Thursday, July 9, 2009

Subprime Resurfaces as Housing-Market Woe

Posted in the Wall Street Journal by Carrick Mollenkamp:

The U.S. housing market is facing new downward pressure as holders of subprime-mortgage bonds flood the market with foreclosed homes at prices that are much lower than where many banks are willing to sell.

While nationwide figures are scarce, a review of thousands of foreclosures in the Atlanta area shows that trusts managing pools of securitized mortgages sold six times as many properties as banks during the six months ended March 31. And homes dumped by subprime bondholders sold for thousands of dollars less on average than bank-owned properties, the data show.

Experts say this is a bad omen for residential real-estate prices and homeowners trying to sell or refinance, because the fire sales, many to cover soured subprime loans, put downward pressure on the value of nearby homes. All of this undermines federal efforts to stabilize the housing market and revive the broader economy.

"While the banks are trying frantically to get loans off their books, they face the problem of large shadow inventories of housing being dumped on the market, which would depress prices further," said Anthony Sanders, real-estate finance professor at George Mason University in Fairfax, Va.

In the Atlanta area, hit hard by foreclosures and declining home values in the past two years, mortgage-backed securitization entities completed 6,260 foreclosures in last year's fourth quarter and the first quarter of 2009, according to data compiled by Data Intelligence Corp., a Marietta, Ga., real-estate analytics firm which reviewed the records for The Wall Street Journal. That was more than double the 2,737 foreclosures by banks in the same period.

Of those foreclosures, securitization entities sold 2,963 homes during the same period for an average of 62% of the original loan amount. Banks unloaded just 442 of the homes they foreclosed upon, with an average selling price of 69% of the original loan amount.

There still is much more inventory that mortgage-servicing firms are racing to sell for securitization trusts. Such entities tend to sell in bulk so that they can cut losses, finding it more cost-efficient to move homes through foreclosure and subsequent sale than to try to restructure the mortgage with the borrower. Securitization trusts also realize that potential buyers won't step in unless the price is attractive.

"You have to haircut that in a big way," said Christopher Marinac, managing principal at FIG Partners, a bank-research firm in Atlanta.

According to Karen Weaver, global head of securitization research at Deutsche Bank AG, the steepest losses are on subprime loans, where lenders generally are recovering just 26% of the original loan amount.

Analysts said Atlanta is typical of a pattern that is emerging across the U.S. In the first quarter, Atlanta had the 35th-highest foreclosure rate out of 203 metropolitan areas with a population of at least 200,000, according to RealtyTrac Inc. Nine Georgia banks have failed so far this year.

On a nationwide basis, foreclosures were started on a record high of nearly 1.4% of all first-lien mortgages in the first quarter, according to the Mortgage Bankers Association. U.S. home prices in 20 major cities fell an average of 0.6% in April, a smaller decline than March's drop of 2.2%, according to the Standard & Poor's/Case-Shiller index released last week.

Residential mortgage-backed securities helped feed the subprime boom, winding up in the hands of investment funds or in more complicated pools known as collateralized debt obligations, where underlying mortgage pools were ultimately sliced into different risk tranches. Insurance contracts known as credit-default swaps often were sold on top of the CDOs.

Securities sold by Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch & Co., companies that filed for bankruptcy protection or were sold in the past 14 months, included residential loans from Atlanta.

In March, the mortgage-processing firm that works on behalf of a Goldman Sachs Group Inc. mortgage trust sold a house in southwest Atlanta for $17,000 -- a markdown of 87% from the original loan value. A Goldman spokeswoman declined to comment.

In the fourth and first quarters, Bear-issued trusts sold 29 properties in Fulton County, which includes Atlanta, for a total of $3.5 million. That was 60% of the combined original loan amounts of $5.8 million.

The loans were pooled in the vehicle during a period of Bear securitizations that were sold to investors prior to the firm's sale to J.P. Morgan Chase & Co. a little more than a year ago.

A J.P. Morgan spokesman said the depressed prices are representative of a housing market correcting itself in a period that is vastly different from a few years ago. Many of the regions facing the largest declines in value are the same ones that soared and saw a frenzy of construction during the housing boom.

In comparison, Countrywide Financial Corp., now owned by Bank of America Corp., completed the sale of 23 properties in Fulton for $3.7 million, or 86% of the original loan amount during the same time period, the real-estate records analyzed by Data Intelligence show.

A Bank of America spokesman said prices being fetched in the Atlanta area for the Countrywide portfolio reflect a reluctance to dump properties far below prevailing market values. The bank is getting an average of 99% of the appraised value of homes on an average sale, while selling within one year 99% of the properties that end up on its books.

"We see local and regional banks having to withstand continued devaluation pressure from the disposition of mortgage-backed securitized properties," said Mason Maynard, founder of Data Intelligence.

The good news is that at least foreclosed homes are moving -- up to a point. And buyers of houses being dumped by securitized trusts are getting a very good deal. Late last year, for example, a property at 1169 Old Fincher Trail in Cherokee County, Ga., that was in a Bear trust was foreclosed on, Data Intelligence said. The original loan was $292,000. When the owners couldn't keep up with the payments, the home fell into foreclosure.

Realtor Tim Hamill of Re/Max Greater Atlanta, who was handling the sale for an asset-management firm working on behalf of the trust, said his mandate had been to sell homes in 30 days.

Greg Foster, a neighbor who built the home 13 years ago, saw an opportunity to buy it for his 25-year-old daughter, Ashleigh, a nurse and single mother of two children. When she wasn't able to secure financing in time, her grandfather bought the house for $164,000 -- or 56% of the original loan amount -- and then sold it to Ms. Foster.

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