Most of the “high-end” debtors in OC were/are just a bunch of poseurs. They never had the money to pay their mortgage, and they never would have the money money in the future. I do think there are a few that are suffering from job losses, but they are not the majority, at least not here in OC. Many of the “rich” were in the industry, drank the kool-aid, and thought that the rivers of real estate gold would flow forever. Oops… this is what is known as a severe drought. The homes in foreclose in Crystal Cove should be entitled, “The developers distressed demise row”. They were leveraged to the hilt. Sadly, it is no different from the 90s. It is unfortunate that the OC cultural pathology brings it down once again. I do think there are true “high-end” people — who bought homes with LLCs and trusts in Las Vegas, Miami, and resort areas as second homes or investment properties — that are walking away from their “investments”. I have run across a few trusts in OC that are/were in foreclosure, but most reek of fraud. So who knows what recourse a lender might have.

Yves over at Naked Capitalism posits on shadow inventory again.

RealtyTrac, as reported on Housing Wire, gave a gloomy update on the US housing market. RealtyTrac does granular collection of data on foreclosures, capturing every filing. One of the shortcomings of this approach is that processes vary by state (as in some state require more court filings over the course of a foreclosure than others). In addition, homes can go in and out of foreclosure (an owner gets the first notice, contacts the servicer and works out a catch-up plan, and later falls behind again). So the commentary of RealtyTrac and other market participants is essential in interpreting the data.

The key takeaway:

James Saccacio, CEO of RealtyTrac, said at the current pace, more than 3m properties will receive a foreclosure filing by the end of the year, and lenders will repossess more than 1m of them. According to a report from the Toronto-based Capital Economics, the weight of the shadow inventory may contribute to a double dip in the housing market. The report found that for every home currently on the market, two homes are waiting to be sold.

“The roller coaster pattern of foreclosure activity over the past 12 months demonstrates that while the foreclosure problem is being managed on the surface, a massive number of distressed properties and underwater loans continues to sit just below the surface, threatening the fragile stability of the housing market,” Saccacio said.

Yves here. The scary part here is this estimate of market overhang refers only to foreclosed and distressed property. There is another category of hidden inventory, people who would like to sell but aren’t even listing their houses. These would include people who want to relocate, aging individuals who’d like to downsize and had hoped to be able to liberate some equity.

She has a point… there are a bunch of sellers hiding out for the market to return, and according to Steve Thomas they are coming out of hiding.

However, I have something else to ponder on. Attorneys that buy charged off debt for pennies on the dollar could rake in some serious dough on the non-recourse loans. In fact, I think the banks would be brilliant to bring in their own in-house charged off debt collection legal team. Which brings up this WSJ article: Homeowners vs. Home-Loan Buyers.

Eddie Patrick thought he had a deal with Kondaur Capital Corp. to restructure the mortgage on his Baltimore house after he fell behind on his payments. The 54-year-old taxi driver dropped a lawsuit against the company after he says it promised to “work with me” on a loan modification, according to a court filing.

Kondaur foreclosed anyway—and then offered to sell the house back to Mr. Patrick for $140,000. “I don’t know why they are so inhumane,” he says about the Orange, Calif., company, one of the nation’s largest buyers of troubled mortgages.

…..

Kondaur has snapped up more than $1 billion of banged-up home loans so far this year. The sellers include traditional lenders Citigroup Inc., J.P. Morgan Chase & Co., PNC Financial Services Group  Inc. and Wells Fargo & Co.

Some loan buyers try to reduce a borrower’s payments or even the loan balance. At Kondaur, standard operating procedure is to pay the borrower to move out and hand over the property in good condition, known as a “cash for keys” deal. Only about 5% of the loans bought by Kondaur are modified; the company says it won’t restructure a mortgage unless it can be resold immediately.

“We help borrowers understand they have a house they can’t afford,” says Mr. Daurio, who aims to recoup his investment on any given loan within six months. Before starting Kondaur in 2007, he was a co-founder of subprime lender Encore Credit Corp.

Mr. Daurio says Kondaur pays anywhere from pennies on the dollar to 85% of the unpaid loan amount for the mortgages it buys. Buying at a steep discount gives the company lots of room to negotiate—and still walk away with a profit.

…..

Mr. Daurio says Kondaur is trying to evict Mr. Patrick, the Baltimore taxi driver, who was offered $8,100 to move out by the end of August. Kondaur also cut its sale price on the house to $130,000. Mr. Patrick says he can’t afford it. His six-year-old son recently had two brain-cancer operations, he says.

It is no surprise that some borrowers are unhappy when Kondaur forces them to face the music, Mr. Daurio says, but it isn’t his fault that borrowers got themselves into houses they can’t afford.

“The vast majority of these people knew the risk they were taking,” Mr. Daurio says. “Like so many of the borrowers I dealt with when I was originating loans, they thought housing prices were going up.”

Now here is my take — aside from the sad story of the borrower with the kid with brain cancer (hey, wasn’t that Slade Smiley’s excuse on why he walked on his home?… Oh no wait… that douche also forgot to pay child support, never mind.) — if I were Kondaur. Lets hypothetically assume that Kondaur bought Mr. Patrick’s loan for 30 cents on the dollar at $70k, making the original loan balance about $233k. Of course they would rather foreclose than do a loan mod. If Mr. Patrick could afford a loan mod at $130k Kondaur would have to hold the loan 3-6 months to see if Mr. Patrick can pay the loan, then they could sell it as a re-performing loan, and they would still only be able to sell it for 70 cents on the dollar. That 130k loan would translate to a $91k sale for a gross profit of $21k or 30%, however the net would be a whole lot less.

If they foreclose on Mr. Patrick and they could sell the home for $120k, making a gross profit of $50k or 71.4%. What would you rather do? After that, assuming it is a recourse loan, they could charge off the balance of $113k = ($233k original loan amount – $120k sales price). They could:

1. Sell that balance to a debt collection service/attorney for pennies on the dollar for say an additional gross profit of $4k.

2. They have an in-house team that weeds through the true deadbeats and finds the strategic defaulters with real assets. They go after them, and after BK/litigation they recover on average 30% of the charged off debt.

Think about that! If they recovered 30% of that $113k, that would be an additional $34k in gross profit for a total of 120%. Assuming the billion dollars of loans that Kondaur bought is at their cost, and 10% of that are strategic defaulters that they could recover from, then that would be a gross profit of $48.6 million. Even if the billion dollars was the original balance amount, and really they have loans they bought at $30 million, that would translate to a gross profit of over $14.5 million. Either way, that would easily pay for a couple of in-house attorneys and a team of assistants to work through the deadbeats.

Mmmm… Maybe I should make a call to Kondaur. Foreclosure + debt collection/judgment = profit. Sorry if my post seems to suffer from ADD, because it does, and I am also really tired. I just had to get this out there.

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