Distressed Residential Real Estate News, Over 8.5 Million Homes On The Market. Punt!

The Rising Tide of Foreclosures 17 comments
by: Wealth Daily March 22, 2010 | about: IYR / RWR / RWX / XHB
Wealth Daily picture Wealth Daily

As sure as the two cardinals that are perched outside my window, I'm beginning to think that Lawrence Yun could use a lucky rabbit's foot or two.

Better yet, maybe he ought to consider spending the day combing through the grass in search of four-leafed clovers...

Either way, he can use all the help he can get this spring.

Because as any honest realtor will tell you, the next few months of activity are the ones that will set the tone for rest of the year. And given the ongoing free fall in housing, it is make-or-break time for the 2010 housing market.

As the NAR's chief economist is well aware, the open houses will either be on the quiet side this spring, or jammed with those buyers that Yun insists are still somewhere on the sidelines.

All I know is that after hanging his hopes on these mysterious folks for the last two years, Yun's sideline buyers have yet to materialize — even though all the king's horses and all the king's men have tried to lure them out of the woodwork.

The 2010 Housing Market Teeters on Edge

Meanwhile, the pain of those trapped by the fantasy of the bubble continues to grow as REOs and foreclosures add more supply to the bloated market.

In fact, based on data from the one of the nation's biggest mortgage servicers, nearly 7.5 million loans are in some stage of delinquency or foreclosure, while an additional one million properties are already bank-owned.

That's an 8.5 million "shadow inventory" of homes that needs to close just to clear the overhang of distressed properties alone. At present sales rates, that represents a nearly two-year supply.

Keep in mind, of course, that those are static figures. Three months from now, those figures will be even worse; 346,000 borrowers became delinquent for the first time in January, adding to the burden.

What's more, with nearly one-quarter of U.S. mortgages now "underwater," almost 11 million borrowers are now trapped in loans backed by assets, the value of which is dropping like a stone.

As a result, more and more homeowners are just simply walking away from their troubles — even when they can afford the payments.

For borrowers like Wynn Bloch, walking away was nothing more or less than a business decision, plain and simple. A retired psychologist, Bloch is a renter today after defaulting on her $385,000 2006 home purchase.

"There was not a chance that house was ever going to be worth anywhere near what my mortgage was," Bloch told the LA Times after finding out that comparable homes in her neighborhood were now selling in the $200,000s.

Hardly alone, these strategic defaults accounted for about 35% of the December 2009 defaults — up from 23% in March of 2009, according to Luigi Zingales, a professor at the University of Chicago's Booth School of Business.

Think of it as a "thanks, but no thanks" on a grand scale.

We're From the Government and We're Here to Help

As for the alphabet soup of government programs designed to stem the foreclosure tide, they might as well be trying to drain the ocean with an eye dropper. Like everything else in this bust, it is extend and pretend all the way; nearly 70% of all modified loans re-default within 12 months anyways.

Take HAMP, for instance: This is the Home Affordable Mortgage Program that was supposed to save millions of homeowners from foreclosure.

According to the U.S. Treasury, just 170,000 borrowers nationwide have had their loans permanently changed under HAMP. That's a mere 5% of the 3.4 million borrowers who are eligible under the program.

But even then, that's only half of HAMP's problems. The other is — for the most part — the majority of these "saves" have only delayed the inevitable. Take a look:
permods

Consider this: Even after receiving a permanent modification, the median HAMP borrower is still left with a debt-to-income (DTI) ratio of nearly 60%! That ratio is simply off the charts — and it's an improvement from their previous loan.

In fact, before the industry jumped the shark, a 41% DTI was considered high in a more rational time.

Just think about it... After paying the mortgage, installment debt, alimony, 2nd liens, and other fixed payments, these median borrowers are left with just $1,086.52 before taxes to pay for everything else.

That leaves about $200 a week to pay for groceries, utilities, insurance, repairs, and other expenditures.

And while that is better than the $125 a week they had before the modification, it's nowhere near enough to keep the majority of them from defaulting in the future. The numbers simply won't add up.

As a result, the foreclosure crisis will undoubtedly be with us for some time, weighing heavily on the housing market. And I haven't even brought up the prospect of the option arm debacle that will begin to bust later this year.

Meanwhile, the re-sale market continues to struggle.

Existing home sales dropped 7.2 percent in January after falling 16 percent in December — the biggest declines since comparable records began in 1999, according to figures from the National Association of Realtors.

And keep in mind that's with interest rates on a 30-year fixed rate under 5%. As the Fed pulls out of the mortgage market in the next two weeks, those rates have nowhere to go but up.

And according to my mortgage pals who have over 40 years in the business, this is the sum of all fears.

"Steve," they told me last week, "if rates go over 6%, you can stick a fork in it because at those levels, it's game over for housing." Already it is as bad as they have ever seen.

So maybe Lawrence Yun is just being optimistic when he says, "We will see weak near-term sales followed by a likely surge of existing-home sales in April, May, and June."

Personally, I think he would be better off rubbing Buddha's belly.

Disclosure: No positions
About the author: Wealth Daily
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Unique investment ideas, tips, strategies and insights from our team of editors: Brian Hicks (author of the bestselling book, Profit from the Peak), Steve Christ, Christian DeHaemer, Ian Cooper, Nick Hodge and Adam Sharp.

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o wrocnrob
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Is there a solution? The only way is to put more people into homes. Some kind of "rent-to-own" or equity participation agreement could get value from these assets, which need to bubble again. I don't understand why they feel the need to resort to 50 or 25 cents on the dollar.

It ain't a bubble till it breaks - rob
Mar 22 10:58 AM Reply
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o Malkiel
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I chose the screen name "Malkiel" as a sideways tribute to Burton Malkiel's beloved "Random Walk Down Wall Street". The book had been out forever and I found to my embarassment a couple of years ago that Mr. Malkiel was not only still alive and well, but young and chipper. I... More
I don't think buyers will find 6% a scary number if there are significant bargains out there--sales could be brisk if buyers feel like they're getting a great deal. That may be the crux of the matter--will sellers see the iceberg coming and head for the lifeboats in time?
Mar 22 11:03 AM Reply
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o tinytuna
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Now that I am retired and not earning wages' income any longer, I would like to learn more about investing income. I don't mind sharing a comment either. Seeking Alpha appears to be an excellent forum for both. Some of my own views on these topics can be found at:... More
The deal is irrelevant now and for awhile. When responsible people can feel confident about their income to meet 15 or 30 years of debt paymnets, then the market will chip away at the backlog.
Mar 22 03:30 PM Reply
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o circuitrider
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Malkiel, they are already in the lifeboat, and the ice berg is still coming. The popping bubble you will hear is the hot air and lies of our green shoots and great recovery.
Mar 22 11:24 AM Reply
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o chekurtab
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I'm a survivor of communism brainwashing (via escape from USSR) and capitalism greed (via marriage and divorce). Swear not to get trapped by another "ISM" or propaganda.
Good article. Foreclosures has been rising and still have a long way to go. Large segment of mortgage pie are adjustable mortgages that are set to adjust in 2010 all way into 2012. That can only make matters worse.
Don't forget about commercial real estate bubble. I'm afraid the real estate will take decades to recover.
Mar 22 01:58 PM Reply
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o Alex_G
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chekurtab,

I believe a large amount of those mortgages are in fact prime, conforming, 5/25's or 7/23's. Most of those will adjust to a spread to an average libor or CMT.

Mine is a perfect example: 12 month CMT plus 260 BPS. Current rate is 3.05%. Many of the loans you speak of will actually see a reduction in their payments, not an increase.

I know this doesn't stop the strategic defaulters, but it won't cause the payment shock that sub-prime borrowers experienced.
Mar 22 08:56 PM Reply
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o JIR11
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Alex_G:

I agree. Mine reset at 6 mo LIBOR + 225 bps. my current rate is 2.75%; however, I've seen 6 mo LIBOR tick up each week and is now close to 45 bps.

I think the sticker shock for people like us will come in short time, however, as inflation kicks in.
Mar 23 01:05 PM Reply
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o Alex_G
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I don't think we'll see short rates go up to where libor + 225 bps will exceed current 30 year rates in the next couple of years.
Mar 23 03:09 PM Reply
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o Griz
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Not buying the hype.
Unless we are talking about option ARM's where just about all borrowers were choosing the lowest possible payment. This particularly nasty instrument lets the borrower pay less than the full interest payment required, let alone not paying for any principle.

The pain really comes when these loans reset (possibly at a lower rate but more likely at a higher, non-teaser rate), and become fully amortizing. If the borrower was consistently paying the lowest payment possible for say 5 years, then his principle balance is probably 20 - 25% higher than when he started. Once a fully amortizing payment is required, paying a portion of the now larger principle and full interest likely at a higher rate, these borrowers could see their payments likely double or triple.

I think many of these folks are staying in their homes taking advantage of the low payments, full-well knowing that they are so far underwater that it won't be worth saving. As soon as that reset comes (both principle and interest rate), they will join those strategically defaulters as well.
Mar 23 01:40 PM Reply
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o BUZZER
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Retired laborer/ surveyor/ engineer/ musician/ entrepreneur/ venture capitalist still investing primarily in equities around the world. Born in Germany, emigrated to Canada as a child, English is my second language and I excelled at mathematics in school. Was employed for 6 years after... More
Should it surprise anyone that if you can sell furniture with no cash required for 2 years, that selling houses would be attempted using the same format?
Mar 23 02:03 PM Reply
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o Alex_G
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A lot of those option arm buyers have already defaulted. It would be interesting to see the numbers and charts updated to people current on their payments that haven't adjusted up yet to full amortization.
Mar 23 03:12 PM Reply
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o JPDX
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There may very well be some excitement and price stabilisation in the coming months. Some markets will probably even go up. The problem is that most people are sideline buyers that are stuck in houses they can't sell for several reasons. Walk-aways may be sideline buyers, but their credit will not allow them to buy so they'll end up renting for at least 3 years. It is really up to first time buyers. The low end houses are the ones that will sell, further driving down prices on better homes. This whole thing is going to suck for a long time I'm afraid.
Mar 22 04:03 PM Reply
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o ryanclarke
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As Uncle Ben refuses to let the U.S. economy transition to a non hydrocarbon transportation model ... GM has a better chance of getting South Korea to supply the lithium it needs for the new Volt by scavaging the bathrooms of all the bipolar pill poppers in America ... I have made the reluntant... More
Unless King Obama can convince the Saudis that $50 ( and not $80 ) per drum for oil is a fair price .. the consumer in the U.S. is going to be DEAD.

The big boy banks can hide debt forever ... given the FASB rule changes in March 2009 ... but Bernanke can't print more oil ... unless he can come up with new technology that allows the Fed printing press to do as such.
Mar 22 06:14 PM Reply
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o Robert Castellano
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Dr. Robert N. Castellano, president of The Information Network (http://www.theinformationnet.com/), received a Ph.D. degree in solid state chemistry from Oxford University (England). He has had ten years experience in the field of wafer fabrication at AT&T Bell Laboratories and Stanford... More
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Why are you blaming the Saudis? Blame the speculators and the refineries who are shutting down production to increase prices.
Mar 23 10:10 AM Reply
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o BUZZER
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Retired laborer/ surveyor/ engineer/ musician/ entrepreneur/ venture capitalist still investing primarily in equities around the world. Born in Germany, emigrated to Canada as a child, English is my second language and I excelled at mathematics in school. Was employed for 6 years after... More
I can't understand why the Chinese don't come in and offer 30% of the asking prices and buy up whole subdivisions to rent out to the former owners.

It makes a lot more sense than continuing to buy useless IOU's from the Treasury.
Mar 23 01:26 AM Reply
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o PainfullyAware
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I Am A Concerned Citizen As Well As A Manufacturing Engineer Heavily Involved In Distressed Real Estate. Points To Ponder: Debate Is The Distillation Of Reality. Reality Will Be Reality Whether Believed In Or Not. Pretending In Dire Circumstance Usually Results In Catastrophe. Complexity Favors... More
How Unfortunate That You Will See This Very Thing Across Many Asset Classes.

Just Before The Last Throws Of Contractual Construction, when Turmoil Becomes More Than Just Financial, "Governments" and their "Sovereign Backers" will "Purchase TANGIBLE Holdings, At Fractions, In Other Countries".

Where contracts survive => so will the centers of wealth, and the Instigators and Enablers that can escape the peoples wrath, from their respective origins.

Watch For It; The event will be slow to be seen but quick in the finality.

A Fundamental Change Will Occur Where "Value" Will Rule Over "Promissory" For All Nations.

Not Everything, Nor Every Point, Will Descend Into Chaos => Some Places Are Going To Get A Bit More "Dynamic", to say the least.
Mar 23 02:10 AM Reply
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o Scott Backus
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Biochemistry major working in the software industry with an outside interest in macro finance.
"And keep in mind that's with interest rates on a 30-year fixed rate under 5%. As the Fed pulls out of the mortgage market in the next two weeks, those rates have nowhere to go but up."

The fed may be pulling out of the mortgage market, but I bet they're prodding the banks to step in and buy the mortgages with all the fed cash on their books. The steep yield curve only helps.
Mar 23 01:26 AM Reply
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COMMERCIAL SHORT SALE INVESTOR WRITES BOOK $1 MILLION REASONS YOU SHOULD BE IN COMMERICAL SHORT SALES REAL ESTATE INVESTING- By Earl Allen Boek

$1 Million Reasons You Should Be In Commercial Short Sales

Real Estate Investing



By
Earl Allen Boek




All Rights Reserved 2010

Chapter 1

The Investment Has To Be Done In Your Mind First

My name is Earl Allen Boek.  My friends call me Al Boek.  As I write this I live in the far reaches of Northern California in a smaller city, much like thousands of other smaller cities across the country. I grew up here in the area salmon fishing and playing football in high school and working in the local food service industries.  My family has been here for generations now and I’ve been here for the last 15 years or so, just about the longest period, since my childhood. 

My background is not that different perhaps than many of you that will read this.  I went into the military when I was 19,  when I returned I met and married a childhood sweetheart.  We had two boys who both now have children and families of their own.  I went to a local junior college on the GI Bill and graduated with an
AA, taking mostly business related classes. 

Since I live in an area known mostly for it’s timber and recreation, mountains, streams, rivers and lakes, the pace here and the income potential, compared to places like San Francisco, Los Angles,  Honolulu, other places I’ve also lived, is slower and the real estate investment markets are not like anything compared to
these  metro areas .

The commercial, distressed/short sale transaction I am about to share with you should not have happened in a place so small, really, but the fact that it did, is good news for you living in the more rural areas of the country.  What it means is the information that I am about to share can be of value to you, agreed to maybe different degrees, but still a benefit, no matter where you live.

You should know,  I had no credit and no money when I started this transaction.  Anything you have in those two areas,  better than I did at the time is certainly icing on your cake.  Understand had I a choice in the matter I would rather have had some or a bunch of both credit and cash on hand to invest.  But what I did have, what I found was a distressed commercial medical office complex.

Even though it had sit empty for three years before I did the transaction and I had
driven by this big empty set of offices on two commercial lots across from the post office in my town nothing happened to it until I made up my mind to purchase it. 

So the transaction had to happen first, in my mind before it could have ever happened at all.  Looking back I just wish it had happened a year or two sooner. Then again, the three years of nothing happening to it, had done nothing to hurt my chances of success…as it turned out.

I will be including pictures and other documentation of the building lots and the actual offices that were included in the deal as well as back up documentation and proof of everything I write in these pages.  Because, frankly, even though we have all heard stories like this one.


When you turn your TV on late at night and hear some pitchman saying how you can begin purchasing real estate with no money down, with no credit, with no nothing.  Our minds, quickly take us back to our sanity, telling us that what our minds have created cannot happen in the real world. So after our minds convince us something can’t be done, it seldom is done, that is why I feel you need the proof and back up documentation.  Not just a copy of a check,  at close, which by the way was $98,600 and change.  I’ll also include the written offer, pictures, the closing statements on the deal, the lease/rent registers, the appraisal, so that your mind
figures out what my mind did.  Hey, this deal can be done!

You do not believe me MIND? just watch this.

So just realize what I have, the only thing between you and your first deal, or you in your next 100 deals,  is the command of that little bit of real estate, right between your ears.  You can achieve what you mind can conceive.  Can you do it on your first deal?  Maybe not, but why not?

My suggestion at this point, is to go get yourself 500 business cards with your name on them and the words Real Estate Investor, just for starters so your mind gets the message. Smile.

So, here’s the transaction scenario.  Every transaction has one.  A break down of the deal.  Goes like this…We have one long building approx 3300 sq ft. with a couple of waiting rooms, ex doctor offices, remember, a nurses station, a coffee break room, several bathrooms, including a handicap one, a large phone and file room, and about 5 or 6 nice office spaces and about a dozen of what were once examination rooms, about 150 sq. ft. ea.  Behind this building is another building that would make two nice private doctors offices, each with a waiting room, a nurses/bookkeeping station and another 6 each examination rooms about another 2,500 Sq ft all together in those two attached offices.  Behind that building was a nice brick building used for storing records, free standing about the size of a large garage with a roll up door on one side and entry door on the other.  So all this real estate is on one commercial parcel and behind that parcel is another bare parcel the same size separated by an alley.  The entire transaction, owned free and clear by three older, retired doctors, was being offered for $550,000.  All the buildings were at least 30 years old, maybe a little older.

The entire half of city block across from the town post office is listed by a local real estate broker. His listing commission is 5%  ($27,500)  and if he’s lucky enough to sell it too, it doubles to 10%.

So,  in the heart of a little town, this one having 9,000 folks, mostly retired, just 15 minutes south of the town I live in, just off of Interstate 5, heading North to Oregon, or South to Sacramento.  It’s possible to do a transaction like this one and create or turn it into your first $1 million dollar transaction.

Ok,  there you have it….What do YOU want to offer for it?  Maybe first we need to decide what you think you can do with the buildings, that is what can you do, that no one else passing them has not thought of for the past 36 months to turn this empty project into a money maker? 

The city was called Anderson, so it was as easy as ABC for me.  Anderson Business
Center.  Sub leasing small offices to small businesses became my fifth cash flow stream of income.

Sorry, I left out a few others didn’t I?  Before I tell you about the other income streams, I think its a real good time for you to consider going online and ordering a LLC, Limited Liability Company. You should not spend over $400 for one.  Best to get one from the secretary of state of you State, that’s exactly the same place the web company will be forced to buy it for you.  In my state if I go direct the set up is around $200.  More respect will be paid you if your offer is made from this kind of investment vehicle, unless you rich and well-known in your city,  even then,  now you should FOR SURE use this type of vehicle to do real estate transactions and offers with for the asset protection this structure provides.  Back to the deal.

The first stream of cash…I needed $1,000 to cover the $1,000 earnest money, I needed $35,000 more to cover the added deposit in thirty days so I could move in and I needed $100,000 in 90 days to  close the escrow and take final control of the buildings.  So the first cash flow on the building was the $36,000 I borrowed.  This would have been a good time to get an extra $4,000 to work with also, and I may have done that, but cannot for the life of me remember doing it. 

The second cash flow, got to have a reason for asking for cash, was to cover the $100,000, added deposit which I did.  At that point I was given keys to the building and allowed to move in.  It was in fair to good shape.  So after installing phones and internet, I purchased a banner and started leasing out spaces.  Third stream of cash flow. 

Then I needed some operating capital,  I looked around, and figured I do better hiring a Southern California appraiser than a local one, and asked for his verbal suggestion what the buildings might be worth.  Like sales are used for this, same size, the same type of  locations, adjusted for my smaller town,  market values were compared and then I asked what he thought it all might be worth, leased out?  I was stunned when he told me perhaps over $1 million.  Actually stunned is not the best word, since by then I had a good handle on the actual value of the transaction to me, from an investor stand-point.  None-the-less, at that moment I stepped up my leasing efforts and ordered an appraisal. 

Within 3 months, on the strength of the verbal appraisal coming I found an investor and borrowed another $250,000 dollars and closed the transaction, secured by a second deed of trust and a note drawn on the LLC and signed by me as the manager.  After all title and escrow fees, bringing the taxes all current on two lots and paying all loan payments 6 months in advance, points, fees and cost. I closed the transaction and was issued a check to the buyer, my LLC of nearly $100,000. Dollars.

Within 6 months of the purchase the property appraised at $950,000.  So my fifth cash stream was the appreciation of the building through my fixing up and leasing the offices.  A whopping $400,000 dollars or over $66,000  a month since my purchase increase in value.  (Appreciation my fifth cash flow from the project of nearly 1 dozen cash flows and related companies founded that 12 mo. period)

But it did not stop there. That is where it all really started. The major portion of the money gross and netted in this transaction was not from appreciation but from what I call association.

Al Boek, is a twenty year licensed real estate loan agent.  In no way is
he suggesting you follow his advice or try to duplicate what he had
done at home, smile. However if you do, please contact him he would
like to meet you.  All real estate investing should be approached with
care and the proper pre-screened, agents, brokers, attorney, CPA and
other investment experts. Al Boek, has never called himself an expert.
And suggest you proceed with care with anyone that does.

However, he is looking for professionals nationwide who would like
to network with him and build their own commercial investment
business.  He suggest a good start, NO COST vehicle here:
http://www.mortgagemod101.com  Go to the bottom and click on
Representative and use his name under referral agent and this code.  
r426463  You will instantly show up under his list of Reps and
he will be in contact with you and show you how you might take
advantage of the $535 Billion Dollar Commercial Short Sale Market
exploding over the next 24 months.  EAB

HEY!,  If your gonna run with the big dogs...

http://msmarketing.gogvo.com/index3.php
Hey, If your gonna run with the big dogs you should watch this 7 minute video now.

http://msmarketing.gogvo.com/index3.php