The Obama Administration is considering further sanctions against Lenders who foreclosure before all Home Affordable Modification Program options have been explored.  The HAMP guidelines strongly urge Lenders to look at all options before foreclosing, but falls short of requiring Lenders to examine every severely delinquent account one by one before sending out a Notice of Default.  If the more stringent requirement is enacted Lenders would need to contact all borrowers who are 60 days or more late in order to determine eligibility for a HAMP modification or HAFA short sale.

The change would also require Lenders to stop all foreclosure activity against those who have been accepted into the modification program.  There have been many complaints from families who have begun making approved modified payments and have still been subjected to foreclosure filings.

The Administration says an outright ban on foreclosures before all other measures are exhausted is just one of the options under consideration in order to salvage what has widely been seen as a failed foreclosure rescue program.

Another proposal under consideration is a mortgage write down, which will require rewriting the net present value formula used by lenders to determine whether they will make more money by foreclosing or by modifying the loan.

Grab Your Piece Of The House Rehab Pie
by Bob Massey

How low can you pay for a home in your market?  Can you get one for $30,000? $10,000?  How about one dollar?  Investors who live in the Rust Belt or other areas that were overbuilt and were slammed by the housing bust can find some incredible buys right now.

A Realtor.com search of the Chicago area shows over 150 homes, condos, and multi-unit buildings for $10,000 or less.  Detroit has more than 3400 available for under $25,000, and some even as low as $40.   Minneapolis has over 130 available for $7,000 to $30,000.  In Cleveland you can find some nice little places for under $20,000.  There are even 520 homes with a starting auction bid of one dollar!

The common characteristic of most of these houses is that they are bank owned.  The bright side is that banks tend to be more worried about getting these properties off of their books than they are about making a decent profit off of the asset. Due to the extremely low prices and the banks desire to get the deals done quickly, most of these are all-cash deals.

Most of these houses need significant rehab work.  Many are burn-outs that require gutting. Often liens, real estate commissions, and all required permits and fees must be paid by the buyer.  Buyers must do all the due diligence to get surveys, inspections, and other work done before signing anything permanent.  Homes in this price range are always “as is.”

There could be local factors that you need to be on the lookout for.  An example of this is that most of the 33 listings between $10,000 and $20,000 in Cedar Rapids, Iowa, are in areas of the city that have been flooded.  You would need to find out beforehand if the house is in an area of the town that is going to be town down, and quickly any work in the area is going to be done before buying anything there.  The policy is “let the buyer beware” in these sales.

In Cape Coral, FL many of the properties listed in the $20,000 to $39,000 level are located in the Northeast quadrant, an area due to be assessed $25,000 for city water and sewer services soon.  Many of the low price homes in this community do not need a lot of TLC, but whether the assessment has been paid or not is always an issue in determining the real cost of owning a home in the northern half of Cape Coral.

Both the Housing and Economic Recovery Act of 2008 and the American Recovery and Reinvestment Act of 2009 contain several billion dollars for the rehabilitation of blighted neighborhoods, particularly in areas where foreclosure has been the highest.  At least $4 billion of the Neighborhood Stabilization portion of the 2008 bill have been distributed to the neediest cities.

Investors can’t really expect to receive any money from these grants directly, excepting portions of the bill that provide money for making energy efficiency upgrades for low income housing.  Investors could benefit indirectly if they rent out their properties to Section 8 tenants because these emergency programs are providing money to get people below the poverty level into improved housing via Section 8.

Some cities as well as non-profit organizations could offer grants to investors to get them to buy houses in need of rehab and foreclosures.  Check with your local Housing Authority to see the options in your area.

Unlike Clear Capital’s relatively rosy picture of a recovering housing market, Zillow is considerably more pessimistic.  Zillow’s data is not as fresh as that of Clear Capital.  The housing data it reports go only through December 2009.  The last two months of the calendar year did see a considerable drop in home sales and a dip in home values that is reflected more negatively in Zillow’s report than in the one we covered earlier from Clear Capital.  In these uncertain times, however, it pays to take all trend data with a grain of salt and then to pay attention in detail to what is happening locally within your own market.

As of the 4th quarter of 2009 things looked pretty grim in a number of markets, according to Zillow figures.  Home values declined 5% nationwide between the 4th quarter of 2009 and the 4th quarter of 2008.  In 29 of 143 markets in the Zillow survey had flat or decreasing home values after 5 months of increases during 2009.  Zillow defines double-dip markets as those with decreasing values of 1% or more for 5 consecutive months or more, followed by a similar increase, followed by another decrease.

Zillow sees that double-dip pattern in several markets: Augusta, GA, Greeley, OH, Harrisburg, PA, Lancaster, PA, and Oklahoma City.  Some of the major cities Clear Capital saw on the recovery list, Zillow anticipates will fall into a double-dip of price declines, including Atlanta and San Jose.  Other major cities Zillow believes is in danger of a double-dip of price troubles are San Diego, Boston and Denver.

Zillow does not expect the second downturn to be as severe or to last as long.  It will merely correct some price over-valuation that went on during a five month period in mid-2009.

One reason Stan Humphries, Zillow’s Chief Economist, is still bearish on home valuation is that foreclosures remain at an all-time high.  Of all U.S. home sales in the 4th quarter of 2009 20.3% were foreclosed homes.  In Las Vegas, and several California cities, foreclosures were the majority of home sales in the 4th quarter.

Not all the home price news was bad, according to Zillow.  In 27 of the 143 markets surveyed home prices appreciated year-over-year in the 4th quarter, and in 15 markets home prices stayed steady.

The percentage of U.S. homes with negative equity rose in the 4th quarter to 21.4%.  In some communities sellers settled for 23-28% less than they paid originally for their home when the home was resold in the 4th quarter of 2009.

It will be interesting to see whether Zillow’s trend information gets rosier when it reports on the 1st quarter of 2010.  If it is using the same playbook as Clear Capital, the news should get better.

The Lender Processing Services (LPS) reports that home loan delinquency rates in the U.S. have now exceeded 10%.  This means that for every 10 households nationwide, one has a loan at least 30 days late.  Picture it this way: there’s a late payment in at least one household on every block in the country!

Taken together with existing pre-foreclosures 13.3% of all mortgages are either delinquent or in default.  This rate translates into over 7.2 million mortgages that are behind on payments, and another 1 million properties have already been taken back by Lenders.

The new serious delinquencies (90 days or more late) between December 31, 2008 and December 2009 stood at 2.3 million of these loans.  The percentage of new serious delinquencies during 2009 grew to 4.64%, which is higher than any previous year reported by LPS’s Mortgage Monitor.

Clearly we’ve got a while to go with this foreclosure crisis.

Congressman Kenny Marchant (R-Texas) has introduced an electronic verification process requirement for those seeing loan modifications and refinancing through FHA, Fannie Mae and Freddie Mac.

Marchant points out that studies have shown that much of the mortgage fraud that left unqualified people in homes they could not afford involved undocumented workers who received assistance in providing false employment and income documents by mortgage brokers anxious to close deals between 1995 and 2005.

On his website Marchant sites a Nevada case where a mortgage broker falsified documents for illegal aliens in 233 cases and 58 of these loans have since gone into default.  The mortgage broker has been found guilty of 32 cases of fraud and one case of conspiracy.

Marchant maintains that by adding an E-Verify process to establish the Homeowner’s legal status before a loan modification or refinance application is taken the FHA and GSA agencies can save millions of dollars in wasted time and dollars in processing home loan applications for illegal residents.

While Las Vegas leads the nation in foreclosure filings, it is also gaining ground in Short Sales.  The Greater Las Vegas Association of Realtors announced that in January 21.1% of all home sales were Short Sales.   This is a 2% increase over December.  Rick Shelton, GLVAR president, called the Short Sale trend “promising” because it accompanied a similar decline in the sale of foreclosed homes.  Still, REOs represented a hefty 57.4% of all Las Vegas home sales in January.

Home prices are reported to declining at a rate of less than 1% from the previous month in the Las Vegas market, while the number of sales is increasing.

The number of homes purchased with cash increased from 40.4% to 45.5% between December and January, an indication that Investors, second home buyers and retirees are beginning to see a good value in the Las Vegas market once again.

Many states have already squashed up front fees for companies doing loan modifications.  Now the FTC is seeking a rule change to ban the practice nationwide in an effort to curb fraud in that industry. If the FTC rule goes into effect even loss mitigation attorneys will be required to have evidence of a loan modification acceptance before they can charge for the service.

The FTC has filed suit against 28 companies that purport to help people in foreclosure keep their homes.  State agencies have filed law suits against hundreds of other organizations.

One of the practices that are a tell-tail sign of deceptive practice is use of advertising that makes the loan modification company look as if it is coming from a government agency or from the Make Home Affordable program.

If the rules go through, disclaimers will be required to disclose that the modification company is for-profit, cannot guarantee success in causing the Lender to modify the loan, and does not require the Homeowner to stop communicating with the Lender.  Loan modification specialists who are also assisting with a bankruptcy for the Homeowner may have limited exemption from the rules.

Attorneys and others may comment on the proposed rule at the FTC’s notice of proposed rulemaking site.

Many are expecting interest rates to rise quickly very soon by at least a point.  This will cause many Homeowners already distressed by job loss or under water mortgage payments to have to pay even more every month.  It is expected that the next adjustable rate mortgage reset will lead to another jump in residential defaults.

Specifically, here is what is in the works: Rates are resetting.  Currently, interest rates are at historic lows with 30 year fixed mortgages below 5%.  As interest rates increase ARMs are likely to readjust by as much as double where they are now.  Just like many commercial owners, Homeowners with ARMs are often not qualified to refinance because the mortgages are under water.  Hence, many will become distressed and will either need a Short Sale or face foreclosure.

Homeowners’ equity is gone. Many over-improved property over the boom years, or took on second or third mortgages to use for other purposes.  Homeowners took on too much debt and now cannot qualify for additional financing because of inadequate income compared to debt.

Homeowners are making the decision to abandon homes even when they have the income to continue paying.  In many cases it is cheaper to rent than to continue paying mortgages—or at least that will be the case as ARMs reset.  Homeowners who can qualify for an FHA loan inside of three or four years despite a foreclosure on the books are making the “business” decision to walk.  It is estimated that approximately 25% of all foreclosures are for Homeowners who simply gave up despite the ability to pay.

Investors should get prepared for this new wave of Short Sale business.

The mortgage and real estate industries’ top servicer, originator and data processing service, LPS, has reported a continuing deterioration of loans as the end of October 2009.  For every one loan improved toward current status, three more fell into delinquency or foreclosure.

LPS reports that one in 7.5 homeowners became delinquent or went into foreclosure as of the November 30 report that came out December 2. The total delinquencies reached an all-time high of 9.97%, a 5.46% increase from October and a 21.29% increase from November 2008. More than 4% of the loans that were current in December 2008, fell behind by 60 days or more, including foreclosure, by the end of November 2009.

The foreclosure rate in November was also at the highest rate since LPS started keeping data: 3.19%, a 1.46% increase from October and an 81.41% increase from November 2008.

First American CoreLogic speculates that the shadow inventory of foreclosures could be as high as 1.7 million.  Right now the number of new foreclosure filings is declining, but that is only because of government programs requiring possible workout before foreclosures are filed.  Most of these will still end up in the foreclosure process eventually. The states with the most delinquent or seriously delinquent loans were Florida, Nevada and Mississippi. Those with the fewest were North Dakota, South Dakota and Alaska.

A December 4 Bloomberg article on bank Short Sale approvals is another mainstream report documenting that Short Sales are becoming commonplace as a solution to the flood of bad loans on Lenders’ books.

In the past few weeks Wells Fargo, Freddie Mac, and other major players have started defining the terms that are acceptable for Short Sale flips, all practices that fall within the range of the methods I teach.  So, expect to see even more Short Sale activity in the coming months using the flip as the method of choice.

The Bloomberg article points out Lenders have not had structures in place to incentivize staff for making decisions about taking losses on property leading to major foot dragging among certain Lenders when it comes to accepting Short Sales. Lenders have also been reluctant to accept losses while second mortgage holders and other lien holders have been stubbornly holding out for their payments.  Now secondary lien holders are beginning to accept reality and settle for pennies on the dollar so that the Short Sales can be approved with greater overall reductions for Investors and their end Buyers.

Lenders also have been working on software to track Short Sales more effectively and they are adding staff, both components necessary to deal with the flood of foreclosures in the current and expected pipeline over the next few years.

JP Morgan has doubled the number of officers trained to handle Short Sales, adding 5,000 people just since January 1, 2009.  As of October 2009 Bank of America had established a “cooperative short sales” program, and has also added staff to handle the flood of applications both for loan modification and Short Sale.  Over all, according to Laurie S. Goodman of Amherst Securities Group, Short Sales save between 10 and 15% for Lenders compared to foreclosure.  Both are significant losses for Lenders, but the Short Sale is less of one.

New Treasury guidelines set to go into effect April 5 will require Lenders to consider homeowners for Short Sale within 30 days after missing two monthly payments.  While there are things about the new government program we do not like, getting Lenders to make decisions quickly about the appropriateness of a Short Sale is a good thing and may increase the numbers of Homeowners who are helped.