JPMorgan Chase has made a silent shift from foreclosures to short sales in an attempt to clear their delinquent loan backlog. 

Irvine Home Address ... 10 SUNSTREAM Irvine, CA 92603
Resale Home Price ...... $549,000

Deep down you know it's best for yourself but you
Hate the thought of her being with someone else
But you know that it's over
You know that it was through
Let it burn
Let it burn
Gotta let it burn

Usher -- Burn

Everyone is desparate to hang on to their houses. Some hopeless borrowers hold our for sentimental reasons, and in California many struggle for financial ones. There comes a time when reality sets in and people just let it burn. 

Foreclosure sales are being canceled at a record rate. That sounds like good news. If it were occurring because (1) borrowers were curing their loans or (2) loan modifications were successful or (3) short sales were occurring more frequently, it might be something to celebrate. Unfortunately, none of those is occurring. Banks are canceling foreclosure auctions because they are overwhelmed by delinquent borrowers, and they don't have the slightest idea what to do about it. 

HAFA Ushers Record Number of Foreclosure Sale Cancellations in California

Lenders are canceling more foreclosure sales in California than ever before, and new financial and political demand for short sales could be the culprit.

Lenders canceled nearly 22,000 California foreclosure sales in June, driven mostly by JPMorgan Chase. It’s a 27% increase from May, a 153% growth from a year ago, and an all-time high, according to ForeclosureRadar, which tracks foreclosures in the state.

Foreclosure sales can be canceled for successful loan modifications, short sales, a legal requirement, or even a filing error. In terms of strategy, a spokesperson for JPMorgan Chase said the bank has not made any policy shifts to cancel more foreclosure sales.

According to ForeclosureRadar, a certain number of the cancellations can be attributed to pending modifications and short sales, but homeowners and real estate agents have complained to the company of sales that were canceled without either.

This trend underscores how clueless the banks really are. They have no idea how to resolve this problem, so they lurch from one failed solution to another. The backlog of foreclosure properties is enormous, so pulling back from foreclosure in the short term is like bailing the sink before pouring in Liquid Plumber. They still have a clog and a sink full of soiled water, but they realized continued filling the sink is doing them no good.

Unfortunately, canceling all their foreclosure sales isn't going to work either. They can't foreclose on everyone because there simply isn't enough cash available to absorb a couple of trillion dollars of real estate at the courthouse steps. Resolving the backlog of delinquent borrowers is going to require a combination of successful loan modifications, short sales, and foreclosures.

The successful loan modifications will be few and far between because most borrowers are hopelessly overextended. Short sales will clear out a large number of properties, but it still requires active participation by the seller. Many properties are abandoned and many have squatting owners who are sitting there waiting for the Sheriff to evict them. Short sales alone will not solve this problem.

JPMorgan Chase is undoubtedly canceling too many foreclosures, and when the short sales don't happen -- and many will be killed by owners gaming the system -- the Chase and other lenders will need to ramp up their foreclosures again later to clear out the trash.

“We have seen a shift over the last couple of months where homeowners want this process to be over and they want to start to rebuild,” said a spokesperson for ForeclosureRadar.

Researchers at the company received varying answers as to why the cancellations are up. The best answer came from one unnamed REO professional. According to the source, the Home Affordable Foreclosure Alternatives (HAFA) program had the most to do with the cancellations. The Treasury Department launched HAFA in April to provide incentives to servicers for conducting short sales and deeds-in-lieu of foreclosure to homeowners who fail the Treasury’s Home Affordable Modification Program (HAMP).

Loan modifications are obviously not working. The HAMP program is a dismal failure for a number of reasons, not the least of which is the borrowers themselves:

“Now that servicers have systems in place to administer the program they are removing delinquent loans from the foreclosure pipeline to allow a reasonable short sale time period,” the source told ForeclosureRadar. “Predictably (also my opinion) the period would be expiring just after the November elections so there would be less political blowback as those properties that don’t conclude with a successful short sale are taken to foreclosure and ultimately, REO.”

This is a brilliant observation. Politics plays into this decision. Expect to see increases in foreclosure filings again after the elections when the short sales do not go through.

After foreclosure activity dropped across the board in May, new foreclosure notices increased 6.7% in June, and notices of trustee sale jumped 21%. In fact, notices of trustee sales have outnumbered preliminary notices of default for the past four months. The gap really widened in June, when there were almost 9,000 more notices of trustee sale.

But this trend could become the norm as banks have to restart more foreclosures than they initiate.

“Historically it is very unusual to have more Notice of Trustee Sale filings than Notices of Default” says Sean O’Toole, founder and CEO of ForeclosureRadar. “But with skyrocketing cancellations and the possibility of failing loan modifications, this will be increasingly common, as lenders are only required to file a Notice of Trustee Sale to restart the foreclosure process.”

Lenders pushed 23% fewer properties into REO status in June and 46% less than a year ago. The amount of properties that have received a notice of default but have not yet been scheduled for sale increased 8.8% in June, but further along the foreclosure pipeline, inventory remains constricted. The amount properties scheduled for sale dropped 1%, and REO inventory declined 4.8% in June.

Shevy and George are out in the trenches making offers on short sales daily. I spoke with Shevy yesterday, and he hasn't noticed any increased willingness among the various parties to make these deals happen faster. The usual culprit is the second mortgage holder.

The HAFA program pays the second mortgage holder $1,500 to go away. Most aren't taking it. Since many Orange County borrowers have assets, these second mortgage holders are demanding the sellers liquidate and pay them off before they approve the sale. In typical OC fashion, most of these sellers are unwilling to pay up. Perhaps at the lower rungs of the housing market where the borrowers have no assets, more short sales will go through, but in more affluent areas, the HAFA program is doing nothing to facilitate short sales.

Owners who attempt selling short haven't come to accept that they must be insolvent in order to walk away. The fantasy among most of them is that they can short sell and keep all their stuff. It doesn't work that way. Unless people start selling their assets to pay off these second mortgages, don't look for more successful short sales to occur in Orange County. It isn't going to happen.  

Most owners will use delays in the short sale process to further game the system. It is an easy way to add six months to a year to the squatting process. The longer they play along, the more time they have to hide their assets and possibly get some price recovery.

As I have said before, all the parties involved have incentive to drag this process out. The end result is a great deal of squatting and more accelerated default. Once everyone has stopped paying their mortgage, the banks will be forced to resort to foreclosures to clean up the mess. More foreclosures are going to happen.

As banks attempt the transition to short sales and fail, the inventory should continue to balloon. More houses are being put up for sale, but the pace of transactions is not increasing. Between the flippers bringing foreclosures to the market and owners listing more short sales, I expect to see inventory to continue to rise.

Option ARMs are not affordability products

Many people took out Option ARMs because they could not afford the payments on a conventionally amortized mortgage. This was a classic affordability product, but as I have pointed out, Affordability Mortgage Products Make Prices Unaffordable. The previous owner of today's featured property used an Option ARM and despite a significant down payment, he couldn't afford the payments on this property.

• This house was purchased on 8/12/2004 for $461,000. The owner used a $461,000 first mortgage and a $160,000 down payment.
• On 7/27/2007, just before the credit crunch stopped origination of these products, the owner refinanced with a $458,400 Option ARM with a 1.75% teaser rate.

Foreclosure Record
Recording Date: 04/20/2010
Document Type: Notice of Sale

Foreclosure Record
Recording Date: 11/24/2009
Document Type: Notice of Default

This guy didn't get as much squatting as most. The property went to auction on 5/20/2010, and the opening bid was $409,500. To the pleasure of the first lien holder, the property was bid up to $445,300. The flipper stands to make a reasonable profit on the deal. 

Irvine Home Address ... 10 SUNSTREAM Irvine, CA 92603

Resale Home Price ... $549,000

Home Purchase Price … $445,300
Home Purchase Date .... 5/20/2010

Net Gain (Loss) .......... $70,760
Percent Change .......... 15.9%
Annual Appreciation … 132.4%

Cost of Ownership
-------------------------------------------------
$549,000 .......... Asking Price
$109,800 .......... 20% Down Conventional
4.61% ............... Mortgage Interest Rate
$439,200 .......... 30-Year Mortgage
$108,683 .......... Income Requirement

$2,254 .......... Monthly Mortgage Payment

$476 .......... Property Tax
$0 .......... Special Taxes and Levies (Mello Roos)
$46 .......... Homeowners Insurance
$300 .......... Homeowners Association Fees
============================================
$3,076 .......... Monthly Cash Outlays

-$379 .......... Tax Savings (% of Interest and Property Tax)
-$567 .......... Equity Hidden in Payment
$190 .......... Lost Income to Down Payment (net of taxes)
$69 .......... Maintenance and Replacement Reserves
============================================
$2,389 .......... Monthly Cost of Ownership

Cash Acquisition Demands
------------------------------------------------------------------------------
$5,490 .......... Furnishing and Move In @1%
$5,490 .......... Closing Costs @1%
$4,392 ............ Interest Points @1% of Loan
$109,800 .......... Down Payment
============================================
$125,172 .......... Total Cash Costs
$36,600 ............ Emergency Cash Reserves
============================================
$161,772 .......... Total Savings Needed

Property Details for 10 SUNSTREAM Irvine, CA 92603
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Beds: 2
Baths: 1 full 2 part baths
Home size: 1,525 sq ft
($360 / sq ft)
Lot Size: n/a
Year Built: 1981
Days on Market: 40
Listing Updated: 40352
MLS Number: S619237
Property Type: Condominium, Residential
Community: Turtle Rock
Tract: Rb
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Gorgeous Townhome in Turtle Rock community. New laminate floor and baseboard. Kitchen open to Family room with Balcony. Fireplace in Living room with new title decoration. Move-in ready.