Banker's Nightmare

I have been watching foreclosure.com for about 4 months and have been keeping track of the data for California.

Just for a lark, I decided to plot the data on semi-logarithmic graph paper. My thinking process revolved around the idea of what a banker would do to forecast for the future mortgage delinquency's and this looked like a pretty good start. If you're a banker, this has to be a graph that is hopefully flawed! If not, there is going to be some pain.

This graph plots the increasing foreclosures in the California market and the predicted future foreclosures. Three lines are drawn High, Middle and Low estimates based on data supplied. Double click on the graph for an enlarged view.




A few interesting notes. The total foreclosures for 7/29 was 3,384 (a data point I didn't use) and the figure for 9/1 was 3,060. 324 foreclosures disappeared. What we could be looking at here, are Notices of Default (NOD) being filed and as in say a bankruptcy, the bank accepts the deed in lieu of foreclosure. Bankruptcies do not necessarily generate a NOD but the banks acceptance of the property would probably cure the NOD.

What we cannot see in real time that the banker can, is how many people he has on their way to a NOD that he is aware of. We don't see the figures until the NOD is filed. If it's a bankruptcy, there just might not be a NOD.


So, back to the visual aid here, if you look at the middle of next June, we could be looking at about 23,000 foreclosures. This years total will probably be less than 8,000, but if we "trust" the graph, we are going to be in pain in June of next year.

The real issue here is, if the data assumptions are correct for June of 2007, this implies a banking crisis far greater than the Savings & Loan debacle of the 1990's.

Real Estate Musings

Everybody is familiar with the standard bell curve. That's what this little curve is all about. This is nothing scientific but rather a walk through some constructive thinking. This time, we choose to pick on real estate.

The values don't have to be quite right, its the concept that we are after. Notice that 50% of the real estate is classified as less than nice (ie Crappy to OK).



As a buyer, your interest will lie with the 50% to the right (nice to plush). In just generalizing, half of the market is really non existent. We could define "Real Crap"; as too old and run down, or gang neighborhood or an absurd asking price for say a 700 foot starter home. Nice could be defined as; "better than anything we have been shown before by this realtor," or brand new. Excellent could be defined as something we would like but cannot afford.

Just from reading the other blogs and comments, it looks as if its the "Nice" and the "Excellent homes are selling. My interpretation of this is that these people who are selling, are reducing their prices to accommodate the perspective buyer. Home builders top the list, and anybody that was lucky enough to buy before the tremendous price rise I would also include in this group.

Notice how sales in the right side of the bell curve would skew the "Median Home Sale Price," even higher when the seller is reducing his expected price (ie the sellers house was valued at 700k but they were willing to accept 600k) If the median price was 500k, you see that increase in a declining market.

So what are we looking at? 50% of the sellers on this bell curve have bought high and are stuck, you can't sell low. Considering the numbers, this is an awful lot of stressed real estate!

The banks or financial institutions that are holding the paper can see what has to transpire next, and it looks as if, "Maybe if we give it some more time, "Real estate could come back and save our ass!"

Loan writers are still cranking out the loans, fewer of them, but the game is still being played. Just where is the money coming from? Maybe from some GSE (government sponsored enterprise)--I wonder who could be buying the notes?

Stock Market Quirks

Back in 1987 crash there was a new phenomenon. Everyone that tried to call their discount broker couldn’t get through, the lines were busy. A lot of the new ownership of stock was held in Street Name, not in the buyer’s name. The difference here was that back in time, people took delivery of the stock certificate. The inconvenience of taking delivery meant that you might have to wait up to 4 weeks for receipt of the certificate. In today’s fast market that could be a drawback.

There was no problem walking into a full service broker that October day and handing them a certificate and telling them to sell it. If you were with a discount broker, you couldn’t get in the door, there was a line.

Let’s troll on to the present. A majority of people with a brokerage account today are online through the internet. Ask yourself one question. What would happen today if the market went south and everybody tried to logon and put in a sell order at the same time? I think we all get that question right. The difficult question would be; “What is the real trading price of your stock if everyone that wanted to sell could get on line and sell.” This is what happened in 1929, the market ticker was 6 hours behind actual trades. People were trading blind. The internet lockup might be a good thing, because in 1929 the market came back. So no action makes a lot of sense.

Enter the mutual fund manager with his computer program for trading the market. Let’s figure that between 1,000 and 8,000 mutual funds/Ira/etc decide to play. If you decide to not play, your fund gets valued by the other’s trading. It will be similar to your automatic sprinklers’ kicking on while you’re having an outdoor dinner party. Both events are planned, what happens isn’t.

In theory, 100 shares of IBM sold at market during a panic could have a real bid of 5 cents a share. That would net the seller 5 dollars. Don’t forget the 8 dollar discount brokerage fee. That sure beats the full service commission from a regular broker, doesn’t it!

Bankruptcy Vs Forclosure

If you cruze any of the other sites I have as favorites, you'll observe that a lot of the chatter is about home foreclosure's.

Click on this site Forclosures. Notice the foreclosure statistics and also the bankruptcy stats.

This is where it gets interesting. A reader pointed out something to me that I hadn't known about(his email):

One subject that is not getting covered in the press is the
inaccuracy of foreclosure statistics. This is because there are huge numbers of
"deeds in lieu of foreclosure" being taken in by lenders instead of foreclosures.

In a round about way, we are talking about bankruptcies and how lawyers handle them. It looks as if a bankruptcy lawyer goes to the bank and points out what is going to happen next (with regards to his client) and the Banker has only two options, take the deed in lieu of foreclosure or go the whole 10 yards the hard way. Notice that this circumvents the NOD (Notice of Default).

What we have here is a hell of a lot of bankruptcies, and it looks as if the NOD's will never be filed. The only conclusion you can draw from this, is that the banks are picking up a lot of real estate that is being missed by the bean counters.

Look at how much of what is happening, can be hidden from view. Neat Huh????