Rise Of Re-Remics

Rise of the Re-Remics

Over the past few several years we have all seen the impact of the economic crisis ostensibly cause by bad loan underwriting standards, rating agency goofs, greed and the rest of it. This has resulted in many, many RMBS bonds formerly rated AAA being downgraded to CCC or worse. What to do with all the downgraded bonds? I know, let’s put them into a new securitization and then tranche the good loans and the bad loans, get the “good tranche” newly rated AAA and so forth. Read on to get a bit more about this process.

You can get a decent basic education on re-remics at this link (it includes an excellent graphic illustrating the basic concepts of why Re-Remics are done).

http://www.theatlantic.com/business/archive/2009/10/re-remics-really/27639/

and a related link to an article from the WSJ here (which does require a subscription to read the entire article):

http://online.wsj.com/article/SB125434502953253695.html

At first glance, these securities look quite a bit like the old “CDO” structure in which other securities were packaged up as assets in a new deal and then tranched by issuing new bonds that were backed by the cash flows on those underlying securities. Of course a CDO had a “collateral manager” whose job it was to monitor the assets and that person also had a “reinvestment period” of several years during which the assets could be traded in and out of to maximize profits etc.

However, Re-Remics are NOT CDO’s – even though they smell like them quite a bit (take that comment any way you want).

These are technically called “ Resecuritization of Real Estate Mortgage Investment Conduits”. In this instance a “REMIC” can be thought of as a plain old RMBS security. And “Resecuritizing” those RMBS securities means the process of packaging them up into a NEW REMIC, ie. A “Re-REMIC”.

From the links earlier you can see that the primary reason for doing a resecuritization is to separate the bad loans from the good loans that are “locked up” inside a formerly AAA RMBS security. In their original form, and because these bonds are backed by a pool of assets which have deteriorated considerably in most cases, the entire RMBS bond is priced very low. However, if we can separate the good from the bad, then we create a new bond backed by the “good” loans and a lower, more risky tranche backed by the “bad loans”. Sort of a mini “good bank / bad bank” sort of situation. The Re-Remic tranche backed by the good loans all of a sudden gets a much higher price; is rated by the rating agencies as AAA (yup, that’s right); and the original investor now does not have to set aside nearly as much regulatory capital as previously. Magic!! What a concept! Of course, the Re-remic tranche backed by the bad loans is priced even lower and is usually not rated by a rating agency. So the amount of regulatory capital set aside for this piece can be quite a bit higher than before. But hey, if we stuff 70% of the new Re-Remic into the AAA and only 30% in to the unrated piece, voila! Net effect is that less money is having to be locked up in set aside regulatory capital and that money becomes freed up to use more productively elsewhere. Financial alchemy, indeed!

A few years, back, much was made of various financial institution’s inability to properly price those complex beasts known as CDO’s. Well the same thing goes for Re-Remics. In any single one of these Re-Remics, we may have up to 50 or more formerly AAA assets, now rated as low as CCC or worse. What is the proper way to value these. If you have a portfolio of these Re-Remic tranches, how do you go about valuing them. The answer is: It’s not simple – just like valuing CDO’s was fraught with complexity – so are these Re-Remics (although we think less so than CDOs).

If you use a predictive modeling company to generate forecast prepayment, default, severity and delinquency vectors (or if you produce these yourself), then you should ideally want to be able to apply these vectors to each and every asset that backs the particular Re-Remic tranche that you’re trying to price. If you are like most firms, you probably produce a wide range of “vector sets” for each economic scenario that you’d like to stress your bonds at. Some firms produce eight economic vectors sets (scenarios), some produce 10, some produce 60 or 100’s (using Monte Carlo Simulation). Once produced, that’s a LOT of vectors and manually loading them into Intex Desktop can be a painful, mistake-prone process and then the process of running the price/yield and cash flow tables can be time consuming, and can also eat up all the processing power on your computer.

You should be able to price these securities easily. Can you do it? Do you have clients that have a large portfolio (or even a fairly small one)? I’d be interested to hear how people are handling the pricing of Re-Remics currently. Are you doing “just enough” to get the job done? What are the stumbling blocks you’re running into? How often do you have to price them? Is that an adequate amount of frequency of pricing and so forth. If you want to take the conversation off-line from this blog, please email me at Jack@thetica.com and I will respond.

In addition to that, we probably all can remember the concept of a CDO “Squared”. This was where a CDO started to invest in the tranches of other CDO deals. Thereby “telescoping” the risk outwards even further. To analyze the underlying bonds required plumbing the depths layers downwards – and this become a particularly difficult task to adequately stress test these bonds.

This past week I have actually heard of a new security called a “Re-Re-Remic”… Similar to a CDO Squared, this is a situation where the Re-Remic tranches have been put into yet another Re-Remic structure and those assets have been “tranched” in order to separate the wheat from the chaff once more. Impossible you state. Nope. It’s for real. Will you be able to prices these securities. I hesitate to personally call these securities “Re-Remic Squared” because of all the horrible connotations associated with the term “CDO Squared”, but that’s essentially what they are.

Is this just another Wall Street concoction guaranteed to give us waves of further financial nastiness down the road? Well, whether they are or not, my question still stands. How are you planning on evaluating and/or pricing these bonds. Depending on your position in the market (trader, risk manager, financial controller, mortgage research analyst, IT professional, analytics provider, and so forth), this may be heading your way or you may already be looking at it square on.

I would love to hear your comments on the overall subject of Re-Remics and also the new-fangled “re-re-remics”.

Best,
Jack S. Broad
Co-Founder
Thetica Systems, LLC
Jack@thetica.com

SEC Investigating

Here is the latest piece of the on-going investigation from ProPublica dealing with CDOs and what happened with the housing bubble:

http://www.propublica.org/article/sec-investigating-deal-between-jpmorgan-and-hedge-fund-magnetar

From the desk of “Quark” – a bit of financial strangeness

Vectors

Predictive Modeling companies attempt to create projections for the future based on various economic scenarios. There are quite a few companies producing these vectors and they have a wide variety of uses for financial institutions.

Inputs to vectors.

Some of the standard inputs for producing vectors are:
*Home Price projections
*Unemployment projections
*Forward Interest Rates
*Property Valuations
*Borrower Credit Profiles
*Loan Characteristics and related historical data

Uncertainty Principles and Quantum Effects

Questions from various market participants arise as to how “granular” should these items be. For example, should we create projections only at the national level or drill down to state or county, even zip code projections? Similarly, with unemployment projections, should we do this at the state or county level or are national level statistics sufficient? Arguments for and against each point of view exist. One view is that doing it at too granular a level gives way too many inputs to take in, and by focusing so intently on the “micro” level, you’re losing sight of the forest. Another opinion is that too much of a macro view gives one not enough insight into what’s happening at the detail level, and you’re losing touch with reality.
Another way to think of this is with a “quantum world” view – where when you attempt to determine the exact position of a particle, you cannot determine its exact speed. If you determine the exact speed, you cannot find its exact position. By drilling down to zip code + 4 unemployment data – you might lose sight of more macro trends that would impact that area. Yet, by focusing on, say, too wide a range of home price indices, to use another example, you tend not to see the actuality of what’s happening with properties relevant to specific RMBS of interest. It’s perhaps a bit of a stretch to apply this to the same quantum effects, but maybe not. Certainly the question arises as to how much granularity is sufficient. When do you need more detail and when do you not?
One vendor I spoke with recently has even gone so far as to produce the property address of homes backing RMBS, but apparently you can only actually SEE the property address for yourself, if you sign a document stating that you will not then go looking at the borrower credit profile (such as from Equifax, Experian, or TransUnion). Because RMBS loans are “anonymous” (aka “de-identified) in the sense that you don’t know who the borrower is, nor do you know the property address, then solving the problem of “where is the property located exactly so that the most granular level of property valuation can be performed” can be highly valuable indeed. Here again, though, we have this almost “quantum” oddity of “being able to determine the exact location of a property, but not then being able to determine the credit profile of the borrower who owns the property.
Of course, if a property is now REO, then the current owner of the loan IS the owner of the property and no credit profile is needed particularly. In the case of RMBS, the Trust itself has become the “owner” of the property. With foreclosures and REO at such high percentages of deals, then the need lessens for credit profiles of the original borrowers of these particular loans, as these original borrowers have been evicted and no longer have any rights to the property itself.
Surely, I’m just imagining this “quantum effect.” It can’t possibly apply to finance… Enough with all this uncertainty!
So what is the way forward here? We maintain that thinking things through in the above manner leaves one without any really defensible viewpoints. How about we go forward and use a “results-driven” approach? In this approach we try a wide variety of approaches – trying each one of them under a wide-variety of levels of granularity. Don’t stick too much on any one approach, but then save these predictions for ALL of these variations. Then each month look at the actualities of what occurred in the real world and see which approaches most closely approximated what was found in the real world. Do this month after month and don’t develop any particular prejudices. In other words, constantly be on the alert as to which approaches produce the most practical real-world results. Perhaps then, a pattern may emerge as to which “solution” fits best.
Hopefully, then, we won’t have a situation where the “solution” itself only “resolves itself” when we observe it closely; but maybe the next time we observe it, it’ll be a different answer – just like, quantumly speaking, when a particle is observed, it’s location cannot be determined.
One thing is for sure, you want your predictive modeling company to be able to show you what their predictions were at various points in time (without the benefit of 20-20 hindsight) and have them show you how did their predictions do. Any predictive modeling company worth their salt for their crystal ball techniques should be able to show you how their predictions performed. We’re not saying they should be 100% perfect in all their predictions under all circumstances, but they should be able to show you exactly how they did – unless of course, they’re embarrassed to show you how badly they did.
In any case, if you want to get information on “the exact property address and home valuation”, check out a vendor which provides a very interesting solution as regards to home property valuations matched against the anonymous loan-level securitized data. See Lewtan’s ABSNet Home Val ™ solution here:
http://www.lewtan.com/products/ABSNEThomeval.html

Have a nice day. See you next observation – maybe.
Quark Out!

Securitization For The Rest Of Us!

Thetica Systems is happy to announce the fall release of our eBook: Securitization For The Rest of Us! Readers will discover the basic building blocks required to turn debts into income, and to utilize the power of numbers to create a flow of billions of dollars with the creation of bonds that profit the adventurous few with the capital to invest. Our eBook also examines the factors that directly resulted in the Wall Street losses at the end of this decade, from which our economy is still recovering. Enjoy this introduction…it starts us out on a journey that will have some hills to climb, but at its end, you will have a much wider viewpoint to understand our economy. This is Securitization For The Rest Of Us!

Introduction – Securitization For The Rest Of Us!

More Pictures from the ABS East 2010 Conference

This is a shot from outside the Fontainbleu Hotel in South Beach, Miami, where the ABS East Conference was held.






Here are a few members of Thetica Systems, including CEO, Ariel Yankilevich(mid) and President, Jack Broad(right), on day three of the ABS East Conference at our exhibitors display booth.



And here is another shot with a couple of friends (notice Jack holding our custom stucky note pad).

Last night, Tuesday, Oct. 5th, we packed up everything and called it a day. And today we head back to base to regroup.

The ABS East Conference 2010

Here are a few pictures of the extravagant Fontainbleu Hotel in South Beach, Miami, where the ABS East Conference is currently taking place and where Thetica Systems has set up shop as an exhibitor.

This is our CEO, Ariel Yankilevich, at our exhibitors display at the ABS East Conference;

And here is Ariel again giving a demo in our prospective client flooded exhibition area.

Data Commoditization in the Securitization Markets (Part 3)

Today we proceed with the third installment and continuing discussion of the RMBS data industry with a section on “Loan Data Vendors”.

2. Loan Data Vendors – these are data vendors who specialize in the collateral (loan) information. This seems to overlap with component #1 item C (in blog entry 2 of this series), and to some degree it DOES overlap, however, Intex has not been known for providing the level of loan detail and in particular, ongoing historical monthly payment information that a proper Loan Data Vendor provides. Intex does provide monthly collateral information but it can be quite difficult to see and/or analyze it from an historical perspective. This thereby creates a market “niche” that various companies have stepped into in order to capture this need. Examples include Loan Performance (this is the largest and most well-known of the loan data vendors) , Black Box, ABSNet (Lewtan), Lender Processing Services, S&P and others. Most importantly this component includes at least the following:

a. Loan Data: this includes many fields of information relating to the actual loan itself including such things as original balance, current balance, purchase price of the property, zip code, state, MSA (Metropolitan Statistical Area), loan purpose (purchase, refinance or cash out), occupancy status (primary residence, investment property); documentation of income or assets, sale price, loan to value ratio, first or second lien, interest rate, loan type (fixed rate or adjustable rate mortgage), if an ARM loan, then what index does the loan reference, Interest Only period (if any), any prepayment penalties and for how long, loan modification details and so forth.

There are over 20 million loans within non-agency securitized deals so you can see that this is a fairly large data set.

b. Historical monthly payment records. These records tell you each month whether the borrow has paid and if so, how much; if the borrower is delinquent and how many days (30, 60, 90+); whether the loan is in foreclosure proceedings and, if it has already been foreclosed, how long it has been in REO. Also, when the property has been liquidated and whether there have been any losses and so forth.

Some loan data vendors provide web-based tools that you can use to query their loan data but many firms also license to routinely receive the data from the loan data vendor onto their own computer systems because they have mortgage research groups who want to be able to analyze the data in depth in order to assist them to predict the future performance of the loans based on what the historical data shows. This provides only a partial picture of the borrower and the property serving as collateral. See the next section for an extremely important additional piece of the puzzle.

**Watch for our next post describing “Enhanced Loan Data Vendors”.

Data Commoditization in the Securitization Markets (Part 2)

Today we continue our discussion of the RMBS data industry with a brief section on “Deal Data Vendors”.

1. Deal Information Data Vendors – by this we mean those data vendors that provide information about deals which includes:

*Overall deal information (Deal name, issuer, investment banker, servicer, trustee, whether the deal is Prime, AltA, Subprime, Original and Current Deal Balance, Cleanup-Call details, etc)
*Tranches (cusips, tranche names, original and current balances, coupon information, writedowns, ratings, credit support, etc)
*Collateral data (loan-level details, loan originator, collateral group related information and historical payments, etc)
*Triggers (primarily cumulative loss and delinquency triggers)
*Hedge Information (interest rate swaps, monoline bond guarantees, etc)
*Historical performance (especially useful for deal surveillance purposes)
*and so forth

A notable example of a data vendor who has all of the above is Intex. This is the most familiar and most widely used vendor of deal information in the industry. There are others including ABSNet (Lewtan) and Markit that also provide this information, but none to the degree that Intex does. Intex has been the longest and most firmly entrenched player in this space and consequently, the most costly.

Whereas it’s true that Intex provides deal information inside deal files and that these files are routinely delivered to a properly licensed client’s own file server, these files are made up of “one deal per file” therefore it becomes quite difficult to compare deals or query across all subprime deals and so forth.

What is really necessary is for a client to have software that reads all of the data about the deals (as enumerated above) into a proper database which can then be queried and analyzed with the purposes of spotting trade ideas or opportunities or generating various reports.

Note that this component does NOT include Bond Analytics – see the 5^th component for more data about Analytics Providers)

**Watch for our next post describing “loan data vendors”, coming soon.

www.TheticaSystems.com

Data Commoditization in the Securitization Markets (Part 1)

July 7th, 2010

Written by Jack S. Broad

© 2010 Thetica Systems, LLC

Introduction

As has occurred within many industries throughout history, the data vendors that provide various information about securitization have been undergoing huge changes causing large price decreases and company consolidation. Additionally, we are seeing many new partnerships springing up concurrent with the increasing need for coherent complete systems to manage all information relating to securitized deals. Without a complete picture of your ABS bonds, how can you accurately assess risks and price volatility?

In this article, we will be reviewing what the key components of a securitization system should be and take a look at some of the vendors participating in each of those components and then describe some of the market forces which we think are creating more and more of a “commoditization” of securitization information.

This trend, we believe, is leading to substantial price compression for securitization data products, causing data to become cheaper and more accessible. This trend is continuing into the future and will result in better deals for industry participants.

In this paper, we describe all the major components of an RMBS information system so as to provide a broad overview of the data industry and how it relates to trading activities. We then go on to talk about some new initiatives in the industry and what their potential impacts will be on the various players in the market place and what this means for your firm.

Data Components of an ABS System

There are five primary components making up the key data needs relating to securitizations. Without these, a firm engaged in trading bonds backed by mortgages is going to be “picked off” by other firms and might as well not be trading as it’ll be just too risky.

These five components are:

1. Deal Information Data
2. Loan Data
3. Enhanced Loan Data
4. Predictive Model
5. Bond Analytics

Historically, trading firms have emphasized one or more of the above components, mostly due to lack of investment in technology and data. It is no longer enough to be “two guys and a Bloomberg” in this industry. What is needed are comprehensive yet flexible systems.

*Our next blog posts will describe these components in some detail *

U.S. – Land of Equality? Not when it comes to foreclosure timelines

Written by Jack Broad

It’s been a while since my last article. I’ve been fully tied up with client requests and projects. In any case, let’s get down to business.

In this article, I want to convey some thoughts about foreclosure timelines. What they are and how they can impact various market participants. Recently I performed an analysis of state-level foreclosure timelines. Here’s some of what I found.

The biggest fact that jumps off the page about timelines, especially foreclosure timelines, is the HUGE disparity that exists from state to state. For example, we restricted our study to those loans that have fully completed the foreclosure process within the last year and found that the average number of months before the borrower’s right to title in their home is extinguished is:

Fastest Foreclosure States (listed alphabetically)

State #Mths

Alabama 2.34

Arkansas 3.08

DC 2.70

Georgia 2.58

Maryland 2.79

Michigan 3.22

Missouri 2.06

New Hampshire 2.88

Tennessee 2.15

Texas 2.85

Virginia 1.89

Maybe that’s not such big news but compare it against the following list of the slowest foreclosure states

Slowest Foreclosure States

State #Mths

Delaware 6.92

Florida 6.13

Iowa 8.54

Illinois 7.28

Indiana 7.23

Kentucky 7.34

Louisiana 6.19

Maine 8.83

New Jersey 7.51

New York 7.05

Ohio 8.03

Pennsylvania 7.10

Vermont 8.39

Holy Smoke!! What a difference! Why is this important to know about?

Does anyone see an almost distinct regional influence in the above? For example, most of the New England states are in the slowest group. While Southern states (except Florida) tend to be more in the fastest group. Why on earth would states like Georgia, Alabama, Texas and Virgina be, what appears to be, almost fanatically fast when it comes to getting people out of their homes when states like NJ, NY, PA, FL do it in a, comparatively, leisurely frame of mind. For anyone in foreclosure, it usually is a pretty stressful situation. You know, maybe you feel a bit degraded and wonder how could things have gotten so bad – all that kind of thinking. Whether it’s a fast process or a slow one – you’re generally caught up in a situation that feels like “something has gotten out of control” in ones own life. But let’s continue to look at this a bit more dispassionately for a moment.

As far as foreclosure timelines go, SLOWER is definitely better for the borrower. It’s obviously worse for the lender because they don’t get to recoup any of their money for a much longer period of time. For the sake of this example, let’s say that a person who becomes delinquent on their mortgage is NOT PAYING at all – in other words, the person isn’t even paying a little bit of money – just nothing being paid to the lender at all. This is the usual state of affairs when a person becomes delinquent. Additionally, it should be known that the person is not able to be evicted or thrown out of their house, at least until the foreclosure process has been completed (and, strangely, in some states not even then). So how much money does a person “save” by not paying their mortgage. For purposes of some simple math, let’s make a ballpark estimate of a $200,000 loan size and an average mortgage rate of 8%. Keep in mind that some states like California have a much higher average loan size.

Let’s say that Pete lives in Missouri and he goes 30 days delinquent (1 missed payment), then 60 days delinquent (2 missed payments) and then the lender gets the foreclosure process started on Pete. According to the above Pete can stay in his house for another two months. This adds up to a total of 4 missed payments. So let’s see:

$200,000 * 8% = Annual mortgage payment of approximately $16,000. That’s approx a monthly payment of 1,333.33 (these figures are not exact but close enough to get this point across)

So 1,333.33 * the 4 months Pete got to skip out on his mortgage payment and he ends up “saving” $5,333.32 in interest.

But if Pete lives in New York, he saves $12,000.00 – an additional $6,666.67! So basically he’s living RENT FREE for at least 9 months (at least 2 in Pre-Foreclosure and another 7 during the actual foreclosure process itself).

In Maine (almost 9 months in foreclosure), Vermont (8.4) and Ohio (8) he saves even more money by not paying.

Now let me make it very clear that I’m not advocating to people that they not live up to their financial obligations. Definitely not, but the point I’m making here is: “How come there’s so much disparity from state to state?” I know the typical answer is that foreclosure laws and timelines are statutory, meaning they are created by state legislatures. How is that possibly right? Is it fair that a guy up in Michigan, who may have been laid off due to the meltdown of the auto industry there – he gets only 3 months of foreclosure process before he’s given the boot, whereas a guy who works on Wall Street and who’s living in NJ and who just got the can because of the mortgage market meltdown – he gets to not pay his mortgage for 7.5 months. If the guy in NJ has a much higher loan amount he will save even more money because of this.

Or how about in Texas where the PRE-foreclosure timeline is only 2 months. 2 missed payments and they rush you, (guns ablazing I guess) into foreclosure. Other places, it’s 90 days at a minimum. But not the lone star state of Texas. 2 missed payments and you’re in foreclosure. Consider yourself “corralled” by the foreclosure “lasso”. Then two months later, you’re out on the street. In fact, in Texas they have a lovely name for the date each month when they do their foreclosures – it’s called “Texas Tuesday”. Isn’t that cute? Tell that to the guy who’s getting shoved out of his house, while the guy up in Delaware has about another 5 more months before he gets the official boot. That additional 5 months gives a person a lot more time to try to figure out an alternative solution. Call his friends, relatives, look for a 2^nd or 3^rd job. Whatever! He at least has more time during which to solve his problem. He also “saves” much more money by simply not paying his mortgage. These “fast foreclosure states” barely give someone any time to think – let alone solve their financial problems and they’re OUT of the house.

Once a person is in foreclosure, their credit is basically shot to hell anyway, so why try to pay at all? Add to this the fact that the housing market has depreciated so fast recently – which has caused many borrowers to have zero or negative equity (the house is worth less than the mortgage they’re paying) that it’s now become a “bad financial transaction” for the borrower. Again, I’m now looking at this in a “dispassionate” dollars and cents way. What do you think a trader on Wall Street would do with a “bad trade” he’s gotten into? Hopefully, he’d get the hell out and FAST so as to stop losing money. And to hell with whether the borrower’s credit is bad. Credit (FICO for example) can be rebuilt in time. In the meantime, stop paying the damn mortgage and push that money towards something else. Set aside that money for rent for after you officially don’t own the house any more. Save it to be able to pay for gas for the winter. How about maybe using that “saved” money for the very basic necessity of survival – FOOD for the kiddies. Compare food and shelter to whether your credit score is good and I’m pretty sure I’d know which way people are gonna bounce on that decision if they have to exercise their “option” not to pay anything at all towards their mortgage. The guy can’t be put in jail for not paying his mortgage in this day and age – so he’s not worried about ending up behind bars because of not paying. The threat of “debtor prison” is long gone in this country.

As an aside, my father, who retired to Vermont just told me that he’s had to pay 8,000 towards heating oil for his house for the coming winter because of the rising prices of gas – he’s trying to head off the rising price by paying now at a specific price because if he waits until the winter, lord knows how high the price is going to be – so he’s trying to save money by buying now.

I must emphasize that I am NOT advising anyone to actually do the above. I’m just giving what I think are some of the thought processes that may go through a borrower’s mind. Lenders have got to be mighty worried about the current state of rising delinquencies in the overall mortgage market place.

Timelines increasing

Three other factors can work to INCREASE the timelines beyond what I’ve described above.

First of all, my understanding is that if a person is in foreclosure and declares bankruptcy it puts, at least for a few months, a “stay” (stops the process) on the foreclosure process. Obviously this is going to increase the amount of time the person is living “rent-free” (so to speak). I’ve heard stories of people declaring bankruptcy, stopping the foreclosure process. Coming out of bankruptcy, then the foreclosure process starts again. Then the person declares bankruptcy again which stops the foreclosure process again. And so it goes. You can think “isn’t that a scam?”. Maybe, but maybe not. The individual is permitted certain activities in our society and that is one way to do it. In the meantime you get to stay in your house without paying a dime. As Don King used to say: “Only in America.” Actually, it probably exists in other countries but I digress…

Secondly, in some states, even after the foreclosure process has been completed, you are not allowed to even evict the person before a certain amount of time has elapsed. What!! You’re kidding right? It’s true. Let’s say you’re an investor and you’re hungry for foreclosure sales because you think you’re going to get a great deal by paying a really low price for some house that’s in foreclosure. So you go to the foreclosure sale at the right time and bid on the house and voila!! You’re the lucky winner. Your bid was higher than anyone else’s. Your bid was even LESS than the full amount that was owed to the original lender AND the lender accepted your bid. Great deal right? Um… Hang on a second… The house you bought is in the lovely state of Vermont. Guess what? The person still gets to live in the house RENT-FREE and LEGALLY for another 6 months!! THEN you can start eviction proceedings (which might take a bit of time if the guy decides to hole up in his house with supplies, ammo and a few wonderful guns). You’re kidding right? This is a joke right? Nope, no joke. You cannot even start eviction proceedings until the full 6 months have gone by. Also, the person is still living in that house. During that time you can drive by the house and look at it wistfully if you want – people might look at you a bit strangely. Not only that but if the borrower were to actually come up with all the monies he owed – he could pay off the bank and reclaim the house. Oh my god. What a nightmare. You’re livid. You’re now gnashing your teeth and busting up the furniture in your house instead of drinking Crystal. Yup – you made a bad trade (as they say on Wall Street). This period of time after the foreclosure sale where the original borrower can still stay in the house is known as the “redemption rights” period. Not all states have it but you’d best make sure before you get suckered into buying some “great” piece of real estate only to find out you don’t actually own it yet.

One other strange fact is that, of the slowest states given earlier, only Michigan has a “redemption rights” period (6 months). This makes the rest of the slower states even more egregious in their “rush to get people out of their houses.”

Thirdly, case loads. As the U.S. descends into uncharted real-estate economic territory, foreclosures are rising fast. What’s that going to do with the legal and court systems responsible for pushing all these foreclosures through. Think of that poor Texas sheriff who now has to sell 100’s of properties on his “Texas Tuesday”. He’ll probably have to come up with a “Texas Wednesday” and “Thursday” and “Friday”. Hell maybe even a “Texas Fortnight”. Somehow that doesn’t evoke much sympathy from me. Poor sheriff – 2 months delinquent. Into foreclosure for another 2 months and onto the streets with your rear end. He’s so stressed by all the additional foreclosures he’s having to deal with. Awww. Poor guy. But seriously, don’t you see the “log jam” on the horizon? Actually, it’s closer than the horizon. Lordy, it’s RIGHT HERE on our doorstep. That does agree with the results I’m seeing in the data. In other words the timelines ARE increasing – but not quite as much as I would have thought … yet.

At this point, my ability to be dispassionate has just about gone into orbit and I’m left in a state of complete “flabbergast” (if there isn’t such a word, I’m officially declaring there is one now).

If my parents or my brother and his family ever have trouble in Vermont, it appears they’ve got not only 8.4 months of average foreclosure timeline, but then have another 6 months redemption rights period. If they spent 4 months being “merely delinquent” before the foreclosure process kicked in, then that’s 18.4 months of rent-free living. Let’s throw a bankruptcy somewhere in there and maybe the Vermont legislature wanting to help people out by extending the Vermont statutory foreclosure timelines. Man-o-man. Who would have thought that possible? We’re looking at maybe 2 years of rent-free living man. Of course, I think ammo and survival supplies are probably unnecessary even though Vermont was a famous gun state historically speaking. I’m also pretty happy about the fact I live in Florida.

At this point, I no doubt need a disclaimer for cya purposes (or is it cma purposes?): Obviously, you should always consult an attorney and your financial advisor.

What I definitely would advise people to do though is NOT to get suckered into companies who, knowing the above, will try to get you to do what I’ve described above and then charge you some percentage of what you’ve “saved” by simply not paying your mortgage. To me, that’s simply taking advantage of people’s fear and non-comprehension and is a pretty unethical practice at best. When you have the ability to pay, you really should live up to your financial obligations. After all, you signed on the dotted line. If you can pay, do so.

Okay, so at this point we’re probably in agreement that it’s a pretty unfair situation for such disparity to exist between the states. What should be done about it? Some states are attempting to increase their foreclosure timelines such as Massachusetts and Colorado. Try searching on Google for “foreclosure timelines” and you’ll be able to confirm most of what I’m talking about here.

I understand the idea of permitting each state to handle its own destiny but it almost forces people to know about these issues before even moving into a particular state. Maybe the federal government should step in and say: “Too much complexity. Too un-standardized from one state to the next. Too much disparity and unfairness. Here’s how it’s going to be.” In this case, I personally think it would be a good thing to standardize the processes and procedures surrounding timelines. I have a 1500 page tome of a book from the US Foreclosure Network which gives state by state descriptions and details (by lawyers unfortunately) that is simply amazingly complex. Trying to sort through that morass of information is one of the more difficult and somewhat unpleasant things I’ve studied in recent memory. To my mind, there’s simply no reason for it to be that complex.

What’s amazing to me is I have seen almost nothing about the disparity I talk about above in the financial press. How could some of these simple observations be missed – if someone knows of some sources where this is talked about please let me know.

It should be noted that we also studied the PRE-foreclosure timelines on a state level and as you’d expect, in general, it averages between 2-4 months (30 – 120 days) before someone is herded on into foreclosure. But some states (such as Texas mentioned earlier in this blog) average on the low side of even the pre-foreclosure figure. I mean what’s the big rush Texas? (I’m not really expecting Texas to actually answer this question, but thought I’d give it a try anyway.)

To my mind this article gives information about one of those things where “truth is stranger than fiction”. Anyone else have experience with this? If so, I would really welcome your thoughts.

Sounds like it’s a good time to invest with companies that specialize in rental properties.

Coming Next: “REO” (real estate owned) timelines

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