Summary: Without an economic incentive to foreclose, it would not be in the bank shareholders best interests to pursue foreclosure even though borrowers clearly defaulted & owe money to the lender. The economics of distressed assets in mortgage and commercial banking are quickly changing. I am quite open to discussing this in the mainstream media if any are interested in hearing the "Truth go Viral!" I want all to keep this in mind when pondering the release of reserves by the banks. My JPM quarterly review is still on its way, and I will share a substantial amount with the public.
About a week or so ago, I posed a controversial question, Is the US Government About to Forgive Mortgage Debt? Let’s Crowdsource Our Way Through a Scenario or Two! In that missive I warned that the recovery rate on many of the repossessed properties was not only at a historic low, but actually approaching zero, save a few blips from .gov bubble blowing and shenanigans by banks in the form of kicking cans down the road. I also said that the time may very well come when there may be no economic incentive for banks to foreclose on certain properties, and that pool of properties may grow larger than many could imagine. I know it is difficult for many to come to grips with this, but the math really ain't that hard.
Even Tyler Durden, whose controversial ZeroHedge site I read and contribute to with a passion, is being too optimistic. Yeah, that's right! You know things are bad when ZeroHedge is too optimistic! In his post "Quantifying The Full Impact Of Foreclosure Gate: Hundreds Of Billions To Start", he assumes there WILL be something to foreclose upon. I assert that in increasingly more common instances, there will be no economic interest to foreclose upon. It is starting at the fringes and the margin, but it is moving closer to the center faster than many think. And the longer, and deeper "Fraudclosure" investigations continue, the closer and faster to the center it will get. This is, of course, not even considering the fact that all of this investigating and shining the light in dark corners will reveal the true elephant in the room (and it is not hastily signed affidavits that can be quickly fixed) which is that many, if not most, high LTV mortgage originations were fraudulent to begin with. That means that not only would it not be cost effective to foreclose, but everybody and their momma will be scrambling to put the fraudulent loans back to the originating banks - see The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008! for my realistic take on the situation and the expenses that it entails. Yes, the elusive recovery rate is going to be pushed that much lower. Long story short, bank expenses will skyrocket, along with efficiency ratios, which were already increasing to begin with at the same time housing sales economic activity and prices will drop and credit losses will spike. Oh, what fun we have in store.
Here is and excerpt from Is the US Government About to Forgive Mortgage Debt? Let’s Crowdsource Our Way Through a Scenario or Two to refresh your collective memories and then I will run through an example that clearly shows a high LTV property in Nevada that the lender literally has no economic incentive to foreclose upon if there is litigation to be had.
As those that follow me know, I have been bearish on US banks since 2007. That bearish outlook resulted in massive returns ensuing years, just to have nearly half of it returned due to rampant shenanigans and outright fraud. Needless to say, it pissed me off - but it did much more than that. It created a re-bubble before the bubble that was bursting had a chance to fully deflate. As a result, what we have now is one big mess that is getting messier by the minute.
On Friday, July 16th, 2010 I posted "After a Careful Review of JP Morgan’s Earnings Release, I Must Ask – “What the Hell Are Those Boys Over at JP Morgan Thinking????”. The impetus of such was that this bank that all seem to be in awe of was taking a big risk in order to pad accounting earnings for a quarter or two. Below is an excerpt of my thoughts:
Trust me, the collateral behind many more mortgages will continue to depreciate materially as government giveaways and bubble blowing for housing fade!
The delinquency and NPA levels drifted down a bit, but they are still at very high levels. Charge-offs came down but the reduction in provisions has been quite disproportionate bringing down the allowance for loan losses. In 2Q10, the gross charge- offs declined 26.6% (q-o-q) to $6.2 billion (annualized charge off rate – 3.55%) from $8.4 billion in 1Q10 (annualized charge off rate – 4.74%). But the provisions for loan losses were slashed down 51.7% (q-o-q) to $3.4 billion (annualized rate – 1.9%) against $7.0 billion (annualized rate – 3.9%) in 1Q10. Consequently, the allowance for loan losses declined 6.2% (q-o-q) from $35.8 billion from $38.2 billion in 1Q10. Non performing loans and NPAs declined 5.1% (q-o-q) and 4.5% (q-o-q) respectively. Thus, the NPLs and NPAs as % of allowance for loan losses expanded to 45.1% and 50.7%, respectively from 44.6% and 49.8% in 1Q10. Delinquency rates, although moderated a bit, are still at high levels. Credit card – 30+ day delinquency rate was 4.96% and the real estate – 30+ day delinquency rate was 6.88%. The 30+ days delinquency rate for WaMu’s credit impaired portfolio was 27.91%.
While the lower provisioning was able to beef up the bottom line in this quarter, the same is not sustainable in the future as JPM cannot afford to reduce its allowance for loan losses substantially. This is a one shot, blow your wad and go to sleep deal! There is no margin for error in the future, and one can only assume that the reason this was done was to pad accounting earnings and to take advantage of the extremely short term, and obviously naïve, memory of the financial media and retail/institutional investor. Given the high charge-off rates and delinquency levels, the provisioning will probably need to be bolstered again in the not too distant future.
Now that the Robo-Signing scandals have achieved full notoriety through the media, it is time to address the real issues facing investors in bank stocks. We also believe that the media is staring at the wrong target. Each major media outlet is copying what is popular or what the next outlet broke as a story versus where the true economic risks actually lie - which is essentially the real story and where the meat actually is. This is what is truly at stake - the United States is now at risk of losing its hegemony of the financial capital of the world! Why? Because when we had the chance to put the injured banks to sleep and redirect resources to into new productivity, we instead allowed politics to shovel tax payer capital into zombie institutions as they turned around and paid it right back out as bonuses. As a result, significant capital has been destroyed, the original problem has metastized, and the banks are still in zombie status, but with share prices that are multiples of the actual values of the entities that they allegedly represent - a perfect storm for a market crash that will make 2008 look like a bull rally! For those who feel I am being sensationalist, I refer you to my track record in making such claims.
The Japanese tried to hide massive NPAs in its banking system after a credit fueled bubble burst by sweeping them under a rug for political reasons. Here's a newsflash - it didn't work, it hasn't worked for 20 years, and despite that Japan is embarking on QE v3.3 because it simply doesn't believe that it is not working. Here are the steps the US is consciously taking it its bid to enter a 20 year deflationary spiral like Japan, and may I add that these steps were clearly delineated on BoomBustBlog ONE YEAR ago (Bad CRE, Rotten Home Loans, and the End of US Banking Prominence? Thursday, November 12th, 2009), so no one can say this is a surprise.
Step one: Hide the Truth!
Is it possible for the US Government to choose to forgive mortgage debt? Sounds outrageous? Read on for the legal theory behind this claim and let me know what you think? I thought it was little esoteric as well, but as I looked deeper... Well, I'll let you be the judge.
A lot of attention accrued to Representative Grayson's calling out of foreclosure fraud, and for good reason. The story is absolutely amazing, and kudos to a member of congress that defends his constituency.
It's not as if other entities have failed to take notice. ZeroHedge has its usual witty commentary regarding the possibility of foreclosure transactions potentially being unwound due to fraudulent foreclosure activity. The NYT ran an article stating that Fitch will look into lowering the credit rating of companies that participated in the submission of inappropriate foreclosure paperwork, which apparently seems to include an awful lot of companies. It goes on to state (as excerpted by Zerohedge):
Fitch Ratings said that Wednesday it was asking mortgage companies about their internal processes for executing foreclosure affidavits. If it finds the processes lacking, Fitch will consider downgrading the company’s rating.
The agency also said if the issue is widespread, the resulting delays and extra costs to foreclose could increase losses related to residential mortgage-backed securities.
Here's the twist. A lawyer who happens to have followed my writings over the years has suggested that most are missing the big picture in focusing on fraudulent foreclosure documents. He contends (and I'm paraphrasing here, these are not my words, per se) "that since the U.S. has ownership interest in many (if not most) delinquent and distressed mortgages, this fact will be counted as policy in litigation. As a consequence it matters A LOT if you can say that your client has a Fifth Amendment Due Process right (or third party beneficiary Federal common law right) to a HAMP modification which is in FACT a minimization of the risk of default (not that flaky 31% number) BECAUSE, among other things, the U.S. has no economic incentive to foreclose". Now, I am no lawyer and thus the legal issues are beyond my domain, but I must admit I found the theory interesting. So, I've decided to crowdsource this one in anticipation that some of the more astute legal minds can shed some light on the validity of the theory. I'll supply the financial stuff in this post, and I'll rely on the legal eagles to peer review the theory.
Last year I took the readers of my blog through a visual tour of the condo market in NY from Chelsea Pier to Prospect Park Brooklyn. Even the born and bred NYers were flabbergasted. See (again) "Who are ya gonna believe, the pundits or your lying eyes?", "Who are you going to believe, the pundits or your lying eyes, part 2". Well, things aren't looking much better a year later. They are still doing construction next to sites that still can't sell out their inventory next to sites that are falling into disrepair due to unpaid maintenance charges, next to sites that owe the city money, next to... You probably get my drift by now.
Well, the WSJ reports...
Trump SoHo, the flashy 46-story downtown hotel and condominium, is taking another unusual step to boost sluggish condo sales—offering substantial discounts to buyers who have already signed contracts but not yet closed.
These discount offers run to around 25% of the agreed-upon purchase price, according to documents reviewed by The Wall Street Journal. They're being used as a special encouragement to convince buyers who might be getting cold feet to close their deals.
Discounts are being offered to prod Trump SoHo buyers to close.
Rodrigo Nino, president of Prodigy International, the sales and marketing company for Trump SoHo, declined to discuss the size of the discounts or how many buyers have accepted them. He said Trump SoHo "is not unilaterally offering concessions. The requests have been handled on a case-by-case basis."
Even taking into account these markdowns, Mr. Nino added, "the average net closing price is in excess of $2,500 per square foot."
The price cuts aren't the first measure Trump SoHo has taken to get committed buyers to close on their deals. The developers, the Sapir Organization and Bayrock Group, are putting together a plan to offer direct financing to potential buyers who can't secure enough credit to purchases condos. Mr. Nino said the program would be implemented "shortly."
I know, I shouldn't say I told you so but those perma-bullish, green shoots smoking pundits who have been saying for three years that we are nearing the bottom in real estate either have an agenda or really don't know much about real estate cycles. It really gets under brother's skin... From CNBC:
Sales of previously owned U.S. homes dropped more steeply than expected in July to their lowest pace in 15 years, an industry group said Tuesday, implying further loss of momentum in the economic recover
We've been down this path before. We have every reason to be very, very pessimistic on the housing front. We're in a HOUSING DEPRESSION!
Rates as close to zero as they have ever been, yet close to no demand while supply is piling up in droves as banks sell more homes (out of foreclose) than homebuilders do, yet developers keep building! If you look around in NYC, banks are STILL funding developers who are STILL building stuff right next to stuff that they STILL can't sell! This is video from a little more than a year ago that shocked many, even those who live in NYC: Who are ya gonna believe, the pundits or your lying eyes?. If you take a trip down the same strip today, you will still see empty lots with tractors, cranes, for rent signs in the commercial ground space and a whole lot of empty apartments looking for a home owner or renter, dusty from the construction right next to it.
Way back in 2007, I predicted that banks would handily outstrip homebuilders in terms of property sales due to rampant REOs and foreclosures. I issued a reminder last year since the synthetic and contrived equity rally on vapor volume seemed to have had everybody forgetting that we were in a real estate depression: Back to the Homebuilders vs. the Banks, as excerpted...
Back to the Homebuilders vs. the Banks
In 2007 I put out a lot of research and opinion on the home builders and attempted to portray them in a light that the sell side analyst community and apparently the buy side investors failed to notice. See
- Voodoo, Zombies, Lennar’s Off Balance Sheet Accounting and Other Things of Mystery & Myth (I believe this was the first time anyone ever called the homebuilders on their off balance sheet debt through unconsolidated JVs),
- Lennar Insolvent: Enron redux??? Lennar, Voodoo & the Year of the Living Dead!
- Now, a "Realistic" View of Lennar's Solvency
- Bubble, Banks and Builders – Pt III: Do or Die BedStuy
In December of 2007 I predicted that they will compete in a losing battle with the soon to be larger residential home and land owners looking to move properties at highly discounted prices: the banks sitting on foreclosed properties – Bubbles, Banks and Builders.
Well, although I do feel I have been relatively prescient in my predictions and predilections, all of you guys who were waiting for me to be wrong can now have your day. As it turns out, the largest residential land home owner will probably not turn out to be Countrywide (see Would you buy Countrywide if all of its bad mortgages were magically wiped off the books?) or any other bank or builder after all, but most likely the FDIC, or in more direct terms – You, Mr. and Mrs Taxpayer, see: FDIC Holds $1.8 Billion in Property From Closed Banks: WSJ Link. There are properties repossessed this year by the FDIC that were actually also repossessed during the S&L Crisis. Talk about not learning your lesson!
As lately as the 2nd quarter of this year, alleged experts were still pontificating the coming bottom in real estate, despite the fact that unemployment was high, supply was high, demand is low, and credit is tighter than frog ass! Exactly two months ago, I said As I Made Very Clear In March, US Housing Has a Way to Fall. See the following excerpt...
From the Dallas Morning News (hat tip to BoomBustBlogger lix333):
One of Dallas' oldest regional shopping centers has been handed over to lenders. The owners of Valley View Center mall have quietly transferred title to the 37-year-old mall at LBJ Freeway and Preston Road to a lender group headed by Bank of America.
The shopping center, which in recent years has lost anchor tenants, contains more than 1.6 million square feet and has J.C. Penney and Sears department stores. The mall is less than 75 percent leased.
Macerich Co., a California-based real estate investment trust, declined to comment Wednesday on why it gave up ownership of the shopping center. [No need to worry, you do realize that I have plenty of comments on why it gave up ownership of the shopping mall, don't you?]
Why are Banks Hiding High End Residential Real Estate? Courtesy of the Real Estate Channel:
- Without the FTB tax credit, the housing market is receiving artificial demand and price support from the FHA loan guarantees and banks sitting on mortgages of homes once valued at $300,000
- Banks in areas that were severely damaged by the downturn in domestic real estate (Cook County, Illinois, Miami-Dade County, Florida, Orange County, California) have significant inventories of homes worth more than $300,000 that they will not put on the market, even after foreclosures lasting more than 2 years
Here is a the final list of companies culled from a group of nearly 1,800 that we feel have the most profit potential for the year going forward.
|This is a professional/institutional level document, but annual Retail subscribers and any subscribers who have been with me for a year ore more can email customer support for a copy as we show our gratitude for your continued patronage. Professional and Institutional subscribers should download this document in its entirety here: Financial and Non-Financial Short Scan Review & Analysis - Pro (392.88 kB 2010-06-28 05:33:44)|
This is the culmination of four blog posts:
- 1. Non-Financial Companies to Short in 2010: methodology and short listing results;
- 2. BoomBustBlog Bankruptcy Search: Focus on British Petroleum and Collateral Damage: an objective look at the prospects of BP’s potential insolvency;
- 3. The BoomBustBlog Pan-European Sovereign Debt Crisis Bankruptcy Search: a review the financial and bank holding companies whose economic and financial outlook do not support their current valuations;
- 4. and On Shorting Stocks, Double Dips and the UAL/CAL Merger: a drill down of suspect airlines stocks.
Note: The embedded spreadsheets contained in the posts above should be used to access the extensive fundamental data used in calculating the results below.
After two separate and rigorous short exercises, one each for financial and non-financial companies, we have narrowed down the list of potential candidates from nearly 1,800 companies to just 10 (with 13 runner-ups) – all of which we are confident are materially overvalued given their current and prospective financial condition and economic outlooks. What is of particular interest is the fact that a full 50% of these companies landed on our computer screens as finalist in 2008, before the great market melt-up of 2009. They were overvalued and in bad shape during the lower prices of the turbulent times, hence they are significantly more so after seeing their share prices ride the wave of irrational, recession double-dipping, "recovery" exuberance. We have even released forensic analysis of 4 of these 10 companies over the last two years, and all of the banks in the list were also members of the original Doo Doo 32 of May 23, 2008. Members of this list provided significant profits for bears and short sellers as their prices gyrated and collapsed and the market began to realize the precarious situation that they were in. Now that low volume melt-ups are [starting to] giving way to realistic fundamentals, one can expect more of the same. The more things change, the more they stay the same. We plan to refresh the analysis of the repeat offenders, and offer fresh analysis of those who are new to the list.
The two separate short scans that we have conducted were for the non-financial sector and the financial/banking sector resulted in a short-list of 23 companies, with 10 of those companies targeted for full blown forensic analysis, time and resources permitting.
Below is the outline of the methodology used to produce them as well as a select excerpts from one of our previous reports on a particularly egregious "valuation" repeat offender that has proved profitable in the past whose macro outlook tied to the housing sector is a gloomy as ever - despite a near 100% pop in its share price. This the obligatory "freebie" that I toss in to entice non-subscribers to take the plunge. This particular "freebie" happens to be quite actionable, at least in my humble opinion.
From Bloomberg, early in the morning you get the usual, inaccurate analyst chatter: Sales of Existing Homes in U.S. Probably Climbed on Tax Credit
Sales of U.S. previously owned homes rose in May to the highest level in six months as buyers rushed to beat a June tax-credit deadline, economists said before a report today.
Purchases of existing houses, which are tabulated when a contract closes, increased 6 percent to a 6.12 million annual rate, according to the median of 73 forecasts in a Bloomberg News survey. To receive a government incentive worth as much as $8,000, buyers must have signed contracts by the end of April and need to complete deals by the end of this month.
Credit-induced gyrations will make the underlying health of the market difficult to determine over the next couple of months. A slump in builder shares since early May signals investors are concerned the damage caused by the end of government stimulus, mounting foreclosures and unemployment will exceed the benefits of lower mortgage rates.
Then the actual report comes out: Existing Home Sales in U.S. Unexpectedly Fell to 5.66 Million Rate in May
June 22 (Bloomberg) -- Sales of U.S. previously owned homes unexpectedly fell in May, a sign demand was probably pulled into prior months before a June tax-credit deadline.
Purchases of existing houses, which are tabulated when a contract closes, decreased 2.2 percent to a 5.66 million annual rate, figures from the National Association of Realtors showed today in Washington. To receive a government incentive worth as much as $8,000, buyers must have signed contracts by the end of April and need to complete deals by the end of this month.
The decline raises the risk the retrenchment following the expiration of the tax credit will be deeper than anticipated. A slump in builder shares since late April has exceeded the retreat in the broader market on concern the damage from the end of government stimulus, mounting foreclosures and unemployment may cause renewed weakness.
Now, this is the BoomBustBlog version from March of this year where I made it crystal clear that housing will fall further and significantly. The governmetn incentives are just market interference and pricing distortions, prolonging the pain: It’s Official: The US Housing Downturn Has Resumed in Earnest
Let’s take a look at some charts sourced from the upcoming BoomBustBlog subscriber “A Fundamental Investor’s Peek into the Alt-A and Subprime Market”should be released withing 24 hours or so. This release will include all of the raw data necessary for users to run their own calculation and draw their own conclusions. update, which
In the chart above, you can see where CA has made some progress interms of appreciation. CA, FL, and NV account for nearly 50% of nationwide price damage. Let’s take a closer look…