Finding Foreclosures:

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

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

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

In recent weeks, I recently evaluated and/or attended several auctions that occurred (or are scheduled to occur) throughout Southern California.

I was surprised to see that given the amount of distressed inventory that the banks have had sitting on their balance sheets over the last 12-18 months, that the discounts aren’t the ‘deals’ that are being advertised.

When investing in foreclosures as yur first home, or as an investment tool, research is critical. While we encourage the use of technology, as explained in our publication, Finding Foreclosures, we further explain what the banks are looking for, as well as some of the pitfalls associated with buying foreclosures. A lot of ‘experts’ allude to pie in the sky approaches to financing, but consider a couple of thoughts:

Real estate is indeed local; knowledge is universal. Do you understand how the two are critical to your success at buying a foreclosure?  

Would you allow yourself to get caught up in the ‘emotion’ of bidding at an auction, where you could possibly save 10% below market value? Is the 10% discount worth it, given that you bid on the property sight unseen? Were you aware that you’ll be paying the auction house a 5% buyers  premium over and above the final sales price, that by the way, the bank will NOT allow you to finance?

If you’re a sophisticated investor, you’ll understand that there are better values from motivated sellers (the real estate buzzword for ‘desperate’), than you’ll ever find at an auction. You’ll realize that a bank owned property is a better option. You’ll realize that pre-foreclosure benefits everyone. There are several ways to benefit from this current real estate environment. Sadly, auctions are not that avenue.

Simply put, I believe that auctions are the Botox, glossy magazine equivalent of the real estate world. Simply put, they are wonderful marketing techniques that sell 1 or 2 of several hundred homes at a screaming deal, while most of the others are typically at market, and sometimes even above. We’ll keep an eye out on these auctions in hopes that they will someday provide the values that they so aggressively promote.

We hope that you’ll see a real estate environment where excess supply combined with extremely low interest rates will provide the impetus for buying at a great value. If you’re waiting for the bottom to hit, be careful. It will have passed you up while you’re daydreaming for prices to continue dropping, at the same time that interest rates will begin to increase, under the current pressure of government intervention designed to help prevent foreclosure.

Happy investing in 2008! Will you create wealth by employing the right strategies in foreclosure investing, or will you sit on the sidelines until the next boom?

Is Bush’s plan enough to save homeowners? Perhaps not some, but it may delay the inevitable and create worry in the markets.

This plan is for homeowners who were making payments at lower introductory rates but have had a harder time at the adjusted rate.

The “plan” is a result of talks between U.S. Treasury Secretary Henry Paulson and other banking execs, regulators and mortgage investors–along with consumer groups–to try to stop the estimated 2 million new foreclosures by the end of the year.

The plan will apply to borrowers who made loans between the start of 2005 through January 30 of 2007, with rates that are scheduled to increase between January 1, 2008, and July 31, 2010.

Some groups wanted a seven-year freeze; others (banks) were looking at one to two years. The five-year plan appears to be a compromise.
This is really designed to help those who are going to have resets they cannot afford. It will freeze their rate, not allowing it to increase, for that five-year period.

The problem is, we may just be creating a situation where we’re delaying the inevitable. The worry over what will happen when all of these people who got their rate stabilized have to begin paying the full amount may hurt the markets. I think the goal is much like an on-ramp with a light–to let people on slowly (or to go into foreclosure slowly) rather than have a huge wave of them all at once, so prices can stabilize a bit. Perhaps we should leave the markets to do their thing, and let’s take the drop in price and the high foreclosure rate now. Banks don’t want to own homes; they will work with homeowners with or without government intervention.
To really look at this, a mortgage typically running around $1,200 per month would add $300 per year in payments by rate resets if you got a mortgage in 2006. The goal would be for borrowers to negotiate into a fixed rate plan. The hope is that by the time these people then have their rates reset (again), the market will be better equipped and there will be less inventory and more money back into the credit markets to handle the new wave of foreclosures. Will that occur? I’m not so sure it’s in the best interest of the markets and may just drag out a problem that could resolve on its own more quickly.

Dani

Just because a homeowner is in a “state of foreclosure” doesn’t mean he or she will lose his or her home. There is a process (judicial and nonjudicial, depending on the state the individual lives in) that determines how long before the person actually loses his or her home–and how long he or she has to try to get it back.
But new information is indicating that more and more homeowners are actually going all the way through to the foreclosure process and, in fact, losing their homes. Foreclosure activity hit a high in August in this past year, meaning that default notices are down for October. This means that perhaps lender intervention is working. Notices of default, often the first legal step after a missed payment and a sign that foreclosure could be imminent, were actually down 9 percent in October. However, reposessions–the bank actually taking back the home–were up 35 percent, meaning that more people who enter the process of foreclosure are losing their houses.

Nevada continues to dominate in foreclosures for the 10th straight month. Its average is 3.6 times the national average. Nevada foreclosures grew 20 percent over the previous month and have increased 300 percent since October of 2006.

California is second, but it has decreased 2 percent from the previous months.

Florida, ranking third for October, was down 9 percent in activity from the previous month, but up 165 percent from one year ago.

The other top states? They continue to be Ohio, Georgia, Michigan, Colorado, Arizona, Indiana and Illinois.

Another bit of news? Foreclosure totals–that is not the percent of homeowners in foreclosure but the actual number of homes in foreclosure–don’t look so good. California, Florida and Ohio round out the top three. Ohio is worrisome, with a 10 percent increase over the previous month. Ohio is also fourth among all states in per-household filings.

A state that has been somewhat worry-free, Texas, actually documented the fifth highest state total–but it is one in 735 households, which is lower than the national average. The volume is caused by the sheer number of homes.

What metro cities are worst?
California dominates in the top metro foreclosure rates, taking six out of 10 spots for October. Merced is now number one, replacing Stockton. The rate is one in every 82 households, or 6.7 times the national average. Stockton and Modesto are now in second and third; Riverside-San Bernardino and Vallejo and Fairfield are sixth and seventh. Sacramento has moved to ninth place.

Las Vegas is fourth in the nation for the month: One in every 120 households. Detroit is fifth. Cape Coral and Fort Myers, Florida, are eighth.

Cleveland has now moved into the number 10 spot.

Dani Babb

Source: Realtytrac Press Release Nov 29, 2007

In a story by Floyd Norris in The New York Times Business section November 24, Norris warns of a recession due to housing worries.

At first glance, his logic appears to make sense. However, he ignores some of his own points that–in and of themselves, in my opinion–create a different answer to the question: Will the housing problems lead to a recession?

First, he cites that builders are building at a level half of what they were two years ago. Precisely–when supply and demand work as they should, recessions can be held off.

Second, he cites that if we don’t have a recession due to housing, it will be the first time in history that a housing slowdown hasn’t resulted in a recession. Exactly. This will be the first time in history. Why? The very nature of this “housing bubble” is unlike anything we’ve ever had in history. I’ll explain more in my final paragraph.

Third, he notes charts–one of which shows that housing starts declined with the mortgage crisis. And? I’m not sure when this revelation hit Norris, but that is one factor in the current housing crisis, and it means that we, as a nation, got a double housing whammy. It doesn’t mean market conditions won’t prevail.

As long as jobs remain plentiful, people are making money (and who would have thought we even had a housing “crisis” with the retail numbers from Black Friday?) and investors feel confident in the Fed’s decisions, I don’t see the reason for such alarming headlines–unless there is a New York Times circulation recession, too.

Why is this different?

• This housing decline is being compared to others in U.S. history, when it clearly is different. Why? We had an incredible increase in prices, with some states seeing 200 percent increases in as little as two years. We had investors in the market like never before. It isn’t like other housing conditions ever before.

• This was a bubble in some areas coupled with easy-to-acquire mortgages (which by the way was a great help toward the average Joe realizing a part of the American Dream) and low interest rates.

• Bubbles don’t lead to recessions. They lead to price declines–and fast. Did the tech stock bubble and burst lead to a recession? Nope. Why is housing different? This isn’t a general overall decline in housing. This is housing returning to normal and homeowners still thinking they can get 2004 prices for their houses.

• Excess inventory will shave off as prices decline along with interest rates. When inventory reaches 6.5 months, we’ll be back in business.

Dani Babb

I was perusing the blogs tonight, and I noticed this one:

http://www.soflahousing.com/2007/11/video-peter-schiff-on-fox-news.html

It features a video of Peter Schiff and me from Fox News this past week. It never ceases to amaze me that people do not want to buy low and sell high! Judging by the consumer spending on Black Friday, it doesn’t appear as though people feel the wealth effect too negatively right now. Thoughts? Are any of you not buying due to lack of equity in your homes? I’d love to hear numerous viewpoints on this.

Dani Babb

 Ever wonder what to do after you own the property? Check out this link! Many of you are unable to sell your homes, or bought foreclosures and aren’t quite sure what to do with them now. I’ve discovered this fantastic site to help landlords! Many of you are going to turn to landlording, which is not only a good option if your house isn’t worth much today and you need to move now, or you just want to buy up some good foreclosure properties and rent them out and hold them for a few years. You may want to consider this before hiring a property manager as I am doing now. Either way, excellent information and a lot of free forms!

Dani

The new housing numbers for September are more scary than we thought, and the implications of the spiral are worse than some of us expected.

Check out this link - we will be answering YOUR questions about finding foreclosures on the NAR web site!

http://narblog1.realtors.org/mvtype/theweeklybookscan/2007/10/book_review_finding_foreclosur.html

Dani

We have an interesting problem. If an individual files for Chapter 13 bankruptcy to restructure their debt over ten years, they may run into a glitch. The current code prevents mortgage lenders from changing loans on a primary residence, yet they can change terms on a vacation home, investment property, farms and businesses!

There are competing bills in the House and Senate that would allow bankruptcy courts to modify mortgage terms and extend repayment time frames. But as of now, primary homes cannot be modified. (WSJ)

It is suggested that if this modification is made, approximately 600,000 people who will be in foreclosure by the end of next year will save their homes. While it may keep foreclosures away for some, it may discourage lenders from borrowing to low income households. They also worry about what it will do to the loans they’ve turned into securities and sold to investors, because the terms of the loans, which investors paid a price for, could then be changed by the courts. There is, too, some worry that banks will make up the difference by charging everyone else higher rates.

Dani