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January 14, 2011 – The Foreclosure Situation to Worsen in 2011

According to RealtyTrac home repossessions will rise in 2011 from the record one million homes that
were repossessed in 2010. There are five million homeowners who are at least two months behind on
their mortgages primarily do to job losses and declining home prices that push more borrowers
underwater. One in 45 households received a foreclosure filing in 2010, or a record high 2.9 million
homes. RealtyTrac projects three million foreclosures in 2011 with 1.2 million repossessions. This
hidden inventory is on top of the 700,000 homes on the books of banks within the $53.2 billion in Other
Real Estate Owned (OREO). It will likely take three years top clean up these unwanted homes and
some banks are abandoning OREO properties. This environment will reduce property appraisals,
which will eventually filter through to lower home prices.
Foreclosure Players – The Home Owner, The Bank, The Investor
When a homeowner buys a home and takes out a mortgage he is usually unaware whether or not the
bank holds the mortgage as an investment, or has the mortgage pooled into a mortgage-backed
security that is sold to an investor. Before the housing crisis began many mortgages were sliced and
diced into mortgage derivative structures sold in the private market as well as to Fannie Mae and
Freddie Mac. Since Fannie and Freddie became government owned through Conservative these
GSEs have securitized roughly 90% of mortgage securities, as the private market fell off the map.
This tangled web is one of the major problems in trying to unravel how to help homeowners stay in
their homes and to accurately perform a foreclosure procedure when there is no hope of a homeowner
staying in their home.
The Home Owner – May have bought a home they could not afford with a mortgage that they could
not understand. As home values plunged owners owed more than what the home is worth. Defaults
resulted when mortgage payments increased because of higher mortgage rate adjustments, or
because the homeowner lost his job, or felt screwed by the bank.
The Bank – May have exaggerated with how easy it would be for the homeowner to afford adjustable
mortgages. Most mortgages were packaged by the bank and entered into the securitization process
and sold by Wall Street to investors around the world who thought the mortgage securities were “AAA”
rated, and in the case of Fannie and Freddie were backed by the US government, which was not true.
The Investor – The main reason to securitize and sell mortgage structures to investors is to spread
the risk of default to a broader group. The problem was the false ratings and assumed US backing of
Fannie and Freddie-backed securities. As a result instead of investors taking a hit, tax payers have
through the Conservatorship of Fannie and Freddie through the guarantee assumption, which has cost
about $150 billion through 2010.
Now state attorneys general are meeting with mortgage securities investors, who want to shield
themselves from losses that may result in settlements relative to the foreclosure dilemma. The so-
called “too big to fail” banks are in the middle of this as they risk having to buy back the mortgage
securities they sold to investors. I see no problem with this as long as it’s done at a current market
price, not at the original price. That’s what makes a market. The investor bought betting on gains, but
market conditions have changed due to default and foreclosures, so the investor should simple sell the
bonds back to the bank at a current market price, where the investor takes the loss. That’s the free
market solution.
At the end of 2007 the mortgage market totaled about $15 trillion dollars, by some estimates. Of these
FDIC data shows only $2.25 billion were held as investments on the books of our nation’s banks at the
end of 2007. At the end of Q3 2010 this asset class was down $364.9 billion or 16.3%. It’s hard to
evaluate why mortgages had this huge decline, other than defaults and foreclosures, or packaging
loans to Fannie Mae or Freddie Mac. They all did not go into Other Real Estate Owned (OREO) which
rose 338.2% to a record $53.2 billion. This stress in the banking system is a factor in making the
foreclosure process even more difficult for the bank.
The bigger problem is how many mortgages are sliced and diced into Notional Amount of Derivatives,
which grew 43.5% to $236.4 trillion at the end of Q3 2010. You can’t put Humpty Dumpty mortgages
back together again as investors fight over whether they own the front door or even the kitchen sink of
the underlying collateral known as the home.
I do not have a solution and neither does our Government, the legal folks sorting through the mess, or
the financial market place.
The AAII Central Florida Chapter Presents
“The Death of Buy and Hold, the Rise of Buy and Trade” by Richard Suttmeier
Wednesday, January 19, 2011
6:30 - 7:00 p.m. Registration / Refreshments
7:00 p.m. Presentation
8:00 – 8:30 p.m. Q&A
University Club of Winter Park
841 N. Park Ave
Winter Park, FL 32789
Contact Information – aaiichapter_centralflorida@yahoo.com
That’s today’s Four in Four. Have a great day.
Richard Suttmeier
Chief Market Strategist
ValuEngine.com, (800) 381-5576
Send your comments and questions to Rsuttmeier@Gmail.com. For more information on our products and services visit
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