Monday Morning Coffee – Short Sale Traps

Monday Morning Coffee

Short Sale Scams and Traps

Foreclosure Mess – Round 2

Foreclosure Mess

(Round 2)

The latest foreclosure crisis is creating situation that will have to result in major changes to the system and more than likely, billions of dollars of loses for banks.  I spent a lot of time reading up on it this weekend and here is the abbreviated version of what the issues are (as I currently understand them): (more…)

Monday Morning Coffee

Monday Morning Coffee

Importance of Title Insurance

Good morning,

I hope you had a great weekend.  Zach and I took our stab at clothes shopping.  Bought him some size 4 pants that looked a “little” large.  Once we got them home, I was informed that the correct size was “4T”.  Ah well, back to Target. 

Things are getting interesting with foreclosures as the number of banks with “issues” with their foreclosure process is growing.  In several states the Attorney General is stepping in and of course, politicians all over are jumping on the issue.  The timing of this is fortuitous if your goal is higher home prices because although demand has slumped after the tax credit,  if the banks have to delay foreclosures again for a couple of months to sort his out, it will keep inventory from growing too quickly and help prop up prices.  However, it does point out a very large concern all buyers should have, and that is Title Insurance. 

Typically, the seller’s agent picks a title company and it just happens that they have a friend selling the policy.  As a buyer, you need to make sure your agent is making sure you have a title policy from a company that is financially able to withstand the potential issues.  Espcially if you are purchasing a home that has recently been foreclosed on.  You do not want to have your ownership challenged only to find that the company insuring your purchase has gone out of business.  A few companies that are likely to survive any crisis would be Chicago Title, Fidelity Title and First American Title.   As a bare minimum, make sure they are publicly traded so you can look at their financial strength. (more…)

Monday Morning Coffee

Good morning,

I hope you enjoyed the weekend.  It was a nice mix of work and play (although if you had told me 30 years ago I would have call working in the yard “play”, and I think I would have told you you were nuts – right Dad?)  We started thinning out our spaghetti squash and I weighed a couple of them and realized that one plant was giving us about 75lbs of squash, which is about $110 worth of food from one seed.  I thought this was pretty cool until I realized we have to eat another 55lbs of squash to get this benefit.  Why can’t they make steak plants?

I took a look at some new data on mortgages and foreclosures from Fannie, Freddie and FHA.  I posted the information (which came from CalculatedRiskBlog.com) on the site yesterday, so I won’t bore you here.

Although the market is slow, we are continuing to receive offers, and are actually having some success getting a few into escrow.  I should have 2 small, detached condos in the 4S area to tell you about next week (although photos will be a week later).

That’s it, enjoy the coffee!

Birds And The Wisdom They Impart

by Elisabeth Folino

 
This morning, listening to the birds greet a beautiful sunny winter’s morning, it occurred to me that rain or shine the birds always greet the mornings in exactly the same way. They always start it singing with all their might, greeting the day with their beautiful songs and just getting on with the business of living life fully. One can learn so much by watching them.

I like to feed the birds on my balcony; I live in an apartment and can’t have any pets as it is against the rules. I mainly get sparrows and speckled turtledoves, a couple of pigeons and in summer, I get regular visits from rainbow lorikeets. All are fun to watch and all bring joy to my heart. Watching them is relaxing and a form of meditation for me.

The other day, one of the pigeons had got himself stuck in my balcony railing. I thought he was dead. It made me so sad and then, when I went outside, it started to struggle. My heart was filled with joy; it was not dead just exhausted from the effort of trying to free himself.

As I approached the bird, he got more frantic so I soothingly told him not to struggle. He froze, perhaps in fear. I like to think that he could feel the vibration of my not wanting to harm him. I gently placed my hand under him (he was so light) and I lifted him up to set him free. He flew up to the roof of my flat and watched as I put the usual seeds out. Low and behold, after his ordeal, he came right back down to my balcony and ate his breakfast with the rest of the birds.

Why am I sharing all this? Well, for one, it was amazing to actually hold a wild pigeon in my hands even if it was for just one second and I just had to share, but I also could not resist sharing the lesson that this situation brought my way.

Life is full of obstacles; some very real, like the bars holding the pigeon back, and some are imagined but we struggle against them till we are exhausted. Sometimes the answer is with a friend. All it takes is a little lift, a little guidance in the right direction and away we go, free again to soar just like my little feathered friend.

The biggest lesson however, from all this, is how my little feathered friend recovered from the situation. He didn’t sit on the roof looking down at the evil balcony that had tried to trap him; he didn’t relive the frightening situation over and over again. Nope! Down he came to eat his breakfast and live the life he was meant to live.

We can learn so much from birds. They truly know how to live in the now. I believe the lesson here is that sometimes life is hard and we get stuck but often help, in the form of a friend, can set us to set us free. Remaining free, however, is up to us.

Another thing that I have noticed is that while feeding, some of the birds are rather aggressive and tend to chase away the others trying to keep all the seeds to themselves. The funny part is that they can’t chase all of them away and that while they are so busy chasing the others away, they are missing out.

How often do we do that in life? Instead of just getting on with a job, we watch and criticize others only to find that while we have been busy trying to assert ourselves and prove how good we are, that all of a sudden a quiet achiever has managed to do the job and reap the rewards we were so trying to reap.

Isn’t it amazing how so many life lessons can be found just by observing nature’s creatures!

Have a Great Week!

Scott Voak

Updated Foreclosure Data

Updated Government Foreclosure Data

This week, the government released some updated foreclosure date from Q2.  These charts are re-prints from a blog I subscribe to called CalculatedRisk.   It can be found at www.CalculatedRiskBlog.com  I highly recommend it as the person who runs it does a pretty good job of assimilating different economic data.  Even if I don’t always like it, which brings me to the following charts:

Government Guaranteed and Owned Foreclosures

This first chart shows that Fannie, Freddie and FHA are now the proud owners of almost 250,000 homes (this is not all the foreclosures, just the ones taxpayers are on the hook directly for).  The number is increasing as banks are processing more foreclosures for people who just don’t qualify for a loan modification. 

This next chart taxes it a step farther and is really what caught my attention, it shows how many people are upside down on their mortgages.  This is important because if the economy were to go into another recession, these are people who have less incentive to hold onto their homes.  I look at it as the worst case, since anyone with positive equity would try to sell and avoid foreclosure. 

Almost one-third of homeowners are underwater

 The number are scary – 30.6% of homeowners under water and a total of almost $2.4B under water (this is just the portion of their loan in excess of the home value).  Also, these are first mortgages; more people are under water if you consider their second mortgages also.  But, it’s not all bad.  The next chart made me happy I don’t live in Nevada!

Negative Equity by State

Ouch.  California doesn’t look as bad as some of these other states.  And, for those of us in San Diego, we’re better off than most of California.

 Combining all three of these charts, it is evident that the housing recovery is tenuous at best.   Combined with the slowing pace of sales after the tax credit expiration I believe it is cause for concern.

Treasury Department Foreclosure Report

Foreclosure and Mortgage Deliquencies

Q4 2009

I finally finished the OCC and OTS Mmortgage Metrics Report for the fourth quarter of 2009 (I know you’re jealous at how much fun I get to have).   The report looks at all first liens held by most of the largest mortgage servicers.  It covers almost 34 million loans totaling almost $6 trillion.  It is the raw data before it gets spun by the press or politicians.  Here are some highlights and lowlights from the report:

Delinquent Mortgages

• Mortgage performance declined for the seventh consecutive quarter.  Delinquent mortgages and mortgages in foreclosure rose to 13.6% of all mortgages (once again, just talking about first mortgages).

• The percentage of mortages 30-59 days late stayed stable, most of the increase was in seriously delinquent mortgages.  This may be a positive as it is showing that the pace of new delinquencies is not picking up, and that loans are staying seriously delinquent longer which is an indication that banks are working longer to modify before moving to foreclosure.

• Option Arms continue to be the worst performing loans with only 662% current.

• There was a large increase in the number of seriously delinquent prime loans as the number jumped fro 838k to 976k in one quarter.  Almost 1 in 25 prime borrowers is more than 60 days late on the mortgage.

• Overall, 7.1% of all mortgages are seriously delinquent (60+ days late) and an additional 3.4% are 30-59 days late.

• Although the Sub-Prime and Alt-A loans have the highest percentage of delinquencies, the Prime loans have the highest number – this is important as if the percentage of prime loans going bad keeps rising it has a real chance of bringing the market down again.  However, these are also the borrowers that have the best chance of recovering if employment and the economy continue to recover after the stimulus expires.

Home Retention Actions

• The number of home retention actions slipped by 19.1% compared to the third quarter.  This is probably likely to the fact that HAMP received so much publicity in the third quarter that most people who were eligible applied then. 
• Discouraging number on the HAMP program was that although 349k people had entered the 3 month trial period in the second and third quarters, only 21k of those received permanent modifications during the fourth quarter.  That’s about a 6% conversion rate (it’s too early to have data to see how many re-default).  If that is an accurate number (it is possible that many were delayed past 3 months by paperwork issues, etc.) then the program is really a failure.  Let’s hope the numbers get better.
• More than 50% of HAMP trial plans and modifications are for prime borrowers
• There were almost twice as many home retentions started as foreclosures (this would also explain the increase in seriously delinquent mortgages as they stay delinquent until fully modified).
• The percentage of loans modified that had principal reductions fell to 6.8%.  Rate reduction and capitalization (adding your late payments back to the loan) were the most common modifications.
• HAMP modifications only included principal reduction 0.1% of the time, but they did utilize principal deferral 26.8% of the time.
• 42% of all modifications decreased payments by 20% or more – this is important to the  borrower being able to keep up with payments on the modified mortgage.
• 82% of HAMP modifications decreased payments by 20% or more.

Modified Loan Performance

•  The performance of modifications continues to improve over time:
  • Only 33.5% of loans done in the second quarter of 2009 were 60+ days late six months later compared to 42.7% of loans in the first quarter.
  • Only 14.7% of loans modified in the third quarter were 60+ days late 90 days later as compared to 30.8% of the loans done in the first quarter of 2009.
• Loans 30+ days late were obviously a higher percentage; 47.5% after 6 months for loans modified in the second quarter and 29.8% after 3 months for loans modified in the third quarter.  Both of these are significantly better than they were prior to the second quarter.
• The highest Re-Default rate is for Government-Guaranteed loans (FHA, VA, etc.)  with 67.8% 60% days late a year after modification (these are obviously reflecting pre-HAMP modifications as none have been modified for a year yet).
• One reason to be a little more positive about HAMP modifications (if more get completed) is that they seem to be reducing payments by 20% or more, and historically loans that have payments reduced by 20% or more have a re-default rate of only 39.8% a year later (as opposed to 67% if the payments are unchanged).

Foreclosures

• Newly initiated foreclosures declined in the 4th quarter as homes are staying in the seriously delinquent phase longer as lenders are working harder on modifications.
• Completed foreclosures increased by 8.6% over the previous quarter and 35.7% higher than a year ago. 
• There are almost 4x as many foreclosures as short sales and Deed-in-Lieu actions, although short sales are up 96.8% over a year ago.
• 7.8% of all subprime mortgages are in foreclosure while only 2.3% of prime mortgages are in foreclosure (however since there are more prime mortgages, there are actually more total prime loans in foreclosure than subprime).

A couple of key numbers to look at next quarter will be:

• How many of the HAMP trial periods get converted to permanent modifications.
• If the loans that are seriously delinquent transfer into the foreclosed or modified category.
• If loans modified in the third quarter of 2009 and later continue to have a lower re-delinquency rate.

I expect that the data for the first quarter will continue to improve and the real questions will come with the second and third quarter data as that data will reflect the market after the stimulus has expired.

Monday Morning Coffee – Happy New Year!!

Monday Morning Coffee

Look at Foreclosure and Default Rates for Q3 2009

January 3, 2010

Good morning,

I hope you had a great Holiday and New Year.  Cori and I were planning on going out New Year’s Eve, but life got in the way of the party.  So, as we were sitting home waiting for the New Year, I was drinking a Guiness and trying to figure the best way to salute 2009 as it made its exit.  Then I remembered a very eloquent speach an Irish friend of mine (I was drinking a Guiness) once made that summed up my feelings for 2009 pretty well, “Piss Off!”  (He was acutally pretty drunk at the time, and we were a lot younger, and it was in reference to a girl in a bar and things weren’t going well for him and…) Anyway, it seemed to kind of fit everything that happened in 2009.  Then I congratulated 2010 because 2009 set a pretty low standard to beat.  I went to bed only to have Zach wake me up at 3:30 am and make me realize that things aren’t going to change overnight (but at 3:30 am I was thankful it was only 1 Guiness).

 Anyway, here’s hoping 2010 is a great year for all of us.

Late in December, Office of the Comptroller of the Currency and the Office of Thrift Supervision (imagine a lot of accountants that don’t get invited to anyone’s New Years Eve party) released their report on mortgages, foreclosures and other fun stuff for the third quarter of 2009.  (Since I took the last week off from MMC, you had to know this was going to be a long one.)  The report is 49 pages and I can send it to you if you want it.  Key points were:

• Non performing loans are up to 12.8% of all mortgages.
• Almost 1/3 of all option ARM loans are delinquent.
• Home retention actions were up significantly (driven by Home Affordable) in the quarter.
• For every 6 homes that were 60 days late or in foreclosure, there was 1 person who received a mortgage modification or started a trial period plan.
• The most positive sign was that for loan modifications done in the second quarter of 2009, only 18.7% were 60 days late a quarter later (down from 30.7%) This is due to the fact that more modifications than before are lowering the monthly payment by 20% or more.   (I know, it’s kind of like being happy we only lost another 400,000 jobs last month). 
• For 2008, if loan modifications resulted in a payment that decreased by 20% or more, 38.6% of the loans were 60 days or more delinquent by the end of the third quarter of 2009.  If the payment decreased by less than 10% a month, 55.1% of the loans were 60 or more days delinquent.
• Completed foreclosures increased 11.9% and short sales by 22.4% over the second quarter showing that the banks are starting to process more of both.
• Government guaranteed loans (FHA, VA, etc.) perform worse than other loans with 17% of all these loans at least 30 days delinquent. 83% of these loans were securitized by Ginnie Mae.
• There are 3 times as many government guaranteed loans in serious default as there are in foreclosure, indicated there will be a continuing increase in these foreclosures.  (It is also important to note that much of the growth we are seeing right now in the market is because of the easy availability of FHA loans – I hope that the newer loans being issued are not showing the same risk level as those writen 2-3 years ago.)
• Fannie and Freddie loans are mostly Prime loans and are performing better than the rest of the market with only 7.9% 30+ days delinquent.
• An interesting thing to note is that even though prime loans have only a 3.6% serious delinquency rate (60+ days late) compared to 20.1% for subprime, the number of prime loans that are seriously delinquent is 838,083 vs 558,419 for subprime.  The serious delinquency rate for prime loans grew 117.5% in the past year.  The sheer number of prime loans out there means its performance will dwarf anything that happens in the subprime or Alt-A loan arena.

Ok, that’s enough cheerful news to start the year.  On a better note, we had one new listing we put on the market last week and before I could get the single property site up, we had 4 offers and ended up with 10.  We should go into escrow on Wednesday and it will sell for more than it will appraise for (it is under $500k). 

 I will have a 4 bedroom 3,200+sf home for you next week in 4S.

That’s it for now, but before the coffee, I wanted to share a cool project my sister was involved in last October.  She went down to Guatemala and helped fit people with prosthetics (she’s a PT).  There’s a link to the program video for anyone that’s interested (she’s in the orangish shirt) - and even if you aren’t interested, I’m still proud of her for doing it.

Enjoy the Coffee!

The Praying Hands

Back in the fifteenth century, in a tiny village near Nuremberg, lived a family with eighteen children. Eighteen! In order merely to keep food on the table for this mob, the father and head of the household, a goldsmith by profession, worked almost eighteen hours a day at his trade and any other paying chore he could find in the neighborhood. Despite their seemingly hopeless condition, two of Albrecht Durer the Elder’s children had a dream. They both wanted to pursue their talent for art, but they knew full well that their father would never be financially able to send either of them to Nuremberg to study at the Academy.

        After many long discussions at night in their crowded bed, the two boys finally worked out a pact. They would toss a coin. The loser would go down into the nearby mines and, with his earnings, support his brother while he attended the academy. Then, when that brother who won the toss completed his studies, in four years, he would support the other brother at the academy, either with sales of his artwork or, if necessary, also by laboring in the mines.

        They tossed a coin on a Sunday morning after church. Albrecht Durer won the toss and went off to Nuremberg. Albert went down into the dangerous mines and, for the next four years, financed his brother, whose work at the academy was almost an immediate sensation. Albrecht’s etchings, his woodcuts, and his oils were far better than those of most of his professors, and by the time he graduated, he was beginning to earn considerable fees for his commissioned works.

        When the young artist returned to his village, the Durer family held a festive dinner on their lawn to celebrate Albrecht’s triumphant homecoming. After a long and memorable meal, punctuated with music and laughter, Albrecht rose from his honored position at the head of the table to drink a toast to his beloved brother for the years of sacrifice that had enabled Albrecht to fulfill his ambition. His closing words were, “And now, Albert, blessed brother of mine, now it is your turn. Now you can go to Nuremberg to pursue your dream, and I will take care of you.”

        All heads turned in eager expectation to the far end of the table where Albert sat, tears streaming down his pale face, shaking his lowered head from side to side while he sobbed and repeated, over and over, “No …no …no …no.”

        Finally, Albert rose and wiped the tears from his cheeks. He glanced down the long table at the faces he loved, and then, holding his hands close to his right cheek, he said softly, “No, brother. I cannot go to Nuremberg. It is too late for me. Look … look what four years in the mines have done to my hands! The bones in every finger have been smashed at least once, and lately I have been suffering from arthritis so badly in my right hand that I cannot even hold a glass to return your toast, much less make delicate lines on parchment or canvas with a pen or a brush. No, brother …
for me it is too late.”

        More than 450 years have passed. By now, Albrecht Durer’s hundreds of masterful portraits, pen and silver-point sketches, watercolors, charcoals, woodcuts, and copper engravings hang in every great museum in the world, but the odds are great that you, like most people, are familiar with only one of Albrecht Durer’s works. More than merely being familiar with it, you very well may have a reproduction hanging in your home or office.

        One day, to pay homage to Albert for all that he had sacrificed, Albrecht Durer painstakingly drew his brother’s abused hands with palms together and thin fingers stretched skyward. He called his powerful drawing simply “Hands,” but the entire world almost immediately opened their hearts to his great masterpiece and renamed his tribute of love “The Praying Hands.”

        The next time you see a copy of that touching creation, take a second look. Let it be your reminder, if you still need one, that no one – no one – - ever makes it alone!

Have a Great YEAR!

Scott Voak

858 688 0189

Coming Loan Mods and Foreclosures

This is a re-print of a Monday Morning Coffee from 3 weeks ago.  Someone asked me to post it on the blog, so here it is.

I spent a lot of time going through data this week with the goal being to look at all types of mortgages that are currently out there and see what the delinquency rate is and when they are due for interest rate adjustments.  We know from historical data that the following has been true:

• Once a loan is 60 days late, there is a 98% chance that it will be liquidated through a foreclosure, short sale or a loan modification will take place.
• Over the past 2 years, it appears that for every 1 foreclosure or short sale there have been 3 loan modifications.
• Within one year, 58% of all loan modification are 90 days late and since the banks do not do 2 loan modifications on the same loan, at least 58% of the 75% delinquents that were modified the first time around will be liquidated within between 12 and 24 months of first going delinquent.
• Taking those together, once a loan is 60 days late, about 25% of the homes will be liquidated within a year (that’s the longest they are generally taking to process) and 44% (58% x 75%) will be liquidated in the second year.  (I could not find data on the second year after loan modification, most likely because there isn’t enough yet).
• This means that the effects of the mortgage defaults are felt over an extended period.
• These numbers will likely improve over the next couple of years as the Home Affordable modifications do more to reduce principle and payment that previous modifications.  However, there are many that don’t think it will make much difference.  The Home Affordable modifications allow for 5 years before the new loan adjusts towards market interest rates.

With the above track record, I was hoping to look at all loans that are out there and overlay loan types with when they are adjusting and the forecasted foreclosure/modification rates to get an idea how long until we work through the distressed inventory of homes (and who said I’m not a fun guy to hang out with on a Friday night.)

Unfortunately, I cannot get my hands on all the data.  Those who have it are not giving it up without a lot of dollars and frankly, I think we can get a rough idea with what I did find. 

What I found is available on the Federal Reserve Bank of New York’s Web site (if you want to get really depressed, they have a map showing every county in the country with mortgage, auto, credit and student loan delinquencies).  I was able to download the data for Sub-Prime and Alt-A loans as of June 30 of this year.

Quick note – Alt-A borrowers have better credit scores than Sub-Prime borrowers and typically longer time periods before adjustable loans re-set which is why you see lower delinquencies.  

So, the first wave of foreclosures that started last year was in the sub-prime market and the next (possibly this summer) is the Alt-A market.  But look at the number in bottom that is bolded – even after the loan mods and foreclosures of the past year 50% of the people in the country with sub-prime loans are delinquent!

I know this is getting long, but a couple more pieces of information on both types of loans, focusing on CA:

Sub-Prime:

• Of the 326,521 sub-prime loans in existence, about 208,000 are adjustable.
• 172,359 of those have already re-set (the introductory interest rate is over).
• There are only about 36,000 homes left to re-set.

Alt-A:

• Of the 613,650 Alt-A loans in existence, about 428,000 are adjustable.
• 181,898 of those have already re-set.
• There are 246,000 homes left to re-set (most of them more than 2 years out)
• Because of better credit scores, more Alt-A homeowners were offered negative ammortization loans which will be harder to modify because they have no equity.

At least in California there is likely to be more damage in the second wave as the Sub-prime loans that were modified the first time default again combined with a larger pool of Alt-A loans that are re-setting over the next 3 years.

However, I don’t think this means a 20% drop in market prices.  I think we are likely to see another drop during 2010 and an extended period of up and down (the Alt-A loans will re-set through the next 3-4 years and then we will have the Home Affordable loans re-setting starting in year 5 which should be a smaller number (if the market stabilizes) but will still be a negative influence). I think we are mostly through the painful devaluation phase and moving into what I can best call (someone else’s term) an extended “muddle through” period.

In summary as I have said before, we have oversold housing as an investment over the past 10 years and undersold it as “home”.  We don’t have a choice anymore but to look at our homes as places we raise our families and with the help of 30 year fixed mortgages, slowly pay off so that our true  “investments” don’t have to pay for our mortgage when we retire.

Monday Morning Coffee – Links to Foreclosure Data

Monday Morning Coffee – A Lot of Interesting Research

November 9, 2009

A busy weekend saw me asleep very early last night, but feeling a lot better and trying to catch up this morning.   I will try and be very quick because the work is piling up.  I have been working on a prospectus for a bulk foreclosure deal and while I can’t share the details, I can share a lot of the research and what I have found.   I will summarize the findings, but a couple of interesting articles to read if you are interested are: 

http://www.occ.gov/ftp/release/2009-118a.pdf

and 

http://matrix.millersamuel.com/wp-content/3q09/Amherst%20Mortgage%20Insight%2009232009.pdf

The main points of the first report are as of the end of Q2:

• 11.4% of all first mortgages covered are non-performing.
• Loans in foreclosure were 2.9% of all first mortgages, a 10.5% increase from the previous quarter.
• 3% of all Prime loans are 60 days or more delinquent – Prime loans are made to the most credit worthy borrowers.
• The Pay Option ARMs (also known as Pick-A-Payment loans) have a foreclosure rate of 10% plus a 60-day delinquency rate of 15.2%
• Driven by the Making Home Affordable program, homes that newly entered loan modification or payment plans totaled 439,574 for the quarter.  Up 74.8% from a year ago.

The report also called into question the viability of moan modifications noting that more than 56% of all loans modified in the second quarter of 2008 were back in default a year later.  Even more troublesome was that more than 1/4 of all loans modified in the first quarter of this year were back in default in the second quarter – owners never made another payment, they just re-started the foreclosure clock.  The report also noted that foreclosure completions are ramping up as the national, state and local moratoria have expired.

The second report looks at the the amount of inventory that is on the market and compares it to the amount that the banks are will have to put on in the near future.  This report, from Amherst Securities contends that once an owner is 60 days late on a payment, there is a 95.6% chance that the home will be taken back by the bank.  Using that number along with the number of homes that are 60 days late, they conclude that there is approximately 16 months of inventory that the banks will be putting on the market based only on homes that are delinquent today. 

The reports both also noted that another wave of loans is about to reset which will cause a similar number of defaults as we have seen already. 

After reading the articles, you might come to a different conclusion, but it looks to me like the data is pointing not necessarily to another large drop  in prices (although that could still happen), but definitely to a much longer time period for real estate to be depressed.    I will try find the numbers and put together a quick report for next week, but it seems to me that the following is likely to happen:

• We will be through the first wave of foreclosures about 3 – 3 1/2 years after the first loans reset.
• Then have to work through the defaults of all those loans that were modified which could extend the fallout from the re-sets to 5 years. 
• Add on top of that a second wave of resets that is supposed to hit next summer and assume that takes another 5 years to work through which extends things until 2015. 
• At the end of that period will be any fallout from the Making Home Affordable Program which is another type of loan modification program, but with loans that don’t reset for 5 years.  So, if people are not able to increase their incomes in 5 years to a point where they can make their payments when they adjust, we will start another wave just as the second wave ends. 
• Longest case scenario is we are still working through foreclosures from the Real Estate Bubble in 2019. 

Not that’s that that is the worst case.  I think we avoided the worst case.  By doing loan modifications now, the banks have lowered the amount of inventory on the market and created some stabilization that we would not have had if all the homes had hit the market at the same time, and although that extends the length of the recovery  I look at it as slowing the bleeding so we can figure out how to save the patient.  The overall effect is likely to be that the drop is less than it could have been, but depressed values will hang around for a lot longer than they would have.  On the bright side, that will give everyone a good opportunity to take advantage of the lower prices.

Speaking of taking advantage of good opportunities.  Take a look at the new short sale we have listed in 4S Ranch.

That’s it – time to get to work – Enjoy the Coffee!

Ghandi

Mahatma Gandhi went from city to city, village to village collecting funds for the Charkha Sangh. During one of his tours he addressed a meeting in Orissa. After his speech a poor old woman got up. She was bent with age, her hair was grey and her clothes were in tatters. The volunteers tried to stop her, but she fought her way to the place where Gandhiji was sitting. “I must see him,” she insisted and going up to Gandhiji touched his feet. Then from the folds of her sari she brought out a copper coin and placed it at his feet. Gandhiji picked up the copper coin and put it away carefully. The Charkha Sangh funds were under the charge of Jamnalal Bajaj. He asked Gandhiji for the coin but Gandhiji refused. “I keep cheques worth thousands of rupees for the Charkha Sangh,” Jamnalal Bajaj said laughingly “yet you won’t trust me with a copper coin.” “This copper coin is worth much more than those thousands,” Gandhiji said. “If a man has several lakhs and he gives away a thousand or two, it doesn’t mean much. But this coin was perhaps all that the poor woman possessed. She gave me all she had. That was very generous of her. What a great sacrifice she made. That is why I value this copper coin more than a crore of rupees.”

Have a great week!

Scott

Foreclosure Alternatives – Short Sale vs Foreclosure

My team and I have been working on an area of our business that I think is extremely important right now; foreclosure alternatives.  The interesting thing is that the most desirable result is one in which we do not make any money – loan modifications.   We don’t make any money from them because I don’t do them and I will not accept a referral fee from people who do.  I want my clients to know that I am sending them to the most qualified people, not the ones who are paying me the most.  Now, I am not doing charity work. I explain to everyone I meet with that if I introduce them to the company that helps save their home, then I hope they will call me in 10 years when they want to sell – and in the meantime tell all their friends about me.  It’s an arrangement that I hope will work well.
However, through this process there is an attitude I am noticing that is detrimental to everyone and I want to let clients as well as other agents know why.  The attitude is, “If the bank won’t approve my loan modification then screw them, I’m going to let them foreclose.”  The problem with this is that it harms the owner more than the bank.
The first obvious reason this is detrimental is that a foreclosure will hit your credit harder than a short sale.  But the second reason is more important.  On June 25, 2008, FNMA (Fannie Mae) put published Announcement 8-16 which amended guidelines for loan approval.  The key point in this document for our purposes is that if a borrower completes a short sale, they cannot purchase a home using a FNMA guaranteed loan (which will be the large majority of loans going forward) for two years after the completion of the short sale.  However, if the borrower goes through a foreclosure, they cannot purchase a home for five years.
Nobody has a crystal ball and can tell you when the housing market will hit bottom and start to rebound.  Nor can anyone say with certainty how far it will fall and how fast it will come back.  There are a lot of people that think we will hit the bottom sometime in the next year or two and then start to come back.  If this is true and a borrower does a short sale today, he or she will be eligible to purchase again at or very near the bottom of the market.  If the borrower instead allows the foreclosure to happen, he or she will have to watch from the sidelines as the market rises.
Short sales are not fun, but there is a way to do them right and to time them so they work best for the borrower.  While a year ago, only 10% of short sales were getting approved, we are now working with a company that is getting 80% of them approved.  It takes more effort than allowing the bank to foreclose and the rewards are not anything the borrower sees immediately.  However, if the borrower can focus on what will put him or her in the best position five years from now it is clear that a short sale is much preferred to letting the bank foreclose – even if all they want to do now is screw the bank.