Tuesday, March 23, 2010


11.3 Million (25%) of Mortgages Underwater

Cnn.Money.com and several others are reporting that according to FirstAmerican CoreLogic more than 11.3 million homeowners, almost 25% of all U.S. mortgages, owe more on their mortgage than their home is now worth as of the end of 2009.  That is up from 23% and 10.7 million borrowers from three months earlier.  An equally critical number is that over 10% of all mortgagees owe 25% more than their home is worth.  “The rise in negative equity is closely tied to increases in pre-foreclosure activity,” CoreLogic said. Once a homeowner owes 25% more than the house is worth, foreclosure rates rise sharply.
 The number of underwater mortgages increased by about 620,000 from the third quarter, the firm said. Another 2.3 million mortgages had less than 5% equity in their home, which could be wiped out if home prices fall further.  “Negative equity is a significant drag on both the housing market and on economic growth,” said Mark Fleming, chief economist with First American CoreLogic. “It is driving foreclosures and decreasing mobility for millions of homeowners.”
Underwater mortgages are concentrated in few states.  In Nevada, 70% of mortgages were underwater followed by Arizona (51%), Florida (48%), Michigan (39%) and California (35%).
These numbers, along with close to 10% delinquency rates for payments over 60 days late for both FHA and Jumbo loans, point to a slow recovery.  It does however highlight likely upcoming opportunities for Short Sale and REO investors.

Why Investors Should Focus on Short Sales?

Because they will continue to be a VERY significant part of real estate investing for at least two years. It is all in the numbers, and “the numbers do not lie”.
Real estate website Zillow.com says one of every five U.S. home owners owe more on their mortgage than their home was worth in the fourth quarter. YES, One out of every Five – or 20% of all mortgages have some potential as short sale candidates.  U.S. home values declined again in the fourth quarter, as the Zillow Home Value Index fell 5% year-over-year.  It was the 12th consecutive quarter of year-over-year declines.  “The prevalence of markets in or near a double-dip situation shows that we are not yet at the bottom, in terms of home values,” according to Stan Humphries,  chief economist for Zillow.
The Federal Housing Administration (FHA) reports that the percentage of loans it insures which are at least 90 days past due hit 9.12% at the end of 2009. This is up from 6.82% one year earlier – a whopping 34% increase.  For those not familiar, a 9-10% delinquency rate is of significant concern.  FHA currently insures about 30 percent of all new loans for home purchases.  AND, FHA just suspended their 90 day no-flip rule allowing Short Sale or REO investors to sell quickly to an FHA buyer.
According to DSNews delinquencies on prime Jumbo loans continue to climb.  Fitch Ratings Service says they could reach 10 percent as early as next month, as serious delinquencies rose for the 32nd consecutive month.  According to Fitch prime Jumbos at least 60 days past due swelled to 9.6 percent in January, up from 9.2 percent in December 2009.  The company says delinquencies accelerated in 2009, nearly tripling over the course of the year.  States with the highest volume of prime jumbo loans outstanding are California, New York, Florida, Virginia, and New Jersey and comprise approximately two-thirds of the $381 billion Jumbo loan market.  So, 10% of $381 Billion equals $38 Billion in Jumbo loans in trouble.  Florida saw the biggest monthly jump of these states. It holds only 6 percent of the market share, but now has the highest serious delinquency rate at 16.6 percent.
However, of primary focus to investors and the market is the approximately $2 Billion per month of Option ARM’s  scheduled to “recast” beginning in March 2010 and which will climb to $6 Billion in the month by October 2010.  From there “recasts” will gradually climb to a peak of approximately $13 Billion in October 2011 and will taper down to zero by September 2012.  A “recast” of an Option ARM is similar to a reset of a traditional ARM.  However, a major difference is that the likelihood of an Option ARM mortgage being underwater compared to actual value versus a traditional ARM is significantly higher.  Moodys has previously reported that 93% of Option ARM homeowners have chosen to make payments under their “four payment options” that adds principal to their mortgage balance every month, making a potential refinance very unlikely.   Moodys also reported that the average payment increase at the time of a recast is 63%.  How many homeowners paying $1,000 per month can absorb a new payment of $1,630?  Alt-A ARM resets, which are typically stated income mortgages, also nearly mirror the monthly volume of Option ARMS in these same time periods.  In my opinion Option ARM mortgages present significant potential for short sale investors.
Short sales are not for all investors, as they can be complicated and time consuming.  However, the current numbers of short sales are presenting investor opportunity; and I believe their total numbers will continue to grow until early 2012.  To avoid frustration and excessive time spent with banks I recommend that most, and especially new, investors outsource your short sale negotiations to experienced loss mitigation or short sale negotiation companies.  I can recommend experienced and successful negotiation companies if you do not have one.
Ted Akers and Investor Funding Alternatives, LLC provide 100% purchase financing plus closing costs for Short Sale or REO investors when you have an end-buyer under contract.  Investor financing for flip transactions can be accessed at the website www.InvestorFundingSite.com .

When Home Value hits 75% – Owners Walk For Strategic Reasons

According to First American Core Logic 4.5 million home values had fallen to or below 75% of their mortgage balance by the third quarter of 2009.  Those numbers are now projected to climb to 5.1 million homes, or approximately 10% of all homes.  The 75% threshold is being considered a level where more homeowners consider walking away from their mortgage for financial strategic reasons, even though they may be able to pay.  Consultants at Oliver Wyman estimate that 17% or 588,000 homeowners walked from their mortgages in 2008 for such strategic reasons.  The full CNBC article can be viewed at the following link: http://www.cnbc.com/id/35216537
 This data along with the Treasury Department HAFA program and FHA’s one year suspension of their 90 day no-flip rule that should encourage short sale investors.  Although unfortunate for homeowners, the economy, and valuations those that become proficient in the short sale business could thrive for the next 2-3 years.  The key to investors is to get to the homeowner to consider a short sale as an alternative before they throw in the towel.

REO Purchase Subsidy Offered by FNMA

FNMA will subsidize  up to 3.5% for purchases of its REO properties listed under the Home Path program, which is FNMA’s REO disposition operation.  The subsidy can be used towards closing costs or appliance purchases.  The link to that program is www.HomePath.com .  For this incentive properties need to be Owner-Occupied and purchased by May 1, 2010.  Home Path mortgages and renovation mortgages are also available on these properties with as little as 3.0% down payment.
This is a short window available until May 1, 2010.  While the time frame is short it is another indication of attempts to lighten REO levels.  At the end of September FNMA had 77,275 REO properties, a 7% increase year over year.  More significant however is a noticeable increase in seriously delinquent loans.  Loans three (3) or more payments behind increased a substantial 2.3% in November to 5.29%.  While this offer is only available to Owner-Occupants, it is a good indication to investors that FNMA and others are expecting continued high levels of delinquencies.  Opportunities will continue for both REO and Short Sale investors.

FHA Waives 90 Day Investor Flip Restriction!!!

This is Big News for investors AND a smart move by FHA.  Effective February 10, 2010 under waiver of 24 CFR 203.37a(b)(2) the previous restriction preventing FHA buyers from buying a property with less than 90 days title seasoning has been waived for one year as follows:
            The waiver will take effect on February 1, 2010 and is effective
for one year, unless otherwise extended or withdrawn by the FHA
Some conditions apply.  Those most relevant to investors are as follows:
-          All transactions must be arms length
-          The Seller holds title to the property
-          The waiver does not apply to Home Equity Conversion Mortgage (HECM) for Purchase program
-          No pattern exists of flipping the subject property within the previous 12 months
-          The property was marketed openly and fairly via MLS, Auction, or FSBO
  • IMPORTANT NOTE: the waiver states (any sales contracts that refer to an “assignment of contract for sale”, which represents a special arrangement between seller and buyer may be a red flag)
-          If the sale is 20% or more above the acquisition cost additional lender requirements are to apply as follows:
  • Justify the increase with documentation of significant renovation to justify the increase OR a second appraisal, AND
  • The lender orders an FHA approved inspection report and provides it to the Buyer
 The waiver and the balance of specific language can be found at:
The Red Flag language regarding “assignment of contract for sale” is an important consideration for investors flipping properties.  Transactions involving an assignment are likely to receive scrutiny by the End-Buyer mortgage underwriters.  However, use of Transactional Funding is a low-cost alternative by providing two stand-alone transactions allowing for the flip in less than ninety days.  Additionally, the requirements to justify any sale price above 20% of acquisition cost are likely to receive extra scrutiny.  However, at least the waive allows for it with documented improvements and/or a second appraisal and an inspection.
I applaud FHA!  The waiver is not directly intended to assist investors, but is a realization that not restricting free market activities will help move REO property more quickly, will maximize the return to FHA, will assist first time home buyers, and will help stabilize real estate prices.  How long will it take FNMA and Freddie Mac to see the light?

Loan Modifications – Low Numbers and Treasury Leaning toward Short Sales

According to CNNMoney.com, only about 4% of troubled borrowers have received long-term permanent loan modification help under the Obama administration’s foreclosure prevention program.  The number of troubled mortgage borrowers currently in trial loan modifications rose to 697,026, up from 650,994 a month earlier.  However the low numbers of permanent modifications are falling far short of the administrations goal to help 4 million homeowners under the $75 billion plan.  Mortgage servicers have converted only 31,382 people from trial adjustments to long-term assistance as of Nov. 30 and 30,650 people in trial modifications have been denied permanent modifications.  Treasury officials stated the reasons include not making monthly payments on time, not submitting all the necessary paperwork and not qualifying for reasons such as insufficient income.  Much of the blame, according to mortgage servicers, is due to borrowers not submitting required paperwork.  Wells Fargo reports it is taking them 45 days to approve or deny modifications once a borrower file is complete.  “We’re not satisfied yet with how this program is unfolding,” said Treasury Assistant Secretary for Financial Stability Herbert Allison at a House Financial Services hearing.
The good news is that borrowers in modifications are saving an average of more than $550 a month with current modification rates around 5.00%.  While it is reasonable to expect the number of approvals into permanent modifications to increase noticeably as pressure continues to be applied to mortgage servicers, the administration and Treasury are clearly leaning toward encouraging short sales as described in my post at:   http://www.biggerpockets.com/forums/103/topics/42310-short-sales-encouraged-by-treasury and in the post below

Short Sales – New Emphasis by Treasury

The US Treasury Department on November 30th announced plans on how to streamline Short Sales. Most agree, although the administration continues to spin it as a success, that the Making Home Affordable program has been less than optimum. Over 650,000 temporary loan modifications have been approved yet much fewer have been approved for permanent modification status, and stories abound of homeowners in the temporary modification status being foreclosed upon with no explanation. Here is a summary recap of the changes that have been enacted:
- Must be the homeowner’s principal residence.
- The mortgage must be less than $729,750
- Homeowner is delinquent on the mortgage or “default looks likely”.
- Homeowners mortgage payment exceeds 31% DTI based on gross income.
- The Loan must have closed before 1/1/09.
The qualification of “or default looks likely” seems to indicate that the borrower does not have to be in default in order to qualify for a short sale, just that a default “looks likely”. It will be interesting to see mortgage servicer responses, and Treasury’s enforcement, to short sale requests when a default “looks likely” but the borrower is not yet late.
Changes enacted:
- $1000 to lenders.
- $1500 to sellers for closing costs or moving expenses.
- Up to $3000 to junior lien holders for release of their lien.
- A minimum of 90 days and up to 1 year to market and sell the property.
- No foreclosure may commence during the marketing period allowed above.
- Servicers may not lower agent commissions after an offer is received.
- Standardized paperwork
- Servicers may not charge borrowers fees to participate.
- the Short Sale Must Fully Discharge the borrower !!!!
- A Short Sale request is to be approved or denied within 10 days
This is positive news for short sale investors as it shifts emphasis toward short sales, allows a defined marketing time without risk of foreclosure to the borrower, prevents reductions in realtor commissions, drastically shortens time frames, fully discharges borrowers, and apparently allows for submission prior to being in default.
Links for related articles from:
Reuters:  http://tinyurl.com/yk64mbs
Yahoo News:  http://tinyurl.com/ydm43yg
API:  http://tinyurl.com/yj35shj

Delinquencies & Foreclosures Record – MBA predicts more REO inventory

WASHINGTON (AP) — A rising proportion of fixed-rate home loans made to people with good credit are sinking into foreclosure, adding to concerns about the strength of the economic recovery.
Driven by rising unemployment, such loans accounted for nearly 33 percent of new foreclosures last quarter. That compares with just 21 percent a year ago, when high-risk subprime loans made during the housing boom were the main reason for default. At the same time, the proportion of homeowners with a mortgage who were either behind on their payments or in foreclosure hit a record-high for the ninth straight quarter.
The Mortgage Bankers Association’s report Thursday suggests the housing market and broader recovery could be thwarted by the continuing surge in home loan defaults, especially as the unemployment rate keeps rising. Lost jobs, rather than the shady loans made during the housing boom, are now the main reason homeowners fall behind on their mortgages.
About 4 million homeowners were either in foreclosure or at least three months behind on their mortgage payments as of September, according to the mortgage bankers group. Even if a quarter of those borrowers are able to stay in their homes, “there’s a lot of potential inventory coming into the market next year,” said Jay Brinkmann, chief economist with the Mortgage Bankers Association.
Those foreclosures will push home prices downward, especially in the hardest-hit California and Florida cities, places that are also coping with soaring unemployment, he said.
The record-high foreclosure numbers are being driven by borrowers with traditional fixed-rate mortgages, rather than the high-risk subprime loans with adjustable rates that triggered the mortgage crisis. Subprime loans with adjustable rates have fallen to 16 percent of new foreclosures from 35 percent a year earlier.
Loans backed by the Federal Housing Administration also show increasing signs of trouble. More than 18 percent of FHA borrowers are at least one payment behind or in foreclosure.
Among states, the worst of the trouble is still concentrated in California, Nevada, Arizona and Florida, which accounted for 44 percent of new foreclosures in the country. Nearly 13 percent of all loans in Florida were in foreclosure, the highest in the U.S., followed by Nevada at more than 9 percent.
The preceeding is a partial reprint of as Associated Press article today. Although it appears to many of us that REO inventory has slowed, foreclosure data and knowledge of outstanding other types of mortgages indicate upcoming opportunity for Short Sale and REO investors.
For low cost Transactional “Flip” Funding visit: www.InvestorFundingSite.com

REO’s Decrease – Short Sales now 35% of Liquidations

A Research Note by Barclays Capital, indicates that short sales have been boosted by mandatory and voluntary foreclosure prevention efforts that have prevented mortgages from entering REO status.  As federally-funded loan modifications made through the Home Affordable Modification Program (HAMP) grow and lenders are expected to hold off on foreclosure proceedings, the REO pipeline shrunk, according to BarCap researchers. The foreclosure prevention efforts have had the effect of “artificially” boosting short sales.  “The artificial constraints to foreclosure auctions have resulted in a reduction in REO stock,” BarCap said. “As a result, the net volume of REO liquidations has also dropped.
As short sales are not affected by moratoria, their rate held up and their overall share in distressed sales increased.  It has now risen more than 10 points from the lows to about 35% of overall liquidations. It remains to be seen if this increase will sustain itself once the large number of loans sitting in foreclosure are finally released into REO.”  BarCap researchers pointed to the difference in severity seen in foreclosure and short sale scenarios as one of the drivers behind servicers choosing short sales.
HOWEVER, most experts agree that there is a looming shadow inventory of REO’s yet to come and that foreclosure numbers are likely to stay high thru 2011 due to specific types of outstanding mortgages, specifically Option ARM’s which have a greater liklihood of having values underwater when they recast.  Information regarding the Barclays research was provided by Chris McLaughlin.
For low-cost Transactional Funding for Short Sale Back-to-Back closings visit us at:  www.InvestorFundingSite.com

Mortgage Delinquencies Up, But Rate of Increases is Slowing

TransUnion has just reported that delinquent mortgages increased to 6.25%, up a whopping 58% from 3.96% a year ago.  These are mortgages 60 or more days past due.  Two months delinquency is a real step toward foreclosure, as it then becomes more difficult for homeowners to catch up on back payments.  HOWEVER, the rate of delinquency is slowing.  The rate was up 7.6% from the second quarter — a much smaller jump than the 11.3% rise in the second quarter and a 14% rise seen in the quarter before that.  F.J. Guarrera, vice president of TransUnion’s financial services division, says that while the slower rate is encouraging, the continual increase shows there are still a lot of problematic mortgages out there.
Mortgage delinquencies remain highest in the four states where the crisis has hit the worst: in Nevada, the rate reached 14.5%, up from 7.7% a year ago; in Florida, the rate was 13.3%, up from 7.8% last year; in Arizona, the rate hit 10.4%, up from 5.5% in 2008; and in California, the rate jumped to 10.2%, from 5.8% last year.  Two things have to get better before mortgage delinquency rates start reversing themselves: home values and unemployment. “Until we see improvement in both of those areas, it’s possible that it will take longer for delinquency to improve,” Guarrera said.
These numbers reinforce that opportunities will continue to be available in the Short Sale and REO businesses for the savy investor.
To your success,
Ted Akers
For low cost Transactional Funding for Back-to-Back flips visit our site at www.InvestorFundingAlternatives.com

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