Finding Foreclosures:

Foreclosure filings in 10 towns and cities within 10 miles of military bases, including Norfolk, Virginia (largest Navy base), rose 217 percent January through April over last year.

Nationally, this rate–January through April of 2007–was 59 percent.

This means we are seeing nearly four times the rate of foreclosure around military bases.

Top surge areas?
Columbia, South Carolina: Ft. Jackson, where the Army trains recruits, rose 492 percent over last year.
Second largest was 414 percent in Woodbridge, Virginia, next to Marine Corps Base Quantico.

Why? There could be many reasons. Here’s what I think:

1. Salaries aren’t keeping up with inflation (this is speculative, but is posted on military sites).
2. Military personnel are forced to move quickly and can’t sell, so they abandon their homes.
3. Military households tend to be single-income households and had mortgages reset.
4. The military had higher-than-average homeownership during the last five years, with resets hitting these lower-wage servicemen and -women hard, so they might not be able to pay their mortgages.

What do military personnel need to do?

1. Consider “short sale’ing” their property to avoid a foreclosure, even if they show “lates”–it won’t ruin their credit like a foreclosure will.
2. Consider renting out the property. Sites such as the Landlord Protection Agency have ways for you to advertise your home to military workers and protect yourself.
3. Contact the bank immediately, as soon as you know your payment will be late.
4. Look into VA mortgage options for your refinance. New conforming limits may help lots of people refi into an affordable mortgage.
5. When you leave for duty, set up atuomatic bill pay. And, if you have internet access overseas, check to be sure payments are posting.

Dani

If you are out looking for a new home, there are many things in the neighborhood or area that you want to look for. These include, of course, low unemployment, job growth, jobs in the area and a location close to urban areas (which increases demand because of urban sprawl). Look to see if a Home Depot or Target is moving in. Where do I recommend? Here are a few areas:

1. Idaho – around Boise and Idaho Falls. While I was laughed at earlier this week and told that “all four viewers” would call and complain, Idaho has a 2.7 percent unemployment rate and a five-year job growth rate of more than 18 percent. Median household income is above average. It’s a little boring, though; not necessarily right for the young and single. Prices are about 70 percent of what they were two years ago but have been stable now for months.
2. Salt Lake City and Logan, Utah. I’ve been bullish on SLC and Boise for the past year. Both have a 2.8 percent unemployment rate and a five-year job growth of more than 18 percent. Lots of biomedical and high-tech companies are moving in, and there are lots of call centers, too.
3. Key Largo , Florida. Not as battered as other areas of
   Florida, it still saw a more than 30 percent price decrease but is relatively stable now. I still like
   Palm Beach as well due to the numbers of boomers moving.
4. Las Vegas, Nevada. I get beat up for this pick, but look at the facts. It has a 12 percent year-over-year increase in population, and retirees are moving here in droves. The deals are all over the place because of still very high foreclosure rates. Vegas also has a low unemployment rate. Prices dropped 19 percent in one year leaving some great bargains!
5. Phoenix, Arizona. After experiencing a one-year drop in prices of 18 percent after another year of 22 percent, prices are low, low, low.
   Phoenix is the fifth-largest city in the country by population, and it continues to grow. Many major companies such as Motorola, Boeing and Intel continue to create jobs. The city retail sales tax is 2 percent. It’s an inexpensive state to live and work in. Also, boomers will continue to create demand.

Yesterday I received a call from a friend on Wall Street who sat on a conference call announcing a major change from Wamu, advising its withdrawal from the wholesale side of the mortgage lending world.

That’s to be expected, given the recent pressures in the lending industry, specifically as the mortgage broker becomes more irrelevant each waking day.

The big surprise comes from the fact that Wamu has chosen to shut down its entire retail lending operation. Of course, you could stop at a branch and have a 19-year-old open a checking account, help you with your safety deposit box and write a mortgage while he or she is at it (presuming the teen knows how to spell “mortgage”).

Seriously, this announcement–effective immediately–essentially puts a nail in the coffin representing the riskiest mortgage program in America. For the investor community, the program generated tremendous cash flow and investment opportunities for those who understood its complexity. For the everyday homeowner, it was used as a way of stretching the affordability factor, and now it’s gone.

We suspect the elimination of the program will allow for greater stability in the mortgage markets, resulting in a flight to quality for many consumers who, blessed with an ounce of equity, will be able to refinance into more favorable terms in a more conservative, 30-year-fixed program.

I further suspect in the short term that those who became accustomed to $1,400 payments on a $450,000 mortgage will simply walk away, realizing that the ability to refinance will still result in an increased payment compared with the deferred payment that failed to cover the minimum interest payments.

I’m interested to see what impact that will have on lenders such as Wamu that control a huge portfolio of those toxic loans.

Great time to buy from a value perspective, but I feel for any borrower who lives close to one of these homes that has become a ticking time bomb. Of course, I feel even worse for the employees at Wamu who just had their legs kicked out from underneath them because their CEO failed to plan ahead.

Bill Nazur

The abandoned homes in areas such as Detroit and Stockton are hurting neighborhoods–badly.

But they’re helping some poor, remarkably enough.

There is a bright spot for some of these abandoned houses.

Many of these homes, usually foreclosures, experience transients moving in, stealing power, tearing apart walls for copper plumbing and setting fires to make drugs or heat the home. Police are struggling in many neighborhoods to keep this under control (Source: Yahoo Real Estate). There is a consistent problem with crimes and thefts in foreclosed homes. In the past, these thieves would steal from the outside of the home; now they steal from inside, too–with little repercussion. Even the local humane society shelters are over capacity with pets left behind.

However, there is a bright side here–finally.

Some charities, such as Habitat for Humanity, are buying the homes, fixing up the abandoned properties and taking advantage of the low-prices for the homes–basically shells by the time they’re robbed and stripped of valuable wiring and plumbing. Charities are now starting to get these shells for rock-bottom prices and using volunteer labor to turn them into housing for the poor.

Dani

The Fed chairman on Friday, March 14, outlined what the Fed is proposing to alleviate the housing crisis. Here are the highlights and the resulting negative outcomes as I see them. Government, stay out if these are going to be the plans!

1. Prohibiting lenders from issuing loans that borrowers cannot repay. Big problem here. We have no accurate way of assessing this. The traditional method, FICO scores, is no longer accurate. The FICO doesn’t take into consideration mortgage resets and is fairly easily manipulated by people who fix credit. FICO says plans are in the works, but a new algorithm won’t be released until 2009. Also, more people today earn nontraditional income–income working from home on 1099s and so forth. These people are often highly qualified but may not be able to get a loan.

2. Making lenders verify income and assets. I have no problem with verifying assets. But it’s difficult to verify the income of many of today’s workers. For instance, many of us work off of 1099s and take business deductions. This makes it nearly impossible for the bank to see how much we really make.

3. Requiring escrow accounts for high-priced loans. This sounds great, but it’s a ripoff for the consumer! People are better managers of their money than institutions are. If they aren’t, they pay a price. Here is a fact. Take a $1 million home, the “low end” price for many areas in Southern California. If we had to put even 1 percent into escrow, that is $12,000/year. That is money we could have invested and earned interest on. Unless the bank is going to fork over the interest we could have earned by investing it ourselves, forget it!

4. Ban repayment penalties including loan flipping. While Id love to be able to refi my primary residence without a prepay penalty, the truth is that loans with prepays often come at cheaper interest rates because the bank knows it will get X dollars from the consumer. Ban penalties, and the banks will offset this income with higher rates. Period. Bottom line: None of these is an answer to the housing crisis.

There are many deals today in the foreclosure market. With rates coming down and banks easing lending restrictions, even investors are finding their way back into the market.

So if you are a bit tired of the stock market and want to diversify into real estate, here are some top areas I’ve identified where you can find deals as an investor in the foreclosure market, and why:

Ft. Lauderdale, Florida. Ranking number 10 in 2007 metro areas for foreclosures, there are deals galore. Companies are literally walking away from newly built condos. So why is this a good thing? Studies show boomers are moving here–and the ones who already live here are staying. This will help prop up this area in four to seven years as more retire, making it a prime area for a rebound.

Seattle area, Washington. While ranking lower in foreclosures (21st in the nation by state), there are deals (10 percent to 20 percent off of the value) in and around Seattle. Interestingly, studies show boomers are leaving Colorado for Washington and Oregon–two states that may benefit as people retire. Also, Seattle
has consistent jobs in the high tech arena that aren’t leaving, making it another great selection.

North Carolina. I love this state! Ranking 18th in the nation in foreclosures, the median price is about $178,000, a 3 percent drop in 2007. This is about the national average, with good jobs and stable incomes. Also, boomers in the South are migrating to
North Carolina from some of the more expensive areas.

For souls willing to brave a bit more risk, here are some areas really battered in 2007 with steep price declines. These are not for the faint at heart and are risky areas, but a small rebound could mean a big return (long-term holds!)

Riverside/San Bernardino, California. Down 17 percent for 2007 (although not looking great for 2008 either–a long-term hold, indeed). Tampa/Clearwater, Florida. Down about 12 percent for 2007, but lots of people are interested in moving here. It’s a great retirement area, and jobs are stable.

Cleveland and vicinity, Ohio. Down nearly 10 percent for the year. Jobs are not quite stable yet, so it’s risky, but a long-term hold may be warranted here. And there are so many foreclosures, you can definitely get a good deal.

Dani

There is a lot of misconception out there about the foreclosure freeze and whom it really helps, what it takes to qualify and how it works. My goal is to demystify it a bit. Here’s what you need to know:

• The freeze is temporary. It freezes legal efforts to remove delinquent borrowers for 30 days while lenders and borrowers work together on a payment plan.
• This is a joint effort by six of the nation’s largest lenders.
• One big difference between this and other options discussed in the past is that it is available to people no matter what type of loan they have. Even if you do not have an ARM, it may help (ARMS have the highest rate of delinquency, though).
• The borrower does not have to be subprime to qualify. Any kind of mortgage is OK.

When do homeowners qualify?

• Once they are 90 days or more behind in their payments, lenders will send letters asking the owner to call.
• Borrowers will be asked if they want to stay in their home. If they do, they will be offered financial counseling.

Important things to note:

• Loan modifications are not automatic. Homeowners have to provide proof of wages and debt.
• Lenders decide whether to pause the foreclosure process.
• During the freeze, foreclosure prevention specialists decide whether a loan-modification program will work. Will the borrower have a chance to be successful? Is he or she making enough money?
• Potential options are: Lowering rates, lowering the loan balance or both. Anything that does happen requires that the homeowner pay on time for three months, at which point the changes become permanent.

As homeowners, remember that it generally costs the bank $50,000 per home to process a foreclosure. Most would rather have homeowners stay in homes. So call your bank.

Dani

I often wonder what makes people tick…..

My wife had a conversation with our neighbor a couple of weeks ago, and we found out the family was moving because the house was being foreclosed upon. Huh? The house next door with all the bells and whistles is going into foreclosure? We’ll go back to this later in the story.

The tenants moved into the area because of the excellent school district, paid $2,500 monthly rent, first and last month upfront, while they saved additional money for a down payment to be able to move into the neighborhood. This was April of 2007. Let’s follow the clock backward.

Essentially nine months later, no payments have been made, the sheriff puts up a notice announcing the bank is foreclosing, and the current tenants have 40 days to move out from the date of the sale.

You have to assume that something tragic must have happened to the family that purchased the home and the family was never able to make the payments.

You know what happened? Two people saw an opportunity to capitalize on the business of walking away. This will be a completely separate post.

The Mortgage Forgiveness Debt Relief Act of 2007, HR 3648, allowed homeowners to walk away, eliminating the federal taxable liability of the loss they would’ve received a 1099 for. Ahhh. Bet the politicians didn’t see that unintended consequence occurring, did they?

You see, the former owners (Mom and Dad) bought the property for $450,000 and “sold it” (to the kids) for $699,000. Can you say non arms-length transaction?

Or maybe we should call it what it is: equity stripping. You see, the kids have been in finance and mortgage for 10 and 20 years, respectively. Can you imagine $249,000 in gross profits, less transaction costs, going to the parents (or going to the kids through the parents)? Do you think they knew what they were doing? Should I mention that they walked away from two homes, not just one? The total loss to the bank is $1.3 million. And this is but one of countless stories playing out across America.

I believe in the adage “love thy neighbor”–until the neighbors show their true colors, at which time karma will deliver what they so rightfully deserve. I will not be the one to judge them, but I certainly will not be making an effort to make ourselves available for the next birthday party or special event.

I think the apple doesn’t fall far from the tree, and the last thing I want is to have my kids playing with their kids. I’m funny that way.

I wrote in my blog over the weekend a story about real estate and politics. It’s pasted below:

I went to a John McCain fundraiser in Los Angeles, California, on Thursday, Jan. 31. Among lots of Hollywood celebs, former congressmen, senators and our California governor, McCain spoke about the war in Iraq. He made a comment I found quite interesting.

Many critics have said that McCain must begin discussing “the economic situation,” so he’s thrown a few comments in here and there to let people know he’s in tune with American concerns. He said, loosely quoted, “yes, I know, I know, we need to talk about the economy”–and then proceeded to talk about the war again.

In my view, many people on the left and right are using the general population’s fundamental misunderstanding with regard to how economics works to their political advantage. I see Mitt Romney doing it to the nth degree, along with Barack Obama and Hillary Clinton, of course, not unexpectedly. They talk about middle-class families and even create a “war between the classes” that is highly misleading and divisive, all while talking hypocritically about unity. Speaking of hypocrits. We need a “CEO to run the country?” Last time I checked, weren’t the CEOs being jailed, blamed for scandals and ripping off their shareholders and employees?

Some countries try to avoid having a middle class altogether. America clearly has one, and one that has unprecedented homeownership (thanks to the Bush tax cuts and the creative lending practices now being trampled upon by so-called economic experts saying they predicted this “long ago” ).

What people don’t realize is this:

1. What the Democrats and some Republicans are bemoaning a debacle with regard to the mortgage “crisis,” fewer than 2 percent of people in this nation are late on their mortgages.

2. The economy may not be growing as fast as it did three years ago, but we are hardly in a recession. No one cares to look up what the term actually means.

3. The middle class has the highest homeownership in the history of this nation. That’s because mortgage companies wanted to make money. Hedge fund managers wanted to money. Mortgage companies got creative and provided funding to people who wanted to buy homes, investors bought the mortgages, and the middle class benefited. And, although you don’t often hear it from the media, most are actually paying those obligations. So who is losing, exactly?

4. As the middle class gains in equity, and it will–markets never go down over a long period–it will become even wealthier. Lower-middle-income individuals who bought homes will move into the middle class.

What I found refreshing about McCain is that he knows he has to talk about the economy if he wants to score points. He does, to a small degree, to avoid losing to a talking mannequin known as the former governor of Massachusetts.

But what about this? Will losing 70,000 jobs after gaining hundreds of thousands matter when another Islamic radicalist boards a plane and takes a Delta jet into the Empire State Building? Probably not. A Dow down day of 300 could be a blessing.

Maybe we need to stop all the whining and kowtowing to Wall Street and let the Fed do the hard work it needs to do. And we need to stop using bogus claims to try to win the office of president. Maybe, for once, people will see through the BS and think of the big picture rather than the $50 their mortgage payment went up in two years on that McMansion they bought on their $50,000/year salary.

Dani

With the recent drop in interest rates, many consumers are asking, “Is this the time to refi?” The decision is more complicated than “did my rate drop?” There are often many fees associated with refinancing, and consumers need to calculate when the time is right for them. Mortgage applications rose more than 8 percent last week, and there is good reason for that climb.

When the Fed drops rates, most banks drop their rates on certain mortgages, too. People locked into negative amortization or option ARM loans, where they aren’t even covering their interest or had a teaser-rate loan, may be looking to refinance now.

In general, home equity lines of credit see rate drops the day after the Fed lowers rates. How do you know if you should refi? Calculate the savings per month at the new rate, and ask your lender what the refi will cost you. Determine what the break-even point is in months - if it’s six months, and you plan to stay  in a house a year, you get a net win. If it’s 12 months and you plan to move in the spring, keep the higher rate.

Option adjustable rate mortgages, known as pay option ARMs, are the risky loans that let people pay less than the interest and accumulate mortgage principle. These tend to drop 30 to 90 days after a Fed rate drop. Margins always tend to lag the Fed rate. To figure out whether you should refi, get a good-faith estimate with all costs from the lender. Do the same analysis as for a HELOC. With the rate change, what is the savings per month? Divide the total cost of the refi into the savings, and you will get your break-even point in months. If you are planning to stay in your home longer than this number of months, you will save money.

Long-term rates, 30-year fixed loans, generally remain flat and may even increase. I would not consider this a viable option right now.

Short-term, interest-only loans–loans where the first three, five or seven years is held constant–will decrease. To figure out whether you should refi, get a good faith estimate with all costs from the lender and do the math.

There are also intangibles to consider:

1. Is your mortgage stressing you out? Is the unknown tough to handle? If so, you might opt for a short-term, interest-only loan or for a fixed-rate mortgage, even if the rate is higher.
2. Is your principle amount climbing faster than the appreciation rate? You may want to refinance even if the rate is the same, just to stop the bleeding.

Dani

With the wave of foreclosures hitting lenders, there is a new problem on the rise–houses abandoned by banks and homeowners, and people left on the block getting hit with substantial value decreases as a result.

An intense amount of crime is sweeping into these suburban neighborhoods as vandals, thieves, drug dealers, prostitution rings, etc move into abandoned houses.

This is a forgotten component of foreclosure. Fights and legal battles are ensuing all across the nation about just who is responsible for these homes in limbo, being left to vandals and worse.

There are obvious signs that a home has been abandoned. The grass turns brown, eye-level weeds appear, the garage door gets boarded up and signs indicate that the home is bank-owned. In some really bad cities, owners write “no piping” or “no aluminum” or “PVC only” because vandals are ripping the houses apart, bringing in trucks to haul away appliances, copper wiring and moulding, and using sledgehammers to pull piping out of the walls–you name it, it’s being taken. Other abandoned homes are being turned into indoor marijuana farms.

Also, squatters begin to make fires in the homes to stay warm as it gets colder, sometimes burning them to the ground. Other homes are being left to drug dealers and vandals or to criminals who set up shop in the home.

Let’s see how this happens:

1. First, the owner gets a notice of default. The owner often leaves the home right then. Owners often would rather leave on their own terms than the bank’s terms.

If the owners don’t leave then, they often wait until they get a notice of foreclosure proceedings and then leave.

So at this point, the home is abandoned.

2. Foreclosure gives the bank the ability to take the home as collateral for the mortgage. This can take six to 12 months. In the meantime, the house sits. It becomes attractive to vandals, the homeless, gangs, drug sellers, thieves, etc. This is outlined nicely in the BusinessWeek article, “Dirty Deeds.”

3. Ownership becomes an issue. Technically, in most states, the owner still owns the home while the lender decides what it is worth. The lender includes the legal costs of taking it through foreclosure (expensive), back unpaid taxes (a big problem right now), potential repairs if it can’t be sold as is and the value of the home. All of this is compared with  the value of the loan. In many cities, the lender can’t break even. The lender stops the foreclosure process, and the title remains in the borrower’s name.

4. The home becomes a problem. It begins to affect property values across the neighborhood. Initial issues that become apparent are lawns turning brown and pools turning green. Housing inspectors check property records and cite borrowers for violations, which can lead to fines and jail time. But the borrower says in court that he or she thought the bank took the house back.

5. At some point, officials begin to expand the definition of who owns the home. In some states, prosecutors are taking banks that foreclose into court and seeking fines. If the house cannot be sold  because it’s so badly damaged, it may be demolished.

Some ask, if the bank won’t take care of the home and won’t get any money from the home, why not let the owner continue to live in the house and at least take care of it until it can be sold on short sale? Good question. It seems a case of bank officials going through a process rather than using their heads. The result affects property value throughout the entire neighborhood: Being within 150 to 200 yards of an abandoned house severely affects your property’s value.

Dani

The Fed endorsed rules on Tuesday that would “protect” homeowners against shady lending practices. Apparently the government feels the need to find another “in” to create a nanny state. There are substantial problems with this that may hurt the entire market.

The proposal applies to all new loans made by all lenders, including banks and brokers. Finalization is expected next year sometime.

Note: While there is a relevant reason for each one noted below, I also noted the reason it is a problem for the buyer. In the end it’s going to make it substantially harder for people to buy homes - period. That will hurt the market overall when we already have ten months worth of inventory!

Here is what is proposed, the reason the government feels it will protect homeowners and the reason it won’t. It will hurt more than it helps. Another reason to keep the government out of private enterprise.

1. Restrict lenders from penalizing some subprime borrowers who pay off their loans early (This is known in the industry as a prepayment penalty, and almost always is a result of refinancing).

• Why is this relevant to homeowners? Many who need to refinance can’t because the cost is so steep in prepays.

• Why is this a problem? The prepays are risk-based and help offset the risk-associated costs of doing business with subprime borrowers.

2. Force lenders to make sure subprime borrowers set aside money for taxes and insurance (This is known in the industry as impounds).

• Why is this relevant? Taxes and insurance that go unpaid force lender-created insurance, and late taxes go on record as tax liens that, when the home is foreclosed upon, also must be paid off.

• Why is this a problem? Some homeowners have flexible income; that is, it isn’t steady. It might be commission-based, for instance. Salespeople, for example, may wait until their end-of-year bonuses to pay taxes. Forcing them to impound could be a monthly hardship.

3. Keep lenders from making loans in which they don’t have proof of borrower’s income.

• Why is this relevant? It protects the lenders from lending to people who are using stated income loans as liar loans.

• Why is this a problem? Some homeowners have flexible income and they work off of bonuses or sales comp checks. People using this loan legitimiately may run into problems that are unfair–they won’t be able to use a loan designed for them. This may keep anyone on commission-based income from buying a home.

4. Prohibing lenders from lending without considering a borrower’s ability to repay a home from sources other than the home itself.

• Why is this relevant? The lenders are using something other than property to securitize it. While this is great for them, it’s a probem:

• Why is this a problem? The general rule has been that you need six months of monthly payments in the bank. That existed throughout the 2000s. To have another source of income or collateral you must have to be able to buy the home negates the entire way our market is set up–that the home is self-securing. It may make sense for lenders to do this to investors, but not for average homebuyers. This is going to make it tougher for people to buy homes in the future.

Dani