other pretext.  But we are like them in this regard if this is the path we follow.  Is there a different result if a Japanese and American man jump off the Grand Canyon?

Let us now focus on our overpriced home.  Today we salute you Redondo Beach with our Real Home of Genius Award.

Redondo Beach - 668 Square Feet 1 Bedroom Home for $539,000?  Is this 2006?

The South Bay is one of those regions where people think nothing can happen to housing prices.  They assume every city is somehow Manhattan Beach or Rancho Palos Verdes.  They are not.  Redondo Beach is one of those areas.  Depending on which zip code of the two you focus on, Redondo Beach is either doing well or contracting:

90277:   Median Price ($989,000) Up 16.4% year over year

90278:   Median Price ($686,00)  Down 7.7% year over year

Our home today is in the 90277 zip code.  If you are wondering what a million dollar neighborhood looks like in an inflated market, this is a perfect example.  But before I dig deeper into the data on this home, I want to focus on the monthly nut phenomenon.  This also helps to explain why people were so willing to take on Alt-A and option ARM loans even though the principal was simply a ridiculous amount.  What people are missing is that the monthly Southern California buyer is now taking on a monthly mortgage amount that is now resembling the average amount from a decade ago!  Did you get?  The average monthly nut now looks like the monthly nut from 2000.  Let us look at two sample months and what you will see is a clear indication of where we are heading:

This chart probably tells you everything you need to know.  Riverside and San Bernardino Counties, the Inland Empire, are now at prices that date back one decade.  If you are buying in these areas, you probably will find good deals.  However, if you look at the other counties they are still largely overpriced.  Los Angeles is up 58% from a decade ago, OC is up 47%, and the other counties of San Diego and Ventura are overpriced as well.  Yet if we look at the total sales for the region, we are virtually at the same point as in October of 2000.  And the irony is the typical monthly payment is now even with that from 10 years ago.  So something has to give here.  Either prices in the higher priced regions decline to meet the monthly nut or the monthly payment will have to jump.  And just take a look at what Southern Californians were taking out on a monthly average during the bubble:

At the height of the insanity, Southern Californians were taking out an average $2,500 mortgage payment.  No taxes, insurance, or maintenance either.  Just your principal and interest (assuming you paid interest which many didn’t on option ARMs).  Now that we are actually checking for income and using debt-to-income ratios people can’t afford gigantic mortgages.  Remember during this decade incomes have been stagnant.  And now, if you didn’t notice on Friday California released the unemployment rate and in another stunner, the unemployment rate jumped up to another record of 11.9 percent putting the U-6 rate over 22 percent:

Hard to buy a home without an income.  But this home in Redondo Beach brings back memories of those 500 square foot shacks going for $500,000.  This home has a housing bubble history like you wouldn’t believe.  Let us look at what a 668 square foot home can do during a bubble:

Sales History

3/31/2000:          $273,000

7/20/2006:          $680,000

12/23/2008:        $431,000

And the current list price is get this…$539,000!  Bwahahahahaha!  Someone is trying to flip in California even with an unemployment rate of approximately 12 percent and housing imploding!  Real Home of Genius quality indeed.  I love this part in the ad:

“Sunny property surrounded by million dollar homes. Perfect second home, first home or private home. Walk to the beach, shopping and restaurants. It is darling, very special and can grow.”

Surrounded by “million” dollar homes?  Let us take a look:

Zillow doesn’t seem to think so and their pricing algorithm has been generous in California.  That $1.3 million home is 4 bedrooms and 3 baths on 2,614 square feet by the way, in Redondo Beach.  You are at least six blocks away from the beach.  Let us look at some of the pricing action here:

Price Reduced: 06/11/09 — $569,900 to $550,000
Price Reduced: 07/29/09 — $550,000 to $539,000

Now think about this.  $539,000 for a 1 bedroom 668 square foot home that was originally built in 1920!  Before the Great Depression!  One thing is for sure, your monthly nut is going to be much more than the current average of $1,180 for Southern California.

Today we salute you Redondo Beach with our Real Homes of Genius Award.

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Real Homes of Genius: The South Bay of Los Angeles. Today we Salute Redondo Beach. 668 Square Feet 1 Bedroom Home for $539,000. California Unemployment now at 11.9 Percent Officially with U-6 at 22 Percent.

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