Boomer’s Blog

A huge, largely underestimated and under-reported glut of foreclosed, real estate owned (REO) inventory is clogging up the U.S. housing market, and the majority of doesn’t seem to appear on the MLS. The size of this “ghost inventory” is unknown, but its effects cold be chilling for cash-strapped lenders. What does this mean to real estate investors? Tons of cash if you know how to buy right and stay on top of the real estate marketing curve.

Inventories, Foreclosure Filings Skyrocket
In November, the National Association of Realtors (NAR) reported an 11.2-month inventory of existing homes on the market, up from a 10.3-month in October. But now it seems those sky-high numbers statistics could continue rising dramatically, which is likely to lower home sales prices, and slow overall U.S. economic recovery.

Foreclosure filings were reported on 2.3 million U.S. properties in 2008, and an 81 percent hike from 2007, and a whopping 225 percent surge from 2006, according to RealtyTrac’s U.S. Foreclosure Market Report released in mid-January.

These inventory and foreclosure statistics are interesting enough to raise a few eyebrows among hungry real estate investors. But when RealtyTrac compared NAR’s MLS data with its foreclosure data they raised more than a few eyebrows: they raised the question of whether a vast “ghost inventory” is lingering in REO lender clutches, and if so, is it poised to deliver another hard blow to the U.S. housing market?

Piecing together the “Ghost Inventory” Puzzle
RealtyTrac recently examined the MLS listings in four states, including California, Maryland, Florida and Wisconsin, and found that they contained only a third of the foreclosures it has in its database. Research and analysis by Mr. Mortgage points to an even more widespread problem. There are several possible reasons for this apparent disparity and none of them are good for lenders.

At a minimum, preliminary data suggest that only one-third of foreclosures are reaching the MLS database, and it’s entirely likely that this is a conservative estimate.

The value of REO property on the books of FDIC-insured banks at the end of the Q3  rose 21 percent from the previous quarter, to $23 billion. That total represents a 134 percent increase over last year, according to the latest quarterly report released by the FDIC.

Since there is no reliable way to track these data and existing systems are likely overwhelmed by the high volumes of foreclosures working their way through the system, all we have at this point are estimates as to the number of houses that are haunting  REO’s “ghost” or “shadow”  inventory, as it also is coming to be known.

According to CNNMoney, current U.S. housing market declines are likely to sharpen dramatically as a result of this situation because so many foreclosed homes are lingering in bank possession without representation in the MLS.  Regardless of how the government and lenders approach the problem, averting a tidal wave of foreclosures appears to be impossible.

What’s the Holdup?
What could explain this Grand Canyon-sized gap between the numbers of foreclosures that are recorded vs. the number that has appeared on the MLS? Here are a few explanations that immediately come to mind:

• Inventories of foreclosed and REO properties has grown so fast and in such high volumes that the banks can’t keep up with processing demands, which could delay the MLS listing process.
• Federal and state government attempts to slow the foreclosure tide and Fannie Mae and Freddie Mac’s holiday moratoria on foreclosures are contributing to MLS listing delays for many of these properties.
• Because it’s taking longer to process the foreclosures, the REO properties are getting vandalized or suffering natural damage as a result of what’s becoming long-term neglect. Getting these properties on the MLS is further delayed while banks grapple with making necessary repairs.
• It’s also possible that lenders are lagging in submitting these distressed property listings to the MLS in hopes of deferring their losses as long as possible in hopes of protecting their institutions from insolubility.
• Many of these REO properties might already be listed as short sales.

What does the Ghost Inventory Mean to Your Business?
REO housing inventories are expected to shatter more records in 2009 as more of them hit the market and banks continue their struggle to stay afloat. These market conditions are ideal for real estate investors who deploy sound purchasing strategies and stay on top of the game with effective real estate marketing.

For a quick  video detailing how and why this “ghost inventory” is likely to unleash a mighty wave of foreclosure inventory on the U.S. Housing market, check out this Mr. Mortgage interview on CNBC’s Faber Report.

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News stories about reckless excesses and outrageous “golden parachutes” for fallen Wall Street executives have punctuated wildly gyrating financial markets for the past few weeks, though for many of us, it may seem like forever.

Earlier this month, hearings on Lehman’s bankruptcy and AIG’s $85 billion bailout held by the Oversight Committee of the U.S. House of Representatives rocked the news media and diminished investor confidence, contributing to ongoing instability on the financial markets. Friday, the Dow Jones Industrial Average (DJIA) took an unprecedented 1,000-point roller coaster ride, finally closing down about 125 points.

Form the hearings came news that Lehman likely misled investors about its losses. At least three U.S. attorney offices are probing whether Lehman misled investors before its bankruptcy filing, as pressure grows to hold individuals accountable for the financial crisis, the Wall Street Journal reports.

Bridge Loan Over Troubled Waters
Striking the chords of insanity to most taxpayers was the news that AIG executives took a luxury spa retreat to cope with the stress of receiving an emergency $85 billion bridge loan from the Fed. Then, as if to add taxpayer insult to economic injury, The Fed announced late this week that would be fronting AIG another $40 billion to help shore up the giant insurer’s operations.

New Law Won’t Stop Golden Parachute Deployment
Though we’re supposed to draw some measure of reassurance that the bailout bill was revised from Treasury Secretary Henry Paulson’s plan to ban “golden parachutes,” they’re only prohibited under certain circumstances, Namely, when the company sells more than $300 million in assets to the government or only if the employment agreement was made during the bailout period.

According to the Motley Fool, if the severance language already exists or if a golden parachute is already in place, executives will still land on their cash mattresses.

Golden Parachutes Fly over Lower Manhattan
On the eve of the $700 billion bailout bill’s enactment, Bloomberg reported that five of Wall Street’s powerhouses paid more than $3 billion over the past five years to executive staff at the helm of packaging and selling the loans that would ultimately kill the investment-banking system.

The $3.1 billion paid to the top five executives at the firms between 2003 and 2007 in fact, was nearly three times what JPMorgan paid to buy Bear Stearns.

Top executives at Goldman Sachs, Merrill, Morgan Stanley, Lehman, and Bear Stearns made $613 million combined last year. And the worst obscenely paid of them all, Lehman, AIG, and government chartered enterprises (GSEs) Fannie Mae and Freddie Mac paid out more than $1.4 billion in total compensation since 2004, Motley Fool reports. Lehman even paid $23 million to three executives, two of whom were fired, as Lehman begged for Federal aid, mere days before it fell.

Read it and Weep
Though some of the top financial institution executives who made critical decisions linked to today’s meltdowns already have left the positions that made them rich, a look at some of their compensation packages is so obscene, it may require an NC-17 rating.

According to multiple reports, here are some compensations packages what may make an office job seem almost bearable.

Bear Stearns: James Cayne
Before the company did a face plant on Wall Street and was sold to JPMorgan in June, Cayne made $161 million.

Citigroup: Chuck Prince:
Paid: $16 million, and jobless after raising Citi’s exposure to mortgage and consumer credit markets.

Merrill Lynch: Stanley O’Neal:
Paid: $66 million, terminated after the investment bank’s disclosure of $7.9 billion in unexpected losses. (Note: O’Neal was paid $172 million between 2003 and 2007.)

Merrill Lynch: John Thain
Paid $86 million, including a signing bonus, when he started working at the firm last December. Merrill was acquired by Bank of America for about $50 billion on Sept. 15.

Wachovia: Ken Thompson
Paid: $5 million, fired after several mistakes, including the  $25 billion acquisition of a California mortgage lender that caused huge losses for the Charlotte, N.C.-based bank now being acquired by Wells Fargo.

Think last week was rough on Wall Street? Expect more waste to hit the fans in the next couple of weeks as the financial industry executives continue to air their dirty laundry in these House Oversight Committee hearings. I’ve caught some of this stuff on C-Span and it’s almost like watching a soap opera unfold.

October 16: The Regulation of Hedge Funds
Five fund managers who earned over $1 billion last year have been invited to testify about the role of hedge funds in the financial markets and their regulatory and tax status. The five witnesses are John Alfred Paulson, President, Paulson & Co., Inc.; George Soros, Chairman, Soros Fund Management; Philip  Falcone; Senior Managing Director, Harbinger Capital Partners; James Simons, Director, Renaissance Technologies; and Kenneth Griffin, CEO, Citadel Investment Group.

October 22: The Breakdown of Credit Rating Agencies
The CEOs of the nation’s three largest credit rating agencies have been invited to testify about the role of the credit rating agencies in the financial excesses on Wall Street. The three witnesses are Deven Sharma, President, Standard & Poors; Raymond McDaniel, CEO, Moody’s Corp.; and Stephen Joynt, CEO, Fitch Ratings.

October 23: The Role of Federal Regulators
Former Federal Reserve Chairman Alan Greenspan, former Treasury Secretary John Snow, and current SEC Chairman Christopher Cox have been invited to testify about the role and responsibility of federal regulators in the Wall Street financial crisis.

Long-term mortgage Interest rates rose this week to their highest levels since March, likely triggered by rising inflation, high gas prices, and dwindling consumer confidence. At the same time, home values are shrinking in every region of the United States. Can we call this a recession yet?

Mortgage Rates Take a Hike
Currently, the national average interest rate for 30-year, fixed-rate mortgages is up to 6.08 percent this week, up from 5.98 percent last week, This time last year, mortgage financing company Freddie Mac says it was 6.42 percent.

Shouldn’t this be moving the market? Not necessarily, says Freddie. As mortgage rates rise, home values continue to fall. More folks likely will be watching this selling season than the World Series.

Q1 Home Values Fizzle in Most States, All Regions
The value of U.S. homes fell 10.4 percent in the first quarter, says Freddie Mac, marking fueling the most dramatic annual dive since 1971. In the past year, Freddie’s Conventional Mortgage Home Price Index averaged 4.4 percent, the most remarkable decline in 39 years.

Freddie Mac data show that 46 states reported price drops in Q1, and 29 states measured drops over the same period last year. Only Montana, North Dakota, South Carolina and Wyoming reported price gains, however moderate, for Q1.

According to Freddie Mac’s numbers, based on the Conventional Mortgage Home Price Index Classic Series, no region in the U.S. is totally immune to the price drops that sometimes look like economic chronic wasting disease. But depending on your real estate investment strategy, there are some bright spots if you look at the big picture. Again, the real estate markets that didn’t pump-up the real estate bubble, look much more stable these days.

Regional Housing Trends
Here are are some regional housing value numbers crunched in Freddie Mac’s latest report:

West South Central Division

• Includes: Arkansas, Louisiana, Oklahoma and Texas;
• Current values reported for Q1: down 0.5 percent (-1.9 percent, annualized);
• Over the past year: home values rose 1.6 percent;
• Over the past five years, home values climbed 26.8 percent.

Middle Atlantic Division

• Includes: New Jersey, New York and Pennsylvania;
• Current values reported for Q1: down 1.1 percent (-4.1 percent, annualized);
• Over the past year: home values dropped 0.2 percent;
• Over the past five years: home values climbed 44.3 percent.

East South Central Division

• Includes: Alabama, Kentucky, Mississippi and Tennessee
• Current values reported for Q1: down 1.1 percent (-4.3 percent, annualized);
• Over the past year: home values increased 0.3 percent;
• Over the past five years: home values climbed 26.6 percent.

East North Central Division

• Includes: Illinois, Indiana, Michigan, Ohio and Wisconsin
• Current values reported for Q1: dropped 1.5 percent (-5.9 percent, annualized);
• Over the past year: home values dropped 3.8 percent;
• Over the past five years: home values climbed 9.2 percent.

Mountain Division

• Includes: Arizona, Colorado, Idaho, Montana, New Mexico, Nevada, Utah and Wyoming;
• Current values reported for Q1: dropped 1.5 percent (-5.9 percent, annualized);
• Over the past year: home values dropped 3.3 percent;
• Over the past five years: home values climbed 44.0 percent.

West North Central Division

• Includes: Iowa, Kansas, Minnesota, Missouri, North Dakota, Nebraska and South Dakota
• Current values reported for Q1: dropped 2.2 percent (-8.6 percent, annualized);
• Over the past year: home values dropped 2.3 percent;
• Over the past five years: home values climbed 16.3 percent.

South Atlantic Division

• Includes: Washington D.C., Delaware, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia and West Virginia
• Current values reported for Q1: dropped 2.6 percent (-10.1 percent, annualized);
• Over the past year: home values dropped 4.4 percent;
• Over the past five years: home values climbed 37.8 percent.

New England Division

• Includes: Connecticut, Massachusetts, Maine, New Hampshire, Rhode Island and Vermont;
• Current values reported for Q1: dropped 2.9 percent (-11.0 percent, annualized);
• Over the past year: home values dropped 4.0 percent;
• Over the past five years: home values climbed 22.2 percent.

Pacific Division

• Includes: Alaska, California, Hawaii, Oregon and Washington
• Current values reported for Q1: dropped 6.9 percent (-24.8 percent, annualized);
• Over the past year: home values dropped 12.4 percent;
• Over the past five years: home values climbed 40.1 percent.

Federal Reserve Chairman Ben Bernanke has announced his approval of a new plan by the U.S. Congress to help stall the foreclosure rate for homeowners now drowning in debt. The legislation was drafted to help distressed homeowners, and is now snaking its way through the House of Representatives. House Financial Services Committee Chairman Barney Frank of Mass is the bill’s author and original sponsor.

If enacted, the legislation would allow the Federal Housing Administration (FHA) to back as much as $300 billion in refinanced loans for homeowners facing foreclosure. Critics say that the legislation would unfairly punish homeowners who didn’t overextend their finances. Bernanke says that finding ways to avoid preventable foreclosures currently makes for sound public policy. And his support may help Frank find Congressional support for the measure.

The Fed chairman says that there is a strong economic case for trying to avoid the price drops and other economic hardships imposed by the booming foreclosure rate. The costs of foreclosure, he says, may extend well beyond the borrower and the lender. He also has observed that clusters of foreclosures can destabilize communities, reduce the property values of nearby homes, and lower municipal tax revenues. Foreclosures, as we’ve seen, also can drive house prices lower.

MarketWatch reports that one tactic favored by the White House is to reform the FHA and allow it it to increase the scale of its lending. Another approach would be to give stronger powers to the federal government to oversee the affairs of Fannie Mae and Freddie Mac. Bernanke supports these measures and has said that Fannie Mae and Freddie Mac should be used to mitigate the damage of the housing market downturn, and be allowed to do so in a safe and sound manner.

Last week the Fed cut interest rates another quarter of one percentage point to 2 percent.

As a growing number of homeowners dangle over foreclosure’s jagged edge, many lenders have historically been slow to approve short sale deals, but there are signs that they’re changing their ways.

The short sale is a long-standing investment technique that can benefit buyers, lenders and homeowners alike. According to the National Association of Realtors (NAR), Short sales currently account for about 18 percent of overall home sales. But as the housing market continues to stall, some major lenders and loan servicers are streamlining their processes for accepting short sale deals, and this may make short sales a more viable option for investors than it has been in the recent past.

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Federal housing authorities have reached a $31.4 million settlement with ousted Fannie Mae CEO and Harvard-educated Rhodes Scholar Franklin Raines and some of his former staff. The agreement follows allegations that Raines and his deputies inflated earnings reports while at the helm of largest mortgage-finance company in the nation. The deal settles $215 million lawsuit filed by Office of Federal Housing Enterprise Oversight (OFHEO) against the crew in late 2006 over an assessed $6.3 billion in misstatements issued by Fannie Mae, a government-chartered company.

Bloomberg reports that as part of the settlement deal, Raines has agreed to pay $24.7 million in fines and penalties and will forfeit stock options. But the buck doesn’t stop there. Former Fannie Mae CFO Timothy Howard will fork over $6.4 million, and former controller Leanne Spencer was fined $275,000. The penalties however, won’t be paid in full by Raines, Howard or Spencer. Fannie Mae’s insurance carrier will cover the $3 million cash portion of the settlement.

Raines himself will pay a $2 million fine to the federal government; relinquish claims on stock options valued at $15.6 million when they were issued; donate $1.8 million in proceeds from the sale of Fannie Mae stock to charitable programs that help struggling homeowners; and forfeit about $5.3 million in other benefits so far unspecified by OFHEO. He received the stock options in 2000-2003 for 932,000 shares at exercise prices ranging from $69.43 to $80.95 a share. After he was booted, the shares never rose above $72 and now trade at less than $30, rendering his relinquished options worthless on the market.

Insurance will cover Howard’s $750,000 fine, but he’ll give up $5.2 million in stock options, contribute $200,000 in proceeds from stock sales to charity and loose unspecified benefits valued at $240,000, OFHEO said.

Fannie Mae and Freddie Mac were created to boost homeownership. Their profits stem from holding mortgages and mortgage bonds as investments and by charging fees to guarantee and package the loans as securities. The government requires them to reserve capital to cover losses on those mortgages. The companies came under greater regulatory scrutiny in 2003, when accounting blunders first became painfully evident.

In a similar settlement deal, OFHEO documents show that former Freddie Mac CEO Leland Brendsel agreed in November to pay $16.4 million in penalties for his role in that company’s bogus accounting statements. Brendsel resigned under pressure from Freddie Mac in 2003, and on his way out agreed to pay a $2.5 million penalty, return $10.5 million in compensation and drop a claim to $3.4 million in additional earnings.

In the wake of the announcement, Fannie Mae climbed 30 cents to $28.55 Friday in NYSE composite trading, while Freddie Mac jumped 25 cents to $27.06. The two companies own or guarantee more than 40 percent of the $11.5 trillion in outstanding U.S. home loans.

MSNBC: Stimulus Act Offers Hidden Perks for Landlords
The new federal Economic Stimulus Act offers a provision for landlords and commercial tenants that has not yet been widely publicized. Congress has increased the amount of construction costs that can be written off in the first year for improvements on commercial or residential rental properties. With the change, landlords and commercial tenants can now write off 50 percent of “qualified leasehold improvements” in the first year alone, if the improvements are completed by the end of this year; the rest can be written off in declining increments over 15 years. In previous years, only 2.5 percent of the costs of those improvements could be written off in the first year and the declining increments spanned over three decades. The new “bonus depreciation” schedule provides faster relief by reviving the more generous depreciation rules that were in place after the turmoil that followed the terrorist attacks on Sept. 11, 2001.

New York Times: JP Morgan Feeds the Bear
JP Morgan has quintupled its offer to buy troubled investment bank Bear Stearns. The sweetened offer of about $1 billion, is intended to win over stockholders who vowed to fight the original fire-sale deal, brokered last week by the Fed. Under the new terms, JP Morgan would pay $10 a share in stock for Bear, up from its initial $2 a share — a figure that represented an estimated one-fifteenth of Bear’s going market price.

Reuters: Newly Formed Penny Mac to Feast on Distressed Mortgages
Money management firm BlackRock Inc., and hedge fund Highfields Capital Management are backing a new firm that will buy up distressed mortgages, betting that investors are ready to snap up bargains in the beaten down sector. The new company, Private National Mortgage Acceptance Company, which will be known as PennyMac, plans to raise capital from private investors and will help borrowers restructure loans to avoid foreclosure. Penny Mac will star Stanford Kurland, who spent 27 years at mortgage giant Countrywide Financial Corp., as its chief executive officer and Morgan Stanley global residential mortgage veteran David Spector as its chief investment officer.

U.S. News and World Report: Fed Frees Mac to Supersize Mortgage-Backed Value Meals
A week after restrictions were eased on Fannie Mae and Freddie Mac to allow them to gobble up a minimum of $200 billion in mortgage-backed securities, the federal home loan banks have been freed to follow suit.

Forbes.com: Bank of England Snubs Mortgage-Backed Securities from Ailing Banks
The Bank of England has rejected pressure to follow the U.S. Federal Reserve in buying beleaguered mortgage-backed securities from banks that have been hard hit by the credit crisis.

Bloomberg: Existing U.S. Home Sales Rise In February
In defiance of many analysts’ predictions, existing home sales rose in February for the first time in more than six months. For some, his unexpected spike in activity eases concerns that credit restrictions and falling prices would diminish market demand.