I know baby it's hard to be strong Just take the good with the bad And don't think you're alone
Frankie and the Knockouts -- Sweetheart
In January I asked, Did BofA get a sweetheart deal at the expense of the US Taxpayer? When B of A purchased Countrywide, the government agreed to backstop their losses after certain thresholds were met. This limitation on downside risk is the only reason B of A was willing to buy the steaming pile of mortgages on Countrywide's balance sheet. I don't know if we are on the hook for the losses recently announced, but B of A is getting serious about resolving the issues pertaining to the crap on its balance sheet and the liabilities it took on when it bought Countrywide.
Payment to investors for mortgage meltdown reportedly the largest ever
msnbc.com staff and news service reports -- June 29, 2011
NEW YORK — Bank of America Corp said on Wednesday that it will pay $8.5 billion to settle claims from investors that lost money on mortgage-backed securities, in a landmark pact that could influence other major banks to settle mortgage claims.
This will establish a precedent other major banks will be forced to deal with. Expect to see more such announcements in the coming months.
The sum would be big banks' largest single settlement thus far related to the financial crisis that helped spark the Great Recession. The settlement, which Bank of America said would lead to a second-quarter loss, is subject to court approval.
"This is another important step we are taking in the interest of our shareholders to minimize the impact of future economic uncertainty and put legacy issues behind us," said Bank of America Chief Executive Officer Brian Moynihan in a statement. "We will continue to act aggressively, and in the best interest of our shareholders, to clean up the mortgage issues largely stemming from our purchase of Countrywide."
Notice the bullshit implication that B of A was largely responsible with its lending. B of A has huge problems with its own portfolio, but since B of A was less stupid than Countrywide, B of A can look relatively responsible in comparison.
Bank of America said the charges would include an additional $5.5 billion to cover expected payments to other mortgage bond investors.
As a result of the settlement, Bank of America said in a statement that it expects to report a net loss in the range of $8.6 billion to $9.1 billion in the second quarter of 2011, or $0.88 to $0.93 per diluted share.
As banks earn more money, they can write off more bad debt. This will ultimately help them stop the amend-pretend-extend dance and clean up their balance sheets. This is an important, albeit painful, step forward.
The $8.5 billion settlement covers claims from 22 institutional investors, including BlackRock Financial Management, Pacific Investment Management Co and Western Asset Management. The bank said the settlement is linked to mortgages made by Countrywide Financial Corp, once the nation's largest mortgage lender, which it bought in 2008. ...
For several months, Bank of America battled claims based on estimates "that were much different from ours," Moynihan said. But at this point, it made more sense to settle than to keep fighting, he said.
"We have said consistently if people are reasonable and can get to a reasonable assessment of their claims and it's in the best interest of shareholders, we will settle," Moynihan told Wall Street analysts in a conference call.
Citi analyst Keith Horowitz said the settlement, which amounts to only 2 percent of the original principal balance, removes one of the largest investor risks for Bank of America.
"We think this could prove to be a step forward" for Bank of America, Horowitz said. It would show investors that the bank can manage through crisis without raising additional capital.
B of A settled for 2% of the original loan balances, and that is a reasonable assessment of the claims against them? Reasonable by B of A standards perhaps. There is no way that is reasonable by the standards of the investors, nor does it scratch the surface on the losses those investors incurred by buying the Countrywide trash.
The real story here isn't the settlement losses, it is what B of A has agreed to relative to its servicing operations.
Investor settlement includes promise to outsource 'high risk' mortgages
By John W. Schoen -- June 29, 2011
Investors who bought bonds backed by shaky loans scored a major victory Wednesday with the announcement that Bank of America will pay more than $8 billion to make up for some of their losses.
Homeowners on the other end of those shaky mortgages — especially those most at risk of foreclosure — may have less to cheer about.
In the largest settlement to date related to the rogue mortgage lending wave, Bank of America said Wednesday it would pay $8.5 billion to settle claims with investors holding about $100 billion worth of mortgage-related securities sold by its Countrywide unit. The winners include 22 large investors such as Pimco, Metropolitan Life and BlackRock, as well as the Federal Reserve Bank of New York.
Aside from their claims that Countrywide sold them bonds backed by faulty loans, the investors argued that by continuing to service bad loans rather than speeding up foreclosures, the Bank of America unit ran up servicing fees, profiting at the expense of investors.
B of A and other major banks who service investor loans have two incentives not to foreclose. The first is as mentioned above; they make more money on the service fees than they make if they foreclose and terminate the mortgage. Second, the major banks have huge second mortgage and HELOC portfolios that are subordinate to the first mortgages they service for others. Each foreclosure causes them to lose everything on these underwater seconds.
The choice for the major banks is to keep obtaining their large service fees and keep their seconds alive or foreclose and recognize large losses. It shouldn't be a surprise they chose not to foreclose on loans they service for outside investors.
In Higher loss severities will force lenders to resolve bad loans and liquidate REO, I noted that "Each month a loan is delinquent it costs 1.5% of the loan balance in carrying costs. That is a troubling rate of financial decay. Time is the actually the bank's enemy when it comes to loan loss severities. Banks are providing squatters time in hopes they will get current and keep the zombie debt alive. Eventually, the carrying costs are going to make the loss severities so large that banks will either liquidate or implode, after which they will be liquidated anyway."
As a result the settlement includes a promise to hire additional “subservicers” to speed up the foreclosure process for high-risk loans. That means Bank of America borrowers whose foreclosure have been on hold may now see the process accelerated.
“Living with the uncertainty of foreclosure can’t be a pleasant experience,” said Bank of America spokesman Jerry Dubrowski. “The sooner we can deal with that overhang the better for the economy.”
Did B of A start reading the IHB? Last November I argued that Foreclosures are essential to the economic recovery. I have also argued that keeping people in shadow inventory isn't good for the lender or the delinquent borrower. Until I read the statement above, I didn't think either group agreed with me.
Bank of America also faces considerable uncertainty as it continues to try put its mortgage woes behind it.
While the bank said its settlement would resolve "nearly all" its exposure related to mortgages issued by Countrywide, only holders of about a quarter of the securities have agreed to support the deal. Hundreds of investors holding an additional $300 billion worth of securities have yet to agree to the settlement, which also is subject to court approval. There are no guarantees that the remaining investors will go along.
Holdouts won't likely get a better deal, and they will merely waste attorney's fees trying.
“It is not possible to predict whether and to what extent challenges will be made to the settlement or the timing or ultimate outcome of the court approval process,” Bank of America said in its press release announcing the settlement.
At the height of the boom, rising home prices allowed mortgage originators to replace failed loans with freshly written performing mortgages. Lenders, investors and borrowers all assumed that there was little risk in churning out new mortgages — even if they were based on flawed information — because even if a loan defaulted, the rising value of the home securing it would minimize any potential losses.
But when home prices began falling, many of those bad loans came back to haunt the companies that had underwritten them. With demand for new mortgages drying up, there weren’t enough new loans to replace the ones that were going bad.
In the Great Housing Bubble, I pointed out that the entire subprime lending model masked its poor performance by an appreciating market -- an appreciation induced by subprime lending itself. That was the Ponzi scheme embedded within the failed business model. Once prices collapsed, the high default rates translated into large default losses, and the risk became untenable. Hence, we have no subprime lending today, except perhaps for the FHA.
Now investors holding bad mortgages are demanding that lenders buy them back. Those investors include government-controlled lending giants Fannie Mae and Freddie Mac. In January, Bank of America paid $2.8 billion to Freddie and Fannie to buy back mortgages.
Bank of American concede in its press release Wednesday that that it “is not currently able to reasonably estimate” how much more it may have to pay to the two entities for losses on mortgage investments.
It’s also still not clear just how big the mounting losses on mortgage investments will be. With home prices still falling and mortgage defaults rates high, losses on foreclosed homes are hitting even those investors holding top-rated bonds. The ultimate cost of the claims will depend on how many more homes are lost to foreclosure and how much further home prices fall.
Bank of America also faces a potentially large payout to all or some of the 50 state attorneys general, who have been investigating abuses by the biggest mortgage servicers. The state officials are pressing the largest banks, including Bank of America, to pay up to $30 billion in fines and penalties. If a unified settlement can’t be reached, Bank of America could face multiple legal challenges from states that decide to pursue claims on their own.
Our banking system is still in jeopardy. It faces mounting losses, devalued REO, a huge shadow inventory, and falling house prices -- which won't rebound because of the inventory they must liquidate. Fortunately for them, the federal reserve is loaning them money for nothing, and they can at least buy government treasuries earning 3%. Over time, a very long time, they will earn their way out of this hole. In the meantime, our economy will struggle.
A rare good deal?
The owner of today's featured property has owned it for a long time. My records go back to 1995, and it doesn't pick up the original purchase. This property is owned free-and-clear, so no lender approval is required to sell it. The asking price is at or below recent comps, and the cost of ownership is comparable to rental with today's 4.5% interest rate.
Even in today's weak real estate market, I don't expect this $244/SF property to last long.
If we see more pricing like this, I will become more bullish. The price is still too high, but the 4.5% interest rate is making it payment affordable relative to a rental. In high demand markets like Irvine, those circumstances will prompt people to buy despite the likelihood of lower prices.
-$395 .......... Tax Savings (% of Interest and Property Tax) -$617 .......... Equity Hidden in Payment (Amortization) $194 .......... Lost Income to Down Payment (net of taxes) $93 .......... Maintenance and Replacement Reserves ============================================ $2,667 .......... Monthly Cost of Ownership
Cash Acquisition Demands ------------------------------------------------------------------------------ $5,850 .......... Furnishing and Move In @1% $5,850 .......... Closing Costs @1% $4,680 ............ Interest Points @1% of Loan $117,000 .......... Down Payment ============================================ $133,380 .......... Total Cash Costs $40,800 ............ Emergency Cash Reserves ============================================ $174,180 .......... Total Savings Needed
Property Details for 10 SILKGRASS Irvine, CA 92614 ------------------------------------------------------------------------------ Beds: 4 Baths: 2 Sq. Ft.: 2400 $244/SF Property Type: Residential, Condominium Style: Two Level, Contemporary Year Built: 1984 Community: 0 County: Orange MLS#: S664501 Source: SoCalMLS Status: Active ------------------------------------------------------------------------------ Gorgeous remodel property with added/permite DEN . Light hardwood floors through the main level. New cabinets with granite countertops built-in refrigerator. All new appliances. all of the bathroom have been redone huge master shower and more and more. Den is added.
We have another Exclusive Access Property today. This one is a 5 bd/4.5ba in Northwood Pointe. It has a 3 car garage and is on a 9,121 square foot lot.
If you want to learn more about this property, please contact Shevy:
We've got a new Exclusive Access Property. It is a 4bd/2.5ba 2,870 square foot home in Northwood priced at $1,150,000. It is on a 10,725 sq ft lot and has a 3 car garage.
If you want to learn more about this property, please contact Shevy:
Let me say before I start that I adore modern homes! Love Love Love! If you live in Atlanta, chances are you have driven past this house… Many people recognize this house as it is one of the...
This Photographers Life (Architecture + Interior Design)
Over the last couple of months, IHB has teamed up with Global Decision to prepare an accurate and in-depth analysis of the Irvine housing market. Today's post is the first in a series that will illuminate the workings of the local market in a whole new way.
You can take a picture of something you see In the future where will I be? You can climb a ladder up to the sun Or write a song nobody has sung Or do something that's never been done
It's a shame the NAr has gone down the path it has. Few reliable sources of real estate analysis and information exist, and few signs the NAr is going to become one of them. That leaves a void. Uncharted waters buyers must navigate without a reliable guide. It's a void we seek to fill here at the IHB.
We are in the process of assembling our own private database of housing and related economic statistics. Over the next several weeks as I have time to digest the new information, I plan on a number of new analysis posts to truly illuminate the activity in our local housing market.
I have no agenda to spin the data. Let's see what is really going on. I want to be accurate. People can make their own decisions and draw their own conclusions from accurate data. If approached without the built-in bias of a realtor, data analysis can be revealing rather than deceiving.
I will still have a dog in this hunt. I do run a business that makes money from real estate transactions. I am subject to the same biases as any other human being. I sell real estate, but I am not a realtor. The truth needs no salesman. I will present data as accurately as I can. If reality motivates you to buy or rent, the IHB can help you. I have no desire to manipulate data in order to make a quick buck. This is a part-time hobby for me, not my livelihood.
After that post aired, I was contacted by Jaysen Gillespie of Global Decision, an analytics and consulting firm that has worked in the real estate industry. He shares my interest in determining what is really going on in the real estate market. As a professional data analyst, he is trained in special techniques I cannot perform.
In the weeks that followed, we have met several times and with the assistance of another data analyst, Brian Nadel, we have performed an in-depth analysis of the Irvine housing market. Today is the first in a series of posts on our findings. Today's post lays the groundwork for the detail to follow later. The basic model Jaysen developed is complex, and we felt it deserved a post on its own to ensure everyone understands what we did and why it is better than other measures of value currently available.
The following is the writing of Jaysen Gillespie. I have not set it off in block quote to make it easier to read.
Global Decision is an analytics consulting firm. While our methods are not industry-specific, our engagements are skewed towards specific industries in Southern California, such as real estate (along with online gaming and restaurant chains). We specialize in applying both foundational and advanced analytics to better understand business and economic issues.
Today’s post is an example of such an application, known as hedonic housing valuation. The goal of a hedonic housing valuation model is to use all information about a sale, including both the sale price and the characteristics of the home (number of beds, number of baths, square footage, etc.) to understand how the home’s value is derived from its constituent parts. Wikipedia offers a good overview of hedonic regression.
Unlike looking at comps, which relies on a small number of highly similar properties, a Hedonic model incorporates as much data as possible from a vast number of properties. The core mathematical construct behind a hedonic valuation model is a multiple regression, and for such regressions to produce statistically meaningful results, it’s helpful to have a large number of sales as inputs into the model. In non-technical terms, the regression procedure figures out how to best fit the values of all the pieces of a home to build a formula for the value of a home based on the characteristics of the home. A simple linear hedonic valuation model might, for example, conclude that each bathroom adds $15,000 of value to a home – or that each square foot of living space adds $250 of value to a home. Such values are calculated based on actual historical sales and represent the regression algorithm’s best estimate given the data.
For more details on the mathematics behind hedonic regression, along with plusses and minus of using hedonic models for housing valuation, please see the real estate section of the Global Decision website.
All regression methods – and in fact all mathematical models – suffer from one of the same drawbacks: factors not in the model may impact the dependent variable under study. In our example, housing values in Irvine, we might find that properties with an exceptional view sell for a premium. Our housing data does not reflect whether a property has an exceptional view – and our model would likely undervalue that specific home.
As it turns out, the Irvine dataset is the best of most possible worlds. The city itself is extraordinarily homogeneous: schools are uniformly good and crime is uniformly low. There are no “bad” areas, by typical American metropolitan standards. This homogeneousness allows us to construct a model that has a very strong ability to understand how Irvine homes derive value from their constituent parts – and is not overly swayed by factors not available for modeling. To further exclude data points that are not representative, we’ve excluded condos, “attached single family” properties. We’ve also excluded properties with unusual characteristics, such as a 15,000 sq. ft. lot, or 7 bedrooms. Unusual properties only represent about 2% of the Irvine sample and don’t detract from the model’s ability to trend home values over time.
With the data winnowed down to true resale single family detached houses with no unusual characteristics, we can then run the regression to determine how the value of homes has moved over time. Our Irvine dataset includes sales from 2000 through June 2011. The regression model calculates each quarter’s price change, relative to the initial quarter (2000Q1). Because there are only so many sales each quarter in Irvine, and because regression-based models need a certain number of data points to produce valid results, we are not able to generate a monthly price series of the same quality. Regression models require more data than some other approaches – but they also provide a deeper understanding of the data in exchange.
The above chart shows the actual median price for resale SFRs from the underlying dataset, along with the hedonic model’s estimate of how prices for those same properties have moved over time. The key insight is immediately clear: during the years of rapid appreciation, both the median and the hedonic trend were similar. However, between 2005 and 2008, the two series started to diverge and are presently at significantly different values.
A second observation is that the hedonic series is much smoother. The median price can gyrate wildly from quarter to quarter, as evidenced by the 10% drop from 2010Q3 to 2010Q4. The hedonic model, by contrast, dropped only 3.0% in the same period. A core benefit of a hedonic approach, versus a median-value approach, is that a hedonic model is not skewed by changes in the mix of product that sell each quarter. As sales move from larger to smaller homes and back again – or from one neighborhood to another – the median value is pushed and pulled by the changes in the mix of the underlying properties. Such changes do not indicate the actual home value trend and serve only to obscure the true change in home values in the mid-term.
So what’s driving the gap between the median value and the value implied by the hedonic analysis? As we mentioned earlier, changes in the mix of properties affect the median but not the true trend of real estate values. Foremost among such changes is the size of the median home sold. Clearly, with all else equal, if the homes that are selling increase (decrease) in size then the median value will rise (fall). For this reason, some analysts prefer the “price per square foot” summary metric. That metric also produces distortions, though in different ways.
You can see from chart 2 that the median size of homes sold in this particular dataset has risen over time. The rise over time is a general trend, but it also exhibits a visible discontinuity upwards around 2006Q4. Starting in that quarter, about 50% of the quarters have median home sizes that exceed 2,300 – a condition which did not occur between 2000Q1 and 2006Q3. The median home value series is pushed higher by the fact that larger homes are selling. The degree of the distortion is evident in the chart: the gap between the undistorted hedonic index and the median-based index is clearly visible from 2007 to present.
The other major factor that drives home values is location (regression models don’t need it repeated three times). Because Irvine experienced something of a building boom from 2000-2007, the percent of total sales represented by newer homes has also increased over time. This change in mix is another reason why using the median home value over time to represent the change in the true value of any given Irvine home yields distorted results.
An admittedly-leading question to ponder in the astute observations: if builders create housing that’s physically identical to the average existing housing stock, but those properties sell for a premium for being new, will using the median home value as a price index generally overstate the actual change in value? What if builders create housing with more (or less) favorable characteristics over time?
Using the Hedonic Model to Predict Future Prices
An interesting offshoot of the hedonic model is that one can use its relatively-stable quarter-over-quarter values to better understand whether the current price trend is deviating from historical norms. Home values have a seasonal component to them. Most major indexes, such as the Case-Shiller, offer “seasonally adjusted (SA)” and “non-seasonally adjusted (NSA)” series for this reason. The Irvine hedonic model is inherently not seasonally adjusted. In fact, one can use the results generated by the model to help understand the seasonality of price changes. The following graph shows the average change, quarter-over-quarter, in the Irvine hedonic price trend series.
The hedonic model provides solid evidence that prices are generally stronger in Q2, with weakness in Q4. This finding simply confirms conventional wisdom. However, if we couple this fact with the fact that 2011’s hedonic analysis shows a flat trend in Q2 2011, then de-seasonalized trend of Irvine home values in Q2 2011 was negative. Q3, on average, is about 1.8% worse than Q2 – and a typical Q4 is over 4% worse than a typical Q2. Only time (and actual data) will tell if Q3/Q4 2011 will follow these trends, but the implication is that Irvine home values could easily fall 5% in the coming quarters due to seasonal factors alone. If the underlying trend is actually negative, the drop will be exacerbated by seasonality. If the underlying trend is actually positive, the gains will appear muted in Q3/Q4 for the same reason. The Q3 and Q4 editions of the hedonic model will explain which scenario is the case. Stay tuned!
The Irvine hedonic housing model does not directly attempt to predict future home values. It does, however, more clearly show the true underlying value trends based on actual sales. Those true underlying trends can then be combined with other sets of data, such as default/foreclosure rates, loan-to-value ratios, job growth, and so forth to create model-based approaches to predict future home values. In that sense, if others can use the hedonic approach to refine their forecasting models, it does have predictive value.
IrvineRenter's commentary
When we first poured over the results, I was struck by how the model more accurately showed the decline in value since the peak without the distortion of product mix. I have noted on other occasions that the few transactions occurring in Irvine have been of the most desirable single-family detached homes, and in order to complete the transactions, buyers have put more money down.
The hedonic model shows both the increasing size of homes purchased as well those homes being the newer ones. As we will show in future posts, many of these sales have been in Turtle Ridge and Quail Hill were the premiums are astronomical. The flight to quality from cash-heavy buyers is apparent.
Armed with this new model, we dove into the details on various neighborhoods and even the components of the housing stock itself: beds, baths, square footage, age, garages. We also looked at condos and rentals. The results will be detailed in future posts.
Is Turtle Ridge really that nice?
Turtle Ridge is certainly a desirable community. Both rents and house prices carry a premium over the rest of Irvine. Of course, the rent-to-price ratio is still wildly distorted making prices completely unjustifiable on a cashflow basis, but since the market is always right, buyers have been willing to pay a premium on the premium to own here.
But isn't there a limit?
The owner's of today's featured property bought back in March of 2004. Based on county-wide metrics, they should be underwater.
Has Turtle Ridge appreciated nearly 50% since early 2004? Really?
-$1764 .......... Tax Savings (% of Interest and Property Tax) -$3113 .......... Equity Hidden in Payment (Amortization) $980 .......... Lost Income to Down Payment (net of taxes) $389 .......... Maintenance and Replacement Reserves ============================================ $12,002 .......... Monthly Cost of Ownership
Cash Acquisition Demands ------------------------------------------------------------------------------ $29,500 .......... Furnishing and Move In @1% $29,500 .......... Closing Costs @1% $23,600 ............ Interest Points @1% of Loan $590,000 .......... Down Payment ============================================ $672,600 .......... Total Cash Costs $183,900 ............ Emergency Cash Reserves ============================================ $856,500 .......... Total Savings Needed
Property Details for 31 CLOUDS Pt Irvine, CA 92603 ------------------------------------------------------------------------------ Beds: 5 Baths: 5 Sq. Ft.: 4400 $670/SF Property Type: Residential, Single Family Style: Two Level, Santa Barbara, Spanish, Villa View: City Lights, City, Mountain, Ocean Year Built: 2004 Community: Turtle Ridge County: Orange MLS#: P784881 Source: SoCalMLS Status: Active ------------------------------------------------------------------------------ Panoramic City Lights, Ocean, and Mountain View. This Amberhill residence is located on a private Cul-de-sac with full bedroom/bath on first level, five bedroom total + 2 home office and playroom + master retreat. This home features a dramatic living room open to backyard with extensive use of natural stome hardscape, front and back. polished marble and upgrated carpet flooring, crown molding and custom window treatments, Large kitchen with granite counters/island, full backsplash, built-in subzero refrigerator, professional series six burner cooktop, double ovens, and bread-warmer. Spacious family room great for entertaining which includes integrated 5 speaker surround sound with custom media built-in. Very large dual master+ 8-head massage shower, hot tub, and large walk in wardrobe. private backyard with City lights / Ocean/ Mountain views with custom BBQ/pool/jacuzzi
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