Riding The Third Wave of Foreclosures

You’ve probably heard about the two waves of foreclosures that we have already experienced. The first wave was tied to a high number of subprime loans that reset or adjusted, thus causing a large number of defaults starting in 2006 and continuing through 2008. Subprime loans, or C-Paper loans, are generally riskier for the lenders and include loan programs like “Interest Only” and “Option Arms”. Basically, lenders went a little crazy and issued too many of these loans (many to unqualified borrowers), which is the primary reason the housing market is currently in so much trouble.

The second wave started shortly thereafter and also included a large percentage of subprime activity. What was different about the second wave was that it also included a large percentage of Prime loans, which we should continue to see defaulting through 2011. Prime loans are A-Paper loans that are given to the most qualified borrowers with good income and the best credit scores. This was the first sign that qualified borrowers, even ones with good jobs, were starting to feel the effects of the real estate crisis.

Here Comes the Third Wave…
So that brings us to the third wave, which we expect to see hit sometime this year. This will be caused by several factors, one of which is the effect of the infamous Option Arm. The Option Arm or “Pick-a-Payment” loan has been around for a long time and it was first introduced into the market as a flexible loan for sophisticated borrowers with increasing incomes. The problem is that the many people who were put into Option Arms in recent years were either not sophisticated or shouldn’t have been buying a home in the first place. This loan started with a low teaser rate for the first year (as low as 1%) and allowed people to choose how big a payment they wanted to make every month, so most people chose the lowest payment (surprise) which is actually less than the accruing interest, causing negative amortization. Basically, most people had increasing loan balances while the value of their property was going down. Do the math when these people lose their jobs and it’s not difficult to figure out what happens next.

Another interesting trend that should contribute to our third wave is the growing number of $1 million plus foreclosures. This is the fastest growing category of delinquencies and defaults, and about 12% of these borrowers were late on their mortgages last fall. Defaults on these high end properties went up 300% in the past year and we are likely to see increased activity in this category this year.

What about Shadow Inventory?
Another factor worth discussing is what is called “Shadow Inventory”. This is defined primarily as inventory held by lenders that has not been released into the marketplace yet. Since these properties have already been foreclosed on, this will not affect the foreclosure rates, but some people believe it could have a dramatic effect on our real estate market. There are estimates that shadow inventory includes as many as 7 million properties nationwide, which is roughly a year and a half worth of inventory. Now, if this entire inventory was released for sale in a short period of time then I could see why it would be an issue. But, even if the banks could get their act together and release their inventory quickly, why would they? Banks may be smarter than you think (yes, I said that). They make balance sheet decisions every day that ultimately dictate when to sell property and they know that dramatically increasing the supply of property will have a downward effect on values. Wouldn’t that be shooting themselves in the foot? On second thought, it might not surprise me if a bank shot itself in the foot, but I’m still not worried. While our foreclosure problem is not going away soon, it seems to have reached equilibrium and the players involved (short sale real estate agents, banks, etc.) are figuring out how to dispose of these properties more efficiently.

Should You Worry?
Bottom line, there are better things to worry about, like unemployment and rising interest rates. And, if you are a buyer, there are plenty of great deals out there right now and there will continue to be deals for years to come. I wouldn’t wait too long though, since interest rates are not likely to stay low as long as foreclosures stay high. And if you need to sell, the good news is that there are more companies like us that can help you sell your property in this market, even if you are under water.

Thinking of Upgrading? Lets Do The Math

Have you been thinking about upgrading your house, but find yourself procrastinating or wondering if the real estate market has yet to find a bottom? If you are fortunate enough to have the income and resources necessary to sell your current home and upgrade to your dream home, then now is the time. In many parts of the country, we’ve already seen the bottom of the market and if you haven’t seen it in your market, then it is probably closer than you think. Even if I’m wrong and values continue to drop (they will in some markets), if you wait for the absolute bottom, you’ll miss it and you may never have the opportunity to buy your dream home again. Please note: this post is about upgrading your personal residence and assumes you will stay in your new home for at least 10 years. This math is not necessarily for investors or real estate speculators (although they may still learn a thing or two). There will not be a test at the end of this blog.

It’s Time To Trade Up: 3 Reasons It Makes Sense

1. By trading up, you’ll likely make more money in the long run than you would just staying put. Here is how the math works. Let’s say you paid $500,000 for you house 5 years ago and the market has depreciated 30% since then, so your house is now worth$350,000. You are now $150,000 in the hole, right? Well, the answer is yes, unless you take advantage of the buyer’s market and upgrade. Let’s say your dream house that you couldn’t afford 5 years ago was $1,000,000 and now you can buy it for $700,000. So with the $300,000 discount on the new house you are already $150,000 ahead on the trade-up ($129k after commissions). Wait, it gets better. Let’s say in 10 years your new home has appreciated another 30% which equals $210,000 versus the $105,000 you would have gained on your original home. That’s a $105,000 difference in gain for a total upgrade benefit of $234,000!


2. It is better to trade up in a down market than in an escalating market. If you wait for the market to improve, it will cost you on the upswing. Let’s say that you wait 3 years to buy and the market goes up 10%. Your $350,000 house is now worth $385,000 and your dream home is now worth $770,000 so you’ve lost another $35,000 by waiting. I know what you’re thinking, “But if the market keeps going down, then I’ll be able to buy my dream house for even cheaper”. Sure, that could happen, but once again, if you wait for a true bottom then you’ll probably miss it. And, have you considered the effect of interest rates changes?


3. If you will be financing your upgrade, let’s assume that interest rates are going up. You really don’t think rates are going to stay this low forever, do you? Current interest rates have been hovering around 5%, the lowest in 40 years. So, yes, they are going back up and it will likely be a long time before we see them this low again (if ever). Here is the math on interest rates. Let’s assume that you will stay in your new home for 10 years. After all, it is your dream home. If you put 20% down on your $700,000 home, you will borrow $560,000 which will cost you about $256,000 in interest (not including principal) over 10 years at today’s rates (5%). If rates go up only one point to 6% on a 30 year fixed mortgage, you will pay an additional $56,000 in interest over 10 years. If rates go to 7% (still historically low), it will cost you $112,000 more, and so on.

The bottom line is that if you are considering an upgrade and if you have the resources, there is no better time than the present. Oh, I almost forgot; if you qualify for the new home-buyer tax credit, there is another $6,500 benefit to you if you get under contract by April 30 and close by June 30, 2010. See my post: “Homebuyer Tax Credit Extended, Includes Current Homeowners” for more information. If you want to run these numbers on your actual situation then please give us a call. We have a special calculator that does the math for you.

Home Affordable Foreclosure Alternatives Program - HAFA?

Another Government Acronym
When this program was first announced last May it was referred to as the Foreclosure Alternatives Program (FAP), an easy name to understand and a concept that we have all been anxiously awaiting. When the details were finally released last week it was no surprise that the program was 7 months late, provides no real incentives for banks to participate and has absolutely no “teeth”. What is surprising is that the government has chosen to make this program part of its already questionable Home Affordable Modification Program (HAMP) and they have created a totally new acronym that is equally as surprising – HAFA, or the Home Affordable Foreclosure Alternatives Program. Is it me or is this a really sad oxymoron? Hello! Making Homes Affordable is about keeping your home and Foreclosure Alternatives is about losing your home (but avoiding foreclosure). Is the administration so stubborn that they cannot come up with a new program for people that clearly cannot afford their home anymore? Shouldn’t banks be able to determine whether or not a borrower should get a loan modification or a short sale? See my post: “Are Loan Modifications Working?”

I will share some basic details on the HAFA guidelines but honestly, even if banks decide to participate in the program, they likely won’t follow the guidelines anyway. We specialize in short sales and we frequently work with FHA borrowers that qualify for the 15 year old HUD Pre-Foreclosure Sale (PFS) program. If HUD actually enforced their guidelines and the banks actually followed them, we wouldn’t get any PFS deals done, and the fact is that we are successfully helping homeowners with their PFS transactions. So, the bottom line is that we now have another government program that will be loosely enforced and may just create more aggravation than it is worth. If you are facing foreclosure and don’t know what to do, your best bet is to contact a real estate professional, and even better, a Certified Distressed Property Expert®, for expert advice on how to avoid foreclosure. The banks don’t want to foreclose any more than you do, but if you want to successfully avoid foreclosure, you’ll need the help of a real estate professional who understands the banks and their ever changing policies and procedures. Note: Your friend, neighbor, relative, etc. that has their real estate license does not necessarily qualify to help you.

The HAFA Guidelines (In Theory)
PLEASE NOTE: These guidelines DO NOT apply to all homeowners and to my knowledge, no banks have adopted these guidelines yet. Furthermore, Fannie Mae and Freddie Mac have yet to release their final guidelines (which represent the majority of loans) so if these guidelines do not apply to you, it does not mean you are not eligible for a loan modification, short sale or deed in lieu of foreclosure. So, with hesitation, here are the basic requirements for HAFA, which are the same requirements for HAMP:

• The property is the borrower’s principal residence
• The mortgage loan is a first lien mortgage originated on or before January 1, 2009
• The mortgage is delinquent or default is reasonably foreseeable
• The current unpaid principal balance is equal to or less than $729,750
• The borrower’s total monthly mortgage payment exceeds 31 percent of the borrower’s gross income

Bottom Line on Avoiding Foreclosure
Bottom line, if you are facing foreclosure and you want to know your options, please contact us or any other real estate professional who specializes in distressed property.

Homebuyer Tax Credit Extended, Includes Current Homeowners

In a long awaited move, the Senate and House voted in favor of extending the first-time homebuyer tax credit. President Obama is expected to sign the bill tomorrow. The amount of the tax credit to first time home buyers remains the same at $8,000. However, the bill includes some interesting amendments that are beneficial to first time homebuyers and current homeowners. All amendments and updates to the current bill become effective immediately when President Obama signs the bill. Here are some highlights of the new bill:

First Time Homebuyer Updates

• Tax credit remains the same at $8,000
• Property under contract by April 30th, 2010 will be eligible as long as the real estate closing occurs by June 30th, 2010.
• Income limits will be raised from $75,000 to $125,000 for singles and from $150,000 to $225,000 for married couples.

New Provisions for Current Homeowners

• Current homeowners are now eligible for a $6,500 tax credit on property under contract by April 30th and closed by June 30th, 2010.
• Homeowner must have used the home sold or being sold as a principal residence consecutively for 5 of the previous 8 years.

Now Is The Time
Don't let this opportunity slip away. With the tax credit back on the table, and with interest rates and home values historically low, now is the time to buy. Give us a call and find out how easy it is to buy your first home or step up to another.

Thank you Congress - what is good for the housing market is good for the economy!

Are Loan Modifications Working?

Mortgage Metrics Report

Last March the Obama administration announced the Making Homes Affordable (MHA) program to help as many as 9 million households struggling with their mortgage payments, primarily utilizing loan modification or refinance. The success of the program has yet to be determined, but yesterday the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) released their Mortgage Metrics report that, depending how you look at it, could be good news or bad news.

To fully understand the OCC report, you have to first understand their definitions. The MHA program provides for a 3 month trial period in which mortgagors are put on a payment program. If the payment program is successful, then they can be converted to a permanent loan modification. So, while actual loan modifications were down 25.2% from the first quarter to the second quarter, payment programs were up 73.9%. The true success of the program won’t be known until future reports, but the report shows a re-default rate for modified loans in 2008 and 2009 after 6 months at almost 58%! Even if re-default improves significantly, something else needs to be done.

Other findings in the OCC Report

• The number of loan modifications that included a reduction in principal balance increased to 10%, up from 3.1%.
• Mortgage delinquencies increased to 8.5% in the second quarter, an increase of 11.9%.
• Foreclosures in process increased to 2.9%, an increase of 16.9%.
• New short sales increased by 34.8% to 23,102, but remained a small percentage of total loss mitigation actions.
  
  NOTE: The report also acknowledges that short sales have less adverse impact on borrower’s credit than foreclosure.

As we anxiously await the next report, what we cannot afford to wait for is details on the Foreclosure Alternatives Program (FAP). As I wrote in my post “The Housing Recovery Needs Your Help”, the FAP details are long overdue and loan modifications alone (even if they are working) are not enough to reverse the housing crises. What are we waiting for?

The Housing Recovery Needs Your Help

I tend to be an eternal optimist. I believe the housing market is going to rebound sooner than most people because I believe that most Americans truly want to own a home (or stay in their home). I also believe that we are seeing strong signs of a housing market recovery in many parts of the country. However, I also believe that we could rebound much faster as a nation if our government could act faster to save our economy. Everyone agrees that without a housing recovery, our economy will continue to struggle, so what are we waiting for?

The Impatient Optimist
We hear all of the rhetoric coming from Congress, the Treasury and the White House about stimulating the housing market, but the reality is that the stimulus is taking too long. While Congress and the White House argue about health care reform, millions of Americans are losing their homes and qualified homebuyers are sitting on the sidelines waiting for more incentives. It comes down to simple priorities. The housing market could lead us out of recession or take us deeper into one. Meanwhile, our government is wrapped up in health care reform, which is important to our nation in the long run, but is certainly not critical to our economic recovery.

2 Solutions We Need Yesterday
So the feds already know the solutions, but they seem to be stuck on the back burner. Solution number one: Extend the First Time Homebuyer Tax Credit and extend it to all homebuyers. Experts agree that this is likely to happen eventually, but what are we waiting for? The current tax credit ends in November and nobody wants to buy a house now for fear they won't close in time to get their credit. This makes sense given the time it takes to close a loan in today's banking system and the high number of short sales that take considerably longer to close.

Solution number two: Provide the banking system with guidelines and incentives for completing more short sales in a timely manner. The average time to complete a short sale is increasing and our banks are getting more overwhelmed every day. This isn't about a bank bailout, its about helping homeowners and an housing market in need. To date, the government's housing recovery program is falling very short of expectations. Loan modifications are just a band aid and the bank departments that handle them are just a waste of time and money for those homeowners who need real solutions like a streamlined short sale process. The Foreclosure Alternatives Program (FAP) which was announced in May, promised details on short sale guidelines and incentives in late July, and is now 6 weeks late on that promise. Do we have to wait for health care reform to pass before we see FAP in action?

Anti Housing?

As if not doing anything isn't bad enough, the latest out of our Congressional Budget Office is that they are considering reducing the mortgage interest deduction from $1.1m to $500k. I don't have to tell you what this will do to our higher end real estate market which is already in big trouble. We already have over 7 years in inventory of $1million plus homes, so why not further discourage buyers in this already troubled market? Trust me, if the high-end market doesn't get some relief, we are all going to feel the pain. We need incentives, not deterrents!

What Can You Do?
For starters, don't wait on the feds, go buy a house. This is one of the best times in history to buy. If your credit is good, you can get a 30 year fixed mortgage below 5% and the affordability index is extremely favorable. If you wait for the feds to extend the tax credit, you could lose more than the credit amount on interest rate increases alone (its coming), and here in Denver prices are going up. Can you really afford to wait for Congress to figure out their priorities? After all, isn't capitalism more about being proactive and taking advantage of the market, not waiting on the government to help us? Go buy a house.

First Time Homebuyers On The Sidelines?

We hosted a First Time Homebuyer seminar last week and the majority of our audience was primarily interested in the First Time Homebuyer Tax Credit of $8,000. I can't say I blame them either. After all, $8,000 is real money and not just for first timers. Without getting too political I think it is safe to say that most people agree that government stimulus is getting mixed reviews - some of it is working and some of it, well, not so much. Listen up Congress: This $8,000 tax credit is something that is working and needs to get extended. Now, most people agree that will happen, but when will it happen is the question.

Mr. Congressman - This Is Not Cash for Clunkers
So the feds decided to keep Cash for Clunkers alive, which may or may not have been a good thing, but they waited until the last minute. We can't afford to wait for the government to extend the homebuyer credit. Here is how it breaks down. If you don't have a property under contract by early October, you are risking you won't be able to close by November 30th and claim your tax credit. And, if you want to consider buying a short sale (they are hard to avoid) then forget about it unless you are under contract already. It would be a shame to see qualified homebuyers sitting on the sidelines because they don't know if they will get their tax credit. What can we do? Write your congressman and tell them to act now to extend the tax credit! While you're at it, ask that the new tax credit be increased to $15,000 and be available to everyone, not just first time homebuyers. Its worth a try.

Interest Rates and Affordability
The real crime is that homebuyers may be sitting on the sidelines and it is the perfect time to buy a home (in most markets). Interest rates are at historical lows and property is affordable again. In fact, the National Association of Realtors released their latest "Affordability Index" this morning, which is at 158.5 for July - a huge indication of how great this buyer's market is. Basically, an index of 100 means that a family with the median income makes enough money to qualify for the median priced home. So, an index of 158.5 means that same family has 158.5% of the income necessary to qualify for that median priced home. I would argue that even without the home buyer tax credit, this is still a great time to buy. You should still write your congressman though ;0)