How Hard Does CA Hit the 2nd Liens?

By: Reggie Middleton | Mon, Jun 16, 2008
Print Email

This is a little anecdotal, non-scientific snapshot of the returns 2nd lien lenders can expect in the San Diego Foreclosure market.

From a BoomBustBlogger:

"I manage a large real estate team in San Diego and we do a ton of foreclosures with almost 200 REO's either assigned, on the market or in escrow. We started charting the drop in prices on a webpage at www.foreclosure-hotlist.com The "previous value" includes previous sales, the foreclosure amount or the amount of the previous debt. You are right on the money with the call on the top-end HELOC's. They are getting killed right now, there is no equity to protect them and they are sacrificed by the Senior loan who still isn't getting their debt covered by the sale. Add to this the problem we face on short-sales. All of these securitzed debt products mean that in some cases there is no one who can negotiate to take a smaller payoff. All they can do is accept payments, accept payoffs or foreclosure... nothing in-between."

From the reader's site (red font is my annotation):

Here is the latest list of San Diego Foreclosures that already have a deep discount of 10% or more.

These are all bank-owned properties listed by the Gary Kent Team.

For more information on any these properties, call 858-457-5368 and a team member will be ready to help you.

Make sure to check out Gary Kent Seminars for our upcoming Foreclosure Seminar on July 12, 2008

  Address City Zip List Price Previous Value $ Difference % Diff 2nd Lien Haircut @ 90 LTV 2nd Lien Haircut @ 80 LTV 2nd Lien Haircut @ 70 LTV
590 Telegraph Cnyn #B Chula Vista 91910 $144,900 $410,000 $ 265,100 65% 100% 100% 100%
9739 Winter Gardens Blvd. #8 Lakeside 92040 $ 79,000 $183,000 $ 104,000 57% 100% 100% 100%
1420 Hilltop Dr #208 Chula Vista 91911 $142,000 $326,000 $ 184,000 56% 100% 100% 100%
1434 Hilltop Dr. #26 Chula Vista 91911 $163,900 $360,000 $ 196,100 54% 100% 100% 100%
312 J Ave. #53 National City 91950 $ 94,900 $203,900 $ 109,000 53% 100% 100% 100%
475 Redwood St. #406 San Diego 92103 $299,999 $625,254 $ 325,255 52% 100% 100% 100%
2131 B Ave National City 91950 $199,500 $405,040 $ 205,540 51% 100% 100% 100%
2834 Terrace Pine Dr #B San Diego 92173 $154,900 $300,000 $ 145,100 48% 100% 100% 100%
1316 Coronado Ave. Spring Valley 91977 $237,500 $458,639 $ 221,139 48% 100% 100% 100%
1034 Leland St #19 Spring Valley 91977 $149,900 $289,000 $ 139,100 48% 100% 100% 100%
3247 Roberta Lane Oceanside 92054 $257,900 $489,250 $ 231,350 47% 100% 100% 100%
8832 Greenridge Ave Spring Valley 91977 $255,000 $480,000 $ 225,000 47% 100% 100% 100%
4610 51 St #2 San Diego 92115 $162,900 $306,000 $ 143,100 47% 100% 100% 100%
732 Lexington E. Ave #2 El Cajon 92020 $139,900 $259,200 $ 119,300 46% 100% 100% 100%
1594 Smythe Ave San Diego 92173 $196,900 $353,000 $ 156,100 44% 100% 100% 100%
434 Osage Street Spring Valley 91977 $237,900 $425,000 $ 187,100 44% 100% 100% 100%
3422 Palm Ave #10 San Diego 92154 $179,900 $318,250 $ 138,350 43% 100% 100% 100%
1270 Purdy St Spring Valley 91977 $294,900 $512,000 $ 217,100 42% 100% 100% 100%
1213 E. Ave #A-4 National City 91950 $166,900 $288,000 $ 121,100 42% 100% 100% 100%
1531 Monterey Pine Drive San Ysidro 92173 $269,900 $455,000 $ 185,100 41% 100% 100% 100%
577 Point Arena Ct Chula Vista 91911 $349,900 $575,000 $ 225,100 39% 100% 100% 100%
3240 Lakeview Dr. Julian 92036 $209,900 $343,900 $ 134,000 39% 100% 100% 100%
9885 Caspi Gardens Dr #8 Santee 92071 $199,900 $326,182 $ 126,282 39% 100% 100% 100%
3897 Settineri Lane Spring Valley 91977 $279,900 $455,000 $ 175,100 38% 100% 100% 100%
4951 Hilltop Dr San Diego 92102 $285,000 $460,750 $ 175,750 38% 100% 100% 100%
523 Stanley St. Oceanside 92054 $435,000 $700,000 $ 265,000 38% 100% 100% 100%
6744 Akins Ave San Diego 92114 $241,900 $381,867 $ 139,967 37% 100% 100% 100%
1600 White Hickory Pl Chula Vista 91915 $224,500 $351,000 $ 126,500 36% 100% 100% 100%
24369 Del Amo Rd. Ramona 92065 $369,900 $575,000 $ 205,100 36% 100% 100% 100%
1206 W 15th Ave Escondido 92025 $350,000 $543,000 $ 193,000 36% 100% 100% 100%
3422-28 Valle Ave. San Diego 92113 $419,000 $650,000 $ 231,000 36% 100% 100% 100%
4852-56 Jessie Ave La Mesa 91941 $489,000 $750,000 $ 261,000 35% 100% 100% 100%
10327 Strawberry Lane Spring Valley 91977 $319,900 $487,000 $ 167,100 34% 100% 100% 100%
7485 Goode St. San Diego 92139 $399,000 $600,000 $ 201,000 34% 100% 100% 100%
3621 Bancroft St San Diego 92116 $499,900 $750,000 $ 250,100 33% 100% 100% 100%
2318 Doubletree Rd. Spring Valley 91978 $322,000 $470,000 $ 148,000 31% 100% 100% 100%
2497 Dye Rd Ramona 92065 $579,900 $825,000 $ 245,100 30% 100% 100% 100%
1971 Caminito De La Cruz Chula Vista 91913 $344,900 $486,500 $ 141,600 29% 100% 100% 100%
4151 33rd St #8 San Diego 92104 $209,900 $295,500 $ 85,600 29% 100% 100% 100%
2127 Greenwick Rd. El Cajon 92019 $329,900 $459,000 $ 129,100 28% 100% 100% 100%
6926 Park Mesa Way #6 San Diego 92111 $299,900 $410,000 $ 110,100 27% 100% 100% 100%
1526 Tarleton St Spring Valley 91977 $341,000 $459,000 $ 118,000 26% 100% 100% 100%
1214 Mariposa Ct. Vista 92084 $149,900 $194,097 $ 44,197 23% 100% 100% 100%
13918 Calle De Vista Valley Center 92082 $459,900 $595,000 $ 135,100 23% 100% 100% 100%
6880 Monte Verde Dr. San Diego 92119 $441,900 $565,000 $ 123,100 22% 100% 100% 100%
3327 Menard St. National City 91950 $279,900 $321,501 $ 41,601 13% 100% 100% 100%
702 Ash St. #206 Downtown 92101 $428,450 $485,000 $ 56,550 12% 100% 100% 100%
Previous value calculated on either: previous sales price, previous combined loan amount or amount that the bank foreclosed on.

Now, let me include a snippet from the Wells Fargo Drill Down to put this into perspective:

Wells Fargo observations

Loan portfolio:

Sizeable Real Estate loans exposure in troubled markets: Wells Fargo had $148 bn loan in 1-4 Family Mortgages (WFC has a high correlation to industry-wide losses) which represented nearly 38% of the banks' total loan. Out of these loans nearly 51% comprised junior lien mortgage loans (much higher probability of total loss and no recovery). After C&D loans, real estate loans have highest NPAs as proportion of total loans. In 4Q2007, real estate 1-4 family first mortgage NPAs to total loans stood at nearly 1.91% of total loans with total NPAs of $1.4 bn. In terms of geographic exposure, real estate loans from California and Florida comprised 33% and 4% of total real estate loans (i.e 13% and 2% of WFC's total loan portfolio).

WELLS FARGO 1Q-2008 4Q-2007 3Q-2007 2Q-2007
Loan Composition
Commercial 92,589 90,468 82,598 77,560
Other real estate mortgage 38,415 36,747 33,227 32,336
Real estate construction 18,885 18,854 17,301 16,552
Lease financing 6,885 6,772 6,089 5,979
Total commercial and commercial real estate 156,774 152,841 139,215 132,427
Real estate 1-4 family first mortgage 73,321 71,415 66,877 61,177
Real estate 1-4 family junior lien mortgage 74,840 75,565 74,632 72,398
Credit card 18,677 18,762 17,129 15,567
Other revolving credit and installment 55,505 56,171 57,180 53,701
Total consumer 222,343 221,913 215,818 202,843
Foreign 7,216 7,441 7,889 7,530
Total Loans 386,333 382,195 362,922 342,800

Wells Fargo haa increased their loan assets every quarter for the past 4 quarters. Those past 4 quarters are just past the peak of the largest equity real asset and credit bubble of the century? Question: Why is Wells Fargo increasing the amount of these quickly depreciating assets on its books while the underlying properties are rapidly decreasing in price?

Large Second Lien Home Equity exposure with rising NPAs: As of 3Q2007, Wells Fargo had second highest home equity loans exposure among all US banks in absolute amount. In 1Q2008, Wells Fargo had $83 bn loans in home equity comprising nearly 19% of total loans and a staggering 174% of its shareholder's equity.

A more granular view of Wells Fargo's loan portfolio shows us the following (I've highlighted areas to take notice of)...

WELLS FARGO 1Q-2008 4Q-2007 3Q-2007 2Q-2007
% Change
Commercial 2.3% 9.5% 6.5% 7.3%
Other real estate mortgage 4.5% 10.6% 2.8% 2.5%
Real estate construction 0.2% 9.0% 4.5% 4.3%
Lease financing 1.7% 11.2% 1.8% 8.8%
Total commercial and commercial real estate 2.6% 9.8% 5.1% 5.8%
Real estate 1-4 family first mortgage 2.7% 6.8% 9.3% 9.3%
Real estate 1-4 family junior lien mortgage -1.0% 1.3% 3.1% 4.2%
Credit card -0.5% 9.5% 10.0% 6.7%
Other revolving credit and installment -1.2% -1.8% 6.5% 0.5%
Total consumer 0.2% 2.8% 6.4% 4.8%
Foreign -3.0% -5.7% 4.8% 10.7%
Total Loans 1.1% 5.3% 5.9% 5.3%
 
Loans 90 Days or More Past Due and Still Accruing
Commercial 29 32  
Other real estate mortgage 24 10 140% increase??
Real estate construction 15 24  
Lease financing 68 66  
Total commercial and commercial real estate 314 286  
Real estate 1-4 family first mortgage 228 201  
Real estate 1-4 family junior lien mortgage 449 402  
Other revolving credit and installment 532 552  
Total consumer 1,523 1,441  
Foreign 40 52  
Total Non Accural Loans 1,631 1,559  

Increasing provisions and chare-offs

In 1Q2008, WFC's NPAs increased from 1.16% of total loans over 1.01% in 4Q2007. Overall NPAs increased to $4.5 bn from $3.9 bn in 4Q2007. NPAs in real estate construction loans witnessed highest increase of 49% to $438 mn in 1Q2008. NPAs of C&D loans stood at 2.32% of total C&D loans, followed by real estate 1-4 family mortgage (1.91%) and lease financing (0.83%)

Wells Fargo's gross charge offs increased to 0.46% of total loans compared to 0.37% of total loans in 4Q2007. C&D loans witnessed the highest increase in charge-offs with an increase of nearly three-fold to $29 mn in 1Q2008, showing signs of increased stress in these loans. Real estate 1-4 family junior lien mortgage, credit card loans and Other revolving credit and installment had charge-offs of 0.61%, 1.68% and 0.98% to total loans, respectively.

However despite increase in NPAs and increase in charge offs, Wells Fargo provision for credit loss sequentially declined to $2.0 bn in 1Q2008 from $2.6 bn in 4Q2007. (0.52% of total loans in 1Q2008 from 0.68% of total loans in 4Q2007) raising concerns over possible inadequacy of provision amount.

From April 1, 2008 onwards, Wells Fargo has changed its home equity charge-off policy to 180 days from 120 days previously. Amid current deteriorating credit markets with residential sector showing no signs of recovery, it is quite understandable that the bank has changed the policy in a bid to defer recognition of provision and charge-offs.

WELLS FARGO 1Q-2008 4Q-2007
Delinquency as a % of Loans
Commercial 0.03% 0.04%
Other real estate mortgage 0.06% 0.03%
Real estate construction 0.08% 0.13%
Lease financing 0.99% 0.97%
Total commercial and commercial real estate 0.20% 0.19%
Real estate 1-4 family first mortgage 0.31% 0.28%
Real estate 1-4 family junior lien mortgage 0.60% 0.53%
Other revolving credit and installment 0.96% 0.98%
Total consumer 0.68% 0.65%
Foreign 0.55% 0.70%
Total Non Accural Loans 0.42% 0.41%
 
NPA's
Commercial 588 432
Other real estate mortgage 152 128
Real estate construction 438 293
Lease financing 57 45
Total commercial and commercial real estate 1,235 898
Real estate 1-4 family first mortgage 1,398 1,272
Real estate 1-4 family junior lien mortgage 381 280
Other revolving credit and installment 196 184
Total consumer 1,975 1,736
Foreign 49 45
Total Non Accural Loans 3,259 2,679
 
GNMA loans 578 535
Other 637 649
Real estate and other nonaccrual investments 21 5
Foreclosed assets: 1,236 1,189
 
Total NPA's 4,495 3,868

I'd like to repeat this so it is not wasted on anybody: From April 1, 2008 onwards, Wells Fargo has changed its home equity charge-off policy to 180 days from 120 days previously. Amid current deteriorating credit markets with residential sector showing no signs of recovery, it is quite understandable that the bank has changed the policy in a bid to defer recognition of provision and charge-offs.

So, have the implemented this policy in other areas after the last filing, or previously without disclosing it. Did I miss it in the footnotes somewhere? Now, all of thier Delinquencies and NPA numbers are suspect! See chart below...

WELLS FARGO 1Q-2008 4Q-2007  
Delinquency as a % of Loans %
increase
 
Commercial 0.03% 0.04% -11% <-- Questionable!
Other real estate mortgage 0.06% 0.03% 130%  
Real estate construction 0.08% 0.13% -38% <-- Questionable!
Lease financing 0.99% 0.97% 1%  
Total commercial and commercial real estate 0.20% 0.19% 7%  
Real estate 1-4 family first mortgage 0.31% 0.28% 10%  
Real estate 1-4 family junior lien mortgage 0.60% 0.53% 13%  
Other revolving credit and installment 0.96% 0.98% -2% <-- Questionable!
Total consumer 0.68% 0.65% 5%  
Foreign 0.55% 0.70% -21% <-- Questionable!
Total Non Accural Loans 0.42% 0.41%    

WELLS FARGO 1Q-2008 4Q-2007 3Q-2007 2Q-2007 1Q-2007  
            Latest Quarter Growth
Provision as % of Loans 0.52% 0.68% 0.25% 0.21% 0.22% -23% Loss cushions decreasing
Provision as % of NPA's 45% 68% 28% 27% 27% -33% Loss cushions decreasing
Gross Charge off to Loans 0.46% 0.37% 0.30% 0.28% 0.29% 22% Losses increasing
Gross Charge off to NPA's 39% 37% 35% 35% 36% 6% Losses increasing
 
Allowances as % of Loans 1.56% 1.44% 1.11% 1.17% 1.22% 8% Allowances for loans increase
Allowances as % of NPA's 134% 143% 126% 148% 149% -6% But allowances as % of what's needed
NPA's to Loans 1.16% 1.01% 0.88% 0.79% 0.82% 15% NPAs increasing substantially, this number is also in doubt
 
Shareholder's equity 48,159 47,628 47,566 47,239 46,073 1%  
Goodwill 13,148 13,106 12,018 11,983 11,275 0% Goodwill is increasing along with Charge-offs/NPAs, HMMM!!!
Adjusted Equity 35,011 34,522 35,548 35,256 34,798 1%  

I expect recoveries in the red font below to drop precipitously. The yellow highlight shows where there is already weaknes in recoveries in earier quarters.

WELLS FARGO 1Q-2008 4Q-2007 3Q-2007 2Q-2007 1Q-2007    
Recoveries           % increase % of total
Commercial 31 35 35 25 24 -11% 13%
Other real estate mortgage 1 1 2 3 2 0% 0%
Real estate construction 1 0 1 0 1 100% 0%
Lease financing 3 5 3 4 5 -40% 1%
Total commercial and commercial real estate 36 41 41 32 32 -12% 15%
Real estate 1-4 family first mortgage 6 4 6 6 6 50% 3%
Real estate 1-4 family junior lien mortgage 17 14 14 16 9 21% 7%
Credit Card 38 30 29 30 31 27% 16%
Other revolving credit and installment 125 111 105 139 149 13% 53%
Total consumer 186 159 154 191 195 17% 79%
Foreign 14 15 15 17 18 -7% 6%
Total Recoveries 236 215 210 240 245 10% 100%

Despite all this, Wells Fargo seemed to have found a way to sell the MBS for their loans at a profit!

Extraordinary gains offsetting loan write-downs in 1Q2008

Out of net income of $ 1,999 mn in 1Q2008, Wells Fargo recorded an extraordinary gain of $323 mn and $94 mn on gain on sale of mortgage-backed securities and increase in mortgage servicing income, respectively. These gains were partially offset by $263 mn write-down of mortgage loans and $63 mn write-down on commercial mortgages held for sale. Additionally the bank also recorded unrealized loss on securities available for sale of $598 mn in 1Q2008 compared with unrealized gain of $680 mn in 4Q2007. Be aware of the margin for abuse in valuing MSRs (mortgage servicing rights, etc.). If the mortgage is likely to go into default and be foreclosed upon, it is unlikely the servicer will be able to monetize future revenue streams from servicing the mortgage. Also, be aware on non-descript mark ups and gains. The entire world had to eat sh1t due to plummeting MBS values for almost a year with literally no market for these securities. How did those genius at WFC manage to sell their MBS securities with little or no market, and sell them at a gain of $323 million on top of it. The guys at Countrywide, Lehman, Bear Stearns, Morgan Stanley, Merriill Lynch, UBS, HBOS, and a whole hell of a lotta other folk (including me) are dying to know!

 


 

Reggie Middleton

Author: Reggie Middleton

Reggie Middleton
Veritaseum

Reggie Middleton

Who am I?

Well, I fancy myself the personification of the free thinking maverick, the ultimate non-conformist as it applies to investment and analysis. I am definitively outside the box - not your typical or stereotypical Wall Street investor. I work out of my home, not a Manhattan office. I build my own technology and perform my own research - in lieu of buying it or following the crowd. I create and follow my own macro strategies and am by definition, a contrarian to the nth degree.

Since I use my research as a tool for my own investing to actually put food on my table, I can stand behind it as doing what it is supposed too - educate, illustrate and elucidate. I do not sell advice, I am not a reporter hence do not sell stories, and I do not sell research. I am an entrepreneur who exists just outside of mainstream corporate America and Wall Street. This allows me freedom to do things that many can not. For instance, I pride myself on developing some of the highest quality research available, regardless of price. No conflicts of interest, no corporate politics, no special favors. Just the hard truth as I have found it - and believe me, my team and I do find it! I welcome any and all to peruse my blog, use my custom hacked collaborative social tools, read the articles, download the files, and make a critical comparison of the opinion referencing the situation at hand and the time stamp on the blog post to the reality both at the time of the post and the present. Hopefully, you will be as impressed with the Boom Bust as I am and our constituency.

I pay for significant information and data, and am well aware of the value of quality research. I find most currently available research lacking, in both quality and quantity. The reason why I had to create my own research staff was due to my dissatisfaction with what was currently available - to both individuals and institutions.

So here I am, creating my own research for my own investment activity. What really sets my actions apart is that I offer much of what I produce to the public without charge - free to distribute and redistribute, as long as it is left unaltered and full attribution is given to the author and owner. Why would I do such a thing when others easily charge 5 and 6 digits annually for what some may consider a lesser product? It is akin to open source analysis! My ideas and implementations are actually improved and fine tuned when bounced off of the collective intellect of the many, in lieu of that of the few - no matter how smart those few may believe themselves to be.

Very recently, I have started charging for the forensics portion of my work, which has freed up the resources to develop the site to deliver even more research for free, particularly on the global macro and opinion front. This move has allowed me to serve an more diverse constituency, which now includes the institutional consumer (ie., investment turned consumer banks, hedge funds, pensions, etc,) as well as the newbie individual investor who is just getting started - basically the two polar opposites of the investing spectrum. I am proud to announce major banks as paying clients, and brand new investors who take my book recommendations and opinions on true wealth and success to heart.

So, this is how I use my background and knowledge in new media, distributed computing, risk management, insurance, financial engineering, real estate, corporate valuation and financial analysis to pursue, analyze and capitalize on global macroeconomic opportunities. I have included a more in depth bio at the bottom of the page for those who really, really need to know more about me.

Copyright © 2007-2016 Reggie Middleton

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com