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

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

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

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

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