The one market with the fewest foreclosures relative to its mortgage delinquency is New York City -- the homes of banksters are being spared foreclosure and the resulting declines in value.
Start spreading the news, I'm leaving today I want to be a part of it - New York, New York These vagabond shoes, are are longing to stray Right through the very heart of it - New York, New York
Frank Sinatra -- New York, New York
One of the most irritating behaviors I have witnessed during the deflation of the housing bubble is the way banksters have chosen to foreclose in some markets and allow delinquent mortgage squatters to flourish in others. The worst market in the entire country for shadow inventory, the place with the most delinquent mortgages and the lowest foreclosure rate is where the banksters live: New York City.
There is only one plausible explanation for this phenomenon: banksters are choosing not to foreclose in places where it would negatively impact the value of their personal real estate.
If pressed on the issue, they would likely spout some nonsense about New York City being different. It's special, everyone wants to live there, and so on. Markets obey laws of supply and demand, and right now, demand for overpriced NY real estate is very low, and the supply of shadow inventory is very high. Of course, that is shadow inventory. If they simply leave that inventory in the shadows, they can balance supply and demand and meter out these properties as the market can absorb them -- at least that's the theory.
Strategic default will take over
There is one basic flaw with their plan. As more and more people stop paying their mortgage and don't get foreclosed on, the people who are paying their mortgage realize they are being foolish, so they stop too. Think about it; if you can possess property forever with or without paying for it, why would you pay? Moral obligation? On Wall Street?
Strategic default is usually associated with a beaten down market like Las Vegas where it is foolish to continue paying a $300,000 mortgage on a $100,000 house. However, at the other extreme is New York City where all consequences for default have been removed. And mortgage default has major benefit to someone putting 40% or more of their income toward a mortgage. Each person who decides to quit paying gets to keep their house, and they get to keep the money they used to put toward paying down the mortgage. For many it's like a 40% raise in pay.
We are quickly approaching a tipping point in New York City where residents recognize it is in their best interest to default and pocket the payments. Once that becomes common wisdom, strategic default will become the norm just as it has in Las Vegas. If lenders continue to allow these borrowers to squat, it will eventually rise to the level of entitlement on Wall Street. Everyone who works in New York City in finance will look to their company's REO for their housing and expect it to be free. If nobody else has to pay, why wouldn't they expect it for nothing?
Strategic default is not only a phenomenon of beaten down markets. If mortgage delinquency becomes rampant because borrowers know the repercussions are non-existent, strategic default will take over there too.
I never stated that the collapse was imminent. I said I had no way of knowing when the banks would start foreclosing on all those delinquent borrowers. But they will. Now is a good time to take a look at why the entire New York City (NYC) market is headed for collapse.
Based on the volume of shadow inventory in New York City, the housing market should collapse, but the banksters are determined to prevent this from happening even if that means giving away properties to delinquent mortgage squatters. New York City may be on its way to a decade-long slow deflation. If they sell the properties slowly enough, incomes will eventually come back. Right now it would take an astounding 129 months to clear out their backlog.
First, let’s see what’s happened to home prices around the country since the expiration of the first-time buyer tax credit. The best source for this is Clear Capital and its excellent Home Data Index (HDI) Market Report.
Since the end of last summer, home prices nationwide have plunged by an average of 11.5% through April 2011. Some of the worst major metros have fallen even more. Talk of home prices bottoming has stopped. For a year, I’ve been saying that there is no housing recovery in sight.
Yet NYC median home prices have held up pretty well during this period. Why?
Prices have held up in New York City for the same reason they are holding up here in Orange County: lenders are not foreclosing on delinquent mortgage squatters.
In my two articles about Queens, I pointed out that the servicing banks are simply not foreclosing on delinquent homeowners. They aren’t even putting them into default (NOD). Take a look at this chart from the first article showing the rise in serious delinquencies in that borough.
A year ago, 11.2% of all Queens homeowners with a mortgage were delinquent by 60 days or more. I obtained these figures from TransUnion, the credit-reporting firm which puts out a quarterly mortgage delinquency report based on its database of 27 million anonymous credit reports. In the first quarter of 2008, that figure was only 3.9%.
That 11.2% figure equaled roughly 25,000 seriously delinquent homeowners. This number was confirmed by a fairly recent NY Federal Reserve Bank report which stated that 10% of all first liens in Queens were delinquent by 90 days or more. Remember, these figures are for only one of five boroughs in NYC. The NY Fed’s report also showed a 90+ day delinquency rate of 11.8% for the Bronx and 9.5% for a Brooklyn.
The delinquency rates in the New York City boroughs are higher than the rest of the nation. With 25,000 delinquent mortgage squatters in Queens and a liquidation rate of less than 250 per month, it will take over 100 months to clear out the existing inventory.
Are the banks making any attempt to foreclose on all these delinquent homeowners who are living rent-free? You judge.
Let’s take a good look at this amazing graph. New York City has roughly 8 million residents, easily the largest city in the nation. The graph from PropertyShark breaks down the new foreclosure auctions (actually sheriff sales) scheduled by borough. You can see that the vast majority scheduled are for Queens. None of the other four boroughs exceeded 150 scheduled auctions in any month since the end of 2008.
Notice carefully that the peak number for Queens starts to decline well before the robo-signing mess occurred last fall. Sorry, that problem had nothing to do with the bank’s refusing to foreclose on delinquent homeowners. It did provide some cover for the banks, though.
Lenders will use whatever news story that's available to continue to put off foreclosure. They are trying to buy time because they know prices will crash if they liquidate. If they don't liquidate, their borrowers will figure it out and strategically default.
The plain truth is that for more than two years, the servicing banks have made no effort to foreclose on these seriously delinquent borrowers throughout the Big Apple. Take a look at these incredible figures for the number of NYC REOs for sale on foreclosure.com on May 30.
Repossessed Properties on the Market in NYC -- May 30
Queens: 232
Brooklyn: 95
Bronx: 76
Staten Island: 75
Manhattan: 27
I’m not making these numbers up. Go to foreclosure.com and check for yourself.
So what does all this mean for the NYC housing markets? Homeowners in any of the five boroughs do not have to compete with foreclosures for sale as they do in every other major metro. So can they list their property for anything they want. And they do. Every once in a while, like the Venus flytrap, a seller is fortunate enough to catch a buyer.
That is the Orange County experience as well, particularly at the high end. I see delusional sellers all the time on Redfin who bought at the peak and think their property value has gone up. Occasionally, they are right. Of course, it requires borrowers to come up with enormous down payments, and as a result sales volumes are very low, but if lenders are willing to drag this process out for ten years, they might be successful. In the meantime, they will be supporting a lot of squatters.
Sellers don’t catch many, though. In Jonathan Miller’s thorough quarterly report on the Queens market put out by Prudential Douglas Elliman Real Estate, he counted a total of 2,483 1-3 family houses, coops, and condo units sold during the fourth quarter of 2010. That is roughly 830 per month. This is for a borough with roughly 2.2 million residents. These buyers paid a median price of $363,000. If you weren’t aware of what I’ve explained, you would think that the Queens market has held up fairly well. No way. The overwhelming majority of properties on the market in all five boroughs just sit … and sit … and sit.
That also sounds like Orange County.
Where All Five Boroughs Are Headed
At some point, the banks will be under tremendous pressure to foreclose on the huge number of seriously delinquent properties that are now either vacant or occupied by “walkaways” who have been enjoying the free ride longer than anywhere else. Look at this shocking chart from Lender Processing Services.
It shows that In New York State, homeowners with a notice of default (NOD) on their property have not made a mortgage payment for an average of 644 days. That is more than 21 months. Nice deal, isn’t it?
That is the best deal in the country. People who quit making their loan payments get two years of free housing. If they save that money, after the lender finally does foreclose, they can wait two years and buy another property. Since prices will likely continue to fall, particularly at the high end, they will repurchase at a lower price and have equity from their down payment. The people who don't strategically default will make payments and fall further and further behind.
When the banks begin to foreclose and dump the REOs on the market, prices in all five boroughs will completely collapse. This is almost as certain as night follows day. Ignore it at your own risk.
Keith will be focusing on the entire NYC housing market and the suburbs in the seventh issue of his Housing Market Report due out in mid-July.
Looking at the continuum of lender liquidation behavior, Las Vegas is on one extreme and New York is on the other. Desirability has nothing to do with it. Las Vegas has been pummeled by foreclosures and liquidation selling. New York has been spared any meaningful price declines because there are very few foreclosures and almost no liquidation selling.
Both Las Vegas and New York have a huge problem with mortgage delinquency and strategic default, but for opposite reasons. In Las Vegas, borrowers are hopelessly underwater and see continued payment as pointless. In New York, borrowers are offered two years of free housing if they quit paying, so many are taking advantage. Both markets have a huge shadow inventory.
Orange County has been somewhat more balanced in its foreclosure and disposition efforts. Lenders have foreclosed and process more homes at the low end than at the high end, so high end prices are still inflated while low end prices are nearer the bottom. Only time will tell which path is the correct one for lenders. For future borrowers, the tiny mortgages in Las Vegas will be a huge benefit. For buyers in the slowly deflating markets like New York, the huge mortgages will be an economic dead weight.
Get out while you can
With the leading edge of prices now in 2003 in Irvine, many 2003 buyers are chosing to bail while they still can. The owner of today's featured property paid $353,500 on 3/28/2003. She borrowed $282,000 and put $71,500 down. She opened a HELOC for $35,200 on 11/17/3003, but didn't add to her mortgage again until 1/8/2007 when she took out a stand-alone second for $80,000. Her total property debt of $362,000 is only slightly more than she paid. That's conservative by Irvine standards.
She must have fallen on hard times because she stopped paying the mortgage and decided to sell.
Foreclosure Record Recording Date: 05/18/2011 Document Type: Notice of Sale
Foreclosure Record Recording Date: 01/26/2011 Document Type: Notice of Default
She could be one of many working in a real estate related industry who succumb to the long recession. With no history of HELOC abuse, and what appears to be a relatively small mortgage, she could be an innocent casualty of the housing bubble.
-$325 .......... Tax Savings (% of Interest and Property Tax) -$528 .......... Equity Hidden in Payment (Amortization) $24 .......... Lost Income to Down Payment (net of taxes) $72 .......... Maintenance and Replacement Reserves ============================================ $2,366 .......... Monthly Cost of Ownership
Cash Acquisition Demands ------------------------------------------------------------------------------ $4,150 .......... Furnishing and Move In @1% $4,150 .......... Closing Costs @1% $4,005 ............ Interest Points @1% of Loan $14,525 .......... Down Payment ============================================ $26,830 .......... Total Cash Costs $36,200 ............ Emergency Cash Reserves ============================================ $63,030 .......... Total Savings Needed Property Details for 208 MONROE #152 Irvine, CA 92620 ------------------------------------------------------------------------------ Beds: 3 Baths: 2 Sq. Ft.: 1495 $278/SF Property Type: Residential, Townhouse Style: Two Level Year Built: 1985 Community: 0 County: Orange MLS#: H10122016 Source: CRMLS Status: Active ------------------------------------------------- GREAT PRICE FOR THE LARGEST FLOOR PLAN TOWNHOME IN TIMBERLINE. 3 BR 2.5 BA 1495 SQ. LAMINATED FLOORING THROUGHOUT. OPEN FLOOR PLAN IN PRIME LOCATION. LOW HOA FEES.
Thank you, IHB readers
I want to thank everyone for the kind words of support yesterday. I hope to put the issue behind me, but depending on how foolish and vindictive the Orange County Association of realtors wants to be, we may see this story resurface again. Wouldn't that be fun? Perhaps they will quietly go away and drop their complaint. I'm not holding my breath.
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